High Cost of Money.

On Apr. 15, Northwest Airlines and its corporate parent, NWA Corp., signed an agreement with a syndicate of banks and other investors that relaxed somewhat the carrier's liquidity problems of 2005. Northwest faced a $147.8-million principal payment due in November under an existing $975-million secured term loan. With the stroke of a pen, 96% of the payment was slipped five years, to November 2010, and the remaining 4% was spread out harmlessly through the five-year period. The interest rate went up, of course.

A transaction like this, if pursued by an individual, would flout the advice of most financial advisers. It would amount to taking a cash advance on a credit card to make a payment on a credit card bill. But in the low-yield, high-cost world of U.S. commercial aviation in 2005, such deals are commonplace. They're how airlines stay out of Chapter 11.

At the same time, these deals are taking a toll on airline balance sheets. The borrowing binge â€" and the losses the borrowing makes up for â€" have doubled or near-doubled long-term debt and capital leases reported by Northwest, American Airlines, Delta Air Lines and Continental Airlines since 2000, when the bubble economy burst. And shareholder equity has paid the price, going negative at three of the four carriers (see graphs). The story would be the same at United Airlines and US Airways if they weren't reorganizing in bankruptcy.

Even if the big four can avoid bankruptcy, it will take many years of profitability to repair balance sheets, more years than it took to create the current damage. But are repairs even possible?

Profits that approach the past few years' level of losses are virtually unthinkable. If profit can be attained, some of if will have to be shared with employees under recent years' concessions on pay, benefits and work rules. And the network airlines won't be able to regain much of the market share they have lost to low-cost, low-fare competitors.

Northwest's April transaction is tame compared with the one last fall that created the term loan â€" a full-blown restructuring that replaced a $975-million revolving bank credit facility set to mature in October 2004. The fiscal mayhem resulting from a payment like that, three years into the worst market conditions the big U.S. network carriers have ever seen, would have left Northwest wondering whether it had enough cash to make it through the winter, or how long it could last after that before becoming the third of the big six network airlines to file for Chapter 11. Under the term loan, payments were spread over six years. Northwest will have to come up with $527.8 million in 2010.

DELTA CLOSED TWO DEALS last fall that are comparable in scope. In one, a syndicate with General Electric Capital Corp. as agent granted the carrier a $330-million senior secured term loan and a $300-million senior secured revolving credit facility. These transactions establish 2007 as a key year for Delta: The revolver matures in December of that year and the term loan is payable in 12 equal installments throughout the year.

The second money-raiser was with American Express, adding supplements to two agreements by which Amex buys frequent-flier SkyMiles from the carrier. Amex agreed to advance $500 million to Delta, $250 million per agreement, as prepayment for its SkyMiles purchases during 2006-07.

Delta executives are talking of a possible Chapter 11 filing despite the $1.1 billion these two agreements provide, and the $5 billion per year in cost reductions and revenue improvements that the carrier has identified and is implementing. The full $5 billion won't be fully in effect until the end of 2006, and low yields and high fuel prices are offsetting some of the gains anyway. Delta tells the Securities and Exchange Commission it expects "a substantial net loss in 2005" and the need for still more cash by December. Cash totaled $1.6 billion on Mar. 31.

Nearly all Delta's assets are encumbered and it's doubtful the carrier can borrow more. That leaves increased revenues, more cost cuts, asset sales or equity or convertible-debt issues as potential sources of cash. If Delta can't reduce costs further and heavy losses continue, "we will need to seek to restructure under Chapter 11," it says.

GRAPH: OTHER BALANCE SHEETS: Other legacy carriers outside bankruptcy suffer like Delta, but less. Southwest data are shown for comparison.

GRAPH: DELTA'S LONG SLIDE: Maintaining cash, Delta has more than doubled its debt and dropped nearly $11.8 billion in equity in four years.

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By David Bond, WASHINGTON