Delta Air Lines (DAL)

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Delta, the nation’s third-largest airline in terms of passengers carried, traces its roots back to 1924, when Huff Daland Dusters was founded as the world’s first aerial crop dusting organization.

In 1928 the company became Delta Air Service. On June 17, 1929, Delta inaugurated airline service with the first passenger flights over a route stretching from Dallas, Texas to Jackson, Mississippi, via Shreveport and Monroe, Louisiana. In 1941, the company moved its headquarters from Monroe to Atlanta, Georgia. Northeast Airlines merged with Delta in 1972 making Delta a major carrier in New York and Boston, with direct routes from New York and New England to Florida.

In 1987, Delta merged with Western Airlines, becoming the fourth largest U.S. carrier and fifth largest world carrier at that time. In 1991, Delta purchased substantially all of Pan Am’s transatlantic routes and the Pan Am Shuttle, marking the largest acquisition of flights at that time.

Delta Air Lines, for many years, was synonymous with profitability and a family-like labor relations atmosphere that was the envy of the industry.   

Like all large hub-and-spoke network carriers, Delta began hemorrhaging money after the Sept. 11, 2001 terrorist attacks leveled the World Trade Center and damaged the Pentagon. In January 2004, Gerald Grinstein, then 71, took over as CEO amidst difficult contract talks with pilots, irate over his predecessor’s pay package. Grinstein had served on Delta’s board since selling Western Airlines to the company in 1987. He had served as chairman of Delta’s board from August 1997 to October 1999.

Grinstein unveiled a Transformation Plan in November 2004 to cut $5 billion a year in expenses by the end of 2006. After difficult negotiations, pilots supported the effort by ratifying an agreement that:

• Cut their hourly wages by 32.5-percent.
• Changed work rules to increase the efficiency of pilot scheduling.
• Increased the number of 70-seat jets Delta’s regional code-sharing partners could operate.
• Froze pilots’ defined benefit pension plan and substituted it with a defined contribution plan.
• Increased pilots’ medical insurance premiums.
• Granted pilots approximately 30 million stock options.
• Becomes amendable Dec. 31, 2009.

Grinstein sought to distribute the pain of the restructuring across the entire airline. Between 2001 and 2005, Delta cut 3,670, or 40 percent, of its management and administrative jobs.  The Transition Plan, however, could not forestall the inevitable. As fuel prices soared, low cost competition mounted and competing legacy carriers slashed costs in bankruptcy court, Delta filed for bankruptcy protection in September 2005. Delta’s most recent financial data show the company had lost nearly $11 billion from 2002 to 2005.

In bankruptcy court, Delta sought to cut an additional $3 billion a year by:

•  Improving network productivity: Delta has cut $1.1 billion a year in costs by reducing its domestic fleet by 20 percent and de-emphasizing its hub and spoke network in favor of a point-to-point route system like that pioneered by Southwest Airlines. It shifted dozens of its largest aircraft to more profitable international routes in one of the largest international expansions in aviation history.
• Renegotiating or rejecting contracts: Delta has cut $970 million a year in expenses by rejecting contracts. It rejected leases at airports in Tampa, Dallas and Orlando, where it had operated hubs. It rejected leases or purchase agreements affecting 143 aircraft and it refinanced its remaining debt at lower interest rates. 
• Cutting labor costs: Finally, Delta cut $930 million a year in expenses by cutting jobs, wages and benefits. Pilots lost their defined benefit pension plan and took another 14 percent pay cut worth $280 million a year through the end of 2009. Retired pilots had to begin paying half their retiree health insurance premiums. In exchange, ALPA and other unions secured claims against the company that they can sell to supplement retirement savings and pay. Delta also cut another 1,000 administrative positions. (For details on the Delta pilot contract, FLTops.com members can search our archives.)

In a show of good faith, Delta eliminated all incentive programs for its management and cut their pay 10 to 15 percent. It then launched plans to offer incentive pay, 401K retirement and profit-sharing plans to pilots and other rank-and-file employees.

By late 2006, Delta reported that it had achieved 85 percent of its goals and was finalizing a plan to submit to its creditors for approval. The plans were interrupted, however, in mid-November by an unsolicited $8 billion bid by U.S. Airways. The airline, which had only emerged from bankruptcy in late 2005, was still in the process of merging operations with Phoenix-based America West.

With strong backing from Delta’s labor unions and creditors, Grinstein was able to thwart the takeover attempt. Already bitter over US Airways failure to merge its pilot contracts, the Air Line Pilots Association opposed the deal. Other unions followed suit and Grinstein deftly lined up Delta’s most important creditors and business partners behind his own reorganization plan. In late January, US Airways withdrew its bid.

Grinstein further endeared himself with Delta employees when the airline disclosed in March 2007 that he would not accept any stock grants, bonuses or severance payments authorized by the reorganization plan to retain management. 

In mid-April 2007, more than 95 percent of Delta’s creditors approved the airline’s reorganization plan. The airline expects to emerge from bankruptcy April 30.

In 2006, Delta reported a $6.8 billion loss, bringing to nearly $17 billion its losses since 2000. Despite slashing nearly 24,000 jobs in five years, however, rising fuel prices kept its operating cost per available seat mile at 11.56 cents. That was more than a penny above its 2002 cost and 31 percent above that of Southwest Airlines.