Aviation week talks with Delta! Part 1

[Dizel8]

Foud this article on another board, good reading about the review by Delta!

Delta's Strategic Review Team Explores Solutions
By Frances Fiorino
07/11/2004 04:13:25 PM


DELTA'S DAWN . . . OR SUNSET?

It's no way to celebrate a birthday--struggling to survive, skirting bankruptcy and recharting life's course. But that's exactly how Delta Air Lines is marking its 75th year.

The carrier burned through $500 million in cash and lost nearly $400 million in the first quarter. Delta's second-quarter results are to be released next week and the prognosis is not good. Losses could be greater, and some industry observers believe bankruptcy protection may be inevitable.

Delta CEO Gerald Grinstein said "continued losses of this magnitude are unsustainable." Winning massive concessions from Delta pilots, considered the highest paid in the industry, and simplifying the fleet were key to survival, but not enough, he said.

GRINSTEIN TOLD employees in a July 1 memo that "last year's determination of the level of savings we would need for long-term viability is no longer valid" due to a number of factors: a "whopping" $680-million increase in fuel costs in 2004 compared with last year and deterioration of yields as fast-growing low-cost carriers enter markets.

Delta, he said, goes "head-to-head with them in competition for over 70% of our domestic revenues." In addition, six credit rating downgrades since 2003 have made it "more difficult and prohibitively expensive to access the capital market . . . and costs continue to outpace revenues with no improvement in sight. We need to do more and do it quickly."

Senior managers are trying to do just that inside Delta headquarters at Atlanta-Hartsfield-Jackson International. The mood is somber, intense; it's been that way that since January when Grinstein ordered a stem-to-stern strategic review of his airline, one that has been crippled by potentially mortal economic blows of the post-Sept. 11, 2001, period.

Here, giant sepia prints that capture Delta's halcyon days adorn the hallways, almost in mockery of the state of the industry today. Aircraft and flight crews, beginning with Delta's 1924 start as an crop-dusting service, look out across the intervening decades when steely-nerved pilots all looked like Robert Stack and airplane travel was actually glamorous.

Inside the executive offices, the sepia abruptly turns to black-and-white, current-day reality. Joe Kolshak, who on June 1 was appointed senior vice president-chief of operations, explains the strategic teams' activity to Aviation Week & Space Technology.

There are three teams of senior officers, their focus: "Streamlining operations and simplifying the way we do business." Grinstein's inspiration for the review stems from principles outlined in the book, Good to Great by Jim Collins, adopted by many corporations as a leadership "bible." Grinstein summed up those principles when he told employees that to reach sustained profitability, "our team must be characterized by determination, agility and a willingness to run the company in nontraditional ways while respecting the Delta culture."

Grinstein, 72, opts for a low, nearly nonexistent, media profile because his sole focus is internal, to get the job done, Kolshak says. "He came to fix this company, not as a mercenary with a pot of gold waiting at the end of the rainbow. He's irreverent, high-energy, and progressive-thinking. Grinstein's working at half the base salary as that of his predecessor (Leo F. Mullin) with no contract, no retirement, no bonus. He's done it because he fundamentally believes he can do it. When you go into a meeting with Jerry, you check the ego at the door. It's 'let's get the job done, unemotionally. Just do it.'"

Kolshak is on the hub-and-fleet or what he calls the "where-and-what-we-fly" team. The other two are the cost and product teams.

Each team meets once a week for 3-5 hr. The three have met jointly twice since April to share major findings and directional issues, says Kolshak. The joint team will present a brief overview of findings to the board in July and, with board approval, may begin implementing a few key initiatives before mid-August, when a final presentation of the business plan will be made to the board.

Grinstein told employees the initiatives will not only include labor cost-cutting measures but "operational restructuring and innovation [needed] to survive and compete." In some cases, they will unfold a detail at a time for competitive reasons.

"Whatever happens, Delta will emerge a different airline," says Kolshak, "We are going to do some things that will transform our company. Delta, in a year, two years, from now will look very different from what you see today, in a positive sense. And they will not be 'fuzzy' options, but clear paths, x, y and z. We will then lay out a timetable in what we call in the U.S. Marines Corps, POA&M--plan of action and milestones--around these ideas."

