Comair, ASA Get New Flying Assignments

As part of Delta Air Lines' [DAL] planned restructuring announced last week, regional subsidiary Atlantic Southeast Airlines (ASA) will lay off 1,500 workers based in Dallas.

With its stated intent of saving $5 billion a year by 2006, Delta will reconfigure 51 percent of its routes next January. For wholly owned ASA and Comair, the new route structure includes new hub assignments and more point-to-point flying.

However, missing from the massive restructuring plan is the future assignments for 119 regional jets (RJs) now assigned to the soon-to-be closed Dallas-Fort Worth hub. Delta for the most part ignored the role of its Delta Connection operation in its announcement. Some analysts are speculating that the regional operations are being held in reserve as leverage with the mainline pilots and potential collateral for post-bankruptcy debt financing.

In its restructuring plan, Delta is continuing to seek $1 billion in payroll savings from the pilots as well as reducing benefits for other employees. Delta will also be trimming its work force by 6,000 to 7,000 - about 10 percent of its current payroll. The ASA downsizing is in addition to the Delta mainline staff reduction.

Delta has set Sept. 30 as a deadline for its mainline pilots to reach a new agreement. The carrier is also asking debt holders for new terms. Delta CEO Gerald Grinstein said that "if all the pieces don't come together in the near term" the carrier would file for Chapter 11 bankruptcy protection.

The odds of the carrier going bankrupt have increased to 70 percent, said JP Morgan analyst Jamie Baker. Credit Suisse analyst James Higgins said the odds have increased from 50 percent to 66 percent because the pilots don't have an incentive to settle outside of a courtroom. The lone man out in the forecast is Calyon Securities analyst Ray Neidl, who still believes Delta will avoid Chapter 11. "There is a one-in-three chance they will file for bankruptcy. There will be a lot of gamesmanship played out over the next several weeks," he told CRAN.

As Delta closes the Dallas hub, it will be adding flights to its hubs in Atlanta, Cincinnati and Salt Lake City. In both Cincinnati and Salt Lake City the total number of new RJ flights surpass the increase in new mainline flights. However, in Delta's homeport of Atlanta, the carrier will increase its mainline flights by 10 percent and its RJ flights by 5 percent.

In addition, to redeploying its fleet to the remaining hubs, Delta plans to add more RJs and mainline aircraft flying point-to-point routes out of Boston, New York, Fort Lauderdale, Orlando and Tampa.

Both ASA and Comair have been given tentative new hub assignments, but the specifics on the new point-to-point routes will wait until the finalization of the late winter schedule, to be published later this month. However, both ASA and Comair are being redirected back to their original markets.

As ASA withdraws from Dallas, which it established in 1986, it will establish a new hub in Salt Lake City, said Gina Pesko, an ASA spokeswoman. The carrier will set up a pilot and flight attendant crew base with about 175 employees. It will also establish a 35-man maintenance base to handle the Bombardier [BBD] CRJ 700s, which will fly 40 daily flights from Utah to new western destinations. ASA employees in Dallas and Atlanta will be eligible for the Salt Lake operation, she said.

SkyWest [SKYW], the Utah-based Delta code-share partner, will handle the ASA airport operations.

The largest shift for ASA will be 28 percent growth - 75 new flights - out of Atlanta, to 330 daily flights. While ASA boosts its Atlanta operations, where it is based, Comair will be reducing its current 90 daily flights by about 66 percent. Comair is also pulling its 14 flights from Salt Lake City.

Comair will redeploy these RJs to its homeport of Cincinnati as well as to Boston and New York, said Nick Miller, a Comair spokesman. Comair currently flies 302 flights from Cincinnati, which will be increased "pretty significantly," he told CRAN without getting more specific.

The latest Delta plan will be "moderately positive for the regionals," Neidl said. "They will be picking up a little bit of extra business. From what Delta told me, they are not doing any significant cutback in ASMs [available seat miles], but instead just moving around their assets. I am not sure how much additional business the regionals will get."

While SkyWest will benefit with the preservation of the Salt Lake hub, JP Morgan's Baker said the regional carrier would probably fare better if Delta files Chapter 11 rather than successfully restructuring out of court. Baker believes that Delta stands a greater chance of flying 70-seat RJs with a court-imposed pilot package. Otherwise, Delta may be forced to maintain the 70-seat scope restrictions in order to get the pilots to make wage concessions. Already an experienced 70-seat operator, SkyWest would benefit from the scope clause relaxation.

"One glaring omission from [Delta's presentation] was any discussion of the future of regional flying," Baker noted. "Only 83 RJs have resurfaced in other hubs - leaving 60 percent of this capacity missing in action - far too great a number to simply be absorbed by non-hub operations. One possible reason is that Delta Connection is intended to form the collateral behind a Delta DIP (debtor in possession) financing. The future size and shape of Delta Connection remains a negotiating hurdle with the pilots, also contributing to management's peculiar silence on the subject."

Other elements of the Delta plan include the expansion of Song, (the low-fare experiment flying out of JFK), retiring four mainline aircraft types, upgrading the cabins, expanding international operations, expanding its new simplified fare structure and revising its frequent flyer program.

Even before Delta announced its plans to abandon Dallas except for 21 daily mainline flights, Dallas-based American Airlines [AMR] said it plans to add 70 additional flights by next summer. American Eagle will fly about one-half of these flights.

>>Contacts: Jamie Baker, JP Morgan, (212) 622-6713; James Higgins, Credit Suisse, (212) 538-3456; Ray Neidl, Calyon Securities, (212) 261-4057; Gina Pesko, ASA, (404) 766-1400, x3243; Nick Miller, Comair, (859) 767-2832.<<