Delta Survival Hinge Point
Delta Survival Hinges on Pilot Contract Decision
By David Bond and Frances Fiorino
04/08/2006 03:42:26 PM
ONE STRIKE AND YOU'RE OUT
In the fall of 2004, as Delta Air Lines and its pilots went down to the wire negotiating concessions to keep the carrier out of Chapter 11 bankruptcy protection, a Delta captain was spotted at Los Angeles International Airport with a sticker on his flight bag. "Full pay to the last day," it said.
The sticker was wrong. Delta dodged that "last day" by securing about $1 billion per year in contract givebacks from its Air Line Pilots Assn. unit, putting off a bankruptcy declaration for nearly a year. Now, mired deeply in Chapter 11, it faces a second "last day"--pilots have overwhelmingly authorized their union to call a strike if a three-member arbitration panel decides to nullify the contract and allow Delta to impose its own terms.
At stake is Delta's ability to reorganize in bankruptcy or even survive. If management negotiates its way out of a strike, it must make sure it gets enough concessions to succeed when it returns to the marketplace. If the pilots strike, Delta will be hard put to stay in business, a prospect that would delight its competitors--particularly AirTran Airways, which hubs at Delta's Atlanta fortress, and carriers with extensive operations in the eastern U.S.
The airline says it needs $305 million per year in additional savings from the pilots, down from $325 million in its original demand, while the pilots are offering $140 million per year that would "snap back"--be restored--after three years.
The pilots, meanwhile, argue that Delta's new demands come on top of the December 2004 givebacks, in which they lost about 50% of their contract's value, including a 32.5% pay cut. At stake now is about 50% of what is left of the contract, including an 18% pay cut, they say. In addition, their pensions will be reduced "severely" because Delta hasn't funded the plan since July 1, 2005.
Delta CFO Edward Bastian told the panel he's aware "there's a tremendous hit that pilots will take. The fact of the matter is the company is in pretty dire financial straits. . . . Delta was clear from the outset that we don't have the cash to make the contributions."
Results of the three-week strike vote, conducted by telephone and Internet, were announced Apr. 4 by the union. About 96% of Delta's 5,800 pilots voted, and 5,295 of them are in favor of providing strike authorization. And the Air Line Pilots Assn. (ALPA) last week approved a $10-million grant from its major contingency fund to help Delta pilots implement a walkout. The union's executive council also gave Delta pilots union Chairman Lee Moak sole authority to call a strike any time after Apr. 17.
Moak says the results of the strike ballot send "the strongest message yet that if Delta's senior executives are successful in their misguided attempt to reject our contract, we will strike." About 6,000 mainline pilots, and not regional affiliates, would be involved in the strike according to the union.
Few industry observers believe Delta could survive a strike. Bastian has said it would be "devastating" to the carrier and noted at the hearings that "Delta is in a much more serious condition than any . . . of the carriers in the industry. The fact that we have no further borrowing capacity, no further assets to pledge, no access to the capital markets of any substance, is cause for concern." Further, he noted the competition knows that Delta faces "real and present" vulnerability and would like nothing better than to "get a chance to take a shot at us and potentially knock us out."
Delta management told arbitrators that it has no contingency plans for a strike, will not try to operate during one and could not survive for long. Delta's cash position is built entirely on its $1.9-billion debtor in possession (DIP) financing from a syndicate led by GE Capital Corp. and Morgan Stanley Senior funding. The DIP agreements protect the lenders with restrictive covenants that would be violated almost immediately in a strike.
As part of a December 2005 interim agreement between Delta and the pilots, a three-member arbitration panel is to act on Delta's motion, under Section 1113 of the bankruptcy statutes, to nullify the pilots' contract. The bankruptcy-court judge normally would rule, but the two sides agreed on the panel and its membership instead. Like the judge, the panel has two choices--reject the contract or uphold it--and is expected to reach a decision by Apr. 15.
But there was a twist in the plot. On the final day of the hearing, Mar. 23, panel Chairman Richard Bloch delivered some unexpectedly passionate closing remarks (see box) imploring both sides to continue to try and "fix it" themselves and not leave the ultimate decision solely to the panel. He said that in the panel's judgment, both sides raised credible objections to the other's plan and that there were "real flaws, oversights, exaggerations and shortcomings that attend both positions." He added that "each side has within its power the ability to destroy this company." Both sides were asked to present reports on their discussions to the panel last week.
The panel's decision might officially be due Apr. 15, but Section 1113 deadlines aren't always firm. Only recently, the deadline for a Northwest Airlines Section 1113 motion came and went while negotiations continued. A settlement followed days later, and the motion was never ruled on.
In Delta's case, Apr. 15 is the Saturday of Easter weekend, giving rise to speculation that, like tax returns, the decision might not be due until Apr. 17. People close to the talks suggest that, like Northwest's, a Delta deadline might not be hard and fast.
Pilots, meanwhile, continue to demonstrate they mean strike business. Last week, they organized another round of informational picketing at major airports. Last month, hundreds of pilots held a practice strike at Hartsfield-Jackson Atlanta International Airport, Delta's main hub. However, Moak says the pilots' union is ready to negotiate and believes there is still time to reach an agreement.