Leo's Legacy

[Flying Freddie]

Delta CEO Bails


The Motley Fool Take
Delta Air Lines


By W.D. Crotty
November 25, 2003
Leo Mullin, the 60 year-old CEO of Delta Air Lines' (NYSE: DAL) is out. When the former management consultant and banker voluntarily steps down on May 1, what sort of company will the heralded "outsider" leave Delta investors?

A little history: When Delta sacked 34-year veteran Ronald Allen back in 1997, the accepted rationale was his arguably draconian Leadership 7.5 Program. Mr. Allen had attempted to reduce Delta's operating cost per seat mile from 9.5 cents to 7.5 cents.

According to executive vice-president Bob Colman in 1999, "While it saved the company, Leadership 7.5 barely left the house intact." Colman went on, "When Leo arrived, the airline was dead last in key customer service ratings, and you needed a microscope to find employee morale."

What's eating Delta today? You guessed it, high operating costs.

Compare the domestic operating costs at Delta with its two primary low-cost competitors. For the year ending Q2 2003, Delta's operating costs per seat mile increased from 10.3 cents to 13.8 cents. That same period, AirTran's (NYSE: AAI) costs declined from 8.5 to 8.2 cents and JetBlue's (Nasdaq: JBLU) from 6.3 to 6.1 cents. What a difference!

It doesn't look any better when you compare Delta to its peers. AMR's (NYSE: AMR) American Airlines operated at 11.6 cents in the second quarter. UAL's United's costs were 11 cents. Both benefited from negotiating labor concessions.

Last Friday, ratings agency Fitch lowered Delta's rating on $4.5 billion in unsecured debt, citing high operating costs as one reason. Clearly, from Mr. Allen's departure in 1997, Delta has gone full circle:

Delta's needs a leader. Delta must reduce operating costs. It needs a vision to guide the company and strengthen its balance sheet (which has $12 billion in total debt).

With a market capitalization of $1.5 billion, the stock trades at levels not seen since the early-1980s. The stock is up marginally since the end of last year and has roughly doubled from its recent $6.10 low set in March 2002. But it's still a far cry from its all-time highs of $71.58 in July 1998.

Where to from here? Given so much debt, high costs, and an unsettled management, investors would be well advised to stand aside. With so much cost-cutting required, and competition so fierce, it's investors that may not be left "intact."

W.D Crotty was a consultant at Delta Air Lines in the days of Leadership 7.5.

 

[General Lee]

Does the Delta CASM include ASA/Comair? I think it does. RJs increase CASM due to the short stage lengths and fewer seats. But yes, we do have a debt problem that needs to be solved. As I mentioned before, the pension problem gets smaller as the stock market and interest rates rise, so that one will get better. As far as costs are concerned, only the pilots are controlled by a contract, and that is being renegotiated right now. The other employee costs could be lowered in one minute. We do need some good leadership though----a leader or leaders that will lead us through this rough period. I think that will happen---it sure wasn't happening with Leo.


Bye Bye--General Lee

 

[Palerider957]

General:

This new CEO is from GM?? I can't remember the last time General Motors was in the news for something positive, they have lost money faster than the airlines. This guy has NO airline background.....He's had to deal with unions like the UAW, so I'm sure he's no fan of unionized pilots.

I don't see this as good news. Leo may not have been a ball of joy, but this new guys credentials frightening. JMHO....

 

[Xdriver]

General: So if your the only one with a contract that means everyone at Delta should be making min wage??

 

[General Lee]

Xdriver,

No, no. I never said that. I said that if Delta wanted to get quick money fast without the negotiations---they could get money from all of the other employees in "one minute." They put their trust in the company, and that is what you get sometimes when you do that. It means that the company could have access to cash savings quickly by doing whatever they want to them. Since we have a contract, they have to negotiate with us. That doesn't mean that we won't give up some pay---they just can't get it as fast. I don't want everyone else to make min wage----but we have been paying A LOT of money each month to protect ourselves---and the others have not. We will give what is necessary, and the others might have to take a hit too---maybe 10% here, or 5% there. That goes the same for managment---no more secret bonuses or free options to cash in on when everyone else is taking a hit. That is just fair. Everyone else had the option to get a union, but chose not to. To think that we will be the only ones to take the majority of the hit---that is fantasy land.

