Northwest and Delta Air Lines are likely to file for Chapter 11 bankruptcy protection in mid-September, a month before a more-restrictive...

Share story

WASHINGTON — Northwest and Delta Air Lines are likely to file for Chapter 11 bankruptcy protection in mid-September, a month before a more-restrictive bankruptcy law goes into effect, bankruptcy experts and airline insiders say.

The airlines are expected to delay any action until around the Labor Day weekend to avoid distressing employees during the busy summer travel period.

Northwest and Delta continue to post significant losses while trying to cut costs and adjust to record high fuel prices.

Last week, Northwest reported a second-quarter loss of $225 million, compared with a loss of $182 million for the same quarter in 2004. It is losing about $4 million a day.

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks.

The airline is trying to get employees to agree to $1.1 billion in pay and benefit cuts. So far, it has secured cuts of about $265 million from pilots and $35 million from management and salaried workers.

In a conference call with reporters last week, Chief Executive Douglas Steenland refused to speculate if or when Northwest would have to file for bankruptcy.

But he said the new law taking effect Oct. 17 would be “one of the factors” considered in making a decision.

Delta Chief Executive Gerald Grinstein last week wrote employees that the airline’s efforts to cut about $5 billion were not enough to avoid a possible bankruptcy filing.

Grinstein’s memo came after Delta announced a $382 million loss for the second quarter.

Delta’s lawyers were preparing to file for bankruptcy last October when its pilots agreed to wage and benefit cuts of about $1 billion a year.

“Delta has been very candid about the risk that a number of factors, some of which are beyond our control, will affect our ability to avoid a Chapter 11 filing. But we’re still working to pursue an out-of-court solution, even as we face increased financial pressures,” said Delta spokeswoman Benet Wilson.

Congress passed the new bankruptcy law in April in part to force companies to reorganize quicker.

The regulations were drawn up against the backdrop of two current airline bankruptcies: United Airlines’ parent company and US Airways.

Under the new law, companies in Chapter 11 are barred from paying retention bonuses to executives unless the executives prove they have job offers elsewhere.

The provision aims to stop companies from taking money from employees hit by wage and benefit cuts to enhance packages for managers, said Lynn LoPucki, a law professor at the University of California, Los Angeles.

“Very often the same managers who got the company in trouble were instead getting retention bonuses to stay,” LoPucki said.

The bankruptcy law also will force financially troubled companies to reorganize and emerge from Chapter 11 protection quicker.

Companies will have up to 18 months of a so-called exclusivity period during which they must submit a reorganization plan and are protected from takeover attempts.

United, in bankruptcy for 2-½ years, has yet to submit a plan and has asked for several extensions of its exclusivity periods.

The airline plans to emerge in the fall.

The law will require companies to make quicker decisions about whether they want to reject leases of their vendors or partners. Currently, companies do not have a deadline.

After Oct. 17, however, companies filing for bankruptcy will have to make those decisions about leases within 210 days.

Some airports and regional airlines have complained to the bankruptcy court that their futures were in limbo because United had not told them whether it would continue to use their services.