Delta Faces $4B in Plane-Lease Claims

Delta Air Lines Inc.'s liability to investors who financed 270 of its aircraft in return for tax benefits could exceed $4 billion.


Delta Air Lines Inc.'s liability to investors who financed 270 of its aircraft in return for tax benefits could exceed $4 billion, new court documents show.

The numbers suggest Delta faces a confrontation over its aircraft-financing deals that could be nearly as large as the one UAL Corp.'s United Airlines experienced in the final stages of its bankruptcy reorganization. United's exit from Chapter 11 proceedings was nearly delayed by a quarrel over $5.1 billion in so-called leverage-lease claims.

Delta, the country's third-largest airline by passenger traffic, has spent a year in bankruptcy proceedings and is aiming to complete its reorganization by the middle of 2007. In papers filed with the U.S. Bankruptcy Court in Manhattan, Delta has proposed rules for resolving the claims disputes, saying it wants to avoid UAL's experience.

But a growing number of aircraft financiers have objected to the proposal, saying the rules would make matters worse. Many of the financiers happen to be the same investors who quarreled with United -- including Walt Disney Co. In separate filings with the court last week, dozens of financiers said Delta owes them more than $4 billion.

Disney said Delta's proposed rules suggested the airline hadn't learned a "lesson" from United's experience with aircraft claims. Instead, it said, Delta is "attempting to invent entirely new, untested, unwieldy and unfair processes." Those processes, the entertainment conglomerate said, are "likely to run aground."

Leverage-lease transactions are complex financing deals that have become common in the airline industry because they provide big benefits to airlines and financiers alike. Financiers get tax deductions for interest accrued on the deals, and they get the right to collect compensation for tax losses if the leases are scuttled. Airlines, meanwhile, obtain their aircraft on relatively easy financing terms.

In recent years, the tax benefits have attracted unusual companies to the aircraft-leasing business. But big airline bankruptcies have triggered big fights over the benefits.

In 2003, United scuttled its lease on a Boeing 757 jet that was partly owned by Disney. As the airline was preparing last year to exit bankruptcy proceedings, it faced $5.1 billion in claims from Disney and other financiers of its aircraft. United eventually settled those claims for about $150 million.

Disney said in court papers last week it owns three McDonnell Douglas MD-11 aircraft and two Boeing 767s that Delta leases. The company, which joined Northwestern Mutual Life Insurance Co. in objecting to Delta's proposed rules, said the airline owes it and Northwestern Mutual $229.3 million.

A much larger group of aircraft financiers, which includes Bear Stearns Investment Products Inc. and owns all but a handful of the 270 aircraft Delta leased, has estimated its own claims against the airline at $3.5 billion. Another group of financiers, including Comcast Corp., AT&T Credit Holdings Inc. and Banc of America Leasing & Capital LLC, has said Delta owes it $380 million.

On Friday, Delta said in court documents that its proposed rules had been misunderstood and offered modifications that it said would resolve "virtually all of the issues raised in the objections." U.S. Bankruptcy Judge Adlai S. Hardin is scheduled to consider the matter at a court hearing Tuesday.

"The procedures are fair and reasonable and should be approved," Delta said. It said the tax claims related to the aircraft leases are "likely to be among the largest claims filed in these cases."

Delaying their resolution, Delta said, would hurt the ability of other unsecured creditors to be repaid. "If the litigation of relevant issues must be postponed until virtually the end of the bankruptcy process, the pendency of the relevant claims would delay and impair the distributions to which other unsecured creditors are entitled," it said.

This content continues onto the next page...

We Recommend