NEW YORK (CNN/Money) -
Delta Air Lines' pilots union said early Thursday it had reached a tentative agreement with the airline to cut flight crew wages by nearly a third, saving the airline about $1 billion annually and giving it a chance to stay out of bankruptcy court.
The Air Line Pilots Association (ALPA) said the deal, which still needs approval from the union's rank-and-file members, was reached Wednesday afternoon. It includes a 32.5 percent pay cut, effective Dec. 1, followed by a five-year wage freeze.
The union also said the deal gives pilots the option to purchase a 15 percent stake in the airline. The package includes changes in work rules that the union said are better for pilots than other concession deals in the industry, even though they are worse than specified in the current contract.
A statement from the head of the Delta unit of ALPA called the new deal painful. But said the unit said it was essential to keep the airline out of bankruptcy court, where new contract terms could have been dictated by management and the court.
Shares of Delta (up $0.78 to $5.72, Research) gained more than $1.30, or as much as 26 percent, early Thursday and were still up about 11 percent in midday trading in New York.
Delta issued a statement saying the agreement was an important step in stemming losses at the airline, although it would not rule out a future bankruptcy.
"Bankruptcy remains a possibility, due to Delta's precarious financial situation," said the statement from Chief Executive Officer Gerald Grinstein. "We are making significant progress and are on course with our customer-focused transformation plan."
Problems not over
Analysts agreed that the airline is in better shape Thursday with the labor agreement, but not yet out of the financial woods.
"I think that they've bought themselves a little bit of time, certainly," said Jim Corridore, airline equity analyst with Standard & Poor's. "But I don't think, even when they came up with the goal of $1 billion in concessions, that they expected fuel prices to be at these levels. I expect they'll continue to burn through cash, and they'll need to do more."
Corridore, who does not own any Delta shares, has an "avoid" rating on the stock, one step below "neutral" but one step above "sell."
Atlanta-based Delta has been struggling for some time.
It hasn't reported a quarterly profit since 2000, well before the Sept. 11 terrorist attack hit demand for air travel. In its most recent quarter, it reported a loss of $592 million, or $4.73 a share, excluding special items, up from $172 million, or $1.43 a share, on that basis a year earlier.
The loss was worse than even rising loss forecasts from airline analysts, who are now looking for fourth-quarter losses of another $5.09 a share, and full-year losses of $14.87 a share, or about $1.9 billion before special items.
The airline has seen miles flown by paying passengers rise about 12 percent so far this year. But the average amount paid per mile is off 3.5 percent, while it was grappling with an average fuel price that rose 32 percent over the same period a year ago.
The rising losses caused it to burn through cash, leaving it with only $1.4 billion in unrestricted cash and cash equivalents at the end of September, down from $2.7 billion at the end of last year. It had total assets of $23.5 billion and total debt and capital leases of $12.8 billion.
Before this deal, Delta was saddled with the industry's highest labor costs, even though its mechanics and flight attendants are not in a union. It also faces significant competition from low-fare carriers, such as AirTran Airways (Research).
Delta reached its previous contract agreement with the Air Line Pilots Association in May 2001, making its pilots the best paid in the industry, with raises of between 24 and 34 percent over the four-year pact.
After the Sept. 11 terrorist attack sharply cut demand for air travel, competitors such as American Airlines, United Airlines and US Airways all won steep wage concessions from its union employees. Northwest Airlines recently reached a tentative agreement on cost cuts with its pilots Oct. 14. United and US Air won their concessions while in bankruptcy court, during which they were also able to restructure and shed some of their debt.
Labor is not the only area management has been working to cut costs. Monday it was able to win a restructuring of some $135 million in debt originally due next year with its lenders, although it will have to pay higher interest rates to push back the due date for those loans. It also reached agreement with American Express (Research) to provide up to $600 million of financing
The airline had 542 planes for its mainline service and 69,700 employees as of Sept. 30. It served 82.2 million passengers the first nine months of this year, or about 300,000 a day.
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