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Analysis: Delta Celebrates 10th Anniversary of Exiting Bankruptcy

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Analysis: Delta Celebrates 10th Anniversary of Exiting Bankruptcy

Analysis: Delta Celebrates 10th Anniversary of Exiting Bankruptcy
April 30
13:57 2017

MIAMI – In 2017, Delta Air Lines is unabashedly a member of the global airline elite. The carrier is the world’s second largest by revenue (after rival American Airlines) and third largest by passengers carried (after American and Southwest).

More importantly, it has ranked as one of the world’s five most profitable airlines for each of the past five years (in total operating profits) and has been operationally profitable every year since 2010.

In the U.S. airline industry, that seven-year stretch ($26.7 billion in collective profits) represents perhaps the second best stretch of financial success for any U.S. airline since deregulation (Southwest’s 44 years of continuous profitability are on a completely different level altogether).

Delta’s strategy and execution over the past couple of years have certainly not been entirely above reproach. Delta’s fuel hedging strategy has shaved billions of dollars off of net income (while impacting free cash flow less) since the 2014 drop in oil prices, and the purchase of the Trainer refinery hasn’t been clearly revealed as a winner.

Moreover, the once peerless operation has shown a few cracks, largely driven by software malfunctions. But these challenges do not invalidate the track record or accomplishment of the past seven years.

The darkest timeline


Ten years ago Sunday (April 30, 2007), Delta Air Lines exited Chapter 11 bankruptcy protection, wrapping up a year and a half long restructuring process after filing for bankruptcy on September 15, 2005.

Delta’s bankruptcy filing was not a shock. Between 2001 and 2005, Delta lost $12.3 billion in the wake of rising fuel prices, bloated labor contracts, and over-capacity from a series of unviable low-cost carriers.

Delta was also carrying the financial baggage of its airline within an airline; the ill-fated Song. In that sense, the pressures that Delta faced were not radically different from those that drove United Airlines, future merger partner Northwest Airlines, and U.S. Airways (twice) into Chapter 11.

It was at this moment that Delta nearly slipped into what would have been an incredibly dark timeline.

While Delta was in bankruptcy attempting to restructure its business, rival U.S. Airways (itself a veteran of two Chapter 11 restructurings) swooped in with a cash+stock takeover offer on November 15, 2016 that started at $8 billion and proposed a series of synergies and aggressive restructuring that would have shrunk the footprint of pre-merger Delta.

Within three months, on January 10, 2007, U.S. Airways raised its total offer to $10.2 billion in all.

Keep Delta My Delta


U.S. Airways’ courtship was not welcomed by Delta’s employees or management team, which wanted to exit merger talks as an independent carrier (and already had its eyes set on a merger with Northwest Airlines to boost its Asian presence).

Much of the negotiation centered on private back channel work with Delta’s creditors, but once those groups proved susceptible to the U.S. Airways offer, Delta needed another arrow in its quiver.

Enter Ketchum Public Affairs, a communications firm that engineered a brilliant nationwide petition and public relations campaign centered on the simple but effective slogan of “Keep Delta My Delta.”

The Keep Delta My Delta campaign was incredibly successful because it drew on the natural affection that Delta employees and customers felt for the airline and further implied that these stakeholders had ownership in Delta. In less than two months, the campaign turned hundreds of elected officials and policy makers against the merger and attracted more than 100,000 signatures on an online petition.

Buoyed by the campaign, Delta formally turned down the U.S. Airways offer on February 1, 2007, and returned to its plan to emerge from bankruptcy as an independent carrier.

Delta comes out of bankruptcy with a bang… and then a whimper


The late spring of 2007 saw a flurry of activity from Delta, as it won court approval from the U.S. Bankruptcy Court for the Southern District of New York for its reorganization plan.

Backed by $2.5 billion in exit financing, Delta formally exited Chapter 11 on April 30, 2007, touting its accomplishments during the 19-month bankruptcy:

  • Completed a comprehensive transformation plan one year ahead of schedule, delivering $3 billion in annual financial improvements;

  • Reported four consecutive quarters of operating profits, with $155 million in operating profit in the first quarter of 2007;

  • Achieved the lowest mainline non-fuel CASM (excluding special items) of the network carriers in 2006;

  • Reduced the revenue gap with the industry — Delta’s length of haul adjusted PRASM was 95 percent of the industry average in the first quarter of 2007 — up from 87 percent for the same quarter in 2005;

  • Is projected to reduce net debt by more than 50 percent, from $16.9 billion at June 30, 2005, to a projected $7.6 billion at the end of 2007.

Upon exiting bankruptcy, then-Delta CEO Gerald Grinstein proclaimed:

This is a great day in Delta’s history — a day that would not have been possible without the hard work and sacrifice of Delta people around the world. Through our restructuring we have successfully repaired our balance sheet, improved the customer experience, expanded our international route system and built a platform for future success. Delta is now a fierce competitor in a tough industry and we are confident that we will reclaim our rightful place as an industry leader.

To coincide with its exit from bankruptcy and excite customers and employees, Delta also unveiled a new brand image centered around a three-dimensional red “Widget” logo, the same logo that graces all of Delta’s planes today.

