Delta's Grinstein on Exiting Bankruptcy
In 2004, Gerald Grinstein came out of retirement to become CEO of Delta Air Lines, just as the company was sinking into a financial crisis. Delta declared bankruptcy in September 2005. Over the next 18 months, Grinstein shepherded the airline through deep cost cutting, including pay cuts for pilots and other employees, along with major route restructurings and a 16 percent reduction in the company's aircraft fleet. Grinstein also rebuffed a $10 billion takeover bid by US Airways. Delta emerged from bankruptcy on April 30. Grinstein spoke with Deputy Business Editor Rick Newman about how the company used bankruptcy to its advantage.
Q: Delta got through bankruptcy very quickly, earning praise for keeping litigation to a minimum, sustaining a pretty big chunk of pilot pensions, and issuing incentive packages to thousands of employees when you finally emerged. How'd you do it?
A: Well, it wasn't just me; it was a combination of people putting this together. But a few things made this work. We absolutely set a target of about 18 months. I said, "I hope it doesn't take that long, but that's our target." At the time, in the fall of 2005, there were some amendments to the bankruptcy law, and one thing was, they gave an 18-month period of exclusivity to debtors in bankruptcy. That didn't apply to us, but 18 months seemed like a good target. ... But the real burden of persuasion was with the creditors. We tried to make everything as brief as possible, just to make it easy to understand.
Q: Was there some kind of template that you followed? Was there anything you modeled on United Airlines, which was already in bankruptcy at the time?
A: I don't think we fixated on United. And there was no real template, not from an airline industry point of view. The general experience in airline bankruptcies is not good. There's no real model. ... But from a practical notion, we knew that the longer you stay in bankruptcy, the harder it is to adapt to the environment once you come out. With the US Airways [hostile takeover] bid last November, for instance, we felt it would lengthen our stay in bankruptcy. That's one of the reasons we were so adamantly set against it.
Personally, I thought there was no way the Department of Justice would approve it, and when US Airways had talked about merging some of their operations [back in 2000], negotiations took 18 months. And that was without bankruptcy. And after all that, the government turned it down. We didn't want that to happen. We thought it will just extend our stay and produce nothing but delay.
Q: What about litigation? How did you keep a lid on that?
A: At the beginning, we said, "Let's not fight everything; let's solve as much as we possibly can without litigation." The bankruptcy process is usually a bunch of pit bulls fighting each other. In that environment, everybody is angry, sharp of tongue. We didn't want to get into that.
Q: Allow me to be cynical for a moment and assume that law firms like litigation, because they make more money that way. So where did the discipline come from? How did Delta enforce its aversion to litigation?
A: The discipline really came jointly. There are always unsung heroes in situations like this, and John Varley, one of our in-house lawyers, he was really our communicant with the law firms. He watched all of the issues and made sure we did everything we could without litigation.
Q: What were some of the key moments of progress along the way?
A: There were a lot of opportunities to have rows with the creditors' committee, but one thing that helped is that we were overcoming some of their concerns. Like our revenue per available seat mile, which was about 83 percent of the industry average in 2005. We got that up to about 94 percent in 2006. That was one of the cornerstones of our turnaround. We also said we were going to take out $3 billion of costs and $1 billion of wage and benefits. We were on track, or exceeding, all of that.
Q: US Airways made its bid for Delta in November of 2006. Do you think that sped up Delta's exit from bankruptcy?
A: Yeah, I do. It became apparent once the creditors turned down US Airways that that was a critical, pivotal decision. I think we would have gotten to a unifying event eventually. But the US Airways hostile bid galvanized everyone. Every employee, politician, corporate executive, we were united against it. It created an enormous sense of momentum.
Q: Delta has moved around a lot of its planes. What's the strategy?
A: If you look at other airlines, like Northwest and United, they look very similar to what they looked like before bankruptcy, although with lower costs. But we had 18 or 20 percent of our routes international before bankruptcy, and we've steadily moved that up. Before bankruptcy, we had 64 wide-body flights a day between Atlanta and South Florida. That's too many seats, which means you have to sell them at a discount. By putting those planes into international markets, we're using them more efficiently. And now we mostly use narrow bodies for Florida.
Q: Why couldn't you restructure the fleet like that prior to bankruptcy?
