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Businessweek: How Delta Climbed out of Bankruptcy

GogglesPisano

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How Delta Climbed Out of Bankruptcy
A new route structure, aggressive cost-cutting, and a shrewd merger have made Delta one of the best-positioned major U.S. carriers

May 15
By Dean Foust

Delta Air Lines (DAL) plunged into bankruptcy in September 2005, marking the culmination of more than a decade of management missteps made largely out of hubris. The Southeastern airline allowed itself to go through many of the stages of decline outlined in Jim Collins' new book. Its sense of infallibility helped foster an undisciplined pursuit of practically every new jumbo jet that aircraft manufacturers rolled out, forcing it to fly large planes even on one-hour routes. Add to that a distinct denial of the increasingly grim realities of the airline business, exemplified by the errors made earlier this decade by then-Chief Executive Leo F. Mullin. He launched the trendy Song discount airline, which fizzled amid high costs and stiff competition from JetBlue Airways (JBLU). Worse, Mullin negotiated a 2001 labor deal that paid top pilots a record-shattering $300,000 a year. "Management always had to have the biggest and the best," recalls a former exec. "It was the Delta way."

That strategy helped the Atlanta-based carrier rack up billions in losses, pushing it into bankruptcy. And management was so slow to accept its humbling fate that one bankruptcy judge told executives: "I have not heard anything that I will say remotely impressed me that you have the money, the talent, or the thought that you could successfully reorganize in this case." Admits President Ed H. Bastian: "There were periods when Delta could have been just 24 hours from disappearing. If the pilots had walked out, I'm not sure we could have pulled through."

Less than four years after it was left on life support, Delta is now the picture of health. Thanks to a management overhaul, a rigorous shift towards more profitable international routes, aggressive cost-cutting, and a shrewdly timed merger with Northwest Airlines, Delta is now viewed by many analysts as the country's top-performing major carrier. It boasts the strongest balance sheet, the best route structure, and the best prospects for future profitability. "They transformed the company amazingly well," says longtime critic Roger E. King, an analyst for CreditSights, a New York-based institutional research firm.

It was a hard-won battle to reverse the downward spiral. In 2004, with cash running low and most assets hocked, Delta struggled for many weeks to find the debtor-in-possession financing to keep operating. It also came within 24 hours of failing to avert a pilots' strike. The carrier had to fight hedge fund managers pushing for a sale or breakup, then a hostile bid from US Airways (LCC).

GETTING ON COURSE
What put Delta on the path to recovery and renewal was a willingness on the part of management and employees alike to make sacrifices. Gerald Grinstein, a director who had stepped in as CEO in early 2004, convinced the pilots to swallow deep pay cuts while reducing his own salary by 25%. (For good measure, he later donated his bonus to a scholarship fund for the children of employees.) Together with Bastian, he convinced a key group of creditors—suppliers including Boeing (BA), Pratt & Whitney (UTX), and Coca-Cola (KO)—that they'd lose big under a merger with US Airways, which flew mostly Airbus planes using General Electric (GE) engines. And Bastian persuaded creditors to accept Delta's plan over US Airways' takeover bid, which was more dependent on outside financing. "They took the bird in hand," he recalls.

But simply warding off failure wasn't enough.

After the bankruptcy, Delta spent millions to rebuild morale, flying in many of its 47,000 employees for a series of events that were equal parts team-building and tent revival. And Delta convinced creditors to cede 15% ownership to employees. "They saw the importance of having the pilots and employees on board to unlocking the synergies of the deal," says Delta CEO Richard H. Anderson, a board member at the time who got the top job in August 2007. "It was equally important for the employees to know that we followed through on everything we promised."

Delta recruited Glen W. Hauenstein from Alitalia to move the carrier into underserved markets such as Kiev, Ukraine; Tel Aviv; and Nice, France. Lacking the cash to buy enough long-haul jets, Hauenstein retrofitted existing planes with winglets—tips on wings that reduce drag and save fuel—to give them more range. The result: International routes now represent 38% of all Delta flights, vs. 20% in 2005.