The rebranding campaign was jointly led by advertising firm SS+K and Modem Media.

Display at the Delta Flight Museum

Display at the Delta Flight Museum

The rebranding was just one piece of a broader 2007 “Flight Plan” aimed at revitalizing Delta’s entire business.

To celebrate the occasion, Grinstein actually rang the opening and closing bells on the New York Stock Exchange (NYSE) from Atlanta and Manhattan respectively as Delta’s shares resumed trading on the NYSE.

Image Courtesy of Delta Museum

Image Courtesy of Delta Museum

But the celebrations were short-lived. Soon after Delta exited Chapter 11, the long-festering housing bubble burst, plunging America and the world into the worst financial recession since the Great Depression. Delta was not spared the general financial carnage that afflicted U.S. corporations, losing a whopping $8.9 billion.

Future merger partner Northwest lost an additional $6.0 billion. But Delta’s restructuring plan continued apace, and despite the pain felt by Delta’s shareholders and employees during a rough 2008, brighter days were ahead.

The key pillars of Delta’s post-bankruptcy success


Delta’s success over the past nine years is the confluence of many factors, including structural changes like consolidation in the industry and (more recently) a reduction in the price of oil. But it has also been driven by several strategic moves that Delta made, particularly in the 2008-2012 period.

Merging with Northwest

The first step in Delta becoming the juggernaut that it is today was merging with Minneapolis based Northwest Airlines.

The two SkyTeam partners had complimentary networks, with Delta strong along the East and West Coast and on Trans-Atlantic flights while Northwest was strong in the Midwest and on Trans-Pacific flights. Moreover, the Northwest fleet and fleet strategy helped power Delta’s business in years to come

Strategic Network Changes – new and growing hubs

In recent months, it has been clear that Delta has been pursuing a bit of a “four corners” hub strategy in the U.S.

The pinnacle of this is of course Delta’s new hub and Trans-Pacific gateway at Seattle, where it has picked a fight with Alaska Airlines, and the brewing battle in Boston with JetBlue.

And after playing footsie with Los Angeles and the LA market for nearly two decades after the Western Airlines merger, Delta has finally built up Los Angeles in a sustained and meaningful manner, cresting over 200 daily departures for Summer 2017 and making moves to secure its own terminal facility for growth (combining Terminals 2 and 3) moving forward.

The fourth corner doesn’t really exist in the Southeast, though one could argue that the focus city operation at Raleigh-Durham is that fourth corner.

Delta has also in the period through strategic growth at New York JFK and (more importantly) through the slot swap with U.S. Airways at New York LaGuardia, taken meaningful steps towards actually “Winning New York” as the 2007 plan suggested.

The combined hubs are almost the same size as United’s down the road in Newark in terms of daily departures, and Delta has the pre-emininent position at the preminent revenue generating airport (LaGuardia) in the NYC metropolitan area.

At the same time as Delta has built these hubs, it also pulled down ill fated or poorly situated hubs like Cincinnati, Memphis, Dallas Fort Worth, Tokyo Narita, and Orlando, resulting in an incredibly healthy network that generates excellent revenues despite arguably having the least desirable hub markets of any of the three U.S. legacy carriers.

Taking care of employees

Whether it was taking pay cuts and making concessions prior to bankruptcy, accepting further cuts in bankruptcy, or helping to stave off the U.S. Airways takeover bid, the affection that Delta employees felt for the company played a critical role in the company’s restructuring.

Now that it is profitable, Delta has responded to that in kind, working to ensure that it’s team remains highly compensated relative to the market, and instituting initiatives like profit sharing to give back more to its employees.

Focusing on operational excellence and product quality

One area where Delta quickly surged ahead of its peers (even with some recent stumbles) was operational quality and excellence, which Delta set as a company-wide strategic priority.

For the last four to five years, Delta has seen excellent on time performance, cancel rate, and record lows for other metrics like mishandled bags, and this has flowed through to the bottom line – Delta’s operation is more productive and predictable, reducing expenses, and passengers pay a premium for Delta’s flights in part based on operational standards.

In addition to operational investments, Delta has also taken several steps to boost its product offering, including investing in all aisle access (and now quasi suite) business class products on long-haul planes, upgrading softer service elements like food and drink, and even looking for ways to improve the customer experience for economy class passengers.

This too has helped boost the bottom line.

Moneyball fleet strategy to generate cash and pay down debt

The last pillar of Delta’s success has been its unique fleet strategy of eschewing orders for next generation planes in favor of used and current generation aircraft.

This probably peaked with the acquisition of the McDonnell Douglas MD-90s and the ex Air-Tran Boeing 717s a few years ago, but even to this day, Delta spends much less on new aircraft than its rival airlines do.

This has some trade offs in terms of higher maintenance and fuel costs, but the older planes (and even newer ones like the 737-900ER) are cheap to own or lease and more importantly help keep Delta’s capital expenditures down. Delta has used this extra cash to either return cash to shareholders or pay down debt and long term liabilities.

Delta’s success over the last decade is the sum total of all of these factors and more. The journey that started a decade ago when Delta exited bankruptcy has been an unqualified success.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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