Delta Air Lines Inc.'s (DALR) chief operating officer, Jim Whitehurst, was in a hotel in Orlando, on his way to a workout before a speech to 500 of the carrier's sales reps, when he heard the news on TV. Chief Financial Officer Edward Bastian, was driving to work when he saw the headline on his BlackBerry at 7 a.m. And Delta CEO Gerald Grinstein was slipping on his tie and preparing to head in to the office when a voice on one of Atlanta's AM stations urgently announced that US Airways Group (LCC) was making a hostile $8.8 billion bid to buy Delta out of bankruptcy.
In many ways, the bid couldn't have come as a huge surprise to Delta's management team. As soon as Grinstein & Co. put the airline into Chapter 11 in September, 2005, managers knew that the long-anticipated wave of consolidation among the nation's largest airlines might finally be at hand and that Delta would be a juicy target. It dominated the nation's second-busiest airport, Atlanta. And Delta would still be mired in bankruptcy long after other airlines had emerged and were reporting strong profits. Even before the $16 billion carrier had filed for bankruptcy, United Airlines (UAUA
CEO Glenn F. Tilton had called Grinstein expressing interest in Delta but was rebuffed on the spot. "He said, ‘Are you interested in talking?' And I said, ‘Not at all,'" recalls Grinstein, a crusty but charming lawyer and former railroad executive. He had already rejected two overtures from Doug Parker, the brash young chairman of US Airways, who had proved his mettle dealing with some of the same challenges facing Delta, such as fighting off low-cost carriers and streamlining poorly performing hubs.
When Parker countered with a hostile public bid on Nov. 15, a new act unfolded in the drama that has consumed Grinstein and his two lieutenants for the past year. On a personal level, having to sell Delta would be a bittersweet denouement for the trio. For Grinstein, Bastian, and Whitehurst, bankruptcy has been a tortuous process in which they, in effect, killed off the old company as they tried to raise a new Delta from the ashes. Bastian still vividly remembers standing in the bankruptcy court the day Delta filed. "There must have been 200 people in the courtroom," he told a large gathering of employees in September. "And I was the only person there from the company among layers of accountants, lawyers, all eyeing what they were going to take from Delta--an arm, a leg."
Yet for all the agony of bankruptcy, Bastian told the same employees that it was exactly the medicine Delta desperately needed. "Bankruptcy allows you to bury the past and examine every decision this company has ever made," he said. And in the past year, Grinstein, Bastian, and Whitehurst have worked around the clock renegotiating thousands of contracts, bucking up demoralized employees, imploring bankers to provide financing, and wrangling with creditors to keep them from picking all the meat off Delta's bones.
If Grinstein and his team are to preserve Delta's independence, they now must persuade those very same creditors--a diverse group that includes Boeing Co. (BA), the Pension Benefit Guaranty Corp., and even its own pilots' union--to reject US Airways' proposal and to place a bet that management's ongoing turnaround efforts will deliver a bigger long-term payback. Perhaps anticipating that US Airways or another carrier might resurface with a bid, Bastian had begun in recent weeks privately making the case to Delta's creditors that the airline would be worth far more as an independent carrier than whatever sum any suitor who came along might be willing to pay in bankruptcy. "They're going to be much richer than they think," says Bastian.
Indeed, Grinstein, a longtime director who came out of retirement two years ago at age 71, has made clear that he doesn't want to see the airline devoured by an upstart carrier out of Arizona. A merger "would just slow down our emergence from bankruptcy. And the track record for mergers is just not great," he said in an interview right before US Airways made its bid. Some creditors who spoke to BusinessWeek say that it isn't a given that they'll push for US Airways' bid, which offers bondholders a 25% premium to the recent trading value of Delta's unsecured debt. But they warn that the recent offer raises the pressure on Grinstein and team to make a persuasive case that they can wring more profit out of Delta than US Airways can--and do it fast. "I don't think the Creditors' Committee is necessarily going to say, `The US Air deal is great. Let's go,' " says a source close to one creditor. "But they will use it to put Delta's management into a bidding contest."
