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Subject: Delta -- Discussion of Claim Sale
for Retired & Active Pilots by Mike Stark

Wednesday Evening, March 28, 2006

Delta -- Discussion of Claims For Retired & Active Pilots

Once again, retired Delta pilots are being asked to make important decisions regarding financial choices that require more insight, foresight and background knowledge than most individuals would be expected to know or understand - without some reasonable guidance and discussion, plus a few ideas to ponder.

While many of the retirees do not invest with our particular company at American Financial Advisors (AFA), I feel a certain obligation or loyalty to help all pilots - out of a genuine concern for the basic well-being of Delta employees and their families - but more specifically as a fellow aviator for life - who happens to have access to information which might be helpful to all.

Thus, the following discussion of a number of issues facing the decision of what to do with the "Claim" dollars might be of value.

Table of Contents

New Delta Stock - Buy, Sell, or Hold?
What Value Can I Expect From the Claim Sale?
What Happened at United?
What's the Truth on Why We Lost the DB Plan in the First Place?
Apathy Kills
Re-Call the Current ALPA MEC -- and Recover
Sell the Stock?  Get the Cash and Then What?
If I want to sell my new Delta shares what will be the mechanism?
A Check For $250,000? -- Would I Invest in Delta With All of It?


New Delta Stock (DAL) - Buy, Sell, or Hold?

Delta Air Lines, during its entire history - has never lost money in a year that ends with 7, 8, or 9.  This is as much a function of the industry as a whole -- but still worth noting.

You have to go back to 1939 to find the first year where the 3rd year of a President's term ended up with negative returns for the stock market that year.

What do these statements have to do with the issuance of new Delta stock upon exit from Chapter 11 and the potential value of Delta's new shares for a Claim sale? 

The answer is - it doesn't hurt to have a little momentum or history on your side as a potential positive factor during this particular window while exiting Bankruptcy. 

A pertinent and recent example of this is how the market slide in May/June of last year affected the value of United's stock.  Many United pilots sold at much lower prices as the pain increased while the value of their Claim -- paid in stock -- was on a downward slide last Spring and Summer.  (I'll re-cap what happened to them later on in this article.)

The great unknown is:  What will the new Delta common stock do once it starts trading in the marketplace.  The answer is - no one knows.

Incidentally, Delta has filed a petition with the NYSE to keep the old symbol of DAL when the new stock trades.  The current common stock -- DALRQ -- will be cancelled and worthless upon exit from bankruptcy.  The proposed current date to exit Chapter 11 is April 30th.  This means the new Delta common stock will likely open for trading on Tuesday, May 1, 2007 -- or soon thereafter.


The upside speculation is that Delta stock could perform well.  The heavy debt load ($20+ billion) and cost structure per seat mile have been reduced dramatically. 

Revenue has been increased significantly since Glen Hauenstein and Bob Cortelyou came on board from Continental in 2005 and revamped the entire way Delta deploys its aircraft assets on a daily/weekly/seasonal basis.

Projections are for Delta to make over $800 million in 2007 - and more in 2008.

The significant three-year advantage Southwest (LUV) commanded over the rest of the industry with fuel hedges that averaged around $30-35/barrel are coming to an end.  The playing field becomes more level.  Another potential plus for Delta's stock.

If the stars align -- Delta stock could do very well.  Initially receiving Delta stock as "payment" or compensation for your lost benefits is not a bad thing -- but there are many issues to consider on how long -- or how much -- of the stock you retain or sell -- in order to re-capture the most value.


The downside is there are factors that involve risks no one can control including - but not limited to:

(1)  the price of oil rising above $70 during the peak 2nd and 3rd Quarters,
(2)  a large scale terrorist attack that involves either domestic or International airline facilities or aircraft again,
(3)  a Delta airplane crash,
(4)  a merger,
(5)  weak or poor leadership,
(6)  fare wars and increased competition,
(7)  manipulation by hedge funds or large shareholders,
(8)  or simply a weakening economy or recession - where air travel is reduced across the board.

