Delta CEO Anderson's masterstroke was the merger with Northwest Jonathan Chapman
Delta Air Lines (DAL) plunged into bankruptcy in September 2005, marking the culmination of more than a decade of management missteps made largely out of hubris. The Southeastern airline allowed itself to go through many of the stages of decline outlined in Jim Collins' new book. Its sense of infallibility helped foster an undisciplined pursuit of practically every new jumbo jet that aircraft manufacturers rolled out, forcing it to fly large planes even on one-hour routes. Add to that a distinct denial of the increasingly grim realities of the airline business, exemplified by the errors made earlier this decade by then-Chief Executive Leo F. Mullin. He launched the trendy Song discount airline, which fizzled amid high costs and stiff competition from JetBlue Airways (JBLU). Worse, Mullin negotiated a 2001 labor deal that paid top pilots a record-shattering $300,000 a year. "Management always had to have the biggest and the best," recalls a former exec. "It was the Delta way."
That strategy helped the Atlanta-based carrier rack up billions in losses, pushing it into bankruptcy. And management was so slow to accept its humbling fate that one bankruptcy judge told executives: "I have not heard anything that I will say remotely impressed me that you have the money, the talent, or the thought that you could successfully reorganize in this case." Admits President Ed H. Bastian: "There were periods when Delta could have been just 24 hours from disappearing. If the pilots had walked out, I'm not sure we could have pulled through."
Less than four years after it was left on life support, Delta is now the picture of health. Thanks to a management overhaul, a rigorous shift towards more profitable international routes, aggressive cost-cutting, and a shrewdly timed merger with Northwest Airlines, Delta is now viewed by many analysts as the country's top-performing major carrier. It boasts the strongest balance sheet, the best route structure, and the best prospects for future profitability. "They transformed the company amazingly well," says longtime critic Roger E. King, an analyst for CreditSights, a New York-based institutional research firm.
It was a hard-won battle to reverse the downward spiral. In 2004, with cash running low and most assets hocked, Delta struggled for many weeks to find the debtor-in-possession financing to keep operating. It also came within 24 hours of failing to avert a pilots' strike. The carrier had to fight hedge fund managers pushing for a sale or breakup, then a hostile bid from US Airways (LCC).
GETTING ON COURSE
What put Delta on the path to recovery and renewal was a willingness on the part of management and employees alike to make sacrifices. Gerald Grinstein, a director who had stepped in as CEO in early 2004, convinced the pilots to swallow deep pay cuts while reducing his own salary by 25%. (For good measure, he later donated his bonus to a scholarship fund for the children of employees.) Together with Bastian, he convinced a key group of creditors—suppliers including Boeing (BA), Pratt & Whitney (UTX), and Coca-Cola (KO)—that they'd lose big under a merger with US Airways, which flew mostly Airbus planes using General Electric (GE) engines. And Bastian persuaded creditors to accept Delta's plan over US Airways' takeover bid, which was more dependent on outside financing. "They took the bird in hand," he recalls.
But simply warding off failure wasn't enough. After the bankruptcy, Delta spent millions to rebuild morale, flying in many of its 47,000 employees for a series of events that were equal parts team-building and tent revival. And Delta convinced creditors to cede 15% ownership to employees. "They saw the importance of having the pilots and employees on board to unlocking the synergies of the deal," says Delta CEO Richard H. Anderson, a board member at the time who got the top job in August 2007. "It was equally important for the employees to know that we followed through on everything we promised."
Delta recruited Glen W. Hauenstein from Alitalia to move the carrier into underserved markets such as Kiev, Ukraine; Tel Aviv; and Nice, France. Lacking the cash to buy enough long-haul jets, Hauenstein retrofitted existing planes with winglets—tips on wings that reduce drag and save fuel—to give them more range. The result: International routes now represent 38% of all Delta flights, vs. 20% in 2005.
But the masterstroke in Delta's rebirth was the merger that Anderson engineered with Northwest Airlines in 2008. The merger is not only expected to help Delta trim an additional $2 billion in costs, it has also married Northwest's strength in Asia with Delta's presence across Europe and Latin America. Wary of a culture clash, Anderson closed the deal in six months—about half the time of most airline mergers—and set up 27 internal committees to handle everything from fitting flight attendants for new uniforms to merging frequent-flier programs.
Everything was built around Delta's paternalistic culture. Anderson even changed the ID numbers on employee security badges to prevent people from figuring out whether a colleague hailed from the Delta or Northwest camps. What he didn't want, he says, was a situation where "employees were constantly sizing up which side you were on." And the pilots agreed to combine their two unions. Robert W. Mann, an airline industry consultant who advised Delta's pilots during the process, says, "It was the most rational, controversy-free process of this sort that I've ever been involved in."
While such moves have helped Delta minimize losses amid a down economy, Anderson remains acutely aware that failure is always close at hand. He flies in a Delta cockpit jump seat about once a month to pick the brains of pilots. And in a recent two-day stretch, he spoke to 2,000 employees to hear concerns and suggestions. For Delta to remain aloft, he argues, management needs to stay as grounded as possible.
Foust is chief of BusinessWeek's Atlanta bureau.