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How Delta\'s Cash Cushion Pushed It Awry (WSJ)
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I found this article very interesting, and thought you might find it interesting as well.
*******
Cross Winds: How Delta's Cash Cushion Pushed It Onto Wrong Course --- No. 3 Carrier Looked Strong After 9/11, Making It Harder to Restructure --- Pilot Deal Puts Off Chapter 11
By Evan Perez
2265 words
10/29/2004
The Wall Street Journal
(Copyright (c) 2004, Dow Jones & Company, Inc.)
ATLANTA -- In the days after the Sept. 11 terror attacks, Delta Air Lines stood apart from its embattled rivals.
AMR Corp.'s American Airlines and UAL Corp.'s United Airlines, which both lost aircraft that day, were left scrambling along with US Airways to avoid financial disaster. But Delta's then-chief executive officer, Leo Mullin, could boast that his was financially one of strongest of the big U.S. airlines, sitting on a pile of profits from the 1990s boom and a history of fiscally conservative management.
Three years later, Delta is one of the most financially troubled airlines, far behind other big carriers in restructuring to compete in the changed landscape of the aviation industry. Yesterday, Delta announced a deal with its pilots union that will stave off a bankruptcy filing -- but company officials immediately pointed out that one still remains possible.
In hindsight, it is clear now that Delta's pile of cash and position as the strongest carrier after 9/11 lured the company's pilots and top managers onto a dire course. Delta's focus on boosting liquidity turned out to be its greatest blessing and curse, helping the company survive 9/11 relatively unscathed but also putting off badly needed overhauls to cut costs.
Six days after the attacks, Delta put its investment-grade credit rating to use to persuade skittish Wall Street investors to buy $1.25 billion in bonds secured by Delta aircraft. More big deals followed in the next few months, as Mr. Mullin and Delta's then-chief financial officer, M. Michele Burns, concluded that aggressively building up cash and liquidity was their paramount strategy for weathering the storm. While other airlines immediately pushed labor groups and creditors for operational and financial restructurings, Delta reported that it had another $8.9 billion in unencumbered aircraft, some of which it could use to help secure yet more cash to survive the downturn.
Delta hoped economic conditions would improve and still smarted from acrimonious contract talks with pilots earlier in 2001. So it shied away from another showdown with its workers or disruptive changes to its operations. As Delta's losses mounted in the face of rising labor and fuel costs and a crippling price war with low-cost rivals such as AirTran Holdings Inc.'s AirTran Airways and JetBlue Airways Corp., Mr. Mullin repeatedly raised yet more cash. The strategy ballooned into a crippling $20.6 billion debt albatross around Delta's neck.
Delta, the No. 3 U.S. carrier with its strong East Coast base, has beefed up trans-Atlantic routes and has been developing its giant Atlanta hub as a gateway into Latin America. But a big chunk of its business is still centered on routes from the Northeast to Florida, which this year became a problem when four hurricanes caused repeated disruptions and cost $50 million in business.
This month, Delta had to beg its vendors, creditors and its pilots union for the concessions that allowed it to narrowly avert a planned bankruptcy-court filing on Wednesday. Delta avoided court protection with a last-minute deal with its pilots. The union tentatively agreed to a 32.5% pay cut and a five-year wage freeze, but Delta was forced to give the pilots up to a 15% ownership stake in the airline and make other concessions it had hoped to avoid.
Even with the financial relief the company won this week and under a best-case scenario, Delta will continue hovering near bankruptcy for the next few months, vulnerable to oil-price swings and fare wars. In a statement yesterday, Delta CEO Gerald Grinstein said that "bankruptcy remains a possibility due to Delta's precarious financial situation" but added that the airline was making progress in its efforts to avoid it.
Some Delta executives now concede they paid a price for their financial cushion. "Because we managed ourselves in a financially responsible way, because we were strong, and because we were better positioned than other airlines," Mr. Mullin said in a recent interview, "we ended up in the tougher bargaining position."
Delta's board and management committed blunders in the first year after 9/11. They approved bonuses and special bankruptcy-proof pensions for top brass at a time they were asking employees to sacrifice, which in turn put off any possible deal with pilots. Delta's board, gun-shy after ousting a previous CEO, moved slowly to recognize new leadership was needed after Mr. Mullin became hobbled by controversy over the special pensions.
The company defended its actions amid the downturn. "After 9/11 we were in uncharted territory in the airline industry and we moved swiftly and decisively to secure the survival of the company through aggressive cost-cutting," John Kennedy, a Delta spokesman said. Among the moves, the company announced a cut of 13,000 jobs, most of which were voluntary buyouts, and eliminated dozens of unprofitable routes, he said.
