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A Break In The Clouds For Delta


The Corporation: STRATEGIES

A BREAK IN THE CLOUDS FOR DELTA

Its new chief has a little breathing space and lots of ideas

When Gerald Grinstein met Leo F. Mullin last May, he was looking for someone to shake up Delta Air Lines Inc. Grinstein, the board member who had led the ouster of longtime chief executive Ronald W. Allen a month earlier, had called Mullin to a room at the O'Hare Hilton in Chicago for a secret job interview. As the two shouted to one another over the pounding noise of another company's pep rally in the room next door, Grinstein peppered Mullin with the same questions he asked all 12 candidates. It wasn't until Mullin asked a question of his own, however, that Grinstein realized this could be his man. "Is anything or anyone sacred?" Grinstein recalls Mullin asking.

Grinstein told him no--and when Delta picked Mullin to take over as CEO on Aug. 15, he counted on getting a man willing to shake up the status quo. Grinstein read Mullin right. Although an industry outsider--the 54-year-old former banker was most recently vice-chairman of Chicago-based utility company Unicom Corp.--Mullin has moved quickly to tackle Delta's problems. He has reached out to disgruntled employees, given managers more say over day-to-day decisions, and moved ahead with a $1.42 billion purchase of 10 aircraft. And, in a show of strength, he pushed out Chief Financial Officer Thomas J. Roeck Jr. on Nov. 20, citing his lack of strategic vision.

Still, Mullin has just begun to scratch the surface. Before next July's annual meeting, when he may have a chance to take over the chairmanship from Grinstein, he will have to demonstrate that he can move beyond tactical changes and develop a sound long-term strategy.

Rivals question the hiring of an airline outsider--and one who had never been a chief executive to boot. But admirers such as Unicom Chairman James J. O'Connor say Mullin is up to righting Delta's woes. At Unicom, parent company of Commonwealth Edison, he was second in command and tackled everything from lobbying to personnel. Mullin, who holds a BA, an MS, and an MBA from Harvard University, also launched the revamp of Unicom's technology systems. "He could look beyond the immediate situations that confront a company and help develop decisions as to what the company could become," says O'Connor.

Mullin himself argues that his plan--to rebuild Delta's once-high service levels, bolster morale, and keep down costs--doesn't require extensive industry experience. "My fundamental goal," says Mullin, "is to build a great organization that happens to be an airline."

HORROR STORIES. Thanks to the industry's current healthy run, Mullin will have some breathing room. With fuel down 14% a gallon since March, a strong economy, and plenty of business travelers, airlines are booming. Moreover, Delta is leading an industry push to raise ticket prices. All told, PaineWebber Inc. analyst Samuel Buttrick expects Delta's earnings to rise 6% for the fiscal year ending next June, to around $900 million, on revenues up 4%, to $14.2 billion. The improvement has Delta's shares, like those of other carriers, gaining altitude. Since Mullin took office, they are up 38%, to a record of 120.

To keep the numbers climbing, Mullin is moving quickly to address the customer-service and morale problems that led to his predecessor's ouster. Although Allen won kudos for aggressively trimming Delta's overblown costs, the cuts left employees steaming and torpedoed the carrier's reputation for service: By late 1996, 61% of Delta's employees felt they could not trust management and 57% said service had declined. To make matters worse, "problems were showing up in the relationship between passengers and employees," Grinstein says.

In Mullin's own travels he has seen the result: ripped seat backs, broken luggage racks, messy cabins, and late planes. After one employee meeting, a flight attendant sent him a binder full of photos of overflowing trash bins and dirty seats. So Mullin plans to redo the interiors of Delta's 559 jets in the next 18 months, much faster than he planned.

TECHNOLOGY LAG. But spiffy seating alone won't solve all the problems Allen left behind. That's why Mullin is meeting regularly with small groups of employees to identify problems and solutions. He made a significant gesture to workers when he agreed to pay the expenses of the pilot's union representative on Delta's board. Still, he's no pushover. He won't give the pilots a raise despite threats that they may refuse to fly Delta's new Boeing 737 aircraft when they arrive next fall. Mullin also campaigned to stop the Transportation Workers Union from organizing Delta's 8,000 ramp workers, a bid the TWU lost on Dec. 9.

As trying as these problems are, they look tame when compared to Mullin's biggest challenge: quickly and effectively reinventing Delta's information systems. With planes throughout the industry flying nearly 70% full, superior information systems help Delta's rivals American Airlines Inc. and United Airlines Inc. sell more full-fare and first-class tickets and maximize pricing even on low-fare tickets. Mullin concedes Delta's inability to do the same is hurting results. "When you look at the systems in terms of whether or not we have any competitive advantage, the answer is no," he says.

Delta's technology lag became clear this fall when the airline first warned analysts that the September quarter would fall short of expectations, only to reverse itself in embarrassment a month later, saying it would meet them. "There's lots of room for improvement," sighs Marc Pinto, a portfolio manager at Janus Capital Corp., which holds 2 million Delta shares. Mullin recently hired a new chief information officer, but Delta's technology problem is likely to take at least two years to fix.

Mullin also has looming competitive problems to sort out. Domestically, the rise of low-cost rivals could damage Delta, which operates a more expensive fleet of long-haul aircraft. Before its problems, ValuJet had forced Delta to match its cheaper fares, spurring the launch of discount Delta Express. With ValuJet rebuilding under the AirTran Airlines name, low-fare competition may return.

Overseas, where Delta gets 20% of its revenue, even bigger problems await. After losing $2 billion from 1991 to 1995 on its acquisition of Pan Am's European routes, Delta eked out its first transatlantic profit last year. But difficulties remain: Delta recently closed its troubled Frankfurt hub, and it lacks landing rights at London's Heathrow. Moreover, its presence in Asia and Latin America is slight. Overall, its reliance on smaller partnerships, such as those with Swissair and Sabena World Airlines, has left it weaker than carriers like Northwest Airlines Inc. that have struck major strategic alliances.

Mullin has begun to address those problems. He quickly ended an unprofitable relationship with Singapore Airlines Ltd. and is personally conducting an ambitious Washington lobbying effort to help Delta's cause in the long-running negotiations over landing rights in Japan, France, and Britain. And on Dec. 10, Mullin announced plans to expand Delta's Latin America operations, which he says fit better with Delta's Atlanta hub than Asia. Still, the moves are only a start. "Delta is behind, and Mullin is going to have to give a lot of time and effort to catch up," says industry consultant Dan Kasper of the Law & Economics Consulting Group Inc. in Wellesley, Mass.

Certainly, Mullin has brought a studious and energetic approach to these challenges. He travels at least three weeks every month to employee meetings and frequent one-on-ones with investors. With most of Mullin's airtime spent studying copious briefing books and white papers, Delta's senior lobbyist, D.Scott Yohe, says his boss is learning fast. "He has put his own personal imprint on the Japan talks," says Yohe. Clearly, Mullin knows how to ask the right questions. So far, his answers look pretty good too.By David Greising in AtlantaReturn to top


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