Airlines face more turbulence

Continued turmoil in the airline industry was evident Thursday, as Delta Air Lines’ credit rating was lowered to junk status; United Airlines said it probably will end up terminating and replacing its employee pension plans; and union leaders representing US Airways pilots urged members to take a good look at a management cost-cutting proposal to help the airline avoid a second trip into bankruptcy — and possible liquidation.

“ Atlanta-based Delta’s plan to restructure some of its debt outside of bankruptcy has raised concerns among credit analysts who believe the move could be tantamount to defaulting on the money the struggling carrier owes.

Standard & Poor’s on Thursday dropped Delta’s credit rating to a lower degree of junk status and warned that the rating could be lowered to default.

S&P is concerned that a swap of debt for equity in the company could be viewed as coercive if the debtholder has no other choice and ends up receiving less financial consideration than originally owed.

Atlanta-based Delta’s low credit rating hampers its ability to raise additional financing.

Delta’s debt stands at more than $20 billion.

“Ratings could be lowered if Delta does not make rapid progress toward significant cost reductions in its negotiations with pilots, or if there are further moves toward out-of-court debt restructuring,” S&P analyst Philip Baggaley said.

In addition to wanting to restructure its debt, the nation’s third-largest airline is trying to get $1 billion in concessions from its pilots, make changes to its fare system and improve customer service as part of a broad turnaround plan.

The airline has warned of the possibility of bankruptcy if it doesn’t get the pilot cuts.

“ Chicago-based United Airlines said in a bankruptcy court filing that it “likely” will be necessary to terminate and replace its employee pension plans.

The carrier cited the size of further cost cuts and the need to find bankruptcy-exit financing as reasons for such a drastic move.

The filing came a day before a federal bankruptcy court hearing on United’s pension plans, which the company announced last month it would no longer contribute to while in Chapter 11. That action has been assailed by United’s unions and challenged by the government’s pension-protection agency as violating federal pension law.

In its court filing, United cited the government’s recent decision to reject its bid for a $1.6 billion loan guarantee along with sky-high jet fuel prices. The Elk Grove Village, Ill.-based airline said it “must have the cash flow and liquidity that the financial markets are willing to finance.”

“We have taken every effort to restructure our business without affecting accrued pension benefits, and will continue to explore every other option,” the company said in the 26-page filing. “However, given the magnitude of further cost reductions needed to create a viable business plan and attract exit financing, termination and replacement of all our defined benefit pension plans likely will be required.”

If United ends its four employee pension funds, it would represent the largest pension default ever by an airline. The action would dump billions of dollars in future pension obligations onto the already-strapped Pension Benefit Guaranty Corp.

The agency said last week that United’s pension plans are underfunded by $8.3 billion.

“ Union leaders representing US Airways pilots said a new labor agreement could be struck soon, telling their rank and file a new deal is “our last opportunity to control the fate of our airline and our careers.”

US Airways Group Inc., of Arlington, Va., has said that new labor deals with unions are necessary to avoid a second trip into bankruptcy and possible liquidation.

A deal with the pilots would be the first significant step in US Airways’ plans to cut costs by $1.5 billion a year, including labor savings of $800 million.

The airline has sought $295 million a year in concessions from pilots. Management made a proposal Tuesday that union leaders are asking members to review carefully.

“It is by no means a final deal, but it will give you an idea of how management is now looking at many of the issues, and the alternatives, being discussed at the table,” wrote Bill Pollock, chairman of the union’s leadership council.

Pollock, in his message to pilots, also rebuked some members of his own union group for dismissing the threat of liquidation.

“I know you’ve heard it before, but these negotiations are quite likely the most critical ones of our careers. This may very well be our last time at bat, our last opportunity to control the fate of our airline and our careers,” Pollock said.