Long after 9/11, Mr. Mullin steadfastly opposed using the word "bankruptcy" or raising it as even a remote possibility. In a conference call with Wall Street analysts in July 2002, Ms. Burns, the chief financial officer, noted the tough operating environment but said the airline was maintaining a positive cash flow and that its access to the capital markets would be the ticket out of its jam. "Delta's liquidity position is a priority," Ms. Burns said at the time. "Our balance sheet is among the strongest in the industry, and that gives us the financial flexibility needed during this recovery." A spokesman for Mirant Corp., where Ms. Burns is now chief financial officer, said she declined to comment.
The optimistic tone calmed the capital markets, but it also gave Delta's other constituencies little urgency as Delta asked for help to lower costs. Most importantly, it allowed leaders of the Delta pilots union to repeatedly invoke the cash pile as evidence that the company didn't really need the level of financial concessions it was seeking -- even as the airline spiraled toward bankruptcy.
Determined not to give back any part of the industry-high contract it won just before 9/11, the union, representing more than 7,000 Delta pilots, fought the company's decision to furlough over 1,000 pilots in 2001. Then, while pilots at other airlines were taking huge pay cuts, and other employees at Delta were having cuts imposed, Delta pilots got their contractually agreed 4.5% wage increases in 2002, 2003 and earlier this year.
"At the time we thought that was a fair contract, they never told us we could not afford that contract," John Malone, chairman of the union's leadership council, said in an interview last November.
After the 9/11 attacks, Delta was the only big airline with the combination of financial resources and a relatively cooperative, mostly nonunion work force that would have allowed it to pursue a major restructuring from a position of strength. But a long series of miscalculations and bad luck frittered away that opportunity.
Within days of 9/11, Delta dramatically accelerated its borrowing, using some of it to fund operations. On Sept. 17, 2001, the company sold $1.25 billion in equipment-secured bonds. Two months later, in December 2001, it sold $730.5 million in European bonds secured by planes and equipment. In 2003, Delta arranged $900 million in financing to replace credit expiring that year. In April of that year, Delta borrowed $352 million under secured financing arrangements with General Electric Capital Corp.
One board member involved in the discussions around seeking additional financing said the strategy was built on a gamble that Delta's underlying business would turn around in time. "It's not as if the board and management was unaware" of the risks, said the director. "Everyone realized that while this cash infusion from borrowing would enable Delta to continue on without severe financial problems, the business would have to turn around or Delta would have a problem paying all this money."
Meanwhile, Mr. Mullin took a prominent role as a spokesman for the big airlines in their efforts to win a government bailout. His much-lauded efforts at the time led to a brief infusion of federal aid to Delta but had the larger effect of helping keep afloat badly maimed competitors that ultimately have hindered Delta's turnaround.
In late 2002, as it became apparent the post-9/11 crisis had no end in sight, Delta homed in on costs, announcing a new "profit improvement initiative." It included trying to cut losses in its Dallas hub by expanding the use of small regional jets, improving turnaround times for aircraft, which makes aircraft use more efficient, and installing more automated kiosks for check-in at airports.
It also announced plans to start a new low-cost "airline within an airline" unit to battle upstart low-cost competitors for leisure travelers' business. It was a strategy that had failed previously for Delta and other airlines, but Mr. Mullin was determined this time it would work. Wall Street critics panned the carrier dubbed Song for using up $65 million in cash that Delta could have better spent improving its mainline operations. Song remains unprofitable.
Executives also began looking at their labor costs. With United and American using their declining finances to wrestle concessions from union workers, Delta realized it could no longer avoid similar steps. Like other carriers, Delta used layoffs to reduce its work force immediately after 9/11. But Mr. Mullin and other executives were proud that Delta was unique among major carriers in offering generous buyouts that made most of Delta's job cuts voluntary.
The company tried to pare costs further by switching nonunion workers to a cheaper pension plan and by freezing employee pay. It then began preparing to talk to its pilots union, the only major organized group among its 60,000 employees.
The first talks with the union went nowhere. Mr. Mullin claimed success in bringing the pilots to the table and for receiving their first proposal in the waning weeks of his tenure in 2003. But there was little movement as the two sides staked positions far apart on compensation and other details.
"Delta has been headed to bankruptcy from day one," says James Broadhead, retired chairman and chief executive of Florida utility FPL Group Inc. and a Delta board member at the time. "I knew from the beginning that the pilots wouldn't give anything until the last possible minute, and that may turn out to be too late." Mr. Broadhead, who left the board in 2002, says Mr. Mullin should be given credit for his efforts, adding: "Who knew what was going to happen? He was taking steps that would give the company strength."
