Delta Takes Flight
How CEO Gerald Grinstein piloted a major airline through bankruptcy
Twenty months ago, Delta Air Lines was a flying cliche: a bloated airline that had slid into bankruptcy. Costs were too high. Cash was scarce. The wrong planes flew the wrong routes. Pilots were threatening to strike. And Wall Street analysts were invoking the "L" word, suggesting that if Delta liquidated, it might finally help solve the airline industry's chronic overcapacity problem.
There's still an overcapacity problem, but now it's up to some other troubled airline to go bust and solve it. When Delta emerged from Chapter 11 on April 30, analysts applauded its rapid transformation into a modern, competitive carrier. Most creditor claims against the company have been resolved-in near-record time. Pilots and other employees are content. And unlike other companies in bankruptcy, Delta managed to restructure its operations while avoiding prolonged battles with unions and other creditors. "We probably haven't seen a bankruptcy as successful as Delta," says Serguei Netessine of the University of Pennsylvania's Wharton School. "Typically you see months of litigation. The company did an excellent job."
Two Paths out of Bankruptcy: Delta vs. United
Delta Air Lines, which exited bankruptcy on April 30, has earned plaudits for rapid Chapter 11 proceedings that entailed minimal litigation and rewarded thousands of employeesnot just a select group of executiveswith equity in the new company. Here's how Delta stacks up against United Airline, which exited bankruptcy in February 2006:
|Revenue 2006||$17.1 billion||$19.3 billion|
|Number of aircraft (approx.)||600||460|
|Time in bankruptcy||585 days||1,146 days|
|Reduction in fleet||2 aircraft||100 aircraft|
|Reduction in workforce||6,000||25,000|
|Reduction in operating costs (annual)||$3 billion||$7 billion (by 2010)|
|Bankruptcy-related fees paid to law firms||$137 million||$335 million|
|Payment on pilot pensions (est.)||65-85 cents on the dollar||30-50 cents on the dollar|
|Employees offered public shares as incentives||1,200 executives plus 39,000 noncontract workers||400 executives|
Compiled by Serguei Netessine, the Wharton School, University of Pennsylvania
There was no template for a model bankruptcy when Delta entered Chapter 11 in September 2005. In the aftermath of the 9/11 terrorist attacks, which sent the air-travel industry into a tailspin, US Airways had declared bankruptcy twice. By the time Delta filed, United Airlines had been plodding through Chapter 11 for nearly three years. Northwest Airlines declared bankruptcy the same month. "The general experience in bankruptcies was not good," recalls Gerald Grinstein, Delta's CEO.
Doubts. One thing Grinstein and his management team did know was that for the ship to fly smoothly, speed was critical. "We knew that the longer you stay in bankruptcy, the harder it is to adapt to the environment once you come out," Grinstein says. He and his executives targeted early spring of 2007 as Delta's emergence date. It was an ambitious goal, one Delta never announced publicly. But there was plenty of skepticism internally. Chief Financial Officer Ed Bastian, made point man for the restructuring effort, reinforced the goal repeatedly. At one point, Marshall Huebner, Delta's lead outside lawyer, told Bastian it was the fastest possible timetable, and it would probably slip. "Thank you for the first part," Bastian said, "but we're not going to slip."
To meet the goal, Delta would have to find a way to avert time-consuming litigation. "The bankruptcy process is usually a bunch of pit bulls fighting each other," Grinstein says. "We didn't want to get into that." The company encouraged creditors and other claimants to approach the airline out of court, and it set up a triage system to respond to every significant issue within days. "We said, 'We want anybody with an issue to call,' "Huebner explains. " 'Don't file papers, don't launch missiles; just call.'"
It took a while for the approach to catch on. In November 2005, Delta filed a petition to cancel its pilots' contract and exact pay cuts beyond a 33 percent reduction negotiated less than a year earlier. A predictable showdown with the pilots ensued. They just weren't buying the bonhomie from the lawyers. "A lot of people get paid a lot of money all through bankruptcy," insists Lee Moak, a 767 captain who is chairman of the Delta pilots union. "It's a cottage industry. Those people create conflict."