But the masterstroke in Delta's rebirth was the merger that Anderson engineered with Northwest Airlines in 2008. The merger is not only expected to help Delta trim an additional $2 billion in costs, it has also married Northwest's strength in Asia with Delta's presence across Europe and Latin America. Wary of a culture clash, Anderson closed the deal in six months—about half the time of most airline mergers—and set up 27 internal committees to handle everything from fitting flight attendants for new uniforms to merging frequent-flier programs.

Everything was built around Delta's paternalistic culture. Anderson even changed the ID numbers on employee security badges to prevent people from figuring out whether a colleague hailed from the Delta or Northwest camps. What he didn't want, he says, was a situation where "employees were constantly sizing up which side you were on." And the pilots agreed to combine their two unions. Robert W. Mann, an airline industry consultant who advised Delta's pilots during the process, says, "It was the most rational, controversy-free process of this sort that I've ever been involved in."

While such moves have helped Delta minimize losses amid a down economy, Anderson remains acutely aware that failure is always close at hand. He flies in a Delta cockpit jump seat about once a month to pick the brains of pilots. And in a recent two-day stretch, he spoke to 2,000 employees to hear concerns and suggestions. For Delta to remain aloft, he argues, management needs to stay as grounded as possible.

Return to the Jim Collins Table of Contents

Foust is chief of BusinessWeek's Atlanta bureau.
 

General Lee

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Where are the comments from Newor-King and CRJ567?


Bye Bye--General Lee
 

motch

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Even though Delta didn't hire me and it will be something that I'll always regret, Delta has the oppurtunity to become a World Leader in Commercial Aviation.

It will be interesting to see where they are and how they are doing in 5 yrs from now~

Hay Admin.. can you set something up to bring this thread back up in 5 yrs!
LOL

Always
Motch
 

Airbus_Driver

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I just read "Airline Without a Pilot" by Harry Nolan, Jr. It was an eye opening read of the incompetence and corruption that has existed at the executive level of Delta Airlines from 1987-2005. It should be required reading for any Delta employee.
 

ACL65PILOT

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I just read "Airline Without a Pilot" by Harry Nolan, Jr. It was an eye opening read of the incompetence and corruption that has existed at the executive level of Delta Airlines from 1987-2005. It should be required reading for any Delta employee.

It is a good book. I hope those days are behind us.
 

Tanker Clown

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Who's gonna write the next article "How Delta Dove Back Into Bankrupcy?" I wouldn't go patting yourselves on the back just yet guys. Since Delta came out of Ch11 they have hemmoraged cash.

At least they have those uber profitable international routes.....oh, and Song.
 

General Lee

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I just read "Airline Without a Pilot" by Harry Nolan, Jr. It was an eye opening read of the incompetence and corruption that has existed at the executive level of Delta Airlines from 1987-2005. It should be required reading for any Delta employee.

That was a great book. It shows what happens when a banker takes over an airline, without any airline experience.

Bye Bye--General Lee
 

crj567

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Nice article-

Reminds me of all the great stuff I read about DAL right after 9-11. They had more unrestricted cash than any airline. DAL had just made $1 billion profit a year or two prior, and there was virtually no chance of bankruptcy. In fact a couple of business writers stated that every other majpr would go out of business before DAL could go bankrupt. Well, we tend to forget how easily things went up in smoke.

Mullin was a great example of overconfidence and belief in invulnerability. But he and his crowd managed to "synergize" the place straight into the ground.

DAL is not well-run. This is simply a fact.......Any fool can see that INTL is very cyclical, and we are not on the cusp of a good cycle.

-In all honestly, I hope good things happen, but I just don't see how that is going to happen with Steenland and Anderson putting all their eggs in that crazy INTL basket. Let's hope Africa is somehow the gold mine these morons are convinced it is.

-Good luck-DAL will need it.
 

General Lee

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Nice article-

Reminds me of all the great stuff I read about DAL right after 9-11. They had more unrestricted cash than any airline. DAL had just made $1 billion profit a year or two prior, and there was virtually no chance of bankruptcy. In fact a couple of business writers stated that every other majpr would go out of business before DAL could go bankrupt. Well, we tend to forget how easily things went up in smoke.

Mullin was a great example of overconfidence and belief in invulnerability. But he and his crowd managed to "synergize" the place straight into the ground.

DAL is not well-run. This is simply a fact.......Any fool can see that INTL is very cyclical, and we are not on the cusp of a good cycle.