Ex-Marine and Boeing 757/767 captain Kolshak gets involved with many issues intrinsic to the airline's survival, given his current job responsibilities: flight and technical operations, Delta's Operational Control Center, safety, security, as well as Delta Connection carrier operations. Kolshak, with Delta since 1988, was promoted to his new position from senior vice president of flight operations.

"I AM NEVER GOING to do anything in the interests of saving a buck that degrades the safety of this operation. We will stop flying before we do that. That's my pledge and that's my commitment," says Kolshak.

One major focus of the teams is what the airline will demand in concessions from pilots, who form the only union at Delta. They are also among the highest paid pilots in the industry.

Kolshak said the Delta Air Lines Pilots Assn. (Dalpa) held an Master Executive Council meeting in early June and resolved to reengage the company to achieve a negotiated mid-contract. (The regular contract is amendable in May 2005. Aug. 3 is the earliest Delta could begin formal Section 6 negotiations.)

"There's a lot of negativism in the media, but the crews are doing a fabulous job and operational performance has been great in an environment that's challenging as far as staffing is concerned." Kolshak is referring to early retirement spikes. (According to Dalpa, in September 2003 there were 218 early retirements; as of June 1, 266.) "Delta is doing everything to backfill, not knowing what further early retirements we could have," said Kolshak.

However, not one flight has yet been canceled for lack of crew, said Kolshak. "Time is going 'into the pot' so to speak, and pilots are working overtime." In addition, Delta's 19 management pilots are filling in where necessary. Also 1,060 of pilots furloughed prior to Sept. 11, 2001, will be returning to Delta--the first 30 returned July 1--at a rate of about 30 per month.

Dalpa, which represents 7,500 mainline pilots, last week said it is working on a comprehensive proposal to present to Delta "in the near future."

Union spokesperson Chris Renkel said the union hopes the plan is a success, but points out "we can't be successful on our own. There's no amount of money we can give that is going to help this company if everyone else doesn't participate as well." The union's biggest concern, said Renkel, is Delta's ability to put together a restructuring plan that includes all of the players."

 

[Dizel8]

Part 2

Philip Baggaley of Standard & Poor's, like Aviation Week, a McGraw-Hill Companies subsidiary, said, "Reportedly, creditors have banded together in anticipation they might be asked for concessions as well. Historically, airlines have sometimes been able to negotiate revised lease rates, or other terms with private aircraft financiers, such as leasing companies, manufacturers or banks. It's been very difficult to renegotiate a public debt outside of bankruptcy."

Delta's inward focus on the strategic review has resulted in open-ended speculations--among them, just how much Delta might be demanding in pilot concessions. Estimates have ranged from $300 million to $1 billion. "Delta has never publicly announced any number related to pilots and concessions talks. Numbers are derived from leaks and miscalculations--but not Delta," according to an airline spokesperson.

Addressing the issue of speculative information with employees, Grinstein said only that "it's painfully clear last year's estimate of the cost savings we will need if Delta is to survive and compete is no longer valid. The hole has deepened during intervening months."

Blaylock & Partners analyst Ray Neidl, who gives Delta a one-in-four chance of entering bankruptcy protection, said he calculated the airline "would require a minimum of $850-900 million in annual cost cuts from the pilots' union, using the 34.5% salary cut the airline was looking for and adding another 15%, or $100 million, from work rules."

The strategic review teams' focus is also directed at meeting low-cost competition. "Everybody blames low-cost carriers for the state of industry today," said Kolshak. "But they're actually a good thing, as they are forcing industry to truly become an enterprise that has been deregulated and operates under the constraints and freedoms of the free market."

"Low-cost carriers are transforming the way we think about customer service," Kolshak noted, pointing out that they introduced self check-in kiosks and web-based ticketing--all part of the current travel landscape.

"We are asking, 'What do customers want from Delta?' They want cost and control. They are trapped for a certain amount of time, so anything a passenger can control, such as kiosk check-in, buying food on board, makes for a satisfied customer. As far as an onboard portion that cannot be controlled, Kolshak said Delta has encouraged crews to be honest with passengers about problems. Operationally, the airline can control schedules, and, where it makes sense, cancel flights to prevent delays.

Kolshak also pointed out that the initial concept behind Delta's carrier-within-a-carrier, low-fare Song, was "to build something to capture some of the niche market JetBlue had developed and learn something that would be transferable to the main- line, such as food for sale and zone boarding. I would argue that news of Song's demise is a bit premature."

