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Shareholders brace for Delta turbulence
By ROBERT LUKE
The Atlanta Journal-Constitution
Published on: 07/06/04
When Delta Air Lines' management and pilots union negotiators meet later this month, Bob Kindred hopes there will be a symbolic empty chair at the table, with a placard that reads: "Shareholders."
"Whenever they get into these kinds of negotiations, it seems that shareholders are not represented at the table," said Kindred, a Delta stockholder. "It's just my feeling.
Kindred is among thousands of Delta shareholders who wonder what will happen to their investment if the airline and its pilots, suppliers and other creditors don't agree on enough concessions to stave off bankruptcy. Concerned shareholders include employees with some of their 401(k)s in Delta stock, mutual fund holders and small investors who have considered the airline a good bet.
If history is a guide, a Chapter 11 filing would likely wipe out the worth of Delta's common stock, and severely cut the value of its preferred stock and many of its bonds.
Already, those who've held Delta shares for the past few years have seen the stock value savaged. Shares that peaked at $71.50 in early 1999 closed Tuesday at $6.59. The question for longer-term stockholders is whether the shares will be rendered worthless in a Chapter 11 case or will slowly regain value.
Those thinking of buying now, while the price is low, face an even simpler question: Do you feel lucky?
Some speculators known as short-sellers are betting that Delta shares — which tumbled as low as $4.53 in May — are richly priced, even at their current depressed value.
As of mid-June, short-sellers had sold more than 56 million shares, or nearly 46 percent of the shares outstanding — an unusually high amount that reflected a conviction things would get worse before they get better. The short-sellers borrowed the shares from brokers, aiming to replace the borrowed shares by buying them back at a lower price, pocketing the difference as profit.
Of course, if Delta's stock goes up, they lose.
Some analysts, such as Ray Neidl of Blaylock Partners and Jamie Baker of J.P. Morgan Securities, agree that more bumps are in store for Delta shares even if a Chapter 11 filing is averted. For starters, Delta and its pilots union are expected to resume pay-cut talks later this month, which will likely fuel fresh speculation about bankruptcy.
"Come August, as the talks start, the shares could come under pressure," said Neidl, who has a "sell" rating on the stock. He predicts Delta's shares could head south of $4.
A higher probability
Investors intent on bargain hunting should beware, said Baker, who nevertheless has an "overweight" rating on the shares.
"With Chapter 11 rhetoric likely to worsen as summer progresses and lenders, including labor, likely to initially resist, we think the probability [of bankruptcy] once again moves up," the analyst said in a note to clients last month. "We'd rather wait [to buy] until it does."
The betting is that Delta eventually will be able to cobble a deal with its employees and creditors and stave off bankruptcy.
"I think there's a 1-in-4 chance Delta will wind up in bankruptcy," Neidl said.
If Delta is able to get concessions, Neidl suggests, shares could shoot to $13. Baker figures the price could go as high as $15.
When AMR, the parent of American Airlines, faced bankruptcy, its shares finished as low as $1.41 in March. The price of those shares tripled three weeks later when the carrier reached a deal with its pilots. AMR's shares eventually rose to close as high as $17.38 in January but have since retreated to around $12.
'Dangerous' investment
Still, Neidl contends "it's a little dangerous in the short term" to buy Delta's shares. He noted, for example, that besides concessions, Delta also needs a boost in revenue and cash flow. Delta's expenses now outstrip revenue, causing it to dip into its pile of unrestricted cash, which totaled $2.2 billion at March 31.
"In the fall, if cash declines, the stock can go to as low as $2," Neidl said.
Baker lists other risks as well, including the possibility of a weakening economy, higher fuel prices or a terrorist attack. While the last three years have been especially rough on airline stocks, volatility is nothing new in the industry.
Airline stocks — with a few exceptions, such as discounter Southwest Airlines — have been poor investments for buy-and-hold investors. An investor who bought 1,000 shares of Delta for $45,250 on June 30, 1994, would have seen that investment drop nearly 69 percent to $14,240 a decade later.
So it's not surprising that 92 percent of Delta's outstanding shares are held by institutional investors, such as mutual funds, which typically dart in and out of stocks.
Profiling shareholders
At the end of March, Delta reported 22,306 shareholders of record, which means they have the certificates. Delta could not provide details about its shareholder base, such as the number of Georgians who hold stock in the Atlanta-based airline.
Delta likely has thousands more shareholders who hold their investments through brokers. There also are about 70,000 employees in the company's 401(k) plan. The company's matching contribution is invested in Delta stock.
Shareholder Kindred, a retired sales representative for an industrial chemical company, bought 400 shares of Delta preferred stock in 1999, paying $25 a share, or $10,000.
"At that time, we felt that a blue chip stock like Delta was absolutely safe as we could get," said the Canton resident, who bought the stock for income. The shares have an annual dividend yield of 8.125 percent, payable quarterly.
Delta's common shares traded at about $60 then.
Kindred has seen his preferred shares lose about 58 percent of their value.
Kindred won't double-up and buy more, and neither will Delta retiree Carol Williams, who worked at the Atlanta ticket offices for nearly 32 years before retiring in 1995.
"It's not that I don't consider it a good buy," said Williams, who owns 200 shares bought at an average cost of $19. "I just don't have the cash flow on hand. He bought his 400 shares about five years ago, thinking it was a rock-solid blue chip investment."
But neither Kindred nor Williams are selling their shares, either.
"I can't afford a loss," Kindred said. "When you're working and get monthly income, you don't worry about things like this. But when you're 76, retired and not in good health, you look at everything you have invested because you don't have an opportunity to recoup it. You can't make it up, absolutely not.
"I'm going to ride it out until I see there's no hope."
Williams once owned more Delta shares and used them to buy a two-bedroom condo in Buckhead. She bought half her current holdings when the stock market reopened after Sept. 11 as a show of support. She thinks Delta will avert bankruptcy.
"I'm not nervous about Delta," she said. "I think that the pilots and the executives, in spite of rare cases of greed, will work it out, and that it will survive."
