NEW YORK – Recent reports on the Delta Air Lines pilots’ agreement focus on the carrier’s pilots being the highest paid in the industry and on the possibility that the company may still declare bankruptcy, despite the $1 billion cost-cutting deal, according to its Chief Executive Gerald Grinstein.
But the pilots’ salaries, which will be chopped by 32.5% starting Dec. 1, are not new. What is new (or relatively new) is the persistence of the decline in the business of all airlines, not just Delta (nyse: DAL – news – people ), and the runup in fuel prices.
The starkest item in reality facing the airline industry is that its business has yet to recover to pre-Sept. 11, 2001, levels. Another big problem is fuel costs. While Delta, like other airlines, cut about $600 million in costs between 2001 and 2003 (even before the recent changes in labor agreements), its fuel costs at the same time went up by about $120 million. Given that oil prices have increased by roughly three-quarters in a year, the fuel expense for 2004 will be much worse. Salaries and related costs increased, too, by $210 million, but that was largely because of pension expenses and pre-existing labor contracts.
The biggest impact on Atlanta-based Delta has come from items it cannot control. The overall level of airline business for 2003 was still about 10% lower than 2000, according to the U.S. Bureau of Transportation Statistics. Airline traffic for July, the latest month available, was up 7.9% over a year earlier, the BTS said. If the trend holds, 2004 airline traffic may match 2000 levels. In the four years before 2000, traffic was up about 19%, which is more in line with historical norms.
This year, fuel costs have provided another wallop. For the first six months of 2004, Delta’s revenue increased by $670 million or just less than 10% compared to a year earlier. At the same time, its costs went up by $562 million (not counting a reimbursement of insurance costs by the government). It did cut labor costs, albeit barely. Some of the increased expenses were caused by an increase in the number of flights. But fuel costs accounted for most of it, rising by $297 million or 31%. The trend in fuel costs has accelerated since these numbers were recorded, though oil prices have fallen back a bit this week.
If Delta heads for bankruptcy court, it will join UAL‘s (otc: UALAQ – news – people ) United Airlines and US Airways (otc: UAIRQ – news – people ). AMR‘s (nyse: AMR – news – people ) American Airlines, Continental Airlines (nyse: CAL – news – people ) and Northwest Airlines (nasdaq: NWAC – news – people ) all have major financial problems. Even Southwest Airlines (nyse: LUV – news – people ), which is actually as heavily unionized as its competitors but without the similar pension obligations, has seen its share price dive by 19% this year, and JetBlue Airways (nasdaq: JBLU – news – people ) just reported dramatically worse earnings.
It is “one very important and necessary piece of a very complex puzzle,” Grinstein said yesterday in a memo to employees. “Make no doubt about it, due to Delta’s precarious financial situation, many uncertainties remain.”
In his own message to pilots, John Malone, the chairman of the Delta chapter of the Air Line Pilots Association, described the deal as one that “will hopefully buy Delta additional time” to continue its restructuring efforts outside bankruptcy court.
But for all the airlines, the problems can hardly be credited to mismanagement. The blame should be sourced to world events, first terror, and now oil prices that are far beyond their control.