Delta Details Cash-Crunch Woes

The company's shares fell 6.1% shortly after the start of trading.
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Updated from 10:35 a.m. EDT

Shares of

Delta Air Lines

(DAL) - Get Report

slumped Tuesday after the airline delivered what is likely its most explicit warning of a looming cash crisis that could force it into bankruptcy.

The stock was down 31 cents, or 9.4%, to $2.99.

In a quarterly filing with the

Securities and Exchange Commission

, Delta said it doesn't expect to achieve all of the $5 billion in annual benefits from its transformation plan until the end of 2006. At the same time, the airline is grappling with historically high fuel prices and tough price competition.

"Accordingly, we believe that we will record a substantial net loss for the nine months ending December 31, 2005, and that our cash flows from operations will not be sufficient to meet all of our liquidity needs for that period," the filing stated.

The nation's third-largest airline has already cautioned it might bump up against liquidity problems this year, but observers said this is its clearest warning it's running out of money.

"They're being very explicit about cash flows not meeting obligations," says Helane Becker, airline analyst at the Benchmark Co., a New York-based brokerage. "They've never come out and said 'We're doomed,' and I think that's what the market is interpreting this as." Benchmark neither does nor seeks to do business with companies its analysts cover.

The Fuel-Cost Factor

Delta barely escaped a Chapter 11 filing late last year by persuading pilots to agree to $1 billion in annual concessions and lining up financing from

American Express

(AXP) - Get Report

and

General Electric

(GE) - Get Report

.

In addition to reducing labor costs and boosting efficiency, the airline is attempting to better compete with low-cost carriers via a bold fare simplification plan launched in January. But Delta based its transformation plan on lower fuel costs. The company expected jet fuel to average $1.22 a gallon this year, but it paid $1.42 a gallon in the first quarter. Each one-penny increase in a gallon of fuel adds $25 million to Delta's liquidity needs.

With high fuel prices hurting its transformation efforts, Delta is considering other ways of bolstering its cash position, including asset sales or the issuance of new equity or debt. But the airline has acknowledged that substantially all of its assets are encumbered, making additional debt financing unlikely.

There has been speculation that Delta may try to sell two regional carriers it owns, Atlantic Southeast Airlines and Comair.

Delta's agreements with American Express and General Electric include covenants requiring the airline to maintain specific cash and operating earnings levels. Although Delta was in compliance at the end of the first quarter, it warned in the quarterly filing "there is significant uncertainty whether we will be in compliance with all of these covenants in the near-term or in future periods."

Factors that could push the airline over the edge include fuel costs and the likelihood Delta will have to come up with extra cash to renew its current Visa/MasterCard processing agreement, which expires in August.

If the airline violates its covenants with the two financiers, a bankruptcy filing is likely.

"I don't think a lot of people are surprised they're likely to file for Chapter 11," says Becker. "The company is not likely to survive in its current form. But Delta has been very circumspect about distributing that information, and this is the first time they've been so aggressive about not qualifying their language."