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AUGUST 23, 2004
BUSINESS WEEK
NEWS ANALYSIS
By Brian Grow
Delta: A Wing, a Prayer, a Revamp
CEO Gerald Grinstein's long-awaited overhaul plan is on the runway. Getting pilots on board will be a crucial next step
[font=arial,helvetica,univers]After eight months of nail-biting among employees and late nights for senior managers, Delta Air Lines (DAL ) is finally launching its "strategic reassessment," a bold overhaul designed to save the ailing airline from Chapter 11.
On Aug. 18, Delta CEO Gerald Grinstein presented to the board a turnaround plan, dubbed "The Delta Solution," in a bid to help the nation's third-largest airline avoid a spiral into bankruptcy. Delta has lost $5.6 billion over the past three years. In a letter to employees, Grinstein said that more job cuts are likely, even though Delta has already slashed its workforce to around 16,000.
"Decisive and comprehensive, this is a 360-degree plan which, when complete, will transform our product, fleet, network, and cost structure into an airline that is designed to carve out new and previously uncharted network airline territory," wrote Grinstein.
FARE DEAL. The Atlanta-based carrier needs just such a radical makeover. With low-cost rivals such as AirTran Airways (AAI ) and Southwest Airlines (LUV ) competing on more than 70% of Delta's routes, and with fuel costs expected to rise by $680 million this year, the carrier has been hemorrhaging money. On July 19, it reported a $2 billion second-quarter loss, after writing off $1.65 in deferred income taxes and additional dues to its pilots' pension costs, after some 300 of them called it quits in June.
Cash reserves have dwindled to $2 billion, down from $2.7 billion in January, and Delta expects to burn $350 million in cash per quarter for the rest of the year. "The hole grows deeper," Grinstein warned employees in July.
Facing the possibility of bankruptcy if cash flow drops below $1.5 billion, Grinstein now has unleashed the strategic plan he has been developing since taking the helm last January. The details are still sketchy, but in a Securities & Exchange Commission filing, Delta disclosed that it has begun a consent solicitation with aircraft and equipment leaseholders to restructure those debts outside of Chapter 11. The move could save Delta millions and result in those bondholders obtaining an equity stake in exchange for freeing Delta from its current repayment obligations.
"FUNDAMENTAL CHANGES." Delta also wants to substantially simplify airfares for flights out of Cincinnati, its second-largest hub. Unrestricted fares from Greater Cincinnati/Northern Kentucky International Airport will drop by as much as 60%, as it seeks to attract new passengers and fend off low-cost competitors. No flight from Cincinnati will cost more than $499, including walk-ups, within the lower-48 states. Each flight will have just two first-class and six economy-class prices.
Analysts believe such a fare structure could migrate to other Delta hubs. "We are initiating fundamental changes throughout the company that will make it easier and more appealing for customers to do business with us," says Paul Matsen, Delta's chief marketing officer.
Overall, Delta probably needs at least $2.3 billion in annual cost cuts, according to airline analyst Ray Neidl at Blaylock & Partners. A big chunk of that, he believes, has to come from the pilots -- still the industry's highest-paid. So far, management has demanded $1 billion in pay cuts and reduced benefits from its 7,500 pilots, while the union has countered with an offer of $705 million in concessions.
PENSION BLUES. The two sides, however, appear to be nearing a compromise: The pilots' union and senior Delta executives met on Aug. 19 to discuss demands for an equity stake and a seat on the board in exchange for $1 billion in pay cuts. "A pilot deal is a must-have," says Gary L. Chase, airline analyst at Lehman Brothers in New York.
Still, Delta's financial dilemma could worsen. UAL's United Airlines unit, struggling to cut costs and exit bankruptcy, warned on Aug. 19 that it's "likely" to terminate its four employee pension plans, which are underfunded by $6.4 billion. Such a move would almost certainly intensify pressure on Delta to reduce its own pension-plan payments to remain competitive, say analysts.
In the latest proposal to its union, Delta wants to freeze pilots' pensions and start a new "defined contribution" plan that would reduce payouts. Delta owes $3.7 billion in cash to its current pension plan, according to AirlineForecasts, an aviation consulting group.
DOWN AGAIN. The toughest nut to crack: Multiple downgrades from credit-rating agencies have made it almost impossible for Delta to raise new funds and reduce $20 billion in debt. "We're at the tipping point," Grinstein has told analysts. Underscoring the point, on Thursday, Standard & Poor's downgraded to CCC from CCC+ citing concerns about the possibility of an out-of-court restructuring of Delta's debt (see BW Online, 8/19/04, "S&P Cuts Delta Rating"). It was S&P's fourth downgrade of Delta this year.
