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Delta drowning in debt

Analysts say it's a bigger challenge than pilot wages

ATLANTA — While much of the public focus surrounding Delta Air Lines Inc.'s turnaround efforts has been on the need for pilot concessions, some analysts believe the carrier's massive debt is a bigger challenge and the one more difficult to resolve outside of bankruptcy.

The nation's third-largest carrier paid $757 million in interest on its debt last year, a figure that has increased more than 50 percent since 2001, regulatory filings show. At that rate, the $1 billion in annual savings Delta hopes to achieve by 2006 from pilot wage and other concessions would be eclipsed by the company's yearly interest payments.

The airline's effort to restructure its debt could soon become clearer. Today is the deadline for a recent debt exchange offer. And next Wednesday, Delta reports its third-quarter earnings, which is expected to provide updates on its debt and available cash.

"In my opinion, they're going to get the concessions; I've got a couple of steak dinners bet on that," said Ray Neidl, an airline analyst with Calyon Securities Inc. in New York. "I think the more difficult thing is going to be restructuring the debt."

The Atlanta-based airline, which operates a hub at Salt Lake City International Airport and employs approximately 4,000 people in Utah, considers its total debt to be $20.6 billion, which includes $8 billion in noncancelable lease obligations on aircraft and other equipment. Interest on its debt was $499 million in 2001 and $665 million in 2002. Through the first six months of this year, Delta had accrued $391 million in interest on its debt, records show.

Delta's scheduled debt maturities on the principal it owes are $230 million for the six months ending Dec. 31, and $1.2 billion for all of 2005, records show.

Meanwhile, as of June 30, Delta had only $2 billion in unrestricted free cash, which it has been burning at a rate of $4 million a day. Its earnings release next week will show how much cash it had as of Sept. 30, which could help determine if it needs to file for Chapter 11.

"If the cash is down to $1.5 billion, I think time has run out," Neidl said.

Delta could stem the increase in its debt and pay off existing debt if it can cut other expenses, like pilot costs, said Joel Denney, an airline analyst for Piper Jaffray & Co. in Minneapolis.

"They're both in tandem," Denney said of reducing debt and pilot expenses. "If one or the other is not successful, your result is largely the same, which is bankruptcy."

Delta officials did not respond to several telephone and e-mail requests for further comment.

The company got a boost Wednesday from positive signs in its negotiations with pilots — the two sides continue to meet and the union has reported progress in certain areas. Shares of Delta were up 67 cents, or 21 percent, to close at $3.80 Wednesday on the New York Stock Exchange.

Still, Denney said Delta may find over the next several weeks that it can't wait any longer. He noted that the company's bargaining position in restructuring its debt would be better in court.

"If you come to the conclusion that you can't get enough cuts to make your business profitable, you're better off filing as soon as possible before you eat up more money," Denney said.

That could mean some tough choices for Delta's creditors, which also are being asked to tighten their belts as part of the airline's $5 billion overall cost-cutting plan. In its latest debt restructuring effort, Delta has offered to exchange $680 million of its debt with new notes secured by $1.3 billion worth of debt-free aircraft, flight simulators and flight training equipment. The offer, which expires today, was made to holders of $2.6 billion in various forms of Delta debt.

Delta has laid down what's at stake regarding its debt obligations in recent Securities and Exchange Commission filings.

"Except for our existing commitments to finance our purchase of regional jet aircraft, we have no available lines of credit," Delta said in one filing. "We believe that, unless we achieve significant reductions in our cost structure, we will be unable to access the capital markets for new borrowings on acceptable terms."