Delta Air Lines Bankruptcy Emergence, Part 4: Presentations to the International Media
Note: Nine years ago today, Delta Air Lines formally emerged from bankruptcy protection; and this article is the fourth of a series of articles — actually comprised of what was originally three separate articles — which I first wrote nine years ago today.
J eff Battcher, who was recently appointed as the Vice President — Corporate Communications of Delta Air Lines, started off the presentations by commenting on how Delta Air Lines is gearing up to be a “bolder, stronger, fiercer” competitor which has now become a global provider. He then introduced Gerald Grinstein, Chief Executive Officer.
Mr. Grinstein, who is affectionately known as Jerry, commented on how Delta Air Lines had been in bankruptcy since September 15, 2005 — for one year, seven months and seventeen days — and is ready to emerge from bankruptcy later that morning at any time.
Delta Air Lines could not survive as it had been, Jerry said. There was an excess of seat capacity in the domestic markets, and customer amenities had been reduced. Delta Air Lines was forced to reduce the amount of different types of aircraft in its fleet, which at that time comprised of twelve different aircraft with twenty different cockpits. This cost US$350,000,000.00 per year simply to train pilots on these different configurations. Delta Air Lines must simplify its fleet and be less dependent on its domestic route system by expanding internationally.
The result is that Delta Air Lines, according to Jerry, not only adhered to but exceeded its plan “all the way”.
Approximately three billion dollars in changes was implemented, including a one billion dollar reduction in wages, two pay cuts, expanded workdays for its employees, and a reduction of benefits. An additional billion dollars went towards aircraft. For example, what currently costs approximately US$75,000.00 per month for maintenance and upkeep of the MD-88 fleet used to cost approximately US$225,000.00 per month. The remaining one billion dollars was spent on the international expansion.
Jerry said that the goal was to have international flights comprise 40% of the route structure of the global network of Delta Air Lines, although he “would not be surprised to see it expand to 50%”, all without sacrificing the domestic feed into these international routes. International growth and expansion will continue, Jerry said.
He is confident that a non-stop route between Atlanta and Shanghai in China will be in place next year, with continued expansion into Asia.
In terms of the relationships of partner airlines within the SkyTeam alliance, they are good and strong. Jerry referred to the relationship between Air France and Delta Air Lines in particular.
With the introduction of the new livery, it will take one fewer day to paint each aircraft. He also described himself as a “screwball CEO who could not stand the limp drapes on the tail”, if I heard him correctly. The re-branding, he said, represented restoration as well as expansion. Delta Air Lines will become “more competitive with stepped-up service”, and it will continue growing. He said that the head of the pilot’s union thought that this was a “great thing for Delta”.
Delta Air Lines will have the cost structure and balance sheet to help it survive.
He said that he will retire in approximately sixty days. There will be seven new board members who will join the Board of Directors, who are charged with the task of selecting a new Chief Executive Officer to succeed him. He said that he would prefer to have the successor chosen internally from within Delta Air Lines. Delta Air Lines must maintain its balance sheet – it must not be over-extended. It must strive for best-in-class cost structure. It must simplify its aircraft fleet, and over the years, Delta Air Lines will replace its 767 and MD-88 series over the coming years, and it has recently ordered 737-700 and 777 series aircraft. He did hint that certain Airbus aircraft “will be considered”.
Jerry then gave comments pertaining to the facilities at John F. Kennedy International Airport.
THe only tax benefit that Delta Air Lines receives is a US$15,000,000.00 cap by the city of Atlanta on the tax it pays on fuel. There is no other assistance from the city of Atlanta or the state of Georgia.
Jerry’s final remark is that he does not believe that there will not be a consolidation period within the airline industry for the next couple of years, but it will eventually happen and the consolidation will not be “traditional”.
Wheels Up: A New Delta Takes Flight by Edward Bastian
Ed Bastian, Executive Vice President and Chief Financial Officer for Delta Air Lines, stepped up to the podium to present a Microsoft PowerPoint presentation titled Wheels Up: A New Delta Takes Flight.
