Delta Air Lines
warned of worse-than-expected third-quarter losses and said it will be in violation of certain covenants come December. The No. 3 airline's shares fell 26% on the news.
In an 8-K filing with the
Securities and Exchange Commission
, the airline said it expects to lose $350 million in the third quarter, largely because of eroding travel demand. Excluding unusual items, the company now expects to lose $225 million. This summer the company had said its third-quarter loss wouldn't "differ significantly" from the second-quarter loss of $186 million.
"We currently do not anticipate any near-term improvements in revenue," said the company in a letter to investors.
Delta stock, which was halted briefly on the news, fell $2.99, to $8.51, in midday trading.
After a spring rebound in travel, this summer was a disappointment, with traffic down from year-earlier levels. And with ticket prices down to levels unseen since 1988, revenue has been stagnant at best.
"In our June quarter, we stated that Delta did not expect the financial results of the third quarter 2002 to be substantially different from that of the second quarter," said the company. "However, we now believe that our performance for the September 2002 quarter will be weaker than we had anticipated."
Delta also said it will be in violation of some of its financial covenants come December. By the end of the fourth quarter, Delta said that its debt-to-equity ratio won't meet lending requirements set forth by Commerzbank, because the company has to take a noncash charge between $700 million and $800 million for its defined benefit plan.
In order to have the debt-to-equity part of the covenant waived, Delta has agreed to maintain a minimum of $1 billion in cash and cash equivalents at the end of every month, starting on Oct. 31. This effectively handicaps the amount of cash Delta has to spend, weakening a balance sheet that was one of the company's stronger selling points.
The company said it will be able to meet its debt obligations as they come due by using the cash it has on hand and other investments. "While Delta expects financing to be available to it on commercially reasonable terms, in the current business environment, access to financing cannot be assured," said the company, which had $1.7 billion in cash and cash equivalents as of Aug. 31.
Cost Cutting and Government Handouts
Delta, which has become something of a
dark-horse pick for some fund managers, said it will continue to cut costs in order to manage its way through the downturn that is crippling the industry. The company will lay off 1,500 flight attendants and has hedged fuel prices to ensure that a spike in the price of oil won't devastate the bottom line.
But capacity may still be an issue. While it will be down 2.5% to 3.0% in the month of September over year ago levels, the company said it will be up between 2% and 2.5% year over year in the month of December.
Today's news caps a week in which airline executives asked Congress to ease the industry's tax burden and help pitch in to help pay for increased security. Many on Capitol Hill expressed reluctance, telling the airlines to get their own houses in order before asking for additional help just one year after receiving a $5 billion cash grant. But without assistance, executives said that additional layoffs, service cutbacks and bankruptcies would result.