Palerider,

The Grinstein guy---or Ex-Western CEO---will really be in charge, and he has a better relationship with labor. The GM guy--Smith I believe, will run the financial side and help us trim our debt and do things that he did at GM---but probably not deal directly with labor. If we had to deal with him and he was a hard a$$, then we wouldn't give in and wait for the next contract talks. Even in todays' USAToday, it said we were in no danger of Chap 11. Most of the bad press asks how we will compete against the LCCs etc in the future, but clearly leaves out that the economy will also get better. They want paycuts, and that is clear----Wall Street is always against labor. I think we will allow Song to get bigger---maybe use all of the 120 or so 757s, and maybe make Song a different category---with possible 5% less pay even after the paycuts, but allow them to fly 5 more hours a month. I can see that being one of the results. Who knows?

Bye Bye--General Lee

 

[B6Busdriver]

General,
Are you sure ASA/COMAIR is included in the CASM? At US Airways the wholley owned carriers were always seperate.

 

[General Lee]

B6busdriver,

I am PRETTY sure that they are. I believe Fred Reid admitted that at the last "love" meeting----but I will try to ask around. I can't believe that only lowering pilot costs will lower the CASM another 2.0 points. Oh, that's right---we are always the problem. (We also have 2500 less pilots now than pre-9-11----it must have been 15.0 on the CASM back then......)

Bye Bye--General Lee

 

[B6Busdriver]

Those pesky pilots! The management at the latest Midway was blaming the pilots for high costs right to the end.

If ASA/COMAIR are include in your CASM that would have a huge effect. Isn't the typical CASM of an RJ about 14 to 15 cents per mile? If the CASM at Delta is about 10 cents then I would think mainline ops would have to be around 7 to 8 cents and that seems a bit low.

 

[General Lee]

B6busdriver,

You are probably right, but SUPPOSEDLY we are the only ones that are overpaid (except management....), so that would mean that everything else is industry standard or better--not causing the CASM to rise. So, if we take a large paycut---then everything else will fall right into place and the CASM will be 7.5. I have heard that Comair/ASA was included in some of the figures, and that Reid did acknowledge that at one of those meetings----that I did NOT attend anyway.

Bye Bye--General Lee

 

[delivery100]

General,

whats the overall feeling about the size of paycut DAL pilots are willing to give? 10%? 20%? Just curious, I hope its as small as possible because Delta is the lone airline holding the bar up.

 

[MedFlyer]

I think Leo's lasting legacy at DL will be what I like to call "schizo Delta."

Under Mullin's reign, DL has been fragmented into so many parts and pieces that customers no longer know what to expect. A customer flying in DL's sytem today might pay $400 to fly ATL-IND in a worn out, dirty 732, they might pay $79 to fly JFK-FLL on a fancy Song 757 with state of the art IFE, they might get crammed in an RJ for 3+ hours flying DFW-OAK, they might get an ex Shuttle plane with leather seats and extra legroom or they might get put on ASA which is setting new lows in customer service. This jumbled up mess is turning off customers fast and furious and making DL's lowfare competitors look better and better. Let's face it, Airtran's customer service is ok but not spectacular. However, compared to "schizo Delta," Airtran starts looking pretty good to a lot of travelers.

The sad reality of is that DL's employees will carry the ultimate burden of "schizo Delta." Whether pilots take cuts now or later, they will pay the price for DL's mangled product.

Now to be fair to Mullin, it wasn't all his fault. External events like 9-11 certainly made things worse and there was little he or any CEO could do to prepare for something that catastrophic. It's also not Mullin's fault that DL has to compete with the likes of JBLU and Airtran and their uber low costs. DL will never have costs as low as those guys and competing against carriers with such a huge advantage will be hard for anyone. To his credit, Mullin did a lot on DL's technology side making the effort to bring DL into the 21st century where past management had eschewed any technology.

My final thought on Mullin was that he would have probably made a great CFO or CIO for DL, but he lacked the leadership and vision to be the CEO of a major airline.


Going forward, DL's new management will have to make some changes. If they continue down the current path of "schizo Delta," it's going to be a very hard and painful road for DL's remaining employees. The economy will improve, but "schizo Delta" needs more than an improving economy to thrive in the long run. Ask the folks from TWA or the remaing folks at USAirways about the booming 90's economy. Sure the economy boomed, but their airlines were so mangled that they weren't able to make solid gains during that time. I see DL in much the same position. Granted, DL is in better overall shape than US or TW were, but then again I don't think the economy will boom like it did in the 90's and DL's competition is far stronger than what TW or US faced.


MedFlyer


Note: DL always includes the regionals (ASA/COMAIR) in their CASM/RASM calculations. It tends to inflate both figures quite a bit. I have seen a few analyses done by outsiders that threw out the regionals at DL. The most recent put DL's CASM below US, close to or slightly higher than AA/NW, much higher than CAL and way, way higher than the LCC's. UA was left out because they are still in BK.