If US Airways' Parker ultimately succeeds, he'll be capitalizing on the hard work of Grinstein, as well as the ingenuity of Bastian, a former Delta executive who returned last year to help revive the carrier, and Whitehurst, a former Boston Consulting Group Inc. whiz kid who has shot up through the ranks in his five years at Delta. In the past year, the carrier has engineered a sweeping overhaul of its vast network--cutting as much as 20% of its domestic capacity, shifting many of its biggest jets to serve burgeoning international business centers like Bucharest and Düsseldorf, and all while trying to replace its hidebound, genteel, Southern culture with a more aggressive one.
Since 2003, Delta's head count has shrunk from 70,600 to 51,000, while the number of airplanes is down from 833 to 625. Perhaps most important, Delta has slashed its costs from 9.36 cents per seat mile (before fuel expenses) in 2003, the worst among the nine major carriers, to 6.91 cents per seat mile this year, the fourth-best in its peer group--and the best of the so-called network carriers like United, American Airlines (AMR), and even US Airways. "We're coming out a different company from how we went in," says Mike Campbell, Delta's executive vice-president for human resources and labor relations. Contrasting Delta's experience in bankruptcy court with United's, he adds: "I don't know that United changed the business at all. They [just] changed the balance sheet."
Delta managers have been making anxious jokes about a potential takeover bid for months. Their angst was evident during a companywide therapy session in late September. Hundreds of Delta workers filtered into a conference hall in downtown Atlanta--as the sounds of rock band Journey's song Lovin', Touchin', Squeezin' filled the air--to hear Bastian and Whitehurst offer a state-of-the-company address. As a warmup, a pair of employees posing as TV newscasters cracked jokes: "Remember medical benefits? Weren't those great?" (For the record, Delta still provides medical benefits.) Then Grinstein spoke in a video discussing Delta's precarious condition, his face superimposed over Tom Cruise's body as he hung by his fingernails from a cliff. The crowd whooped.
But, the execs warned, Delta still had much work to do to turn the airship around. "We're going through a massive amount of change, and change is hard," said Bastien.
To understand Delta's current predicament requires a little history. After archrival Eastern Air Lines imploded in 1991, Delta found itself with a near-monopoly in the Southeast. Over the next decade, it practically coined money, earning far higher profit margins than any other airline. Supremely confident of Delta's ability to fill seats, management began using giant Boeing 767s and 777s for short flights--Orlando to Atlanta, for instance--decisions that eventually forced the carrier to offer cut-rate fares just to fill the planes. "[Former] Delta management never met a big plane they didn't want to buy," laments one current Delta executive.
By 2004, with Delta already having hemorrhaged more than $3 billion, it was painfully clear the airline needed its pilots to make concessions. And when then-CEO Leo Mullin failed to bring the pilots back to the table, Delta's directors quickly coaxed Grinstein, a fellow board member who had deftly handled contentious union negotiations as CEO of Western Airlines and, later, Burlington Northern Railroad, to take the job. "I thought Delta was valuable, worth saving," Grinstein says. "I thought I could repair some of the damage between leadership and the people who deliver the service every day." He succeeded: With their peers at other airlines offering pay concessions of their own, the pilots agreed that November to swallow a 32% pay cut.
That was not enough, however, to keep Delta from filing Chapter 11. From the moment that Grinstein put Delta into bankruptcy last year, he knew he was racing against the clock to save the airline. And Grinstein and his lieutenants now confess that as recently as late last year, he wasn't sure whether Delta would survive--or if it would join the likes of Braniff International Airways, Eastern, and Pan Am in the long line of casualties since the airline industry was deregulated in 1978. "When Gerry, Ed, and I sat down and ran the numbers, we were scared to death about whether we would make it through the winter," Whitehurst now recalls. "We were looking at running out of cash."
