Delta CEO's memo stirs alarm among investors

ATLANTA — Delta Air Lines' turnaround efforts are not enough to offset high fuel costs and "more must be done and done quickly," chief executive Gerald Grinstein said in a memo that fueled investor speculation Wednesday of a looming Chapter 11 filing.

Grinstein said the recovery plan will continue "no matter how we address our immediate financial challenges," and that Delta must speed up moves to increase revenue and cut costs.

He said the airline is "still working to pursue an out-of-court solution." A Delta spokesman said the memo merely echoed Grinstein's comments to analysts last week after the airline posted another quarterly loss.

But Delta shares sagged almost 12 percent Wednesday on unusually heavy trading volume amid concern the airline is running out of time to reverse losses and avoid a reorganization in bankruptcy court.

Analyst Jamie Baker, of J.P. Morgan, said the sell-off was premature.

Speculation about a court filing as soon as Monday has swirled among investors for days, Baker said. Delta's board has a regular meeting today, so such speculation assumes Delta's board "could have reached its supposed decision without meeting first," he added.

He also noted the airline last week hired a new finance chief who'll be trying to ink new financing deals, adding "we find it unlikely . . .(he) would have instead thrown in the towel just five days into his tenure." Baker said he expects Delta to "successfully limp into 2006" with enough cash from new financing or asset sales to put off bankruptcy in hopes fuel prices subside.

Still, Grinstein's memo reflected the tightening pressure on Atlanta-based Delta as high fuel costs undercut recovery efforts.

"The high price of fuel, the interest expense on our debt, and other factors have significantly outpaced our transformation initiatives and masked our progress," said Grinstein.

"There's nothing that Jerry said that is not consistent with what he said (last week)," when Delta posted a $382 million second-quarter loss, Delta spokesman Anthony Black said.

Wednesday, investors traded more than six times the daily average volume of Delta shares. The New York Stock Exchange asked Delta to "issue a public statement whether there are any corporate developments which may explain the unusual activity," but the airline declined to comment.

Delta shares ended the day at $2.99, down 40 cents but still above its previous low in May.

A Chapter 11 bankruptcy filing would let Delta keep flying while renegotiating its debts under a judge's supervision. United Airlines and US Airways are already in Chapter 11.

Delta averted a filing last fall with pilot pay cuts and financing deals and launched broad recovery plans. But continuing losses raise the possibility of a cash crunch that could make a filing inevitable.

Delta is believed to be trying to negotiate a second lien, effectively, on financing it received last fall from General Electric and American Express. Some analysts also believe Delta is also close to a deal to sell its Atlantic Southeast Airlines subsidiary to SkyWest or another regional carrier.

"No matter how we address our immediate financial challenges, our ability to survive and to compete over the long term will depend on the continued development and execution of a transformation plan for Delta that is designed to make us competitive," he said.

"Over the long-term, I believe that to be an achievable goal."

Grinstein is "saying 'we have made our best-faith effort and it doesn't appear to be enough,' " said John Kasarda, a management professor at the University of North Carolina's Kenan-Flagler Business School. Delta "simply can't get out of the hole," he said.

Despite only a small dip in Delta's cash reserves last quarter, to $1.7 billion, industry analysts widely predict cash levels could dip dangerously low by year-end, to about $1 billion, unless fuel prices drop or it sells assets or gets more financing.

Grinstein, who's led Delta for 19 months, said some workers are wondering "what's going on?" after rivals American and Continental managed modest second-quarter profits. He said they benefit from earlier cost-cutting and less overlap with discount carriers whose low fares must be matched.