Reviving Delta Cost Tens of Millions

Fixing a broken balance sheet isn't cheap.

As Delta Air Lines turns onto final approach in its bankruptcy case this week, the company has spent more than $137 million on legal fees and related expenses, and the total could push $200 million by the time the dust settles, executives say. That's enough to cover annual salaries for about 3,000 mechanics.

Delta goes to court Wednesday for a hearing on its reorganization plan, with confirmation considered a virtual certainty since creditors have overwhelmingly endorsed the plan. It will be a final gathering for the platoons of lawyers and financial consultants who have helped Delta chop some $10 billion in debt off its balance sheet during restructuring talks with various creditors.

Through the first 16 1/2 months of its Chapter 11 case, Delta's bankruptcy-related bills averaged more than $8 million a month. The biggest charges were from its lead law firm, New York-based David Polk & Wardwell, which had billed Delta for $36.5 million through the end of January, according to court filings.

Still, Delta actually has gotten off pretty lightly compared to some other recent Chapter 11 cases of similar size, legal and industry experts say.

United Air Lines racked up about $335 million in such expenses during its more than three-year-plus Chapter 11 case, which ended early last year, noted Atlanta bankruptcy attorney Darryl Laddin.

"While the cost of the [Delta] restructuring may appear staggering," he said, "it's not unreasonable given the size of the case, the complexity of the case, and the returns to creditors."

Ed Bastian, Delta's chief financial officer, says Delta got its money's worth from the reorganization, which he says will result in Delta exiting with the second-highest market value in the airline industry, after perennially profitable Southwest Airlines.

"Would I have preferred less? Of course," Bastian said of the bankruptcy-related expenses, which could dribble out for another year as the airline deals with remaining claims disputes and related litigation.

Still, Bastian said Delta has reorganized its operations more quickly and more cheaply than United, a similarly large airline, even with the distraction of fighting off a surprise takeover offer from US Airways that surfaced late last year.

"We always stayed in control of the process. We never let the lawyers get in charge," he said.

Bastian predicted easy approval Wednesday in the hearing before Delta's New York bankruptcy judge, Adlai Hardin. The airline says it will formally exit bankruptcy April 30 with the completion of its exit financing deal. Six major Wall Street firms have committed to provide $2.5 billion in such financing.

The airline is already planning a celebration that day at its Atlanta headquarters. Its new shares of stock, issued initially to creditors and employees as compensation for their financial sacrifices, will be listed a few days later on the New York Stock Exchange.

"It feels great," Bastian said of starting a new chapter in the airline's history. "It's very heartwarming to be able to see Delta people prevail," he added, calling it "my highest professional moment."

Along the way, Delta engineered some major cost-savings and operational improvements while first going through a tense face-off with its pilots union over concessions, then fighting off US Airways' hostile takeover bid several months later.

In addition to slashing debt, Delta simplified and shrank its aircraft fleet and retooled routes to emphasize better-paying overseas flying. It also squeezed the pay, pensions and other benefits of its active employees and retirees, cutting pay rates twice and terminating its pilots' pension plan.

Those moves angered plenty of retired pilots who lost much of their monthly pension benefits. Current shareholders also aren't happy; their Delta stakes will be wiped out when the company emerges from bankruptcy.

"I lost 60 percent of my retirement income," said Don Chapman, 65, a retired Delta pilot who lives in Coweta County. "I think bankruptcy court is just a sham [for Delta] to get out of their obligations. It's just not right."

Still, Delta appears to be headed toward the exit with stronger employee morale than many observers would have predicted a few months ago --- partly as the result of US Airways' threatened takeover.

"US Airways in retrospect was a gift," said Bastian, because it helped with "unifying the work force."

He said Delta will emerge with the lowest operating costs among the major network carriers, allowing it to become one of the industry's most profitable players once its retooled network generates revenue similar to those of rivals with more established international operations.

"We have the potential that the others don't have," said Bastian, but it will take some time for the reorganization to pay off. "This is like turning a battleship in the Chattahoochee," he said.

Delta's management has generally gotten favorable reviews for how it handled the carrier's restructuring in bankruptcy. More than 95 percent of its creditors voted in favor of Delta's reorganization plan, the carrier announced last week.

"I think that they accomplished a lot," said Laddin. "Where the rubber hits the road is the return to creditors, and that is substantially higher than other airline cases."

While Delta's expected market value dropped a bit after soaring during US Airways' merger attempt, it has remained much higher than those of other airlines during their recent exits from bankruptcy.

Unsecured creditors at United only got around 8 cents on the dollar, initially, although United's stock price rose afterward, eventually boosting their return. Delta, which has estimated the company is worth $9.4 billion to $12 billion, projected its unsecured creditors will get at least 62 cents on the dollar when their claims are converted to new shares in the company. That's also about where Delta's old bonds and claims were trading last week.

In a recent report, Lehman Brothers analyst Gary Chase projected that Delta's new shares should go for about $20-$30 a share, giving the company a market value of roughly $9 billion. "Post-restructuring, we believe Delta will be among the more profitable legacy carriers for 2007," said Chase.

Allen Michel, a finance professor at Boston University's School of Management, said Delta has done a "superb job" on its bankruptcy restructuring. "I'm impressed that they were able to remain independent."

But he cautioned that most companies are "extremely optimistic" when making projections of their post-bankruptcy financial performance. In a study he co-authored, he looked at the financial projections and later performance of 35 companies that had emerged from Chapter 11 in the early 1990s. Three years later, the typical company's net income was nearly 70 percent below its earlier projection. Some companies had landed in bankruptcy court again.

"All these stakeholders should pay attention to these projections," he said.

DELTA'S TOP BANKRUPTCY BILLERS

Firm: Davis Polk & Wardwell

Role in case: Delta's lead bankruptcy legal counsel

Fees/expenses through Jan. 31: $36,451,292

Firm: Debevoise & Plimpton

Role in case: Delta special counsel for aircraft issues

Fees/expenses through Jan. 31: $26,290,957

Firm: Akin Gump Strauss

Role in case: Law firm for the court-appointed committee of Delta's unsecured creditors

Fees/expenses through Jan. 31: $16,380,517

Firm: Paul, Hastings, Janofsky & Walker

Role in case: Delta's special counsel for labor issues

Fees/expenses through Jan. 31: $6,987,523

Firm: Babcock & Brown

Role in case: Delta's financial adviser on aircraft issues

Fees/expenses through Jan. 31: $6,010,863

Source: Court filings and staff calculations



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