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Delta Air Lines: The Glory Lost and Found (Part I)

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Delta Air Lines: The Glory Lost and Found (Part I)

Delta Air Lines: The Glory Lost and Found (Part I)
April 28
13:42 2017

By Seth Kaplan and Jay Shabat / Airline Weekly 

To mark the 10th anniversary of Delta’s exit from bankruptcy on April 30, 2007, Airways, together with Airline Weekly presents the first of two excerpts of the book Glory Lost And Foundin which its authors, Jay Shabat and Seth Kaplan, tell the story behind Delta Air Lines bankruptcy, and how it rose from the ashes to become a major global airline amid a challenging environment.

Also, don’t miss the August 2016 issue of Airways, in which Delta Air Lines is featured with a complete and detailed article, written by Enrique Perrella.

August 2016

A week after emerging victorious against the US Airways hostile takeover bid, Delta—back in bankruptcy court—formally disclosed its detailed exit plan. And after crossing some t’s and dotting some i’s, it emerged from bankruptcy April 30, reincarnated as a new airline with a fresh cost structure, a reinvigorated workforce and a network that was no longer notable only for its domestic and leisure orientations. Now it was gaining traction in the minds of global business travelers.

Doug Parker, reflecting years later, pointed to two key reasons why his plan failed. One was that he hadn’t done enough to cultivate support from Delta’s workers, a lesson U.S. Airways would take so closely to heart that, in a future bid, it would appear to prioritize engendering the support of employees even above engendering the support of management—and that time, its efforts would succeed. But not with Delta.

“So we put all of our focus on the creditors and driving value to them,” Parker recalled, “and the view was if the creditors vote for it, this is going to get done and that’s where you should go. And what we missed in that is the employees of Delta, who obviously didn’t think it was a good idea, and we didn’t focus on [them]. I think naively our view was, ‘Okay, well this isn’t where the game’s being played.’”

In retrospect, perhaps this should have been clear after the rough congressional hearing in which Jerry Grinstein was flanked by his employee supporters. But that’s not how Parker saw it at the time. “When it was over, we didn’t say, ‘Okay, well now the deal’s over,’” Parker said. “To the contrary, we said, ‘Okay, we got that over with. But that’s not the real game. The real game is with the creditors’ committee. That’s where we’ve got to focus, with the bondholders.’”

But “that hearing was more important than we gave it credit,” Parker reflected, “because even the bondholders then looked and said, ‘Well, wait a second. It’s one thing for the numbers to say we’re going to get all this value, but those guys have got to go try and run an airline. Well, the people don’t want to do it with them. And what kind of airline is that going to be? How are they going to manage that?’”

If that was easy for Parker to see in retrospect, it was even easier for Lee Moak, the Delta pilot leader. “I think that USAir learned from that that the employees do mean something and that they can affect the process,” he said.

The second reason for the deal’s failure, in Parker’s estimation, was one less romantic than the idea that Delta’s employees helped kill the deal (although they certainly did) but just as important. This second reason was an idea that seemed present in the mind of Delta’s bondholders. Although they were impressed by the money US Airways was offering, many of these bondholders also owned bonds of Northwest Airlines, which, of course, was preparing its own emergence from bankruptcy. And just wouldn’t it be great, these bondholders seemed to

Although they were impressed by the money U.S. Airways was offering, many of these bondholders also owned bonds of Northwest Airlines, which, of course, was preparing its own emergence from bankruptcy.

And just wouldn’t it be great, these bondholders seemed to think if Delta were to exit bankruptcy alone and then merge with Northwest? “So as they were talking to us,” Parker recalled, referring to the Delta bondholders, “it was like, ‘Yeah, yeah, we want consolidation. But what we really want is Delta and Northwest to get together, because that will help both of our bonds…. There’s a better deal for us.’”

Delta, for its part, was not necessarily opposed to merging. It was just opposed to merging with U.S. Airways.

Merging would have to wait, however, for Delta had a more immediate task at hand. It needed a CEO to replace Gerald Grinstein, who would retire—really, this time—now that his chief task of restructuring the airline was finished. Grinstein wanted one of his two top lieutenants—Ed Bastian and Jim Whitehurst—to succeed him. And he urged the newly constituted board of directors to choose either of them.

But Gordon Bethune, as advisor to the creditors’ committee, had others in mind. A better move, Bethune thought, was to lure Larry Kellner, Bethune’s replacement at Continental. And if not Kellner, then Kellner’s No. 2, Jeff Smisek. But neither had much interest in leaving Continental.

So Bethune thought of someone else—someone who was willing to leave his job. And Delta’s board was listening, for it was Bethune who had recommended Glen Hauenstein, the network planner who was masterminding Delta’s stunningly successful internationalization while rightsizing dying domestic hubs.

“They had Cincinnati running on steroids and losing their ass,” Bethune recalled of the situation a few years earlier. “It was all screwed up, and Glen knew exactly what to do.” Then Delta hired Bethune’s former human resource chief, Mike Campbell. “They finally hired people who knew what the fuck they were doing!”

To Bethune, Richard Anderson was someone else who knew what the fuck he was doing. Early in his tenure at Continental, Bethune watched as his fellow Texan transformed a troubled Northwest Airlines maintenance department, bonding with mechanics as if he were himself a mechanic, not a former Texas prosecutor. Anderson had left his job as a prosecutor because corporate lawyers earned more money, according to a profile in USA Today.

Before joining Northwest, he was at Continental, where he first caught the eyes of executives for his deft handling of legal matters after a fatal DC-9 crash near Denver. After joining Northwest, Anderson familiarized himself with all aspects of airline management, electing to transfer from the legal department to the maintenance department, of all places.

One reason for that unusual move: It would, he calculated, open a clearer path to the top of the food chain, for in the legal department, that path was clogged by someone above him, another ascending lawyer named Doug Steenland.

Bethune worked closely with Anderson after Continental and Northwest became alliance partners, by which time Anderson—just as he had calculated could happen if he took a detour from the legal department to maintenance—had leapfrogged Steenland to become Northwest’s CEO.

He had become CEO, more precisely, in that fateful year of 2001, seven months before 9/11. His full tenure at Northwest would span 14 years, ending when he left the company—and the airline business altogether—in late 2004, becoming a senior executive for United Healthcare, one of the nation’s top medical insurance companies. Like the time he moved from being a government prosecutor to a corporate lawyer, Anderson was again moving to a job with much higher pay.

At United—the insurance company, not the airline—he would earn $4.3 million annually. But he never lost his enthusiasm for the airline business. He would call Bethune from time to time, saying “Don’t you forget I’m down here if you need help…”

Bethune told Delta’s board: “He’s stupid because he’s making a gazillion dollars, and has his own G4 [a Gulfstream corporate jet] and would quit that job and come work for you.” Bethune also sold Anderson’s experience running a maintenance division, where treating employees with respect was critical. Bethune, after all, had gotten his own start in maintenance too. There he had learned the supreme importance of motivated employees. “You know how much faster I can fix an airplane when I want to fix it?” he asked rhetorically.

Read more: Glory Lost and Found



About Author

Alvaro Sanchez

Alvaro Sanchez

Online Executive Editor. Journalist and Certified Radio Host. Studying for a Specialization in Public Opinion and Political Communications. Even though I love politics I've found myself fascinated by the Aviation World. I'm also passionate by economy, strategic communications, my family, my country, and dogs.

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