The team got the financing it needed to survive. But then it had to take on an even harder problem: repairing relations with Delta's workforce. One of Grinstein's first tasks was to rebuild morale in Delta's ranks--in part by admitting that Delta's problems were caused largely by past management mistakes. To do that, Grinstein and his team have spent the past year flying across the country with the goal of speaking to all of Delta's 51,000 employees.
But the wounds have been slow to heal. As Whitehurst strode to the front of a dim, windowless room at the Atlanta airport, there was no applause--not one clap--from the 20 or so veteran pilots who had gathered on a steamy July morning to hear the boyish-looking executive's plans for fixing the bankrupt airline. With mock seriousness, Whitehurst ticked off the litany of excuses that his predecessors had cited to explain the Atlanta carrier's downward spiral: high fuel costs, stiff competition from rivals like AirTran Airways Inc. (AAI), rich pension obligations, and--yes--high labor costs. Whitehurst paused, then said, "Let's be honest. That's bull----. We are in bankruptcy because we have been losing in the marketplace."
But Whitehurst's efforts to extend an olive branch did little to win over the assembled pilots. One pilot, a 15-year employee of the embattled carrier, quickly put Whitehurst on the spot: "Since 1991, I've watched every CEO of this company have an inbred hatred of the pilots. Do you have an inbred hatred of us?" Whitehurst paused, choosing his words carefully. "We have lost a lot of trust," he conceded to the pilots. "We have a long way to go."
Regaining the trust of employees first meant blowing up the old Delta culture, a top-down structure where employees felt stifled, and creating a new regime where workers felt empowered. To exorcise the "old Delta," Grinstein, Bastian, and Whitehurst spent the past year criss-crossing the country to hold "town hall" meetings where employees could vent and ask questions. On top of that, Delta flew in more than 17,000 top workers--500 at a time--into Atlanta for special daylong sessions staged in a vacant Macy's building downtown.
Following the video from Grinstein and a talk from either Bastian or Whitehurst, workers broke into smaller groups of 40 or so and were led through an exercise where they were asked to draw up long lists describing the "Old Delta" and the "New Delta" they hoped to see. At one session in late September, the assembled workers took a certain relish in mocking the Old Delta. "Procrastinate!" shouted one worker, as the others tittered. "Yeah, the phrase I always heard was, `If you don't do it, you can't get in trouble,'" nodded another. "Hey, here's the Delta Coat of Arms!" said a third, crossing his arms and pointing in opposite directions, a gesture that won howls of laughter.
Rebuilding morale was only the start. Grinstein's next task was rebuilding Delta's management ranks, which were depleted because many of Mullin's hires opted to take their pensions and run in anticipation of the airline's bankruptcy. In July of last year, Grinstein began assembling the team that is in place today. First, he lured back Bastian, who had served as controller before leaving just a month earlier, to return as chief financial officer. Then he promoted Whitehurst, a former Delta consultant whom Mullin hired on the spot as acting treasurer on the morning of September 11, 2001. After rushing the paperwork through, Whitehurst began working for Delta that same day--even though it initially meant taking an 80% pay cut from the $1 million plus he earned his last year at the Boston Consulting Group (though he will assuredly receive valuable stock options when Delta emerges from bankruptcy).
The brainy Whitehurst, a self-described "redneck" from the sleepy south Georgia town of Columbus, has brought a certain feistiness that never existed at the airline before. Indeed, the same company that once opted not to match AirTran's low fares has now adopted a more aggressive approach against competitors. Partly to tamper with the on-time performance of rival JetBlue Airways Corp. (JBLU), Whitehurst added slower Dash-8 turboprop planes at LaGuardia Airport in New York to time slots just ahead of JetBlue planes. And last February, when AirTran announced it would begin offering Atlanta-to-Seattle service--a route that Delta has long had a lock on--the Atlanta carrier said it would fly regional jets on six AirTran routes from Orlando, AirTran's headquarters city. "We will not concede an inch of ground to AirTran ever again," Whitehurst told the gathering of Delta pilots in July. "This is our town. We will take it back."
