Analysts say debt is Delta's top woe

ATLANTA -- As Delta Air Lines Inc. struggles to turn itself around, much of the focus has been on its call for concessions from pilots. But some analysts say Delta's massive debt is a bigger challenge -- and one that's more difficult to resolve outside of bankruptcy.

The nation's third-largest carrier paid $757 million in interest on debt last year, up 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 yearly interest payments.

The airline's effort to restructure debt could soon become clearer. Today is the deadline for a recent debt-exchange offer. And Wednesday, Delta reports its third-quarter earnings.

"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 airline considers its total debt to be $20.6 billion, which includes $8 billion in lease obligations on aircraft and other equipment. Interest 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.

On 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 whether 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 debt and pay off existing debt if it can cut other expenses, said Joel Denney, of Piper Jaffray & Co. "They're both in tandem," he said of 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 comment.

Denney said Delta may soon find it can't wait any longer. He noted that the company's bargaining position in restructuring its debt would be better in Bankruptcy 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," he said.

Delta outlined what's at stake in recent filings: "Except for our existing commitments to finance our purchase of regional jet aircraft, we have no available lines of credit. We believe that, unless we achieve significant reductions in our cost structure, we will be unable to access the capital markets."