After Mr. Mullin signaled his intention to leave, Delta's board moved sluggishly, even as the airline's financial house fell into further disorder. Four months passed before Mr. Mullin publicly announced his coming departure, and two more months before he actually left.
Finally, in January 2004, Mr. Grinstein took the CEO reins. He was reluctant to discuss the company situation publicly, but in private employee meetings Mr. Grinstein said he was surprised to discover Delta's financial condition to be worse than he had expected. Convinced the airline wasn't being dour enough in its financial pronouncements, Mr. Grinstein began warning for the first time that the carrier might be headed toward bankruptcy court.
Pilots and others at Delta doubted the sincerity of Mr. Grinstein's surprise, since he had been a director for 16 years and helped engineer the ouster of former CEO Ron Allen in 1997. Mr. Grinstein insists he didn't realize the true financial situation and that as a board member he wasn't privy to all the information Mr. Mullin was. Mr. Mullin has said the company's financial reports were neither optimistic nor pessimistic, just "realistic."
Hopes of solving the standoff over concessions rose with Mr. Grinstein's arrival in the executive suite, tucked in an unassuming brick building on Delta's sprawling Atlanta airport headquarters. Mr. Grinstein, with his past as a U.S. senator's top aide, lawyer and stints as chief executive at Western Airlines and Burlington Northern railroad, had plenty of experience in thorny negotiations. He spent weeks meeting with employees, trying to win back trust, repeating a tactic he had employed at Western and Burlington Northern.
His first day in office he picked up the phone and called Mr. Malone, the newly elected pilots union leader, and promised to provide new financial information that would make the case that Delta's fortunes were sinking rapidly and that the union needed to move quickly to provide relief. Union officials say for months they didn't get the data they needed.
But Mr. Grinstein's biggest move was to order a top-to-bottom strategic and operational review. Delta needed a plan, but the process ended up consuming nearly nine months of precious time -- when the airline was losing up to $5 million a day.
Mr. Grinstein stands by his decision to bide his time. "It took nine months because you can't make judgments like that off the bat," Mr. Grinstein said in an interview this week. "You have to think it through."
Hello Guys,
I found this article very interesting, and thought you might find it interesting as well.
*******
Cross Winds: How Delta's Cash Cushion Pushed It Onto Wrong Course --- No. 3 Carrier Looked Strong After 9/11, Making It Harder to Restructure --- Pilot Deal Puts Off Chapter 11
By Evan Perez
2265 words
10/29/2004
The Wall Street Journal
(Copyright (c) 2004, Dow Jones & Company, Inc.)
ATLANTA -- In the days after the Sept. 11 terror attacks, Delta Air Lines stood apart from its embattled rivals.
AMR Corp.'s American Airlines and UAL Corp.'s United Airlines, which both lost aircraft that day, were left scrambling along with US Airways to avoid financial disaster. But Delta's then-chief executive officer, Leo Mullin, could boast that his was financially one of strongest of the big U.S. airlines, sitting on a pile of profits from the 1990s boom and a history of fiscally conservative management.
Three years later, Delta is one of the most financially troubled airlines, far behind other big carriers in restructuring to compete in the changed landscape of the aviation industry. Yesterday, Delta announced a deal with its pilots union that will stave off a bankruptcy filing -- but company officials immediately pointed out that one still remains possible.
In hindsight, it is clear now that Delta's pile of cash and position as the strongest carrier after 9/11 lured the company's pilots and top managers onto a dire course. Delta's focus on boosting liquidity turned out to be its greatest blessing and curse, helping the company survive 9/11 relatively unscathed but also putting off badly needed overhauls to cut costs.
Six days after the attacks, Delta put its investment-grade credit rating to use to persuade skittish Wall Street investors to buy $1.25 billion in bonds secured by Delta aircraft. More big deals followed in the next few months, as Mr. Mullin and Delta's then-chief financial officer, M. Michele Burns, concluded that aggressively building up cash and liquidity was their paramount strategy for weathering the storm. While other airlines immediately pushed labor groups and creditors for operational and financial restructurings, Delta reported that it had another $8.9 billion in unencumbered aircraft, some of which it could use to help secure yet more cash to survive the downturn.
