Abstract:

Delta Air Lines was the third biggest airlines in

the US in the early 2000s. After the September
11 attacks, which led to the decline of the airline
industry in the US, many of the major carriers in
the industry went bankrupt. Delta was one of
the few major carriers that managed to stay
afloat. However, in mid 2004, the airline
announced that it might have to file for
bankruptcy protection if it failed to obtain pay
cuts of $1 billion from its pilots, who were the
only unionized employees at the airline. The
case discusses the problems at Delta and their
role in the financial decline of the airline. Issues
like the pilot union impasse, increasing
operational expenses and legacy costs, falling
yields and severe competition from low cost
airlines are discussed in detail. The case also
outlines the restructuring plan of Delta, and the
future of Song, the airline's low cost subsidiary.

Issues:
To appreciate the issues facing airlines in the early 2000s, which were thought to be the most difficult
years in the history of airlines
To analyze the problems facing a major full service carrier in the US airline industry
To understand the power of unionized labor in the US airline industry
To study the increasing power of low cost airlines in the US and the sources of their competitive
advantage
To examine the restructuring plan of an airline on the verge of bankruptcy and to analyze its potential
efficacy in restoring the airline to profitability
Contents:

Delta's Restructuring Plan

Page No.
1

Background
Delta's Difficulties
Pilot Problems
The Road Ahead
Exhibits

2
4
6
8
11

Keywords:
Case, Delta Airlines, Chapter 11 Filing, Hub and Spoke Model, JetBlue, AirTran SkyTeam, 'Song', Legacy
Costs, Delta Pilot Retirement Plan, Point-to-Point Flying, Organizational Culture, US Airline Industry,
United Airlines, US Airways, 'The Delta Solution'

http://www.icmrindia.org/casestudies/catalogue/Business
%20Strategy2/BSTR135.htm

Delta's Restructuring Plan

Amidst speculations of a Chapter 114 filing by the end of 2004, Delta Air Lines Inc. (Delta), the third
largest airline in the United States,5 announced in early September 2004, that it would embark on a major
restructuring program aimed at restoring the airline to profitability by the end of 2006.

The restructuring would involve making

significant changes in the way the airline
operated and include major cost cutting
initiatives. As a part of the program, Delta
announced the layoff of 7000 workers
(approximately ten percent of its workforce)
over a period of 18 months. The airline also
planned to slash 90 percent of its flights into
and from Dallas (one of its major hubs) by
February 2005, eventually leading to the
shutdown of the hub. More than 2000 of the
layoffs would also be from Dallas. Company
officials announced that retained workers would
also have to take deep cuts in their wages and
other benefits during the restructuring. These
steps were expected to save Delta $5 billion by
2006, and help restore financial stability.

Top officials at Delta said that the restructuring was designed to launch the 'right airline for the new
era'.6 Delta's CEO Gerald Grinstein (Grinstein) described the program as a "comprehensive, 360-degree
plan that reinvents Delta."7 Delta had been making losses since 2001 and was fast depleting its cash
reserves. It was also burdened by over $20 billion in debt, $1.2 billion of which was due to be repaid by
early 2005. In addition to this, analysts were downgrading Delta's credit rating at frequent intervals, and
this made it expensive for the airline to borrow funds to meet its financial obligations.

Delta's predicament was similar to that of

several other airlines in the US. The exceptions
in the airline industry were the low cost airlines,
namely Southwest Airlines (Southwest), JetBlue
Airlines (JetBlue) and AirTran Airways (AirTran).
Operating in an industry that was unpredictable
at the best of times, airlines had to deal with
difficult situations as part of the nature of their
operations. Analysts said in September 2004,
that the restructuring would help Delta recover
in the long run, but that the airline was very
likely to enter bankruptcy in the shorter term.
Delta's management had also warned that it
would file for bankruptcy if its pilots union
refused to accept wage cuts by the end of
September 2004.

http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/Problems
%20at%20Delta%20Airlines.htm
Delta's Restructuring Plan Contd...
"If we cannot make substantial progress in the near term toward achieving a competitive cost structure
that will permit us to access the capital markets on acceptable terms, we will need to seek to restructure
our costs under Chapter 11 of the U.S. Bankruptcy Code," the airline said in its second-quarter report to
the Securities and Exchange Commission.8
Background

Delta's history can be traced back to 1924,

when Huff Daland Dusters, an aerial crop
dusting company, was set up in Georgia (USA)
by B.R Coad (Coad) and C.E Woolman
(Woolman), who were associated with the US
Department of Agriculture. In 1928, Woolman

bought out Coad's stake in the airline and

renamed it Delta Air Service. In 1929, Delta
diversified from crop dusting and made a foray
into passenger airline services. The first
passenger flight flew from Dallas (Texas) to
Jackson (Mississippi) in the same year. In 1934,
the airline's name was changed to Delta Air
Lines and subsequently, in 1941, its
headquarters were moved from Monroe in
Louisiana to Atlanta in Georgia. In 1945, Delta
was officially incorporated as Delta Air Lines
Inc., with Woolman as the President and
general manager, and the airline continued to
expand through the late 1940s.

In 1953, Delta merged with Chicago and Southern Airlines, thus adding more routes, especially in the
upper Midwest and Caribbean regions. Delta pioneered the hub-and-spoke flight system in 1955, where
passengers were brought to a hub airport from various smaller places and then connected with other
planes to their final destinations (Refer Exhibit I).