First, he outlined the key messages of the business plan of Delta Air Lines, mentioning how Delta Air Lines has delivered on its commitments throughout the restructuring and how financial discipline will be key to the success of Delta Air Lines. He also mentioned how Delta Air Lines is “well-positioned to return as a top-tier financial, customer and operational performer”.
Then, Ed presented three key components of the transformation plan of Delta Air Lines, which include delivering on its commitments pertaining to a three-part plan to close the revenue per available seat mile (RASM) gap to 93% of the industry average by the end of 2008; repairing the balance sheet by reducing adjusted net debt by greater than 50% from US$16,900,000,000 on June 30, 2005 to US$7,600,000,000 in 2007 to a projected US$6,200,000,000 in 2008 while continuing to further reduce the debt in the future; and eliminating approximately US$2,000,000,000 from the cost structure via improved productivity, a streamlined fleet of aircraft and renegotiated contracts to achieve “best-in-class” unit costs. As a result, only Northwest Airlines realized a better year-over-year change in pre-tax income than Delta Air Lines in 2006.
Delta Air Lines projects a pre-tax income of US$816,000,000, excluding special and reorganization items. The mainline non-fuel unit cost for Delta Air Lines gradually decreased from 8.99¢ in 2003 to 6.6¢ in 2007, down 27% from pre-restructuring levels, which contributes to the best-in-class cost structure. These figures exclude fuel taxes and profit-sharing paid for 2007. However, the mainline stage length adjusted non-fuel unit cost for Delta Air Lines was 6.93¢ for the second half of 2006, adjusted to exclude fuel taxes and excluding special and non-cash reorganization items. If the effect of pilot plan transformation was included, the figure would improve 0.22¢ to 6.71¢, which would be second only to US Airways.
The operating margins and pre-tax income are projected to eventually increase to 12.6% and US$1,900,000,000 respectively by the year 2010. For comparison purposes, the operating margins and pre-tax income for Delta Air Lines were -6.9% and US-$2,100,000,000 respectively in the year 2005. These figures exclude special and reorganization items and US$457,000,000 in projected profit sharing payments in 2010. The plan allows for US$6,000,000,000 to be re-invested in Delta Air Lines as a result of a projected strong cash flow while simultaneously strengthening the balance sheet.
Ed cautioned that Delta Air Lines must “live withing its means” in order to survive. The latest financial results for Delta Air Lines as of the March Quarter 2007 is an operating profit of US$155,000,000 – the fourth consecutive quarter of operating profits. While Delta Air Lines incurred a net loss of US$6,000,000,000, excluding reorganization and special items, that is still US$350,000,000 better than in 2006. The length of haul adjusted passenger revenue per available seat mile (PRASM) increased 6.1%, which outperformed the industry by four points. The mainline unit costs, excluding fuel and special items, decreased 9%, which is best in class. Delta Air Lines has a cash balance of US$4,000,000,000, where US$2,900,000,000 is unrestricted. At 8.2%, excluding special and non-recurring items, the March Quarter 2007 operating margin of Delta Air Lines is second only to American Airlines. Ed said to expect between 11% and 13% operating margins in the second quarter.
After presenting all of the above figures to demonstrate how dramatic the progress has been and will continue to be for Delta Air Lines, Ed summarized how Delta Air Lines is “positioned to win” with improving financial performance combined with the legendary “top-tier customer service and operational excellence” for which Delta Air Lines is known, as provided by the employees of Delta Air Lines. Ed then answered some questions from the international journalists.
Jim Whitehurst Presentation
Jim Whitehurst, Chief Operating Officer of Delta Air Lines, continued the theme of Wheels Up: A New Delta Takes Flight with the presentation of the financial picture pertaining to Delta Air Lines, starting with the Transformation Plan — 2006 Initiatives. The key components of the Transformation Plan call on “delivering on our financial commitments to secure our future, closing half of the RASM gap to build a profitable network, earning customer preference to establish Delta as the airline of choice by being ‘safe, clean and on-time’, and beginning to re-engage our people by re-igniting the winning spirit of Delta.”
