Union: Delta, Pilots' Offers Apart By 2.2 Percent

Washington --- A pilots union analyst Tuesday said Delta Air Lines has slashed costs more than most competitors and that the union's concession offer comes close to Delta's proposal when tallying future costs.

"There's only a 2.2 percent difference" in the airline's expected unit costs in 2007 under the two proposals, said Ana McAhron-Schulz, director of economic and financial analysis for the Air Line Pilots Association.

"In our view, it's not a significant difference. They will still achieve their goals of becoming competitive in the marketplace," McAhron-Schultz told a panel of arbitrators weighing Delta's request for more than $300 million in annual pay cuts and other concessions.

In a related development Tuesday, Delta told employees it expects to cut 1,000 management jobs this spring as part of its effort to reduce overhead expenses. The airline has so far completed half of the 7,000 to 9,000 job cuts it announced last fall.

At the arbitration hearing, ALPA's financial adviser said Delta, with the pilots' proposal, will hit 99.6 percent of its target to cut costs or boost revenue by $3 billion annually through its restructuring in bankruptcy court.

"My conclusion is that under both proposals, Delta comes very close to achieving the $3 billion," said Gene Weil, with Washington-based Milestone Merchant Partners.

Under sometimes convoluted questioning to avoid disclosing Delta's confidential financial information, Weil said the airline has added "substantial additional cushion" to its cash reserves since its September Chapter 11 filing.

The ALPA witnesses Tuesday appeared to contradict earlier testimony of Delta's executives and outside experts that it needs pilot concessions because it is hobbled by high costs and brutal competition with discount carriers, such as AirTran Airways, Delta's largest rival in Atlanta.

But Delta's financial chief Ed Bastian said during a break in Tuesday's testimony that the apparently small difference between the company and union proposals compared to its billions in revenue translates to big money Delta needs to survive long term.

"That's $200 million," Bastian said of the projected cost difference in 2007.

McAhron-Schultz, the pilots union analyst, estimated the cost gap at $187 million in 2007.

Bastian testified last week that Delta expects its pretax profit margin next year to be 2 percent, leaving little safety margin to weather future shocks such as an unexpected spike in jet fuel prices.

"Anytime you have a business model with a 2 percent margin, it's not a real healthy [company]," he said.

Delta wants $305 million in annual concessions for four years, including an 18 percent pay cut. The Air Line Pilots Association has proposed concessions it says average $140 million annually.

Delta has also offered pilots a $330 million long-term IOU after the airline emerges from bankruptcy if their pension plan is terminated. Delta says ALPA has asked for a $1 billion note, but the union says the value hasn't been determined.

The unusual hearings before a panel of three arbitrators were set up as part of a stop-gap pay-cut deal in December that cut pilots' pay by 14 percent and suspended Delta's motion to reject the pilots' contract.

The panel has until April 15 to decide whether to void the contract, allowing Delta to impose its terms.

The union has vowed to strike if the contract is voided, but both sides have said concession talks could continue after the panel's decision. Talks broke off recently so both sides could prepare for the hearings, which started last week.

Testifying in the seventh day of the proceedings in a Washington hotel, ALPA's economic analyst, McAhron-Schultz, said Delta already has lower operating costs than network rivals and has cut them more.

She said Delta's unit costs excluding fuel --- the expense of flying one seat one mile --- were less than 7 cents. That compared with about 8 cents at most big carriers. She said Delta's unit costs dropped 17 percent in the year before its Chapter 11 filing. That compared with a 5 percent decline for most carriers.

McAhron-Schultz said her analysis showed that other big hub-and-spoke carriers "have significantly more competition with the low-cost carriers" than Delta. She said discount carriers compete with other big carriers in about 75 percent to 80 percent of their markets, compared with 65 percent of Delta's.

"We believe Delta's largest competitors are the other network carriers," she said.

Delta's biggest problem, ALPA's experts claim, is weak revenue rather than costs. The union says Delta has been a step behind American, United and other big rivals in shifting aircraft to more profitable international routes, where there is little competition with discount carriers.

Delta draws the smallest share of its revenue from overseas markets of the big U.S. airlines but has been rapidly adding international flights since it filed bankruptcy six months ago.

But Bastian said Tuesday it will take "several years" to grow Delta's international business enough to eliminate the gap with other network carriers. In the meantime, he said, Delta needs to cut costs to compete with discount carriers that are "clearly targeting" Delta's markets.

The arbitration hearing resumes today.



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