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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"The airline industry is highly capital-intensive. It requires a highly dedicated, skilled work force that demands high wages. It's like trying to ride a bull, managing the airline business."

- Raymond Neidl, airline analyst, in 2003.1

"Given the severity of our financial situation, there are no guarantees for success and no time to waste."

- Gerald Grinstein, CEO of Delta Airlines, in 2004.2

"This is the beginning of the recognition that surgery is necessary for the legacy carriers. And while it's painful and not all of the surgery will be successful, it's the only way they're going to get healthy."

- Michael Levine, former airline executive, in 2004.3

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.

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1] Edward Wong, "Airline Economics: Fasten Your Seat Belt", The New York Times, December 9, 2003.

2] Michael Ardnt, "Grinstein Takes his shot at Delta", Business Week, September 9, 2004.

3] Brad Foss, "Full Service US Airlines reach Tipping Point", The Economic Times, September 13, 2004.

4] Chapter 11 of the US Bankruptcy Code allows bankrupt companies to operate and reorganize their business and assets while granting them protection from their creditors.

5] In the early 2000s, Delta was the third largest airline in the US (behind American Airlines and United Airlines) in terms of operating revenues and revenue passenger miles flown.

6] Alan Fein, "Delta Airlines to Layoff Thousands, Outlines Plan", axcessnews.com, September 8, 2004.

7] Alan Fein, "Delta Airlines to Layoff Thousands, Outlines Plan", axcessnews.com, September 8, 2004.

 

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