Another downside is the amount of Delta stock that may be sold by numerous shareholders in the early days of trading - which will naturally drive down the price.  This may not be reflective of the true value - but the market makers will take advantage of the heavy selling for those wanting cash - and no further exposure to Delta stock.

Many individuals being granted new shares of Delta stock have been burned badly a few times in the past by Delta stock.  Based on sheer mistrust or disgust they will sell their shares on principle alone - rather than financial acumen or localized situational awareness.

What Value Can I Expect From the Claim Sale?

We have said from the beginning we felt a good number to use for planning purposes is to add together your Unqual and Medical Claim numbers -- and then cut it in half.

Your true value has already been dramatically discounted by 7.2% for a number of years into the future with respect to your actuarial lifespan -- but that's a whole other discussion that's not worth agonizing over anymore.  You are receiving dollars you had written off just a few short months ago and the gift horse may not pass your way again anytime soon.

Figure on receiving about half the amount of your "Claim" after the dust settles when the stock is sold and the taxes are paid.  This is not a perfect estimate but will probably be close in many cases.  If your Claim is valued at anywhere between 62-78%, use 2/3 of your Claim number as the first reduction in value.  Then take another 20-30% off that number for taxes. 

For example, if your Claim allocation adds up to $500,000 we would guess you'll be lucky to receive $250,000 in real dollars -- again all depending on the amount you receive from the eventual liquidation of the Delta stock you receive or the value you get from any Pre-Sale.

What Happened at United?

The action at United is worth paying attention to for a few important and educational reasons -- most of which will center around the potential volatility of any stock and emotional decisions that can be made in a vacuum -- without a crystal ball -- to view the future direction of any single stock -- or the markets in general.

Here's the scenario that happened at United (UAUA).  On February 1, 2006 they exited BK (after 3 years and 51 days).  The new stock traded the next day on February 2nd.  United stock opened the first day at $40.83/share.  It closed that first day at $35.89 on heavy volume.

During the first couple weeks it ticked up to $42, but many United pilots didn't sell - believing -- or hoping -- it should be much higher versus just slightly above the opening price.  Many held on and didn't sell in the early going.  Most members of UAL MEC pre-sold their Claim - but failed to communicate that intended action to the majority of UAL line pilots.

Those that received United stock as the value for their concessions/terminated pension plans ended up waiting nearly 10 months - from February to December - before they got back "into the black" with their United stock -- as valued at the opening in February.  It then moved above $50 in January this year, but closed today (3/28/07) at $38.11.  The roller coaster for the United pilots' fluctuating value of their "Claim" was not fun.

Here's the hard part the United pilots couldn't know -- as the story unfolded during 2006.  From the opening in February at above $40, and the drop to $36 the first day of trading - the stock briefly got back above $42 in the next couple weeks - then started a long, painful slide down to the low $20's by the end of the summer in August.

The lesson learned is:  At what point during last summer in 2006 do you think many United pilots finally threw in the towel and sold their original Claim or stock allocation for anywhere between $22-25/share or 40-50% below the value it commanded when issued?  There was no way for them to know - in advance - the stock would gradually recover back to the $40's and higher - as the overall markets had much higher gains during the 2nd half of 2006 that continued into January of 2007. 

To achieve any "meaningful gain" (say 20%) - the United pilots had to wait patiently from February 2006 ($40/share) until January 2007 ($50/share) to cash out.  And if they didn't sell at the high in January a couple months ago, they are now back down below the "opening valuation" of their Claim in 2006 with today's close (3/28/07) - again below $40 at $38.11/share.

The point here is that receiving Delta stock as the payout for either your Unqual or Medical Claims may not be a bad thing - but the decision to sell or hold - and when - or for how long -- will be a roll of the dice no one can predict - based on numerous factors.

One way to couch or bracket your thought process is to realize these are dollars you had probably written off and never expected to recoup - once ALPA and the company completely turned their backs on the retired pilots.

