Bankruptcy Fears Hammer Delta

In addition, a large percentage of the carrier's routes overlap with discount airlines, pressuring Delta's fares and, by extension, its revenue.

At current levels, the cost of fuel is a nightmare for airlines, where it represents the second-biggest expense after labor. Last year, carriers were complaining when the price of a barrel of crude oil was in the mid-$40 range.

Delta's ambitious transformation plan, which aims to provide $5 billion in annual savings by the end of next year, assumed jet fuel would cost a lot less -- $1.22 a gallon -- this year than it has. The airline paid an average of $1.60 a gallon in the second quarter, and rising crude costs are pushing the expense even higher. The impact is significant, with Delta estimating that every penny increase in the average price of a gallon of jet fuel increases its liquidity needs by $25 million a year.

Ironically, Delta's push to restructure outside bankruptcy could make a reorganization under Chapter 11 all the more difficult. That's because the airline pledged a substantial amount of its remaining collateral to secure financing from GE and American Express late last year.

"That makes the hurdle that much higher" to a successful reorganization, said Marc E. Richards, a senior partner in the business reorganization and bankruptcy practice group at Blank Rome LLP in New York.

Having unencumbered assets gives bankrupt companies more options to raise cash with outright asset sales or new financing, said Richards, who has represented creditors in multiple airline bankruptcies but whose firm does no business with Delta.

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