-In all honestly, I hope good things happen, but I just don't see how that is going to happen with Steenland and Anderson putting all their eggs in that crazy INTL basket. Let's hope Africa is somehow the gold mine these morons are convinced it is.

-Good luck-DAL will need it.

If you fly RJs for Delta (DCI), you do need more luck than the rest of us. Anyway, Africa is just one of the continents that we fly to, infact starting in July, we will hit every one except Antarctica. Africa is usally lucrative, since the elite there will pay big bucks to visit other places not as hostile. We do very well already going to Africa, and we are adding more cities as the economy heals. We are delaying some service, and upgrading planes on others. It's called paying attention, and our route planning people do that. Let's hope they also draw down some RJ routes, and add DC9s to those city pairs. That would be great.


Bye Bye--General Lee
 

Hamburger

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A CEO that actually earns his pay!!?!??!?!?!

Quick! Someone call Ripley's!
 

ACL65PILOT

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Nice article-

Reminds me of all the great stuff I read about DAL right after 9-11. They had more unrestricted cash than any airline. DAL had just made $1 billion profit a year or two prior, and there was virtually no chance of bankruptcy. In fact a couple of business writers stated that every other majpr would go out of business before DAL could go bankrupt. Well, we tend to forget how easily things went up in smoke.

Mullin was a great example of overconfidence and belief in invulnerability. But he and his crowd managed to "synergize" the place straight into the ground.

DAL is not well-run. This is simply a fact.......Any fool can see that INTL is very cyclical, and we are not on the cusp of a good cycle.

-In all honestly, I hope good things happen, but I just don't see how that is going to happen with Steenland and Anderson putting all their eggs in that crazy INTL basket. Let's hope Africa is somehow the gold mine these morons are convinced it is.

-Good luck-DAL will need it.

Not everything is in the international basket. But they would like you to see it that way. Think head fake.
 

Tanker Clown

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Not everything is in the international basket. But they would like you to see it that way. Think head fake.

If international is a "head fake" you had better hope (if you plan on making money....which is apparently optional at Delta) that you don't go head to head with Air Tran or Southwest. If that's the case, I'm sure Delta's losses this year will blow away last years.

Perhaps another airline within an airline is the fix.
 

coogebeachhotel

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Former biggest and best

TWA
PanAm
United
 

atpcliff

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Hi!

Actually, DAL, and the rest of the world, IS on the cusp of an upward economic trend. Feb/Mar was the bottom, and Mar/Apr things are starting to improve in a wide variety of disparate industries.

Africa is a brilliant move. I am now based in NBO, and business is, and has been, better than the US. Virtually ALL the air carriers here are having a very hard time finding pilots, and they all are short.

The airport is full-to-bursting at the seams with cargo and PAX.

Kenya Airways is EVERYWHERE, and there are tons of foreign carriers flying in from Europe and Asia, and most of them, and most of the cargo planes, are VERY BIG.

There are NO American carriers now flying in to NBO.

cliff
NBO
 

PeanuckleCRJ

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You'll be seeing DAL in NBO shortly.
 

ACL65PILOT

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Point is that DAL is not just the biggest international carrier, but also the biggest domestic carrier.
We are number one everywhere except South America. AMR has that one by a long shot.
We have the feed to fill the lift. This AF/KLM/DL agreement will further our profits and presence. DAL is doing things a lot differently than other have. Not saying we will not make mistakes, just saying it is coming from a different book.
 

General Lee

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Hi!

Actually, DAL, and the rest of the world, IS on the cusp of an upward economic trend. Feb/Mar was the bottom, and Mar/Apr things are starting to improve in a wide variety of disparate industries.

Africa is a brilliant move. I am now based in NBO, and business is, and has been, better than the US. Virtually ALL the air carriers here are having a very hard time finding pilots, and they all are short.

The airport is full-to-bursting at the seams with cargo and PAX.

Kenya Airways is EVERYWHERE, and there are tons of foreign carriers flying in from Europe and Asia, and most of them, and most of the cargo planes, are VERY BIG.

There are NO American carriers now flying in to NBO.

cliff
NBO

We will be flying to Nairobi via Dakar very soon.... I saw 48 hour layovers there too, which could give enough time for a nice short safari. (hey, it's better than Dayton)


Bye Bye--General Lee
 
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