What's the Truth on Why We Lost the DB Plan in the First Place?

Every Delta pilot - active and retired -- needs to know a very small group of current Delta MEC officers are the ones who told ALPA National -- point blank to President Duane Woerth -- that they were not opposing termination of the Delta Pilot's Defined Benefit Plan.  Thus, $85 million sat in the coffers in Washington while the current Delta MEC politely flushed 50 years of hard won negotiations down the drain.

Bottom line?  Delta's own MEC handed over the DB pension plan on a silver platter to Jerry Grinstein - who was more than happy to oblige this kind gesture from any union - but especially from ALPA.

In hindsight, I now firmly believe if former MEC Chairman John Malone had been left in place at the helm, ALL Delta pilots - both active and retied - would still have their Defined Benefit pension plan intact and viable.  John understood -- better than any other individual inside ALPA -- what it would have taken to stand firm and save the pension. 

There are simply too many dollars being thrown around in every direction to believe otherwise - including the fact Washington's power structure was trying to help the situation in any way possible - and thought they had.

Add up these total dollars - (even at 50% of face value with respect to the "Claims"):

(1)  $2.1 billion Claim to the active pilots
(2)  $650 million Note for cash to the active pilots
(3)  $800 million Claim to the retired pilots to "replace" loss of Unqual monthly payments.
(4)  $460 million Claim (approx) to retired pilots/families to cover value of Medical benefits
(5)  $2.2 billion Claim allocated to PBGC for accepting termination of the DB Plan
(6)  $1.7 billion approx. value of existing DB Plan turned over to PGBC following 13% gain in the S&P 500, 16% for the Dow, 17% for the Russell 2000, and 23% in the International markets in 2006 -- so maybe the value of DB dollars still in the plan was higher.
(7)  8% of 2006 salary allocated to all non-contract employees that can be rolled into the 401k or taken as cash upon exit from bankruptcy.  This is certainly deserved by those employees, but also includes full retention of their DB pension plan and a soon to be announced new Defined Contribution (DC) Plan.

Given the amounts above -- is there anyone who really believes the Pilot's Defined Benefit plan had to be terminated if there had been honest efforts to work out the language in HR4 to suspend Lump Sums?  The language in HR4 calls for suspension of Lump Sums if necessary in 2010 anyway. 

Wasn't there any agreement that could have been reached to bridge the "lump sum" gap for three years -- similar to the specific language allowed by Congress to Delta -- to graciously extend an initial window of 17 years to fund the plan? Does anyone believe they would have shut the door once the 17-year mark arrived? 

Are we that naive?  Did we really try?  Or did our own ALPA MEC make it unnecessary to expend any real efforts in these directions?  Duane Woerth is probably still shaking his head and asking -- why -- or why not?

Does anyone really believe Delta Air Lines was going to be allowed to go out of business or not get any "exit financing" because the pilot's DB pension plan was still in place? 

Was Delta Air Lines truly going to leave thousands of passengers stranded because there were no Captains left over the age of 53 to fly the airplanes?  Or was there a PRP blue print we already knew works in a short-term pinch?

The Delta pilot group -- via their own MEC and ALPA -- got hoodwinked and snookered by smarter, smooth talking individuals who were smiling all the while -- behind closed doors.

Your ALPA MEC also dropped the ball big time and let Delta attorneys put language in the agreement with the PBGC that precludes the PBGC from even considering giving the DB Plan back to a healthy and thriving Delta Air Lines for a minimum of five years.  

ALPA-PAC?  Aren't those the political oversight dollars that should have ensured the HR4 pension legislation -- had the right rhetoric included - since it was honchoed by Georgia's own Johnny Isakson and signed by the President - who mistakenly were led to believe they were saving the full pension benefits of ALL Delta employees?

In the final analysis, DP3 fought for -- and is ultimately recovering -- far more for the retired pilots than 25-35 years of ALPA dues guaranteed.

And DP3 only asked for $1,000 to fight the fight versus the $75,000 you gave ALPA during your entire career.

