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Delta: Coffee, Tea, And Pay Cuts?


In October, 2002, Leo F. Mullin, chairman and chief executive of Delta Air Lines Inc., (DAL) laid it out to the carrier's pilots: To become profitable again, Delta would have to slash their wages by 25% and skip promised raises. Since then, both of Delta's larger rivals -- American Airlines Inc. (AMR) and United Airlines Inc. (UAL) -- have lopped pilot pay by 23% and 30%, respectively. And Delta? Its pilots make even more than in 2002, thanks to a 4.5% midyear pay hike.

Now, after getting nowhere with the airline's hard-nosed pilots and with losses deepening, Mullin is stepping aside. In a surprise move on Nov. 24, Delta announced that Mullin, 60, is retiring. He will be succeeded on Jan. 1 by Gerald Grinstein, 71, a veteran director and former chairman. Mullin will remain chairman until Apr. 23, when director John F. Smith Jr., 65, the ex-chairman and CEO of General Motors Corp., (GM) will take that office. Mullin says he has wanted to retire for months. But analysts note the move comes just two weeks after Delta warned of steep fourth-quarter losses.

Given Grinstein's track record, his chances of mending Delta are better than Mullin's. He turned around Western Airlines and then railroad Burlington Northern Inc. after a decade as a top aide to a Democratic senator. In those previous stints, Grinstein developed a reputation for schmoozing with employees while winning concessions from unions. And in his 16 years as a Delta director, he has also built up considerable goodwill. True to form, Grinstein already was out doing meet-and-greets with Delta employees on Nov. 25. He met with workers at Atlanta's Hartsfield International Airport and at the airline's tech center. "He is seen as an honest person," says flight attendant Andrea Taylor, a union organizer and 12-year Delta veteran. "Whatever he promised, he's come through on."

STAGGERING LOSSES

But fixing the nation's no. 3 airline will be tough. Delta's 7,500 pilots are the best-paid in the industry, with incomes of up to $275,000 a year. The airline is steadily losing business at its hometown hub to low-cost upstart AirTran Airways Inc. (AAI) Discounters such as AirTran and JetBlue Airways (JBLU) are also grabbing traffic from Delta between the Northeast and Florida, despite Delta's launch of a low-fare subsidiary of its own, Song.

Indeed, while almost every network airline made money in the third quarter, Delta lost $164 million, and it has warned its fourth-quarter loss will deepen to at least $365 million. Over the past two years, Delta has lost a staggering $2.5 billion. Moreover, Delta faces $1 billion in debt repayments in 2004, on top of $1 billion in pension and capital-spending obligations -- enough to chew through much of its $2.7 billion cash hoard. Standard & Poor's (MHP) on Nov. 24 put Delta's junk-rated debt on its watch list for a possible downgrade. Adds William T. Warlick, an analyst with Fitch Ratings, which lowered Delta's debt ratings on Nov. 21: "Even if Delta gets a quick deal" with its pilots, "it doesn't mean they're out of the woods."

Mullin had been demanding wage cuts after the industry spiraled into record losses following the September 11 terrorist attacks in 2001. Since then, Delta has laid off 16,000 employees, including more than 1,000 pilots. But he was never able to get Delta's only union, the Air Line Pilots Assn., to bend. Delta now pays pilots 20% more than pilots at American and United and 40% more than those at discount airlines.

POISONED WELL

One reason pilots have balked is that Delta has had plenty of cash. Another is more personal: Last spring, Mullin infuriated pilots by putting in a special pension plan for himself and other top execs as he pressed the union for givebacks. Never mind that Mullin later canceled the $65 million pension outlay; the move poisoned the well.

Will Grinstein have more luck with Delta's pilots? While vowing to work closely with the union, he has made it clear that his "unshakable imperative" is to cut costs. A showdown with the pilots looks likely -- and as Grinstein's predecessor would attest, that's a difficult one to win. By Michael Arndt in Chicago


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