Problems at Delta Airlines


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Case Details:

Case Code : BSTR135
Case Length : 18 Pages
Period : 2001 - 2004
Organization : Delta Airlines
Pub Date : 2004
Teaching Note : Available
Countries : U.S.A
Industry : Aviation

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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EXCERPTS

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...

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