On balance, your $75,000 in ALPA dues won other major work rules and benefits in the name of safety during your career - but it still doesn't excuse the treatment and attitude thousands of retired Delta pilots were shown by a handful of Delta MEC officers who caved in -- and ran Stockholm-scared -- during the most critical negotiation in the professional history of ALL Delta pilot's - both active and retired.

What greater threat to the profession existed than a 50% cut in pay/benefits, termination of the DB pension plan, and gutting of the best D&S plan in the industry for any Delta pilot that retires after 2008?

Apathy Kills

The sad part is - Apathy Kills - even more so than complacency. 

Many of the active pilots don't really know what they had - and thus -- don't really know what they've lost.  All they know is - it is a lot less than what they signed up for in the beginning -- when they were so excited just to get hired.

Re-Call the Current ALPA MEC -- and Recover

If the active pilots were smart they would Re-Call the current MEC and set the stage to begin recovering the overwhelmingly largest portion of the concessions granted by any single employee group to "save" the company from liquidation - a factor that was played for maximum effectiveness at every turn by clever, more professional negotiators on the other side of the table.

Included in those concessions is the still untold or recognized story of how much the retired pilots also contributed to the successful turn-around of Delta's dismal financial position -- caused in no small part by numerous missteps and bad decisions over the past decade or longer -- maybe two decades -- since the Summer of 1987.

Anyone who believes otherwise has simply to ask why Delta's major creditors are demanding to name the new Chairman and 10 new members to Delta's Board of Directors

The truth - or real story - that continues to be glossed over by the media, the politicians, the company, fellow employees - and worst of all - their own union - is the magnitude of the financial sacrifice thousands of Delta pilots contributed overall to the survival of Delta - that they haven't been given due credit for - or will ever recover - in many cases.

One reason?  ALPA has not spent the money - or the continuous effort -- necessary to properly educate the traveling public or the population in general - regarding the extensive education, experience, or mentality it takes to attain the rank of Captain - and then stay healthy and skilled enough to complete a 30-year professional career.

Whether anyone who isn't an airline Captain wants to admit it or not - less than 1% of the population has the unique ability, desire, or commitment required to get to the left seat of a commercial airliner - and stay there.  This is not an ego statement -- but both fact and reality. And that fact requires a certain level of compensation -- that is fully understood by anyone who suffers through the death of family members after a crash -- due to pilot error.

Maybe next time ALPA will finally use the pilot's annual dues to enlist the same level of professionalism demanded to run the cockpit safely -- and thus, negotiate and achieve the same professional results they deserve and expect for their contracts. 

Both active and retired Delta pilots serve faithfully as requested under the future promise of every contract signed.  What has been done to this group of dedicated professionals by both the company and their own union - under the guise of "survival" -  remains shameful.

The best move the Delta pilot group could initiate would be to bring in the right, seasoned ALPA members who would help recover what's been lost.  That isn't going to happen with the same guys in place who already gave it all up -- and agreed to do so quite easily.  The Atlanta LEC has a good head start with the new elections that took place recently.

The active Delta pilot's new slogan should be:  "Recall -- and Recover"

Sell the Stock?  Get the Cash and Then What?

Selling the stock does a few things - all of which are usually good.

(1)  Reduce and diversify risk.

(2)  Maximize flexibility.

(3)  Provide certainty.

There are many things to consider by taking cash or selling the stock for cash.

In every case I would first recommend you stop taking withdrawals from your IRA(s) and use the new cash to live on.  Reducing your taxes on the withdrawals is naturally wise -- but also lengthens the time period to hopefully enjoy tax deferred growth of the asset base.  Other investment managers are going to be hawking your dollars to invest.  Your first smart move is to reduce the taxes and withdrawals from your IRA accounts.

Additionally, since this is "found money" by some perspective - why not do something with a portion of the dollars you might not have otherwise ever done because it was "too expensive".