While Delta may be nearing the precipice, Grinstein is chanting his mantra for restructuring: "Do it once, and do it right." So far, investors like what they see. On Aug. 20, the stock rose 16%, to $4.22, as word of Grinstein's fix-it plan began to leak out. At least for now, investors appear ready to climb aboard his Delta. [/font]
BUSINESS WEEK
NEWS ANALYSIS
By Brian Grow
Delta: A Wing, a Prayer, a Revamp
CEO Gerald Grinstein's long-awaited overhaul plan is on the runway. Getting pilots on board will be a crucial next step
[font=arial,helvetica,univers]After eight months of nail-biting among employees and late nights for senior managers, Delta Air Lines (DAL ) is finally launching its "strategic reassessment," a bold overhaul designed to save the ailing airline from Chapter 11.
On Aug. 18, Delta CEO Gerald Grinstein presented to the board a turnaround plan, dubbed "The Delta Solution," in a bid to help the nation's third-largest airline avoid a spiral into bankruptcy. Delta has lost $5.6 billion over the past three years. In a letter to employees, Grinstein said that more job cuts are likely, even though Delta has already slashed its workforce to around 16,000.
"Decisive and comprehensive, this is a 360-degree plan which, when complete, will transform our product, fleet, network, and cost structure into an airline that is designed to carve out new and previously uncharted network airline territory," wrote Grinstein.
FARE DEAL. The Atlanta-based carrier needs just such a radical makeover. With low-cost rivals such as AirTran Airways (AAI ) and Southwest Airlines (LUV ) competing on more than 70% of Delta's routes, and with fuel costs expected to rise by $680 million this year, the carrier has been hemorrhaging money. On July 19, it reported a $2 billion second-quarter loss, after writing off $1.65 in deferred income taxes and additional dues to its pilots' pension costs, after some 300 of them called it quits in June.
Cash reserves have dwindled to $2 billion, down from $2.7 billion in January, and Delta expects to burn $350 million in cash per quarter for the rest of the year. "The hole grows deeper," Grinstein warned employees in July.
Facing the possibility of bankruptcy if cash flow drops below $1.5 billion, Grinstein now has unleashed the strategic plan he has been developing since taking the helm last January. The details are still sketchy, but in a Securities & Exchange Commission filing, Delta disclosed that it has begun a consent solicitation with aircraft and equipment leaseholders to restructure those debts outside of Chapter 11. The move could save Delta millions and result in those bondholders obtaining an equity stake in exchange for freeing Delta from its current repayment obligations.
"FUNDAMENTAL CHANGES." Delta also wants to substantially simplify airfares for flights out of Cincinnati, its second-largest hub. Unrestricted fares from Greater Cincinnati/Northern Kentucky International Airport will drop by as much as 60%, as it seeks to attract new passengers and fend off low-cost competitors. No flight from Cincinnati will cost more than $499, including walk-ups, within the lower-48 states. Each flight will have just two first-class and six economy-class prices.
Analysts believe such a fare structure could migrate to other Delta hubs. "We are initiating fundamental changes throughout the company that will make it easier and more appealing for customers to do business with us," says Paul Matsen, Delta's chief marketing officer.
Overall, Delta probably needs at least $2.3 billion in annual cost cuts, according to airline analyst Ray Neidl at Blaylock & Partners. A big chunk of that, he believes, has to come from the pilots -- still the industry's highest-paid. So far, management has demanded $1 billion in pay cuts and reduced benefits from its 7,500 pilots, while the union has countered with an offer of $705 million in concessions.
PENSION BLUES. The two sides, however, appear to be nearing a compromise: The pilots' union and senior Delta executives met on Aug. 19 to discuss demands for an equity stake and a seat on the board in exchange for $1 billion in pay cuts. "A pilot deal is a must-have," says Gary L. Chase, airline analyst at Lehman Brothers in New York.
Still, Delta's financial dilemma could worsen. UAL's United Airlines unit, struggling to cut costs and exit bankruptcy, warned on Aug. 19 that it's "likely" to terminate its four employee pension plans, which are underfunded by $6.4 billion. Such a move would almost certainly intensify pressure on Delta to reduce its own pension-plan payments to remain competitive, say analysts.
In the latest proposal to its union, Delta wants to freeze pilots' pensions and start a new "defined contribution" plan that would reduce payouts. Delta owes $3.7 billion in cash to its current pension plan, according to AirlineForecasts, an aviation consulting group.
DOWN AGAIN. The toughest nut to crack: Multiple downgrades from credit-rating agencies have made it almost impossible for Delta to raise new funds and reduce $20 billion in debt. "We're at the tipping point," Grinstein has told analysts. Underscoring the point, on Thursday, Standard & Poor's downgraded to CCC from CCC+ citing concerns about the possibility of an out-of-court restructuring of Delta's debt (see BW Online, 8/19/04, "S&P Cuts Delta Rating"). It was S&P's fourth downgrade of Delta this year.
While Delta may be nearing the precipice, Grinstein is chanting his mantra for restructuring: "Do it once, and do it right." So far, investors like what they see. On Aug. 20, the stock rose 16%, to $4.22, as word of Grinstein's fix-it plan began to leak out. At least for now, investors appear ready to climb aboard his Delta. [/font]
