Case Study: Delta Airlines Successful Business Turnaround Strategy

In 1924 Collet Everman Woolman and an associate started the Huff Daland Dusters crop dusting operation, this was the first agricultural airplane made for the purpose of crop dusting for getting rid of boll weevils and insects. The dusting speed was 80-85 mph and the advantage it had was low speed flying, heavy payload capacity and low maintenance cost. This creation was the roots of Delta Air Lines. In 1928 the crop dusting operation broke away from the parent company and became Delta Air Service. The company began getting contracts in delivering airmail and then in 1929 Delta began transporting passengers flying them to Dallas, Jackson and Mississippi. Later other routes were added to Atlanta and Charleston. Delta’s success was growing and began getting popular when the U.S. government awarded it an airmail contract in 1930. It remained in business during a temporary but costly suspension in the airmail contract system in 1934. But by 1941 the company became incorporated and was called Delta Air Corporation and was awarded three more airmail contracts. By World War II Delta is now under the War Department contract and began to devote its time to the troops transporting them. In 1945 Delta returned to normal service and grew more competitive than ever in the airline industry.

Delta Airlines Successful Business Turnaround Strategy

On May 1, 1953, Delta merged with Chicago and Southern Airlines and continued to grow as a major regional trunk carrier through the 1960’s. In the summer of 1967 Delta merged with Delaware Airlines and officially was named Delta Air Lines. Delta had continuous growth through exposure which increased through the Northeast part of the country in the 1970’s. Delta purchased a storage leasing and this move promoted adding several jets to the fleet he already had of about 200. The times were changing and computerized industry is rising. Delta formed two computerized marketing subsidiaries, Epsilon Trading Corporation in 1981 and Datas Inc. in 1982, they coordinated and sold more passenger seats on all Delta flights. By 1992 Delta had a financing problem with Pan Am. The general economic recession on gas had put a hardship on Delta and a heavy debt load with its partner Pan Am, this resulted in a net loss of $506 million for fiscal year 1991. This forced Delta to take unwanted actions to bring Delta back on track financially. They reduced their work force by five percent, froze wages, and cut salaries. Delta also in an effort to combat the reduction of air travelers reduced transatlantic fares by 45 percent in the summer of 1992. They also launched new routes from Las Angeles to Hong Kong. As a result of the shifted focus to overseas routes paid dividends when the company posted a profit of $60 million in the first quarter of 1993 compared to a loss of $125 million in the same quarter the year prior. In 1994, Delta saw additional losses and as a result they launch the Leadership 7.5 program. This was an initiative to help make operations more efficient. As with the name of the program suggest, Delta made a goal of reducing the cost to fly to 7.5 cents per mile per seat. They were able to see results almost immediately following the implementation of the program. By the end of the fourth quarter of 1995 they had seen a profit of $251 million.

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.

Delta Airline’s Restructuring Plan

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. 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.

Amidst speculations of a Chapter 11 filing by the end of 2004, Delta Air Lines 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.

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’. In August 2004, Delta’s CEO Gerald 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. 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. “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.

During the restructuring, United Airlines saw an opportunity for the acquisition of Delta Airlines. After several takeover bids United Airlines withdrew their offer because the failed to gain support from Delta’s major investors and Delta management. On April 30, 2007, Delta Airlines emerged from bankruptcy as an independent carrier with a new logo and paint scheme. On October 29, 2008 Delta became the world’s largest airline with 786 aircraft when they merged with Northwest Airlines. This raised the company’s value from $10 billion to $17.7 billion. This merger was a win/win for both companies but it did come with some challenges. Changes in the airline industry and rising fuel costs created a need for closer cooperation among former competitors. The merger between Delta and Northwest allowed the combined carrier to gain large economies of scale and scope, increase their operating efficiency and improve supply chain management.

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.

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. Comparatively, captains of similar-sized jets were paid around $113,000 a year at American Airlines and $152,000 a year at Southwest Airlines. 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.

Delta Today

“We’ve made significant strides to reduce our greenhouse gas emissions and are pleased to now be a part of an organization that verifies and validates our commitment,” said Ken Hylander, Delta’s Senior Vice President – Corporate Safety Security & Compliance. “Increased transparency is a significant part of Delta’s efforts to build a business model that continually improves sustainability over the long term, which is why we support consistent and transparent standards to calculate, verify and publicly report greenhouse gas emissions.”

Delta continues to invest in fuel-savings initiatives such as improving operating procedures, removing unnecessary weight, installing aircraft winglets and retiring inefficient aircraft and replacing them with planes that produce fewer emissions per passenger.

The airline has lowered its annual absolute greenhouse gas emissions by 7.6 million metric tons since 2005, a 17 percent reduction in six years. Delta also supports greenhouse gas emissions goals of the International Air Transport Association and Airlines for America, including improving average fuel efficiency by 1.5 percent by 2020, stabilizing emissions with carbon neutral growth from 2020 and reducing net emissions by 50 percent by 2050, relative to 2005. Delta has achieved the annual fuel efficiency goal each year since the goal’s inception in 2009.

“Climate-Registered organizations understand that there are both environmental and economic benefits to understanding and managing your carbon footprint,” said David Rosenheim, Executive Director of The Climate Registry. “Delta has become part of a powerful community of Climate-Registered organizations, with substantive data guiding and supporting its sustainable activities.” The Climate Registry is a non-profit organization that operates the only carbon footprint registry in North America supported by states, provinces, territories and tribes. Registered companies demonstrate environmental leadership by identifying and managing their greenhouse gas risks and opportunities. To achieve membership, organizations must undergo a rigorous verification of their greenhouse gas inventories by an external Verification Body in accordance with The Climate Registry’s General Reporting Protocol. SCS Global Services provided third-party verification for Delta. “We commend Delta for committing itself to this critical task and joining other corporate leaders pursuing common-sense climate solutions,” said Eileen Claussen, President of the Center for Climate and Energy Solutions. “Measuring and verifying emissions is an essential step in effectively managing them.” Delta last year joined the Center for Climate and Energy Solution’s (C2ES) Business Environmental Leadership Council (BELC).

Delta Air Lines serves more than 160 million customers each year. During the past year, Delta was named domestic “Airline of the Year” by the readers of Travel Weekly magazine, was named the “Top Tech-Friendly U.S. Airline” by PCWorld magazine for its innovation in technology, won the Business Travel News Annual Airline Survey and was the recipient of 12 Executive Travel Magazine Leading Edge Awards for U.S. airlines. With an industry-leading global network, Delta and the Delta Connection carriers offer service to nearly 315 destinations in 59 countries on six continents. Headquartered in Atlanta, Delta employs 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. A founding member of the SkyTeam global alliance, Delta participates in the industry’s leading trans-Atlantic joint venture with Air France-KLM.

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