Clouds Darken Over Delta

The stock sinks to its worst level in decades after an analyst tells holders to bail out.
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Updated from 4:40 p.m. EDT

Delta Air Lines

(DAL) - Get Report

investors scrambled for the exits Tuesday as an analyst downgrade and more executive departures heightened fears that the carrier could end up filing for bankruptcy.

Although the nation's No. 3 airline has made a valiant effort to stay out of Chapter 11 by cutting costs, getting financial help from partners and streamlining operations, its top executive has acknowledged that higher oil prices -- crude futures hit new highs Monday -- are overwhelming its transformation efforts.

Investors are losing faith the company can stave off bankruptcy long enough for further cost savings to kick in, and shares fell 12.6% to $1.95, their lowest level in decades. A bankruptcy would likely render Delta's common stock worthless.

Merrill Lynch analyst Michael Linenberg Tuesday cut his rating on the stock to sell from neutral, saying the upward trajectory of oil prices increases the chance of a bankruptcy filing in the next two months.

"Delta has been in talks with various creditors about additional funding since earlier this year," wrote Linenberg in a research note explaining the downgrade. "However, we now believe the recent surge in oil prices could keep lenders on the sidelines, at least until after a bankruptcy filing."

Noting that every one dollar increase in the price of crude oil burns $60 million from Delta's bottom line, Linenberg wrote that Delta's fuel bill for this year could grow by more than $1 billion, neutralizing the $1 billion of concessions that pilots made late last year.

Merrill Lynch does and seeks to do business with companies covered in its research reports.

Delta is also delaying its quarterly filing with the

Securities and Exchange Commission

because it's in talks to get a new Visa and MasterCard credit card processor to replace its existing contractor, whose pact expires Aug. 29. The contract matters because a substantial number of tickets Delta sells are paid for with Visa or MasterCard. Therefore, it can't accept those cards unless it has a processing contract in effect.

However, the potential new processor has told Delta that it will need "a significant cash reserve" deposited immediately when the new contract starts. The airline is exploring its options to offset a portion of the cash reserve, but said there was no assurance "whether or when it can implement any such alternative."

Delta expects to file its Form 10-Q within five days.

Adding to concerns about the carrier's viability is the recent exodus from its executive suite. On Monday, the carrier said its treasurer, Todd Helvie, had left the company. A spokeswoman declined to explain why.

The company's top lobbyist, Scott Yohe, who led Delta's recent efforts to get Congress to give airlines more time to make pension payments, has also left, a Delta spokeswoman confirmed. Yohe retired on Aug. 1 but will continue to work for Delta as a Capitol Hill consultant. The spokeswoman declined to explain why the 52-year-old executive decided to retire now.

The latest departures come less than three weeks after Michael Palumbo, the company's chief financial officer, left Delta.

"To us, it seems a little like rearranging the deck chairs on the Titanic," quipped Helane Baker, airline analyst at the Benchmark Company, about the management changes. "We continue to believe the airline will have to file Chapter 11 before October, especially as oil prices continue to move higher."

Meanwhile, Oct. 17 looms as an important date. That's when a new, tougher bankruptcy law goes into effect that will turn up the heat on companies to restructure quickly in Chapter 11. It will give them only 18 months of exclusivity during which they can file reorganization plans without the threat of takeover attempts.

The new law also will prevent bankrupt companies from paying executives retention bonuses unless they prove they have job offers elsewhere.

In Delta's second-quarter earnings conference call, CEO Gerald Grinstein said Oct. 17 was not influencing his decision-making. But Merrill's Linenberg wrote Tuesday that the date could be a "key factor" in Delta's decision as to whether to file for bankruptcy.