As for low-cost carriers, "The fundamental question we pose is, who should Delta be benchmarking against? Who is the real competition?"

It's Kolshak's personal opinion that if Atlanta is Delta's largest operation in the world, and AirTran is the second-largest player not only in Atlanta but in the Southeast and Florida, then Delta should "certainly look, over a greater part of our system on a cost basis, more like AirTran than American Airlines."

Atlanta's Hartsfield-Jackson is known as the "busiest airport in the world," and in 2003 Delta and its subsidiaries transported 61.43 million, and AirTran 10.2 million, of the airport's 79.08 million passengers.

"OUR GOAL IS to turn costs much closer to low-cost carriers, because that's where a large part of the competition is," said Kolshak. "Delta's got to be in competition with AirTran, but we have some components of our system which allow us to get revenue premiums: international flying, operating into small cities. In the past we probably had 25-30% revenue premiums to the low-cost carriers. Today that's dropped to a 15% range; over time can we sustain a 5-10%? Possibly. On the cost side, however, our costs have been 50-60% greater. Obviously there's a disconnect."

Noting JetBlue's use of the Embraer 190 regional jet will change competitive dynamics in small cities, Delta will be reexamining its fleet strategy.

"We absolutely must simplify the fleet" Kolshak said, pointing out that "Delta never met an airplane it didn't like or want." With 12 fleet types, counting sub-fleet types, in the Delta repertoire, the airline is probably looking to cut back to 3-4," he said--one family, one narrow-body and a couple of wide-body types for international and domestic operations on the mainline.

No additional aircraft have been announced for deferrals, said Kolshak, and the airline is looking at leased aircraft for cost savings. Delta has parked its MD-11s, and is looking for replacements for Boeing 737-200s, some aircraft which are 22-23 years old.

Kolshak said the airline is also working to reduce turn times, which average 50 min. across the fleet. Since last September, the airline generated a virtual nine additional aircraft worth of flying through increased utilization and reduced turn times.

Delta's vision sounds similar to Air Canada's restructuring efforts. The international carrier, which filed for creditor protection in April 2003, successfully transformed into a low-fare carrier model in little over a year--by slashing costs, adopting web-based ticketing, changing fleet strategy and introducing more self-service automation.

Delta's also exploring better ways to train the fleet. Capturing data from FOQA, the airline can determine what the threats are and train pilots to react proactively. "In Nashville, for instance, where there was a high incidence of high-energy approaches. We learned the arrival procedure was keeping pilots too high and close. So, we redesigned procedures," said Kolshak.

This year has been accident-free and 2003 was one of Delta's safest, Kolshak pointed out. Some have evinced concerns that the numbers of retiring captains would allow less-experienced first officers to move into the left seat too quickly. He dismissed that idea, saying that it still takes an average of 14 years to become a Delta captain.

Kolshak said he had "mixed emotions" about Mixed Fleet Flying, a program it has undertaken with Boeing. It is designed to explore commonality among fleet aircraft with different type ratings, such as the 767-400/777 as well as the 737NG/757-600. The aim is to eventually reduce the training footprint, thus saving millions in training costs. The program was too expensive to implement at this time, but data from longitudinal studies will be mined later this year. The work will aid Delta in designing the 7E7 cockpit with Boeing.

Maintenance is marked for cost savings. Delta last month (June 25) also entered into an Integrated Materials Management contract, under which Boeing would buy and manage inventory for much of Delta's airframe spare parts. The move is aimed at avoiding the cost of holding inventory and helping with the airlines' lean maintenance strategy.

KOLSHAK PLANS to focus on more in-sourcing, and "getting leaner" is on his team's list. He plans to visit Japanese car manufacturers Toyota and Nissan to learn more about lean techniques. "What do cars and airplanes have in common? There's a lot of applicability between cars and airplanes, how manufacturing lines are set up, and the tooling is similar.

"My biggest concern? I feel confident the team knows what we have to do to win. However, with all the distractions industry-wide it's important that we don't lose focus."