In the late-1950s, the airline adopted its logo of

a red, white and blue triangle resembling the
swept-wing appearance of a jet. Woolman died
in 1966 and was succeeded by Charles Dolson
(Dolson). Soon after Dolson took over, the crop
dusting division of the company was shut down,
and Delta began focusing on passenger
services. In 1970, Delta entered the wide-body
jet era with the purchase of Boeing 737 aircraft,
which could carry more passengers farther, and
at a cheaper overall cost. In 1971, W.T. Beebe
became the Chairman and CEO of Delta. In the
same year, the company started Delta Dash, a
cargo service for small packages. In 1972,
Delta purchased Northeast Airlines, which
strengthened its presence in the northeastern
parts of the US...

http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/Delta
%20Airlines.htm

Delta's Difficulties
Analysts said that Delta's problems were primarily a result of the airline's bloated cost structure and
extremely high cost of labor. They said the operational elements of the airline were also more suitable to a
time when people were willing to pay a premium for quality air service, and had become obsolete in the
early 2000s.

In the late 1990s and early 2000s, the airline

industry had changed and many of the older
airlines like Delta found it difficult to adapt to the
new paradigm. It was estimated that Delta had
lost over $5.6 billion in the period between 2001
and mid-2004. It was also burning cash very
rapidly and had used up $700 million of its
unrestricted cash reserves within the first six
months of 2004. (Analysts expected the airline
to burn cash at the rate of $350 million per
quarter for the rest of 2004 as well.) Analysts
said that one of the main reasons for the high
cash burn rate was the contribution to pension
funds, which rose drastically in 2004, as many
of Delta's pilots opted for early retirement.
However, there were several other problems
which the airline also needed to tackle, before it
could be restored to financial health...

Pilot Problems
In 2004, Delta was involved in long drawn negotiations with its pilots union - the Airline Pilots Association
(ALPA), aimed at getting the union to accept pay cuts that would help the airline balance its precarious
cash position.

At Delta, pilots were the only category of

employees that were unionized. Besides,
according to company sources and analysts,
Delta's pilots were the highest paid in the

industry, earning on an average, between

$100,000 and $300,000 a year. It was observed
that the annual pay for a captain on Delta's
smallest mainline jets (a typical mid-career
position) was, on average, $195,000 a year.
Comparatively, captains of similar-sized jets
were paid around $113,000 a year at American
Airlines and $152,000 a year at Southwest.
Delta pilots also enjoyed more generous work
rules, benefits and furlough protections than
pilots at other airlines. Many analysts believed
that excessively high pay and benefits for pilots
were the main reason for the high labor costs at
Delta...

http://www.icmrindia.org/casestudies/catalogue/Business
%20Strategy2/Business%20Strategy%20Problems%20at%20Delta
%20Airlines.htm#Delta's Difficulties
The Road Ahead
By mid 2004, there was no doubt that a comprehensive restructuring program was the need of the
moment at Delta. Analysts said that, while Delta had managed to stay in a relatively better position than
United, US Airways and American, it was fast going downhill.
Despite passenger numbers increasing marginally in 2004, Delta was not only still making losses, but the
quantum of the losses was rising(Refer Exhibit VI).

Analysts also expected the airline to keep

posting losses, given that fuel costs were
expected to rise by $680 million in 2004, and
that its cash reserves were declining rapidly
due to pension payments and increased
operational expenses.
In August 2004, Grinstein announced a
comprehensive restructuring plan, called 'The
Delta Solution', aimed to put Delta back on the
growth path. "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," said Grinstein in his
presentation of the plan to the board.

Exhibits
Exhibit I: The Hub and Spoke System
Exhibit II: Layoffs Immediately After September 11
Exhibit III: Annual Financials
Exhibit IV: Q2 2004 CASM for U.S. Airlines
Exhibit V: Labor Cost as a Percentage of Operational Cost in Q2 2004
Exhibit VI: Quarterly Profits/Losses for Delta Air Lines from First Quarter 2000 Through Second Quarter
2004. (Earnings in US Dollars)
Exhibit VII: Key Initiatives Under the Delta Solution
Exhibit VIII: Delta's Restructuring Plan

http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/Problems
%20at%20Delta%20Airlines%20Business%20Strategy.htm#The Road Ahead

Let 'em say we're crazy, I don't care about that

Put your hand in my hand baby
Don't ever look back
Let the world around us just fall apart
Baby we can make it if we're heart to heart

And we can build this dream together

Standing strong forever

Nothing's gonna stop us now
And if this world runs out of lovers
We'll still have each other
Nothing's gonna stop us, nothing's gonna stop us now

I'm so glad I found you

I'm not gonna lose you
Whatever it takes I will stay here with you
Take it to the good times
See it through the bad times
Whatever it takes is what I'm gonna do

Let 'em say we're crazy, what do they know

Put your arms around me baby
Don't ever let go
Let the world around us just fall apart
Baby we can make it if we're heart to heart

And we can build this dream together

Standing strong forever
Nothing's gonna stop us now
And if this world runs out of lovers
We'll still have each other
Nothing's gonna stop us, nothing's gonna stop us

Ooh, all that I need is you

All that I ever need

And all that I want to do

Is hold you forever, ever and ever, hey

And we can build this dream together

Standing strong forever
Nothing's gonna stop us now
And if this world runs out of lovers
We'll still have each other
Nothing's gonna stop us
Nothing's gonna stop us, whoa
Nothing's gonna stop us now, oh no

Hey baby, I know, hey baby, nothing's gonna stop us

Hey baby, woo, nothing, hey baby
Nothing's gonna stop us now yeah
Songwriters: WARREN, DIANE EVE / HAMMOND, ALBERT LOUIS
Nothing's Gonna Stop Us Now lyrics Universal Music Publishing