Bankruptcy Fears Hammer Delta

Delta Air Lines (DAL Quote - Cramer on DAL - Stock Picks) has yet to file for bankruptcy, but its shares are trading as if it has.

The stock slumped again Monday on continuing fears that the nation's No. 3 airline will show up in bankruptcy court. The shares are now firmly in the range that another bankrupt carrier, United Airlines' parent UAL (UALAQ Quote - Cramer on UALAQ - Stock Picks), has recently plied.

If Delta does file for Chapter 11, equity holders will be left holding paper that likely will end up worthless. That's because companies tend to cancel common stock when they emerge from bankruptcy and issue new shares to pay off creditors.

Fueling concerns about Delta Monday was a report in The New York Times over the weekend saying the company has begun arranging financing it will need if it files for bankruptcy. The report cited people with "direct knowledge of Delta's actions."

The newspaper added that Delta officials have acknowledged the airline must be prepared for a bankruptcy filing. But these officials said a final decision was not "imminent."

Also causing worry is what Delta may disclose in its quarterly 10-Q filing with regulators, which is due out soon. Last Tuesday the airline postponed the filing for five days, citing continuing talks with a new Visa and MasterCard card processor.

Delta noted that the new processor required a "significant cash reserve," something the cash-strapped carrier can ill afford at a time when fuel prices are moving ever higher. The contract matters because Delta sells a substantial number of tickets that are paid for with Visa or MasterCard.

Shares of Delta were down 28 cents, or 17.4%, at $1.33, below the $1.42 level where UAL's stock was changing hands.

Delta has made a valiant effort to stay out of Chapter 11 by cutting costs, getting financial help from General Electric (GE Quote - Cramer on GE - Stock Picks) and American Express (AXP Quote - Cramer on AXP - Stock Picks) and streamlining operations. But its top executive has acknowledged that higher oil prices are overwhelming its transformation efforts.