In addition to granting Delta Air Lines [DAL] $1 billion in payroll savings, the unionized pilots are permitting Delta to fly more 70-seat regional jets. In the agreement approved last month by the pilots, Delta can fly 25 more 70-seaters in 2005 and another 25 in 2006.

And, unlike the recently approved pact between Northwest Airlines [NWAC] and its unit of the Air Line Pilots Association (ALPA), Delta's hands are not tied in terms of who will fly the additional planes. The $1 billion in wage concessions is a key factor that Delta has said it needs to avoid bankruptcy. Over at Northwest, a much stronger airline financially, the union is precluding the carrier from committing its financial resources toward the purchase of additional 50-seat jets.

The new Delta-ALPA contract permits Delta to fly up to 150 70-seat jets by 2009 provided the mainline continues to fly more block hours. Delta gets one new RJ for each increase of 10,000 block hours flown beyond a base of 1.95 million mainline block hours that will be flown in 2005. Delta is currently authorized to fly up to 82 70-seaters.

While Delta won the right to add the larger RJs, it is saying little else about the future of its regional operations. The carrier has not developed a timetable as to when the planes will be purchased, let alone who will fly them, according to a spokesperson.

Industry observers are predicting that Delta will split the future RJs between one of its two regional subsidiaries, Atlantic Southeast Airlines, and at least one code-share partner.

"There are a couple of different things going in the opposite direction that are pulling at Delta in this decision," said Ray Neidl, an analyst with Calyon Securities. "There are the advantages of going with the most economical operators. On the other hand, they will be considering the long-term potential if they want to spin off their own regionals."

If Delta seeks bids from regional carriers -- both from its own units and independent fliers -- it would be seeking best deal to reduce its overall costs, which is in line with its restructuring program.

In a competitive bid, SkyWest Airlines [SKYW] and ASA would be the likely winners, said Tony Cristello, an analyst with BB&T. The two carriers and Chautauqua Airlines split an order for 45 50-seat RJs (CRAN, March 8).

Delta's Comair was shut out because its pricing was not competitive and it is again expected to be left behind. Comair's pilots on average earn 9 percent to 11 percent more per hour than ASA pilots with the same experience.

As a result of its winning bid earlier this year, SkyWest will take delivery of seven Bombardier [BBD] CRJ 200s next spring. "I think what you will see happen will be the 50-seat order may be converted into 70-seat orders," Cristello said. SkyWest has options for 80 CRJ 700s and CRJ 900s. It has been flying 11 CRJ 700s for United Airlines [UALAQ].

"Given Delta's pullout at Dallas-Fort Worth and the shift in focus to the West, I think SkyWest and ASA are clearly in the best position to receive this growth. I think the 70s will go into markets. A lot of those locations are ASA markets, not those served by Comair," Cristello said.

In an analysis published last month, Robert Ashcroft of UBS Securities notes that Delta has far more 50-seat RJs than any other major airline. "Given the decreasing yields, we believe that Delta has too many small -- and expensive on a per-seat basis -- RJs. If this is correct, this is another problem that Delta could have swiftly solved in Chapter 11 that it must now live with," he said. According to Ashcroft's analysis of the new Delta scope clause, 25 percent of all regional flying must be on either ASA or Comair so long as both remain units of Delta. Only 10 percent of the RJ routes can be point-to-point and no more than 15 percent of the routes can be longer than 900 miles.

In February, Chautauqua, a unit of Republic Airways Holdings [RJET], won the right to fly 13 50-seat RJs for Delta. "I think Republic will probably be in the hunt as well [for the 70-seaters]," Cristello said. However, he cautioned that Chautauqua is precluded by its contract with American Airlines [AMR] from flying anything larger than its 50-seat fleet of Embraer [ERJ] 145s. The company has created an affiliated carrier, Republic Airlines, to fly the 70-seat Embraer 170 for United; however, Republic Airlines still has not been certified by federal regulators. Chautauqua is the only regional carrier flying the new Embraers and Republic holds options for 31 additional Embraer 170s.

Both Neidl and Cristello believe that Delta will be compelled to give a number of the 70-seat RJs to either ASA or Comair to enhance the value of these units should it ever decided to spin-off or sell the regional carriers. "You don't want to deprive them of growth opportunities," Cristello said. "You want to make them appealing in the long run."

Neidl predicts that Delta will put the two regional carriers "on the block when the price is right."

By giving some of the larger planes to either ASA or Comair, Delta helps improve employee morale by demonstrating loyalty to it employees, Cristello said.

Earlier this fall Delta faced the real prospect of filing for Chapter 11 because of a mounting debt load, soaring fuel prices and an uncompetitive labor force. In addition to obtaining the pilots' wage concessions and imposing pay cuts on the rest of its labor force, Delta has obtained new long-term financing, which has enable it to retire some near- term high-interest debt. "Delta has bought themselves another 12 months," Neidl said. If the carrier continues to restructure its operations and improve its balance sheet, Neidl said the company should be able to avoid bankruptcy.

>>Contacts: Ray Neidl, Calyon, (212) 261-4057; Tony Cristello, BB&T, (804) 780-3269; Robert Ashcroft, UBS, (203) 719-6064.<<