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Analysts see Delta 2Q loss
May 14, 2001: 2:39 p.m. ET

Comair pilots rejection of offer raise risk of losses, implications for industry
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - With no end in sight for a pilots strike at Comair Inc., the feeder airline unit of Delta Air Lines, analysts were busy downgrading their outlook for Delta Monday and seeing growing importance in the dispute for the airline industry as a whole.

Members of the Air Line Pilots Association overwhelmingly rejected a settlement offer Saturday that had been made by the National Mediation Board and accepted by Comair management.

There are no new talks scheduled in the strike that begins its eight week Monday, at the same time that the regional airline begins laying off about half of its 4,000 non-striking employees. Management at Comair and Delta have threatened to cut the feeder airline's fleet of aircraft in response to the pilots' rejection of the deal.

Pilots at Delta feeder airline Comair are likely to stay on the picket line after rejecting an proposed contract, which prompted some analysts to forecast second-quarter losses for the parent company Monday. (Source: CNNfn file)
The strike cost parent Delta Air Lines (DAL: down $1.18 to $45.09, Research, Estimates) about 12 cents a share in the first six days of the strike that occurred in the first quarter, along with about $3 million-to-$4 million a day in revenue, according to financial statements from the nation's No. 3 carrier.

The prospect that those losses will continue through the end of the quarter prompted two analysts to change their second-quarter forecast for Delta to a loss Monday from a lowered profit. And even those who still see black ink said they're in the process of cutting forecasts.

Comair was handling about half the flights under the name Delta Connection, serving primarily its hubs in Orlando, Fla., and Cincinnati. Other feeder carriers unaffected by the strike serve hubs in Atlanta, Salt Lake City and Los Angeles.

Merrill Lynch analyst Michael Linenberg, one of those who now sees a loss in the current quarter, believes the Comair strike will leave the airline at little above breakeven for the year, and he cut his overall rating on the stock to neutral from accumulate. The problems at Comair only compound an overall downturn in the airline industry due to a softening economy, he said.

"The strike takes Delta's second-largest hub, Cincinnati, and turns it from nicely profitable to a money loser," he said. "Delta could have made money a year ago even with a Comair strike. But now you have other factors."

Analysts surveyed by earnings tracker First Call forecast the company would earn 37 cents a share in the quarter going into Saturday's vote, which is down from the $2.85 a share it earned a year ago. On Monday two analysts changed their forecasts to a second-quarter loss, with the range of estimates now running from a $1.43 a share loss to a profit of 95 cents a share. First Call said Monday afternoon it does not yet have a new consensus estimate that reflects the lowered forecasts.

Strike has implication for industry as whole

Linenberg and other analysts say the strike is growing in importance for the industry, because if Delta gives in to the pilots' pay demands, it will change the economics of using the smaller regional jets that make up Comair's fleet. Such aircraft have been one of the fastest sectors of growth in domestic air travel.

"I think Delta's hard stance is essential," said Jim Higgins, analyst with Credit Suisse First Boston. "What ALPA is trying to do is make regional jets unprofitable because they failed to cut off their growth through clauses (in major airline contracts)," said Higgins. "This is a very big issue."

Higgins still sees Delta making money in the quarter, saying he believes Linenberg's estimate of a 2-cent-a-day loss due to the strike is high. But he concedes that view could change with continued problems at Comair.

Analysts say that if the strike continues, Delta will be forced to take drastic action, including substantial cuts to Comair's fleet. But Delta will be hard-pressed to replace the Comair service that was handling about 25,000 passengers a day before the March 26 start of the strike, with nearly half of those passengers connecting to or from Delta flights.

Linenberg said that many of the other regional carriers are unionized and that those pilots would be unwilling to fly routes formerly handled by Comair. Typical union contracts assure pilots do not have to handle anything considered struck work. And he said since most regional pilots who want to eventually fly for a major carrier, all of which are unionized, it would be tough to find pilots who would handle those flight.

"If you're a major carrier, you have to look at the type of environment you create on the flight deck," Linenberg said. "It's not all that healthy to have crew members viewed as scabs or crossing a line."

Tough rhetoric from union and management

Delta and Comair officials have been limited in stating their plans to deal with an extended strike except to say they would jointly look for other alternatives to serve Delta's Cincinnati hub that has been the base of Comair's operations, and that it would look at cutting Comair's fleet of regional jets further.

"Tremendous growth opportunities exist in regional jet markets across the nation," said Frederick Reid, president of Delta, in a statement before the vote last Thursday. "We would look for other markets to deploy these aircraft, or consider making them available to the many other operators currently standing in line to serve the flying public. In Cincinnati, we will look for other ways to provide service to Comair and Delta customers."

  It looks like a vast canyon between the two sides, and it looks like the pilots are lining up to go on the Bataan death march.  
  Ray Neidl
Airline analyst
ING Barings
But the fact that pilots voted 1,042 to 99 to reject the proposed contract in spite of those threats shows how many problems there were with the offer, said Paul Lackie, a Comair pilot and spokesman for the union.

"With so much at stake, how bad would it have to be to drive that many people to vote no?" Lackie said. "The answer is pretty damn bad. Otherwise you'd have to say Comair hired 1,350 crazy people as pilots."

Lackie said that most pilots went to meetings on the proposed deal looking for a reason to vote for it and go back to work, but proposals on scheduling, work hours and insurance were much worse than even existing contract.

And he said that the members were not impressed by raises that management said would have made them the best paid among regional jet pilots.

"This proposal included substantial concessionary elements so that when you look at whole thing, the merits over the current agreement are not obvious," he said. As to the "best-pay-in-the-industry" argument, Lackie said, "That's like saying you're least poor of all the poor people. It doesn't address the notion of adequacy."

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The rejected offer would have given pilots immediate raises of between 13.2 percent and 30 percent, according to the company, and raises of 38 percent-to-43 percent over the four-year life of the contract. Top pay now stands at about $69,000, but the union says that first year pay can be as low as $14,562, although management puts first-year pay at $16,180.

Lackie said that he thought that the deal might have passed if not for the new work rule provisions.

"It certainly would have generated more support than was generated in this vote," he said.

But management said that some of the work rules proposals that brought objections from members were the union's own negotiating offers.

The fact that work rules are part of the problem may lead the way to a face saving compromise by both sides, said Ray Neidl, airline analyst with ING Barings, but he's less optimistic about a quick settlement that he was before Saturday's vote.

"It looks like a vast canyon between the two sides, and it looks like the pilots are lining up to go on the Bataan death march," he said.

Will Bush act to end strike?

Higgins said he believes Delta would push once again for intervention by President Bush to end the Comair strike, but the president has thus far declined to name the presidential emergency board which would get the pilots back on the job.

Thus far Bush has declined to use the powers at Comair that he used to keep mechanics at Northwest Airlines (NWAC: down $0.21 to $24.24, Research, Estimates) on the job earlier this year when they threatened to strike, or that he has apparently threatened to use to keep pilots flying for Delta itself before a tentative agreement was reached there on April 22. Analysts were split as to whether Bush would not try to get Comair pilots back in the cockpit.

"Delta's hard stance is aimed at trying to get the president to intervene," said Higgins. "It's increasingly clear this may have much broader implications."

But other analysts and the union's Lackie said intervention by the president would require too great a reversal of past position by the White House and the NMB, although Lackie conceded, "With Washington anything is possible." graphic