Grinstein Takes His Shot at Delta


By Michael Arndt When Gerald Grinstein took over as CEO of Delta Air Lines (DAL) at the start of 2004, the veteran director asked stakeholders to give him time. The carrier needed to be restructured to become profitable again, he said, but he would need months to review Delta's entire operations before he could put together a long-term fix.

The wait is over. On Sept. 8, Grinstein sketched out plans to cut Delta's annual expenses by $2.7 billion by yearend 2006. But while the restructuring might be enough to put Delta back in the black over the long term, even Grinstein conceded it may not be enough to keep the nation's No. 3 airline out of bankruptcy over the next few weeks.

The headline grabber in Grinstein's overhaul: the axing of up to 7,000 employees, or roughly 10% of Delta's workforce, over the next 18 months. On top of previous layoffs, the dismissals will reduce Delta's payroll to 63,000, from 84,000 in 2000. Some of these latest job losses will be at Dallas-Fort Worth, where Delta will slash the number of flights by 90% by next February as it shuts down its airport hub.

"NOT COSMETIC SURGERY." All remaining employees will get socked with as-yet unspecified reductions in pay and health-care benefits, and management expenses will be trimmed by 15%, Grinstein said. "We are all being called upon to work harder for less," he told workers at a town-hall meeting.

Other remedies include: "depeaking" operations at Delta's hometown hub in Atlanta, or spreading out arrivals and departures evenly throughout the day to make better use of aircraft and crews. The carrier is also beefing up operations in Atlanta and its other two remaining hubs, Salt Lake City and Cincinnati; simplifying fares; dropping the number of aircraft types it flies, thereby reducing training expenses; installing leather seats and new lighting in plane cabins; expanding its Song discount airline with 12 more jets; and starting profit-sharing and a performance-based pay scheme.

All in all, judges Daniel McKenzie, an airline-industry analyst with Citigroup's Smith Barney division, the "makeover is not cosmetic surgery."

$1 BILLION PAY CUT? But Grinstein needs huge givebacks from two constituencies to reach his $2.7 billion savings target -- Delta's unionized pilots and its creditors. Despite tough talk by the CEO, neither group has been willing to go along. Delta's pilots are now the industry's highest paid, with some earning $275,000 a year. Grinstein wants them to take a collective $1 billion-a-year pay cut.

In negotiations in August, pilots agreed to give up some money, but nowhere near the sum Grinstein has demanded. Delta is also weighed down by $20 billion in debt. But in an early test of creditor sentiment, investors who hold leases on Delta aircraft also rebuffed Grinstein last month when they were asked to accept lower payments on the secured debt.

Grinstein may yet get the leaseholders to come around. A lawyer who once ran Delta as its chairman, Grinstein, 72, has a history of turning around failing companies. After a decade as a Democratic aide on Capitol Hill, he salvaged Western Air Lines in the 1980s and then railroad Burlington Northern (BNI) in the early 1990s.

UNCRACKED NUT. He's certainly cranking up the pressure at Delta. Unless the pilots and creditors agree to concessions by the end of September, Grinstein warned he'll put the $15 billion company in Chapter 11 bankruptcy proceedings. The Air Line Pilots Assn. has been unwavering, however.

Grinstein isn't the first Delta head to try to crack this nut. When he was unable to get pilots to accept lower pay, former Chairman and CEO Leo F. Mullin announced an unexpected early retirement last fall and handed his job to Grinstein. Moreover, Smith Barney's McKenzie argues that bondholders have no incentive to buckle under. They actually might fare better in Chapter 11, he says.

That's because the more money Grinstein is able to take away from labor, through pay cuts and scaled-back pensions, the more that should be left for creditors. "It's a tall order to get this done," agrees William Warlick, an airline analyst with Fitch Ratings, which rates Delta's debt at two notches above default, with a negative outlook.

"NO GUARANTEES." No one questions that Delta needs a top-to-bottom restructuring. Despite $2.3 billion in cost-cutting, the airline has lost more than $5 billion since the September 11 terrorist attacks three years ago. On its current course, analysts predict, the losses will extend through 2006. Delta is losing customers to low-cost rivals such as AirTran Airways (AAI) and JetBlue Airways (JBLU). On top of that, its pensions are at least $5.7 billion in arrears.

Adding to the pressure, American Airlines (AMR) and United Airlines (UAL), Delta's bigger hub-and-spoke competitors, both have slashed their labor expenses. United, which has been in Chapter 11 since December, 2002, may reap a further advantage if it dumps its pension plans as expected. "Given the severity of our financial situation, there are no guarantees for success and no time to waste," admits Grinstein.

In his early-morning meeting with employees on Sept. 8, Grinstein called his plan his four aces. Investors apparently don't see the same cards. Delta shares on the New York Stock Exchange plunged 10%, closing at $4.04, dropping back toward their 52-week low of $3.33 reached in mid-August.

Analysts don't see four of a kind, either. Stuart Klaskin, a partner with airline consultants Klaskin, Kushner & Co. in Miami, puts odds of Delta slipping into bankruptcy at 50-50. Grinstein has no one to blame for his hand -- he dealt the cards himself. Now he must play them. Arndt is senior correspondent in BusinessWeek's Chicago bureau


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