A Destination, But No Flight Plan

Immediately after the board of Delta Air Lines Inc. approved a $2 billion cost-cutting plan on Apr. 28, CEO Ronald W. Allen held a slide show at headquarters for the pilots' union that summed up the line's problems. Click. $1.2 billion in losses in the past three years. Click. Trouble from low-cost carriers, such as Southwest Airlines Co. Click. The debacle in Delta's European system. Then Allen turned the meeting over to subordinates. "Our first proposal is a white sheet," Operations Vice-President Harry C. Alger told the union. "We've set a cost-reduction goal, and everything else is open for negotiation."

That pretty much sums up Delta's grand turnaround plan. To transform the $12 billion Atlanta-based airline into a low-cost carrier and pull it out of the red, Allen has declared all-out war on costs. He wants to slash everything from marketing expenses to fuel costs. And he intends to eliminate 15,000 jobs, or 20% of Delta's workforce, by 1997. But while Allen, 52, has set goals, the details of implementation are something of a blank. Delta's chief may not know until after Labor Day just how he aims to go about meeting his targets.

A scramble. Small wonder some rivals are questioning whether Delta's goals are realistic. "If you're not going to begin the process of reengineering until sometime in the future, how do you know how much you're going to save?" asks a skeptical Robert R. Ferguson III, CEO of Continental Airlines Inc. Others suggest Allen's plans may not go far enough. Virtually every airline--large and small--is scrambling to cut costs. And the benchmark for what defines a low-cost carrier is heading constantly lower. "They have a very big problem in attempting to come after us. They don't fully appreciate our cost level," warns ValuJet President Lewis Jordan. One example: ValuJet's captains earn an average of $42,000 a year, compared with $140,000 at Delta.

Delta's previous overhauls do little to soothe the skepticism. The carrier has already navigated through a flurry of cost-cutting efforts. Just last year, Allen cut wages and benefits and laid off 550 employees. On top of that, Delta cut its aircraft purchases by $7.3 billion. But now that the dust has settled, Delta is still listing badly. Analyst Julius Maldutis of Salomon Brothers Inc. estimates that Delta will spill more red ink this year. Losses could narrow to $146 million in the fiscal year ending Aug. 31, from $415 million last year.

Chronically high costs, especially huge wage and benefit packages, have a lot to do with Delta's sorry performance. Even after recent expense reductions, Delta still spends 9.76 cents per mile for each of its available seats. That's a far cry from Southwest's 7.2 cents. Only troubled USAir Group Inc. costs more to operate than Delta, at 11.35 cents per seat, according to consultant Avitas Inc. "It's still not enough," Allen says of recent restructurings. "We've got to do more."

DEADLINES. This time around, Allen wants to be far more aggressive on costs. His goal: to lower seat costs to 8.6 cents a mile by June, 1995, and ultimately 7.5 cents by 1997. Allen has targeted 11 areas where he believes he can squeeze out costs. One big advantage: only Delta's pilots and dispatchers are unionized, so Allen can easily make some work-rule changes. Top managers will spend the next few months working out the specifics, though details on who will be laid off are due July 15. The deadline for spelling out cuts in services is Sept. 15. "The unknown bothers a lot of people," says Allen. But Delta's boss says he wants to remain flexible during such a sweeping top-to-bottom review.

As for its pilots, Delta will likely press for work-rule changes to allow for more flexible scheduling. If contract talks get ugly this summer, Allen vows to replace some domestic routes by signing joint-venture deals with smaller airlines. "We hope it doesn't go in that direction," he told the pilots on Apr. 28. Their reaction to Allen's hard line? "We're in the beginning stage of a negotiation, and that's how negotiations work," says Cameron Foster, a negotiating committee member. Some competitors speculate that Delta may have to swap equity with the pilots, as United and Northwest have, in return for concessions.

Elsewhere, Allen says he wants to shorten turnaround time for flights by creating "continuous hubs," meaning traffic will constantly flow in and out, rather than gushing and trickling during the day as Delta's traffic now does. Allen says Delta is even exploring a joint venture with an undisclosed information processing company to handle back-office operations.

In contrast to its domestic overhaul, Delta is making headway revamping its money-losing European routes. Delta paid a hefty $1.4 billion for Pan American's planes and terminals in 1991 to secure its European routes. But Pan Am's operations were in dismal shape. Then the European recession killed traffic. But over the past year, the carrier has dumped some unprofitable routes, while signing up partners, such as Malev Hungarian Airlines and Austrian Airlines, to ferry Delta passengers to European cities.

A GAMBLE. Just as important, Delta cinched a deal in April with Virgin Atlantic Airlines Ltd. to gain access to London's Heathrow Airport, a critical European hub. Delta will pay $150 million to secure seats on Virgin for Delta passengers and has promised to lend flight attendants to the British airline. Some analysts question whether the partnership will work. Delta's style contrasts sharply with the unorthodox Virgin, which hopes to introduce in-flight video gambling later this year. But Virgin founder Richard Branson sees few problems: "I think opposites can work quite well together."

Shareholders seem willing to give Allen's latest plan a chance. After falling almost 20% this year, Delta's stock has climbed about 4% since the Apr. 28 announcement, to 47 1/8. "They're saying not, 'how can we survive to compete another day?' but, 'how can we win?'" says Mike Magiera, a member of the investment committee at Manning & Napier Advisors Inc., one of Delta's big shareholders.

Those who wonder about Delta's capacity for a turnaround would be advised to ponder the lonely lettuce leaf. During an employee suggestion program in 1992, a menu-development worker proposed removing the lettuce leaf Delta used as a bed for its fruit salads. The leaf was a waste, she reasoned, because few travelers ate it. The savings? $1.4 million. Leaf by leaf, over the next three years, Delta will have to find some real cabbage to cut. Or else: Click. Lots more turbulence ahead.

Before it's here, it's on the Bloomberg Terminal.