Delta Air Lines

(DAL) - Get Report

has retained outside advisers to explore its options under bankruptcy protection if employees won't cut their pay. This is another sign of trouble that has Wall Street lowering expectations and issuing warnings.

With Delta warning of bankruptcy and posting deep losses because of high fuel costs, Prudential Equity Group analyst Dan Hemme lowered his 2004 earnings-per-share estimates on the company, while dropping his price target to $4 from $7. In Hemme's view, Delta shares will be under pressure until it makes some headway negotiating with unionized pilots, and that pressure should increase over the summer.

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"The important date for Delta equity, in our opinion, remains the Aug. 3 ... pilot union negotiations," said Hemme, in his note. "We expect offers/counter-offers will be all-encompassing, and negotiations will be relatively rapid."

Early Tuesday morning, shares were down 39 cents, or 6.4%, to $5.71, after sliding 10.3% over the last three sessions.

Last week, Delta laid plans for a worst-case scenario, one in which employees balk at pay cuts and the company is forced to file for Chapter 11 bankruptcy protection. According to media reports, Delta hired Davis, Polk & Wardwell, a New York-based law firm, to help on restructuring its business, just a few days after the company tapped advisory firm Blackstone Group for help in restructuring its debt.

While Hemme said that Delta's move to seek outside counsel is more about due diligence than imminent danger, the news from the carrier is likely to get worse before it gets better. With high fixed costs and weak pricing power, the company will not be able to benefit from the seasonally strong summer period.

Because Delta has not hedged for the price of fuel, unlike

Southwest Airlines

(LUV) - Get Report

, the carrier is completely exposed to the vagaries of the open market. And according to Prudential estimates, every penny change in the price of jet fuel per gallon adds or subtracts 15 to 20 cents to annual EPS.

With no end to high fuel in sight, Hemme lowered his estimates for the rest of 2004, with second-quarter expectations dropping to a loss of $1.34 a share, lower than the current consensus estimate of a loss of $1.31 a share, according to Thomson One Analytics. For the full fiscal year, the analyst now expects the carrier to lose $6.84 a share, nearly $2 more than the current estimate of a loss of $4.89 a share.

Despite Delta's many issues, Hemme doesn't believe the carrier will go bankrupt anytime soon -- the carrier ended the first quarter with $2.2 in unrestricted cash and $26.2 billion in total assets against $12.5 in total debt. But credit rating agencies have put the company's debt outlook under review and Hemme said the threat of bankruptcy is growing.

"Prior conversations with the former CFO led us to believe that Delta would not face imminent risk of bankruptcy above the $1 billion liquidity level," said Hemme. "We believe this threshold has moved, as a declining revenue environment and high fuel costs are placing more pressure on cash generation."

(Hemme certified that no part of his compensation was, is or will be directly or indirectly affected by views expressed in his research reports.)