Delta hoped economic conditions would improve and still smarted from acrimonious contract talks with pilots earlier in 2001. So it shied away from another showdown with its workers or disruptive changes to its operations. As Delta's losses mounted in the face of rising labor and fuel costs and a crippling price war with low-cost rivals such as AirTran Holdings Inc.'s AirTran Airways and JetBlue Airways Corp., Mr. Mullin repeatedly raised yet more cash. The strategy ballooned into a crippling $20.6 billion debt albatross around Delta's neck.
Delta, the No. 3 U.S. carrier with its strong East Coast base, has beefed up trans-Atlantic routes and has been developing its giant Atlanta hub as a gateway into Latin America. But a big chunk of its business is still centered on routes from the Northeast to Florida, which this year became a problem when four hurricanes caused repeated disruptions and cost $50 million in business.
This month, Delta had to beg its vendors, creditors and its pilots union for the concessions that allowed it to narrowly avert a planned bankruptcy-court filing on Wednesday. Delta avoided court protection with a last-minute deal with its pilots. The union tentatively agreed to a 32.5% pay cut and a five-year wage freeze, but Delta was forced to give the pilots up to a 15% ownership stake in the airline and make other concessions it had hoped to avoid.
Even with the financial relief the company won this week and under a best-case scenario, Delta will continue hovering near bankruptcy for the next few months, vulnerable to oil-price swings and fare wars. In a statement yesterday, Delta CEO Gerald Grinstein said that "bankruptcy remains a possibility due to Delta's precarious financial situation" but added that the airline was making progress in its efforts to avoid it.
Some Delta executives now concede they paid a price for their financial cushion. "Because we managed ourselves in a financially responsible way, because we were strong, and because we were better positioned than other airlines," Mr. Mullin said in a recent interview, "we ended up in the tougher bargaining position."
Delta's board and management committed blunders in the first year after 9/11. They approved bonuses and special bankruptcy-proof pensions for top brass at a time they were asking employees to sacrifice, which in turn put off any possible deal with pilots. Delta's board, gun-shy after ousting a previous CEO, moved slowly to recognize new leadership was needed after Mr. Mullin became hobbled by controversy over the special pensions.
The company defended its actions amid the downturn. "After 9/11 we were in uncharted territory in the airline industry and we moved swiftly and decisively to secure the survival of the company through aggressive cost-cutting," John Kennedy, a Delta spokesman said. Among the moves, the company announced a cut of 13,000 jobs, most of which were voluntary buyouts, and eliminated dozens of unprofitable routes, he said.
Long after 9/11, Mr. Mullin steadfastly opposed using the word "bankruptcy" or raising it as even a remote possibility. In a conference call with Wall Street analysts in July 2002, Ms. Burns, the chief financial officer, noted the tough operating environment but said the airline was maintaining a positive cash flow and that its access to the capital markets would be the ticket out of its jam. "Delta's liquidity position is a priority," Ms. Burns said at the time. "Our balance sheet is among the strongest in the industry, and that gives us the financial flexibility needed during this recovery." A spokesman for Mirant Corp., where Ms. Burns is now chief financial officer, said she declined to comment.
The optimistic tone calmed the capital markets, but it also gave Delta's other constituencies little urgency as Delta asked for help to lower costs. Most importantly, it allowed leaders of the Delta pilots union to repeatedly invoke the cash pile as evidence that the company didn't really need the level of financial concessions it was seeking -- even as the airline spiraled toward bankruptcy.
Determined not to give back any part of the industry-high contract it won just before 9/11, the union, representing more than 7,000 Delta pilots, fought the company's decision to furlough over 1,000 pilots in 2001. Then, while pilots at other airlines were taking huge pay cuts, and other employees at Delta were having cuts imposed, Delta pilots got their contractually agreed 4.5% wage increases in 2002, 2003 and earlier this year.
"At the time we thought that was a fair contract, they never told us we could not afford that contract," John Malone, chairman of the union's leadership council, said in an interview last November.
After the 9/11 attacks, Delta was the only big airline with the combination of financial resources and a relatively cooperative, mostly nonunion work force that would have allowed it to pursue a major restructuring from a position of strength. But a long series of miscalculations and bad luck frittered away that opportunity.
Within days of 9/11, Delta dramatically accelerated its borrowing, using some of it to fund operations. On Sept. 17, 2001, the company sold $1.25 billion in equipment-secured bonds. Two months later, in December 2001, it sold $730.5 million in European bonds secured by planes and equipment. In 2003, Delta arranged $900 million in financing to replace credit expiring that year. In April of that year, Delta borrowed $352 million under secured financing arrangements with General Electric Capital Corp.