In addition to reiterating some of the information already imparted by Ed during his presentation, Jim pointed out that Delta Air Lines has made significant progress in 2006 by being a leader when it comes to safety. 2,200 aircraft were deep-cleaned in 2006 compared to 300 aircraft in 2005. Delta Air Lines was third in the industry to Southwest Airlines and US Airways in terms of on-time performance in 2006, but was second only to Southwest Airlines for the first two months of 2007. Furthermore, preliminary data suggests that Delta Air Lines was first in terms of on-time performance by March and April of 2007. Also, with unit revenue adjusted to industry length of haul average, the passenger RASM of Delta Air Lines was 95% of the industry in the first quarter of 2007, the highest percentage in years.
In 2006, Delta Air Lines experienced top-tier employee productivity. Paid sick leave was reduced by 11% in 2006, and Delta Air Lines opened 41 stations in 14 countries.
However, Jim reiterated what Jerry told the audience of international journalists earlier this morning that the key focus areas for 2007 include continued international expansion of the global route network of Delta Air Lines, as well as winning in New York by transforming John F. Kennedy International Airport into a preferred hub. Additionally, Delta Air Lines is the only domestic United States carrier with significant international aircraft growth in the near future, with an international fleet expansion of 35 widebody aircraft added to its existing fleet of 67 widebody aircraft, mainly in June 2007.
In terms of global expansion, Delta Air Lines serves 109 destinations in 51 countries outside of the United States, and it is the world’s leading trans-Atlantic carrier to and from the United States, with 37 trans-Atlantic destinations planned by the end of 2007. Delta Air Lines is “right-sizing” its aircraft fleet: 13 widebody aircraft were moved from domestic routes to international routes in 2006, with another 7 widebody aircraft to be re-assigned during the remainder of 2007. Delta Air Lines is adding 13 new international flights in May and June alone to destinations such as Prague, Vienna, Dubai, Pisa, Seoul, Los Mochis, Bucharest, Santo Domingo, Zacatecas, Belize, Montego Bay, North Eleuthera, and Georgetown, with Lagos, Nigeria in late 2007.
With a map displayed on the screen, Jim called Atlanta the “boardwalk of airline hubs”, as no other domestic airline can connect five continents via one hub.
Atlanta is becoming the airport of choice and convenience for connections between Europe/Asia/Africa and Latin America, Jim said, with an unrivalled destination breadth.
Finally, there is a “world of profitable growth available to Delta Air Lines”, said Jim. For the Asia/Pacific market, Delta Air Lines is seeking China route authority, is launching Seoul
in 2007, will open new markets with 777-200LR aircraft, and will create a new reach through expanded codeshare agreements. For the Latin America market, Delta Air Lines provides a superior gateway with its Atlanta hub and opened new markets with its Los Angeles gateway, as well as provides service from New York to the Caribbean region, Central America and South America. For Africa, the Middle East and India markets, Delta Air Lines was the first United States airline to provide long-haul non-stop service from North America to Mumbai in India, as well as using aircraft to open the Middle East market and having the “first-mover advantage” with flights to Africa.
For trans-Atlantic routes, Delta Air Lines used widebody aircraft formerly assigned to domestic routes to fund profitable growth. Its Boeing 757 extended twin-engine operations (ETOPs) aircraft permits capacity optimization and provides unique new growth markets. As with its flights to Africa, Delta Air Lines once again had the “first-mover advantage” with flights to countries in Eastern Europe.
Once Jim finished his presentation, he took many questions from the international journalists, even during the break after the official session was over.
From left to right: Jeff Battcher and Gerald Grinstein. Photograph ©2007 by Brian Cohen.