Time's Up for Delta, Northwest

Both airlines file for bankruptcy protection and say they'll emerge more efficient.
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Updated from 6:39 p.m. EDT

Call it Chapter 22.

On Wednesday

Delta Air Lines

(DAL) - Get Report

and

Northwest Airlines

(NWAC)

both filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York.

The twin filings highlight the competitive pressures on the U.S. airline industry, which have only been exacerbated by record high fuel costs.

Four of the seven largest U.S. airlines are now operating under bankruptcy protection, although one --

US Airways

(UAIRQ)

-- plans to exit Chapter 11 later this month via a merger with

America West

(AWA)

.

Delta, the nation's third-biggest airline by traffic, and No. 4 Northwest say they will continue normal operations and are reassuring customers their tickets and frequent-flier miles will be honored.

"Delta is open for business as usual and will continue normal operations throughout the reorganization process," said Delta CEO Gerald Grinstein in a news release announcing the bankruptcy filing. "Our customers can be confident that they remain our number one priority and that their travel plans and SkyMiles are secure."

Atlanta-based Delta says it has rounded up $2.05 billion in financing to help it restructure, including a commitment for $1.7 billion of debtor-in-possession financing from lenders led by

General Electric's

(GE) - Get Report

GE Commercial Finance unit and

Morgan Stanley

(MWD)

.

American Express

(AXP) - Get Report

, which together with GE helped Delta avert bankruptcy late last year with financing, has pledged another $350 million of secured financing. The earlier monies will be paid back with roughly $980 million from the DIP loan.

Eagan, Minn.-based Northwest chose not to seek DIP financing because it has already used many of its assets to secure previous cash infusions, CEO Doug Steenland said during a telephone conference with reporters.

The company instead will rely on the $1.5 billion in unrestricted cash it currently has. Although Steenland said that amount should be sufficient, he added that Northwest needs to move quickly to lower its cost structure.

Although both companies are pledging to emerge from bankruptcy leaner and more efficient, that will be little comfort for stockholders, who will likely be left holding worthless paper. Airlines typically cancel equity when they emerge from Chapter 11 and issue new shares to pay off creditors.

Delta has struggled with a high debt load -- more than $20 billion -- and cutthroat East Coast price competition from discounters

AirTran

(AAI)

,

JetBlue Airways

(JBLU) - Get Report

and

FLYi's

Independence Air

.

Although Delta has made progress on an ambitious transformation plan aimed at more than $5 billion in annual savings by the end of 2006, the plan was overwhelmed by fuel's skyward march.

As crude oil futures peaked above $70 barrel in the wake of Hurricane Katrina, the price of jet fuel surged even more as the storm hurt Gulf Coast refineries, which are important sources for plane fuel.

Following the hurricane, the refining cost for jet fuel jumped to a range of $20 to $30 a barrel, meaning Northwest was paying a total of roughly $100 a barrel to fill its planes, Steenland said on the conference call.

Northwest had been working to reduce its labor costs, which were among the industry's highest. Although the airline hoped to get concessions from workers outside bankruptcy protection, increases in oil prices -- particularly after Katrina -- were eroding its cash position too quickly, Steenland said.

"Unfortunately, in addition to an uncompetitive cost structure, our efforts have been overtaken by skyrocketing fuel costs," he said. "We can no longer continue to incur sizable losses and reductions in liquidity as we attempt to complete implementation of the plan. By filing for Chapter 11 now, we ensure that we have the means to complete the transformation of Northwest quickly and effectively."

Northwest expects to become a "somewhat smaller" airline through restructuring, with fourth-quarter capacity declining 5% to 6% from a year before. Job cuts will likely result, said Steenland, although he declined to specify how many.

Both Delta and Northwest were under pressure from looming pension funding obligations, as their traditional defined-benefit plans are significantly underfunded, and were hoping for relief from Congress. Bills currently proposed in the Senate could give the two carriers 14 years to fully fund their plans.

Steenland said Northwest hoped Congress would pass such an extension, adding that the airline will do its best to avoid terminating its pension plans and dumping unfunded obligations on the government's pension insurer, which is already operating with a more-than-$23 billion deficit.

That would mark a different strategy from US Airways and

United Airlines'

parent

UAL

, both of which used bankruptcy to hand billions of dollars of obligations over to the government.

Delta's bankruptcy was widely expected considering the airline made repeated warnings about its liquidity and financial obligations, but Northwest wasn't expected to file so soon. Some analysts believed Northwest still had a shot at getting concessions from other labor groups after it weathered a mechanics strike.

Delta shares, which have plummeted in recent days on bankruptcy speculation, shed 7 cents to 71 cents at the 4 p.m. EDT close of trading.

Concerns about a Northwest bankruptcy subtracted more than 50% from its stock's value Tuesday, although shares rebounded 30 cents, or 19.1%, Wednesday to close at $1.87, apparently on the hope that the carrier might delay a Chapter 11 filing.