A: Because we were running out of money. We did some other things pre-bankruptcy, like taking down our hub at Dallas-Fort Worth. But we were also stockpiling cash. Once we were in bankruptcy, we used the tools of bankruptcy to reduce other costs. Once those costs were down, we could do things like restructure the fleet.
Q: Did you ever think liquidation was possible?
A: I never thought it was a likely outcome. We were certainly in better condition than US Airways when they went in. It was clear they were going to liquidate until America West came along.
Q: What were some of the scary moments?
A: Right after we filed, we had a limited amount of liquidity. That was scary. In November and December of 2005, we were having a row with the pilots over our second concession with them. They were threatening to strike. That was extremely difficult. The pivotal point was when they realized that the creditors' panel was not going to rule for them. We also realized we had to get the confidence of the creditors' committee. Show them we're not the enemy, that our fiduciary goals were the same as theirs.
Q: Doug Parker, the US Airways CEO, has some interesting ideas about how to consolidate the airline industry. Do you think he could end up being a titan in this industry? Or is he just a maverick?
A: I think he's a very good finance person, but you've got to remember: What was happening with the old US Airways, when they were in bankruptcy, and with Delta, that was two different universes. Airways' bonds were trading at 3.5 cents on the dollar. Their whole situation was hopeless. Doug had the vision to merge with them [when he was running America West]; he had an idea. But another piece of the puzzle is merging the operational stuff, the cultures, and they're still not done with that. Plus, Airways and America West had reasonably complementary route structures. There's no overlap like that with Delta.
Q: Conditions still look pretty tough for the airlines. The industry will probably be profitable this year, but fuel prices are still going up, we're closer to the top of the business cycle than the bottom, and many people still think there's too much capacity in the airline industry. What do you foresee?
A: Well, there's no way you can repeal the business cycle. There will be a downturn, and consolidation will take place. But I don't think it will be the traditional kind that the Street would love to see–one big airline absorbing another. It might be more like one airline buying the Atlantic or Pacific routes from somebody else. Putting two airlines together–labor and cultural issues are huge barriers.
Q: So now that you've steered a company through bankruptcy, let's say the CEO of an auto company or some other troubled business called and said, "Hey, we're heading into Chapter 11." What tips would you offer for surviving bankruptcy?
A: Get the right people in place, even if you have to let go of people you really like. You may make a few mistakes, and I did, but people are critical. You need people who are decisive, sure-footed, with the ability to communicate with a broad audience. They must also have some standing with that audience. So that when the creditors' committee asks, "Who is this guy?" you can say, "He's one of the best in the business."
Q: What mistakes did you make?
A: I'm not going to tell you. I don't want to hurt anyone's feelings.
Q: Other tips?
A: Do it as quickly as you can. Time is really short. Keep people's confidence up. It's like walking a tightrope between buildings: Look ahead, not down.
Q: You managed attract people like [Chief Operating Officer] Ed Bastian without offering them a lot of money upfront. How'd you do that?
A: I don't know. I just said, "You have a chance to do something great and exciting, and you may never get another chance like this." Delta also has a certain appeal; it has a storied past. That helped.
Q: Were there people you wanted whom you couldn't get?
A: Some people declined. But my batting average is pretty good.
Q: Delta offered incentive packages to a much broader range of employees than you usually see in companies coming out of bankruptcy, like United Airlines, for example. Why?
A: Management got some incentives coming out, but we also wanted to align management's incentives with those of the frontline employees. It's important to align their share in profits and their reward for meeting performance goals. Going into Chapter 11, there is a huge sense of failure, especially for people with great pride. It is a failure. There's no way to blink at that. A business like ours is so dependent on the morale of people to make sure the flights are on time, the baggage doesn't get lost, that we are handling people well. It's all about keeping morale up. You've got to convince the employees as well as the creditors that we have a plan, it's going to work, and you're going to share the rewards.
Q: Other companies in bankruptcy, like United, have argued the only way to get the best talent to lead them out of bankruptcy is to pay a lot–and guarantee it, regardless of company performance.
A: Well, there has to be restraint on the part of management. Everybody has made sacrifices, and incentives for management can't sound excessive. They have to be broadly shared.
Q: You've said you intend to step down now that Delta has emerged. When do you expect the board to decide on a new CEO?
A: Probably this summer.
Q: So have you thought about starting a fresh career as a turnaround specialist?
A: I think this is the bloody end. I'll be 75 in June, and the spurs are hung up. I'm not jumping on any more horses.