Delta Air Lines ( DAL) has become an all-or-nothing investment scenario, so shareholders better buckle up because the ride only gets rockier as the carrier runs out of time to avoid a bankruptcy filing.

With every passing day, Wall Street brokerages say that Delta becomes a riskier stock to own, as it burns through cash and posts staggering losses. But on the other hand, Delta shares represent an even greater reward for investors with strong stomachs -- that is, if the company can get pilots to agree to wage cuts as part of a turnaround plan.

The mood swings and volatility in Delta's shares are likely to continue, according to analysts, until the carrier either files for Chapter 11 bankruptcy protection or can implement its once-delayed top-to-bottom reorganization of its business. On Tuesday, shares fell 47 cents, or 7.9%, to $5.47 one day after the shares rose 8% on second-quarter losses that were even worse than last year.

"Frankly, at this point, we believe Delta's stock trades as if it were an option," said William Greene, airline analyst at Morgan Stanley, in a research note. "Those who assume a long position in the stock are effectively buying an option that the company can assume an out-of-court restructuring and survive." (Morgan Stanley does and seeks to do business with the companies covered in research reports.)

If Delta's successful, then shares could see the same kind of tenfold increase experienced by AMR ( AMR), parent of American Airlines, in the wake of its out-of-court restructuring last year. But if Delta were to falter and seek out bankruptcy protection, shares will likely be rendered worthless, which is exactly what happened at US Airways ( UAIR) and UAL ( UALAQ.OB), parent of United Airlines.

The risk/reward is only compounded by the fact so many investors are betting the company will file for bankruptcy protection and that its stock is heading to zero. By the end of June, 57 million of Delta's 123 million shares had been shorted and, as a result, stock moves will be greatly exaggerated in both directions, causing some analysts to say Delta's too hot for most to handle.

"Shares have a binary outcome," said Greene. "As evidenced by Monday's trading patterns -- at one point the stock was up 15% intraday -- Delta's shares could gain $3 to $4 per share as easily as they could lose $3 to $4 per share. ... The possibility of a 'short squeeze' remains high, especially if oil prices fall sharply. We would not be involved in the shares today."

Cash Is King

The situation at Delta is grim, even when compared to rivals. Excluding all charges, Delta's second-quarter loss of nearly $312 million, announced Monday, was far deeper than last year's $237 million, despite the fact that the year-ago quarter was impacted by the war in Iraq and SARS. In comparison, Continental Airlines ( CAL) Tuesday announced a $2 million profit, excluding charges.

But even more troubling -- or promising, depending who's talking -- is the fact Delta continues to burn through its lifeblood, cash, during a quarter that is traditionally a strong one for the airline industry. Ultimately, analysts say this dwindling cash position will determine the pace of negotiations with pilots, and by proxy, Delta's future.

At the end of the second quarter, Delta had $2 million in unrestricted cash, down $200 million from where it was three months earlier. Delta's falling credit rating and deteriorating balance sheet will become even bigger problems in 2005, when the carrier has millions of dollars in debt and pension payments to take care of.

"Although Delta generated positive cash flow from operations of $57 million in the June quarter , it is ... a pittance given that the June and September quarters are when airlines generate most of their cash," said Michael Linenberg, airline analyst at Merrill Lynch. "Where do we get nervous? A total cash balance between $1.5 billion and $2 billion is cutting it close -- less than $1.5 billion would likely result in a bankruptcy filing." (Merrill Lynch does and seeks to do business with the companies covered in research reports.)

Sometime in the next five months, analysts say something at Delta will have to give. With the carrier set to open negotiations with pilots on Aug. 3 and planning to release the results of its restructuring plan soon after, there is the potential for positive catalysts ahead. But the only issue that really matters for the near-term survival of the carrier is wage cuts from pilots, who are in the cockpit, controlling the future of the company.

"The company will be in or close to 'The Danger Zone' by the end of 2004," said Gary Chase, airline analyst at Lehman Brothers, adding later, "Liquidity will drive the pace of negotiations. If the company and the union have not reached an agreement by the end of the third quarter, we believe an ultimatum from the company to the union with a very limited time frame will be forthcoming." (Lehman Brothers does and seeks to do business with the companies covered in research reports.)

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