Delta’s Reorganization a Lesson for Other Companies


Delta Airlines is expected to emerge from Chapter 11 bankruptcy
April 30 and re-list on the New York Stock Exchange on May 3. The third-largest
U.S. airline, as measured by passenger traffic, filed for bankruptcy Sept. 15,
2005, having been financially devastated by a spike in jet fuel prices and
growing competition from lower-cost, low-fare carriers such as Southwest,
JetBlue and AirTran. The 19 months the company was under Bankruptcy Court
protection was, at times, tumultuous. During that time Delta survived a hostile
takeover attempt, a major strike threat, soaring fuel prices and deep cuts in
jobs and paychecks.

The future prospects for Delta look promising. In an April 24,
2007, article in USA Today, entitled, “Delta expects to soar
after exiting Chapter 11,” it stated; “(Delta) might also get to claim the
airline industry’s second-highest market value after Southwest Airlines and the
lowest debt burden of any traditional hub-and-spoke airline, analysts say.” It
also appears that Delta’s emergence from bankruptcy will be smoother than what
was experienced by other airlines. The same USA Today article stated
that, “Atlanta-based Delta will have accomplished this in less time, with less
acrimony and at less cost than any of its bankruptcy brethren: US Airways,
United Airlines and Northwest Airlines. Delta’s relatively swift, successful
turnaround is attributed to skillful lawyering, management focus and lessons
learned from other airlines.”

Delta has implemented significant changes in business strategy
such as not focusing as much on the East Coast and Florida, where it took a
beating for years from low-fare competitors. Now there’s more of emphasis on the
more profitable international flights. It’s reported that its percentage of
total revenue from international flights has grown to 35% from 20%. Also, jets
have been assigned to routes differently than before in order to better utilize
their capacity.

Delta management was determined to get through bankruptcy in about
1.5 years and it did just that. This was attributed, in large part, to the
efforts of Delta’s bankruptcy court advocate, Marshall Huebner, whom
American Lawyer magazine just named one of its 2006 "Dealmakers of the
Year.” Media reports state that Huebner, a partner at law firm Davis Polk &
Wardwell, settled many of the claims of creditors instead of having to proceed
with bankruptcy court hearings that can stretch on for months. "Fundamentally,
we’re here to cut deals," Huebner was quoted in the USA Today article.
"We took a proactive approach to listening to what people wanted." USA
also reported that Huebner’s legal fees were much kinder to Delta’s
treasury than other fees to other companies involved in high-profile bankruptcy
cases. The article stated, “In the end, Huebner says, Davis Polk & Wardwell
expects to bill Delta about $40 million for its efforts the past 19 months, less
than half the nearly $100 million Kirkland & Ellis charged United for its
38-month bankruptcy. Although United is a larger and more complex airline with
multiple labor unions rather than Delta’s one, the contrast in fees is
Most of the creditors appear to be satisfied with Delta’s
reorganization, too, according to the USA article. It stated, “In
voting two weeks ago, 95% of creditors’ ballots backed Delta’s reorganization
plan, a strong vote of confidence.” Delta’s reorganization plan will give
unsecured creditors between 62% and 78% of the value of their allowed claims as
shares of new Delta stock. It remains to be seen if Delta’s business model
changes, such as the realignment of jet models to more appropriate passenger
routes, help to sustain a financially healthy airline into the future. However,
it does appear that how Delta conducted its reorganization under Chapter 11
bankruptcy protection may serve as a positive example for other large
corporations to follow.

Source: Tom Diana, NACM staff writer

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