Prelude To a Death? A Sucker Rally at Delta Airlines.

Shares of Delta Airlines (NYSE: DAL) rallied over 30.2% after-hours after the company announced the sale of subsidiary Atlantic Southeast Airlines to Skywest (NASD: SKYW) for $425 Million in cash.  The move is seen as a do or die for the company which needs every dollar in order to avoid bankruptcy.

But is the sale of Skywest a move to avoid bankruptcy, or a preparation for bankruptcy?

This evening, the company also came out with it's 10q which spells it out rather clearly:

We intend to seek an amendment to the Liquidity Covenant which would permit us, through September 30, 2005, to include for purposes of the Liquidity Covenant the amount of the holdback or cash reserve. We cannot predict whether we will be able to obtain an amendment to the Liquidity Covenant, or the duration or other terms of any such amendment. Even if we obtain such an amendment and receive the proceeds from the sale of ASA, we believe we would fail to satisfy the Liquidity Covenant at some time during the remainder of 2005.

We sell a substantial number of tickets that are paid for by customers who use an American Express credit card. Under its processing agreement with us, Amex has the right, in certain circumstances, to impose a significant holdback of our receivables for tickets purchased using an American Express credit card. This holdback, if implemented, would negatively impact our cash and cash equivalents and short-term investments. It would also create additional risk that we would be unable to satisfy the Liquidity Covenant.

Financial Covenants

The GE Commercial Finance Facility and our financing agreement with Amex include covenants that require us to (1) comply with the Liquidity Covenant and (2) achieve certain levels of EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent, as defined). We were in compliance with these covenants at June 30, 2005, but, as
discussed above, we believe we would fail to satisfy the Liquidity Covenant at some time during the remainder of 2005.

The GE Commercial Finance Facility and our financing agreement with Amex contain customary events of default, including cross defaults to each other and to substantially all of our other debt and lease obligations. If we fail to comply with the financial covenants in the GE Commercial Finance Facility and our financing agreement with Amex and are unable to obtain a waiver or amendment, the lenders could declare all outstanding borrowings under these agreements to be immediately due and payable, which acceleration could similarly accelerate the payment of substantially all of our other debt and lease obligations. If this were to occur, we would need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code. For additional information about our financial covenants, see Note 2 to the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

In other words, the company expects to have to file Chapter 11 this year, even with the sale of ASA.  Why the sale now, and not after Chapter 11th?  Because bankruptcy auctions are long and tedious affairs, whose outcomes are far from certain.  Better to take the money now, all cash, and make the proceedings go smoother. 

And that 30% gain last night?  That looks like a sucker's rally.

Two other things come to mind.  A Delta bankruptcy opens up the doors for a company like JetBlue (NASD: JBLU) to snatch up some planes and gates on the cheap.  We discusses that company's prospects earlier.  And what to make of GE (NYSE: GE) loaning massive amounts to these company's so that they'll keep buying their engines and leasing their planes.  They're like the China to the Airline's US Government.  Not sure if I like the business.

So if The Stalwart is right, and the sale of ASA is a foreward, before Chapter 11th, we could be looking at filings sometime in September or October, figuring that an all cash sale of ASA might take a month or so to close.  If we're right, you can be sure we'll be tooting our horn loudly when the time arrives.  If wrong, you'll never see a link to this post again.

UPDATE: The Wall St. Journal has some more good stuff that confirms that this deal won't do anything to help Delta stave off bankruptcy.  Apparently the bid to raise cash is just in an attempt to satisfy agreements with the credit-card processors, so they can still sell tickets to people using Visa or Mastercard (read: everybody):

Delta Air Lines, juggling a dwindling set of financial options to avoid a bankruptcy filing, said it is selling one of its regional feeder subsidiaries to SkyWest Inc. for $425 million, but added that the sale won't be nearly enough to cover a cash reserve needed to secure a crucial new credit-card processing deal.

The third-largest U.S. airline by traffic said its agreement allowing it to accept credit cards from Visa International Inc. and MasterCard International Inc. expires Aug. 29. Delta would be all but crippled if passengers were unable to buy tickets using those credit cards, so the airline is negotiating to either extend its current arrangement through October or enter into a new agreement with another vendor.

Either would carry onerous terms designed to shield the card processors in the case of a Delta bankruptcy. The Atlanta-based airline said it may have to put aside a $750 million cash reserve to secure a new processor or agree to let its existing processor hold back a similar amount of cash from future ticket sales.

Man, if they don't even have enouch cash to accept credit-card transactions,  they're toast.  This also helps explain why the deal was done pre-bankruptcy.  This is an absolute must for operations to continue.