Delta Air Lines
works on a plan to restructure operations, Standard & Poor's lowered the company's credit rating on Wednesday.
The credit rating agency dropped the company's corporate credit rating to "B-", the sixth-highest junk rating, from "B+," and said it appears unlikely that Delta will get the wage concessions it's seeking from pilots anytime soon. The news comes two days after Delta warned that its loss would be deeper than expected in the first quarter due to higher fuel prices.
"The downgrades are based on continuing delays in securing urgently needed cost concessions from the airline's pilots, and prospect for further heavy losses and weak cash generation in 2004 and possibly 2005," said Philip Baggaley, credit analyst for S&P.
"Negotiations with the pilots' union have not yet produced a hoped-for interim agreement and it appears increasingly likely that the union will instead await the start of scheduled negotiations in August 2005," he said.
Without the pay cuts from pilots, Baggaley said that Delta would continue to report some of the worst losses of any company in the industry. But while Delta's credit rating fell, shares of the carrier were on the rise as investors hunted for bargains after a week-long selloff sheared 14% from the Amex Airline Index. In late afternoon action, Delta was up 31 cents, or 4%, to $8.
As the S&P downgrade indicates, Delta's current shareholders will be in for a bumpy ride until the company gets wage cuts from pilots. But while the risks are high, so are the potential rewards.
In July, the company hopes to unveil its restructuring plan, which will presumably outline the magnitude of the wage concessions it hopes to achieve and determine the fate of Song, the low-cost carrier whose expansion has been shelved as the company reexamines its options.
If Delta can cut costs, the company may be able to see the same kind of profit surge that has allowed
, parent of American Airlines, to turn operations around in a short span. Indeed, AMR said on Wednesday that unit costs would fall by a larger-than-expected margin, offsetting some of the impact of high fuel and weak pricing power.
But as long as Delta continues flying with high costs, it will continue to lose more money than rivals like American -- and with its credit rating lowered -- the price of money just went up.