Fund a college education or 529 Plan for your children or grandchildren.  This will be one of the best things you ever do for your younger family members and America in general.  A better education is the greatest monetary gift anyone ever receives.

Take a great vacation. Buy the tickets.  Don't Non-rev.  Stay at the Ritz - or a really nice Holiday Inn if it's hard to break old habits.  Don't get wheeled aboard your 1st cruise ever.

Give a gift to charity.

Pay something off.

Remodel the house or the room where you spend the most quality time.

Get a new truck, new clubs, or a bigger computer screen.

Rent a big RV and get lost for a couple months.

Take the entire family on a memorable trip and cover the whole nut.

Sponsor some burned or diabled children at Camp this summer.

Send your best neighbors a thoughtful gift they will appreciate.

Invest in more real estate.

Surprise someone you know with a random act of kindness -- like your spouse.

Send it to us.  (A 50% pay cut hurts anyone -- regardless of how many jobs they have.)

If I want to sell my new Delta shares what will be the mechanism?

It appears Delta is putting in place the mechanism to Transfer the shares directly from Delta to any retiree/claimants account.  Delta is supposed to be sending a form - similar to the process you completed with the retirement paperwork you filled out for your Lump Sum distributions.

To receive the shares of Delta stock, each recipient will be sent paperwork in the next couple weeks asking you to provide an Account number for a taxable brokerage account to transfer and deposit the shares of stock - like Schwab, Fidelity, Merrill, E-Trade, Wachovia, etc.  -

All of the Claim proceeds are taxable for the retirees - so they cannot be rolled over or transferred into any IRA accounts.  They must be transferred to a taxable brokerage type account where the new Delta shares can either be held, sold, purchased, or optioned with puts, calls, collars, or straddles.

You should also be receiving W-9 Forms from Delta to establish or cover the taxation on your distribution.  We will have more information as the situation unfolds daily.

A Check For $250,000? -- Would I Invest in Delta with All of It?

One of the questions I've asked many of our retired Delta clients I've talked with is:

"If someone wrote you a check for $250,000 would you buy Delta stock with ALL of it?

Or any single stock -- or any airline stock? 

Everyone has answered "NO" - so far.

But I might buy Delta stock with some of it.  Again, like any other investment, we would not place all faith, or a large amount in any single asset or stock.  We believe the same philosophy holds true once the stock is issued and you receive your allotted amount of shares.

It might be wise to sell a portion of the stock, secure the cash - and re-invest in a dozen other vehicles - any or all of which might do as well -- or better -- than Delta stock.

Again, there is no perfect answer to the puzzle.

Usually, in cases like this - a balanced approach makes a lot of sense.  In other words, consider selling some of the stock and keeping some.  But be prepared for volatility and fluctuations or the unforeseen events that might make the stock go up/down rapidly. 

And if it goes up - don't get greedy and then lose half your profit.  Three types of investors - bulls, bears, and piggies.  And piggies usually get slaughtered.

Overall, we're trying to give you ammunition and considerations to mull over and make a reasonable choice based on the numerous factors that will influence the decision to Buy, Sell, or Hold.

We will be issuing a separate article on our offer to all Delta pilots for the dollars going into a portfolio of 10 Dimensional Funds (DFA) that have averaged 16.03% annually since December 1998 through March 1, 2007.  The portfolio is a well-diversified mix of asset classes from around the globe.  From a pure fundamental risk perspective, this may be one of the best choices or options to consider for a portion of your new found dollars.

Please feel free to Call us or E-mail any questions anytime.

Respectfully,  Mike Stark

(888) 413-9080  Toll Free

Editor's Note:  From one advisor to another I respect Mike and consider him a good advisor and friend.  However, his above advice, "stop taking withdrawals from your IRA(s) and use the new cash to live on,"  I cannot agree with.  Our firm (Integritas Fin Grp) does far too much estate planning along with investment analysis to agree with that recommendation for the average retired pilot.   All pilots should get "customized" recommendations that are keyed to their individual situations.  The rest of Mike's points are worth your read.