Delta, Pilots Agree on Terms

The tentative package of cost-cutting concessions is critical to the carrier's survival.
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Updated from 10:37 a.m. EDT

Delta Air Lines

(DAL) - Get Report

and its pilots union have approved a tentative package of concessions and will send it to rank-and-file members for a vote.

The agreement could help keep Delta from filing for bankruptcy protection. Like other carriers, Delta is suffering from high fuel prices and stiff price competition, but has also been trying to reduce its high cost structure. Delta is bleeding cash and scrambling to restructure some of its $20.6 billion in debt.

In reaction to news of the agreement, Delta stock was recently up 74 cents, or 15%, to $5.68. It had traded as high as $6.24.

In a message to its members Thursday, the Delta unit of the Air Line Pilots Association, which represents some 7,000 of the airline's pilots, said its master executive council had ratified the agreement, which negotiators reached with management Wednesday evening.

Delta later confirmed that it had reached an agreement on concessions, but remained cautious about its future.

In a news release, Gerald Grinstein, Delta's chief executive, said bankruptcy remains a possibility due to the company's precarious financial situation, but added the agreement "is one very important and necessary piece of a complex puzzle that must come together in time to reverse the impact of high costs, including unrelenting high fuel prices, compounded by low revenues, and to stem our cash drain."

John Malone, the union's MEC chairman, said the tentative agreement was the union's "best alternative," given the airline's dire straits.

"Let me say from the outset that it pained me to see such drastic changes made to almost every section of our contract; they are significant and will affect each of us and our families," he said in the message. "However, your union and our economic experts were convinced that immediate relief was necessary to prevent a bankruptcy filing in light of the company's economic condition. Reaching an agreement outside of bankruptcy court allows us to have some control over any changes to our contract. While there are no guarantees that a bankruptcy filing will not occur at some point, this tentative agreement will hopefully buy Delta additional time to continue its out-of-court restructuring efforts."

Union members will get a chance to vote on the deal, which is estimated to offer Delta $1 billion in annual savings, beginning Nov. 1. Voting ends Nov. 11.

The deal provides a 32.5% wage reduction from May 2004 levels, effective Dec. 1, with no increases for five years. It will also freeze the pilots' defined benefit retirement plan and give them a new defined contribution plan. Pilots will also receive about 30 million shares of Delta common stock, representing a 15% equity stake in the company.

Delta shares' recent upward momentum prompted Citigroup Smith Barney analyst Daniel McKenzie Thursday to lift his rating on the company to hold from sell.

"Delta is making progress, and our investment thesis at this point is proving wrong," McKenzie wrote in a research note. "Delta last night averted an imminent filing by cutting a last-minute tentative agreement with the pilots. ... We think the stock continues to react favorably to the tentative agreement, so we are upgrading to a hold and raising our

stock price target to $8. Momentum is building in Delta's favor, but we are in an information vacuum. The tentative agreement is a good start, but important pieces of the puzzle remain missing -- debt restructuring, further financing and final sign-off of the deal by

pilot rank and file. ... If these pieces to the puzzle fall into place, Delta could avert a filing. If they do not, there remains a high risk of Delta filing for Chapter 11 by the end of November." (Citigroup Smith Barney does and seeks to do business with companies covered in its research notes.)