SAN FRANCISCO (XFNews) - Delta Air Lines Inc and Northwest Airlines Corp tossed in the towel Wednesday, joining the swollen ranks of US airlines resorting to bankruptcy to rebuild their shattered finances.
With the latest additions, three of the nation's five biggest carriers are legally broke.
Neither move was unexpected.
Atlanta-based Delta, the third-biggest US airline, has been fighting for years to bolster its shriveling financial condition while No. 4 Northwest, also smarting financially, hit the wall when its unions balked at further pay and benefit cuts.
Common to both carriers was a relentless rise in jet fuel prices - up 50 pct this year - and too many seats available to defend the higher ticket prices needed to cover that rising cost.
They were also overwhelmed by competition from low-cost carriers unsaddled with mounting healthcare costs and the generous defined pension plans that once made legacy airlines such attractive employers.
Both airlines assured the public they will keep flying, honoring tickets and frequent flyer programs just like UAL Corp, parent of No. 2 US carrier United Airlines, has been doing since it went bankrupt in December 2002.
Delta was first to pull the trigger, filing for Chapter 11 protection from creditors in federal bankruptcy court in New York in what is increasingly seen by industry analysts as a viable survival strategy rather than a corporate failure.
The Atlanta-based carrier listed assets totaling 21.56 bln usd compared with 28.27 bln usd in debt.
"The action we have taken is a necessary and responsible step to preserve Delta's value for our creditors, customers, employees, business partners and other stakeholders as we address our financial challenges and work to secure our future," Delta CEO Gerald Grinstein said in a statement.
Grinstein warned that restructuring would involve further pay cuts and layoffs among the company's 52,000 workers, including an overhaul of its pension plans. He provided no details.
Northwest followed Delta's lead just minutes later, filing in the same New York court. Northwest listed 14.4 bln usd in assets and 18 bln usd in debt.
Northwest, whose 4,400-strong mechanics union is already out on strike, vowed to further slash costs in its effort to emerge from Chapter 11.
Earlier this month Northwest warned its workers that the 1.1 bln usd in labor cost-cutting it demanded in March is no longer enough to close the gap on the 3.3 bln usd fuel bill it expects to pay this year, up from 2.2 bln usd last year.
"Northwest must significantly lower its costs to compete with other carriers," said CEO Doug Steenland. "Many of these are legacy carriers that have already used the bankruptcy process to achieve changes in their cost structures or newer, low-cost carriers which have much lower labor and operating costs than legacy carriers."
Steenland said bankruptcy would not interrupt ongoing talks with its union workers.
Both airlines are closely following UAL's bid to emerge from bankruptcy, which many in the industry see as the blueprint for shedding costs.
Despite howls of protest from workers and retirees, Chicago-based United used bankruptcy to abrogate labor contracts and get out from under billions of dollars worth of pension obligations it successfully argued it no longer could afford. The federal Pension Benefit Guarantee Corporation is picking up much of the bill.
Standard & Poor's airline credit analyst Philip Baggaley estimates Delta's underfunded pension obligations at 5.3 bln usd and Northwest's at 3.8 bln usd, adding that the numbers are likely to rise.
While AMR has remained solvent though the tough times, Bear Stearns equities analyst David Strine warned it could soon find itself lagging as poorer rivals lighten their financial burdens.
"Filings at Delta and Northwest would leave 47 pct of the industry in Chapter 11 with the opportunity to shed costs, ditch pensions, and repair balance sheets to the detriment of the non-bankrupt legacies such as AMR," he wrote in a research note sent earlier Wednesday.
"In light of this, ... it's difficult to see AMR outperform other airline shares in the medium term, and we lower our sector-relative rating to peer perform," he added.