 

[General Lee]

I thought it was a good article. There are some truths there, and it seems like he has a plan. He never said anything about pay cuts for non-union employees, which could help them save even more money. It is true we have too many fleet types, and I can see them eventually have 3 or 4 different types instead of 12. That doesn't mean a reduction in numbers, since we have the passengers "back". They will have to use the planes better---more utilization will increase productivity of the airplanes and pilots, and that will create more "free" airplanes to use to fight the competition. Expect a rolling hub type deal---which apparently in ATL would yeild another 30-40 extra flights a day at ATL. If INTL flying is their "bread and butter", then why not do more? We used to fly from JFK to Copenhagen, Stockholm, Berlin, Warsaw, Hamburg, Manchester, and Dublin----It would seem like we have many domestic 767-300ERs that could be converted to handle those ops. That may just happen...


Bye Bye--General Lee

 

[P38JLightning]

international "bread and butter"

If INTL flying is their "bread and butter", then why not do more? We used to fly from JFK to Copenhagen, Stockholm, Berlin, Warsaw, Hamburg, Manchester, and Dublin----It would seem like we have many domestic 767-300ERs that could be converted to handle those ops. That may just happen...


Bye Bye--General Lee


I agree that it should, and hopefuly it will. But I'm afraid that IF it does it will be only because of the international block hour grievance. If it were up to Delta management, they would give EVERYTHING (except a few London, Paris, etc. almost Domestic anyway gravy flights that are always full no matter what) to their "code share sky team alliance partnet members".

Of course a simplified pay scale (one widebody rate for example) would greatly reduce training costs for now, while they're working on reducing fleet types. And the "best 3 years" retirement scheme would probably need to go too. Probably less than 3 or 4% of Delta's planes are 777's or 767-400's yet that's what a large number of retirements are based on. Touch it for 3 years and punch out, sticking the pension fund with a huge bill for the rest of your life. Maybe best 10 or 15 years is more appropriate.

Whatever the end result, I hope Delta concentrates on running an AIRLINE, and not an ever increasing portfolio outsourcing orgy as they turn a great 75 year old airline into a logo at the top left corner of your ticket as you fly on 35 different alrlines from anywhere to anywhere, just not on Delta. Time will tell.

 

[General Lee]

P38,

I actually agree with a lot of what you are saying. I really have no idea what the negotiators are negotiating, but there may be some pay scheme like CO's---widebody, narrow body, and INTL. (??) As far as the best three year retirment deal---the best three years will be over as soon as we sign the TA---so many pilots will probably bail out. A lot of the guys still around have taken advantage of the greenslips abound thanks to the other early retirements--and they have been beefing up their last year of their best three. I bet there will be 400-500 more guys bailing after we sign the dotted line---because they could get 60% of there best three years while golfing or sitting on a nice beach---instead of working harder to get 70 % of what they make now. (after a minimum 30% pay cut) We still have over 2000 pilots over the age of 50, and supposedly we have near 500 that have more than 25 years of service--and qualify for full retirement.

You are also right about the "INTL" flying greivance---I wonder how that will be solved? Grinstein did say that he thought it was ridiculous that we have sooo many codeshares---and we should be doing more of it--especially to Asia. We shall see....


Bye Bye--General Lee

 

[InclusiveScope]

Comair, ASA Pilots Readying To Talk Costs With Grinstein

Aviation Daily

07/16/2004

Delta CEO Jerry Grinstein said he'd be willing to discuss cost-cutting recommendations by pilots at Comair and Atlantic Southeast Airlines (ASA), and has "left the door open" to start those discussions, Comair's pilot union leadership said.


The pilot groups, both represented by the Air Line Pilots Association (ALPA), in a letter to Grinstein last month suggested a merger of the two carriers after approaching their respective managements and Delta Connection CEO Fred Buttrell (DAILY, June 23). At that time, ALPA said it didn't expect an immediate response from Grinstein.


Delta's CEO sent a letter back to the pilots, noting his willingness to hear the Comair/ASA pilots plan. "We're in the process of responding," Comair Master Executive Council (MEC) Chairman J.C. Lawson said.


Comair's pilots opted not to give airline management contract relief last fall as part of efforts to compete for 45 growth aircraft from Delta Connection. Most of the planes are set to land in ASA's fleet.


Part of the original merger proposal included combining the two pilot groups, and highlighted there was plenty of growth for both carriers. Comair's future growth is more questionable than ASA's, as it is scheduled to take delivery of only four more regional jets through December. -LR

 

[701EV]

Maybe Mr Grinstein has the Vision?

701EV