One board member involved in the discussions around seeking additional financing said the strategy was built on a gamble that Delta's underlying business would turn around in time. "It's not as if the board and management was unaware" of the risks, said the director. "Everyone realized that while this cash infusion from borrowing would enable Delta to continue on without severe financial problems, the business would have to turn around or Delta would have a problem paying all this money."
Meanwhile, Mr. Mullin took a prominent role as a spokesman for the big airlines in their efforts to win a government bailout. His much-lauded efforts at the time led to a brief infusion of federal aid to Delta but had the larger effect of helping keep afloat badly maimed competitors that ultimately have hindered Delta's turnaround.
In late 2002, as it became apparent the post-9/11 crisis had no end in sight, Delta homed in on costs, announcing a new "profit improvement initiative." It included trying to cut losses in its Dallas hub by expanding the use of small regional jets, improving turnaround times for aircraft, which makes aircraft use more efficient, and installing more automated kiosks for check-in at airports.
It also announced plans to start a new low-cost "airline within an airline" unit to battle upstart low-cost competitors for leisure travelers' business. It was a strategy that had failed previously for Delta and other airlines, but Mr. Mullin was determined this time it would work. Wall Street critics panned the carrier dubbed Song for using up $65 million in cash that Delta could have better spent improving its mainline operations. Song remains unprofitable.
Executives also began looking at their labor costs. With United and American using their declining finances to wrestle concessions from union workers, Delta realized it could no longer avoid similar steps. Like other carriers, Delta used layoffs to reduce its work force immediately after 9/11. But Mr. Mullin and other executives were proud that Delta was unique among major carriers in offering generous buyouts that made most of Delta's job cuts voluntary.
The company tried to pare costs further by switching nonunion workers to a cheaper pension plan and by freezing employee pay. It then began preparing to talk to its pilots union, the only major organized group among its 60,000 employees.
The first talks with the union went nowhere. Mr. Mullin claimed success in bringing the pilots to the table and for receiving their first proposal in the waning weeks of his tenure in 2003. But there was little movement as the two sides staked positions far apart on compensation and other details.
"Delta has been headed to bankruptcy from day one," says James Broadhead, retired chairman and chief executive of Florida utility FPL Group Inc. and a Delta board member at the time. "I knew from the beginning that the pilots wouldn't give anything until the last possible minute, and that may turn out to be too late." Mr. Broadhead, who left the board in 2002, says Mr. Mullin should be given credit for his efforts, adding: "Who knew what was going to happen? He was taking steps that would give the company strength."
After Mr. Mullin signaled his intention to leave, Delta's board moved sluggishly, even as the airline's financial house fell into further disorder. Four months passed before Mr. Mullin publicly announced his coming departure, and two more months before he actually left.
Finally, in January 2004, Mr. Grinstein took the CEO reins. He was reluctant to discuss the company situation publicly, but in private employee meetings Mr. Grinstein said he was surprised to discover Delta's financial condition to be worse than he had expected. Convinced the airline wasn't being dour enough in its financial pronouncements, Mr. Grinstein began warning for the first time that the carrier might be headed toward bankruptcy court.
Pilots and others at Delta doubted the sincerity of Mr. Grinstein's surprise, since he had been a director for 16 years and helped engineer the ouster of former CEO Ron Allen in 1997. Mr. Grinstein insists he didn't realize the true financial situation and that as a board member he wasn't privy to all the information Mr. Mullin was. Mr. Mullin has said the company's financial reports were neither optimistic nor pessimistic, just "realistic."
Hopes of solving the standoff over concessions rose with Mr. Grinstein's arrival in the executive suite, tucked in an unassuming brick building on Delta's sprawling Atlanta airport headquarters. Mr. Grinstein, with his past as a U.S. senator's top aide, lawyer and stints as chief executive at Western Airlines and Burlington Northern railroad, had plenty of experience in thorny negotiations. He spent weeks meeting with employees, trying to win back trust, repeating a tactic he had employed at Western and Burlington Northern.
His first day in office he picked up the phone and called Mr. Malone, the newly elected pilots union leader, and promised to provide new financial information that would make the case that Delta's fortunes were sinking rapidly and that the union needed to move quickly to provide relief. Union officials say for months they didn't get the data they needed.
But Mr. Grinstein's biggest move was to order a top-to-bottom strategic and operational review. Delta needed a plan, but the process ended up consuming nearly nine months of precious time -- when the airline was losing up to $5 million a day.
Mr. Grinstein stands by his decision to bide his time. "It took nine months because you can't make judgments like that off the bat," Mr. Grinstein said in an interview this week. "You have to think it through."