The pilots had little support from other creditors, however, and they had to swallow pay and pension cuts in April 2006, in exchange for future incentives in the restructured company. That gave management a tangible accomplishment to take to the creditors' committee, chaired by Boeing, and to the bankruptcy court in New York. The carrier's labor costs had been among the highest in the industry, and Delta had pledged to cut them by about $1 billion a year.
Grinstein's own, self-imposed pay cut helped win some converts, too. The CEO, a Delta director since 1987 who came out of retirement and moved to Atlanta from Seattle to take the controls in 2004, cut his own salary by 25 percent in November 2005, to $338,000. He also gave up millions in potential bonuses. Most of Delta's other top executives earned well under $500,000, while their counterparts at United and Northwest were earning multiples of that. "There has to be restraint on the part of management," Grinstein insists. "Everybody has made sacrifices, and incentives for management can't sound excessive."
With relief on labor costs, Delta started tackling an inefficient route structure and other problems. Before bankruptcy, the airline was running 64 widebody flights a day to South Florida from Atlanta, with lots of empty seats. The airline started to replace those with narrow bodies and move the bigger jets, mostly 767s, to international routes where the planes would fly fuller, at higher fares, serving cities like London, Athens, Mexico City, and Bombay. International routes, which had accounted for less than 20 percent of Delta's business prior to bankruptcy, now account for 39 percent of its seats.
Progress was steady but slow through the summer and fall of 2006, with the all-important creditors' committee casting a wary eye on every move. Then last November, US Airways made a brash $8.7 billion bid for Delta. US Airways CEO Doug Parker was trying to emulate a clever 2005 deal that allowed America West, a solvent carrier, to merge with US Airways while it was in bankruptcy and take advantage of Chapter 11 tools to rationalize the fleets and payrolls of both entities. But US Airways had been virtually insolvent at the time; Delta wasn't that desperate. Grinstein flatly rejected the offer. The creditors agreed with him.
Parker upped his bid to $10 billion. Delta's resistance hardened. But more than that, the Airways bid unified players on the Delta side. "The takeover attempt brought the pilots, executives, and employees together," Moak says. "It focused the senior executives on the fact that the company was very vulnerable."
Goodies. Action followed. Delta promptly announced that it had obtained $2.5 billion in funding to make the leap out of bankruptcy. The creditors' committee officially rejected the US Airways bid. Another boost came when Delta announced a $58 million operating profit for 2006, its first since 2000. And then in March, Delta announced that 39,000 nonexecutive employees would get raises and stock incentives once the company emerged from bankruptcy-spreading the largess far more broadly than had United, which limited incentives to 400 executives when it emerged from bankruptcy in 2006.
Grinstein believes that the heat applied by US Airways provided a giddyap that hastened Delta's emergence from bankruptcy. "The US Airways bid galvanized everyone," he says. "That was a critical, pivotal decision." Delta also benefited from good timing. With the industry poised to enjoy a profitable year in 2007, "the creditors wanted resolution," says Bill Warlick, an analyst with Fitch Ratings. Airline stock values had been rising, he points out, which was a strong incentive for creditors, who would end up holding the majority of Delta's new shares, to push the company out of bankruptcy.
Delta finally exited Chapter 11 on April 30. On May 3, company executives rang the opening bell on the New York Stock Exchange to commemorate the relisting of the company's shares. "Welcome to Independence Day," crowed Bastian, a lead candidate to become CEO once Grinstein retires this summer.
The celebration may be short lived. Rising fuel prices could crimp the industry's flash of profitability. And cutbacks in consumer travel will probably lead to lower fares, shrinking airline revenue. Delta's shares are already trading about 13 percent below the official offering price on May 3. And some big bills are coming. Delta's aircraft are older than those of low-cost competitors, which could require costly recapitalization just as the industry hits another downdraft. And even after six years of widespread restructuring, the airline industry remains troubled. "This is still an industry with a defective structure that's crying out for consolidation," argues Warlick.
For now, Delta looks like a survivor. But in this business, there's no such thing as a steady cruising altitude.
A Q&A with Delta CEO Gerald Grinstein is on the Web at usnews.com/deltaceo
This story appears in the May 28, 2007 print edition of U.S. News & World Report.