Grinstein's biggest challenge on the management front was to find the talent to restructure Delta's jumbled domestic network, which by every measure was one of the most inefficient in the industry: The airline, for instance, offered five daily flights between Salt Lake City and Butte, Mont., even though no more than 110 people traveled that route each day. As Grinstein cast about for candidates, he spotted a story in an airline trade publication about Glen W. Hauenstein, a gregarious former Continental Airlines scheduler who was then serving as chief operating officer of Alitalia, the Italian state-controlled airline.
Grinstein picked up the phone and talked to a few old industry friends, including Gordon Bethune, the retired CEO of Continental. "I told Jerry that Glen was as good as they came," recalls Bethune. "Jerry said, `But Gordon, we're broke. I don't think I can afford to hire him.' I said `Jerry, you can't afford not to hire Glen. He'll make you $30 million in his first 30 days.' "
Hauenstein went to work, first scaling back and streamlining the airline's money-losing Cincinnati hub, which with more than 600 daily flights was sending up too many half-empty planes. "A year ago it was our worst-performing hub. Today it's one of the best," Bastian said at an employee meeting in October. He also redeployed the widebody jets used in Delta's trendy Song subsidiary, fitted out with digital entertainment at each seat, to be used on transcontinental routes, hoping that all those music and movie offerings will attract customers in need of diversions on the five-to-seven-hour flights.
And to build DELTA'S paltry international service--when Hauenstein joined, the carrier derived a paltry 20% of its revenues from international flights, vs. 36% for United and 43% for Continental--he pulled a page from his old Continental game plan and began expanding into second-tier cities where the competition isn't as fierce. He added direct service to tourist destinations like Nice, France, and rolled the dice with new routes to some heretofore obscure destinations like Accra, the Ghanian capital that has seen its fortunes pick up with an increase in oil exploration.
But some rivals are skeptical that Delta's aggressive international expansion will work. Among the critics: Continental President Jeff Smisek, who panned Delta's global ambitions at a Bear Stearns Companies Inc. (BSC) conference last May. "They are throwing a lot of capacity into the market. I predict they will lose their shirts on it," he told the gathered investors.
Delta executives challenge these criticisms. While traffic to Nice has been a little slower than anticipated, they still believe there's untapped potential to and from blossoming global markets like Bucharest. Delta executives says a big key has been Hauenstein's ability to tweak the airline's domestic flight schedule to feed more passengers into these new international routes. Take Kiev, a market to which Delta now flies five times a week. Not only is Delta filling seats with Ukrainian immigrants who live in New York's boroughs, but Grinstein points out that the new feeder flights Hauenstein set up from Seattle are bringing in an average of 35 additional customers a day for each Kiev flight. "Seattle's my home, but I had no idea there was a Ukrainian population there," marvels Grinstein.
Ironically, Delta's international routes may be one of the things that make the bankrupt carrier so attractive to US Airways, which has a much smaller footprint overseas. Whether US Airways will prevail or Delta preserves its independence is a question that will be answered in coming weeks. Some analysts think Delta's creditors could put a lot of pressure on Grinstein & Co. to accept Parker's offer. But even if that happens, Delta executives privately doubt that US Airways can get the deal approved by the Justice Dept., given the immense overlap between Delta's domestic routes and those of US Airways. "We ran the numbers and the only deal that would [hypothetically] create more overlap than this one would be American and United," confides one Delta exec. "The [notion] that this could survive DOJ is beyond comprehension."
For their part, US Airways' officials say they are confident the deal would receive regulatory approval. If they're right, the combination of Delta and US Airways, which Parker says would carry the Delta name, would create the largest carrier in the nation, and, in time, potentially one of the more profitable. That would mean that Grinstein and team will have succeeded in their task of returning Delta to its old glory as one of the most profitable airlines--but in a way that they certainly never intended.
By Dean Foust