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

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

Delta Air Lines: The Glory Lost and Found (Part II)
April 30
09:30 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 second of two excerpts from 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

By the time it emerged from bankruptcy, Northwest had dramatically restructured itself, just as Delta had. Delta, to be sure, had fallen farther and faster—and had its feet planted more squarely on death’s doorstep when it filed for bankruptcy, making its turnaround more unlikely. But Northwest’s efforts were herculean in their own right: non-fuel unit costs slashed 14 percent, unit labor costs slashed 37 percent, unit revenues up 12 percent and—most importantly—the restoration of profits.

In fact, restoration understates the case: Northwest became one of the most profitable airlines in the industry. In 2006, it managed a $330 million net profit excluding one-off accounting items, along with a 6 percent operating margin, topping everyone but Southwest. The next year proved even better: a $542 million profit and a 9 percent operating margin, this time slightly better than even Southwest.

Delta had exited bankruptcy with management and employees practically on the same side of the table, unified in their opposition to the hostile US Airways bid.

If such an alliance would have seemed merely strange at most of Delta’s competitors, it would have been patently unimaginable at Northwest, where managers internally—complementing the “it’s cold, it’s dark and it’s all ours” line to describe the domestic geography it dominated—had another mantra to describe the take-no-prisoners approach to restructuring, starting with breaking AMFA just before the bankruptcy filing: “We’ll do it once, we’ll do it right and we won’t have to do it again.”

This was truly a new Northwest, with new labor contracts, a simplified and renewed aircraft fleet and a refurbished balance sheet. Its regional network was finally rightsized with the right planes.

Its Pacific network was rapidly replacing DC-10s and 747s with 330s. Its Atlantic network, amplified by the still-highly-profitable KLM joint venture, was further fortified by re-diverting 757s to Europe, just as Delta had done, although Northwest, never with a network as unwieldy to begin with, didn’t have to conduct a network revamp as radical as the one Delta had undertaken.

Northwest had the strongest cargo business of any U.S. airline thanks to its routes in Asia, where so many of America’s imports were produced. It was eager to exploit the fast-growing Chinese market and awaited regulatory approval to enlarge its transatlantic JV to include Delta and Air France. The new U.S.-E.U. open skies agreement meant it could soon fly to London Heathrow.

To protect its heartland markets, Northwest joined with the investment group TPG to take control of Milwaukee-based Midwest Airlines, outmaneuvering Atlanta-dependent AirTran, which had also wanted to take over Midwest and its Milwaukee hub. Unlike Delta, Northwest—even if ruthless in some regards—left bankruptcy without having to terminate anybody’s pension plan.

“To this day,” Steenland recalled years later, “I’m walking through the airports in Minneapolis and Detroit, when I’m there on occasion, and it’s rare if I don’t have somebody coming up to me saying, ‘Hey, I really appreciate you saving my pension, because it really makes a difference.’” Although not terminating them, Northwest did freeze its plans, meaning no future benefits would accrue.

Thanks to a combination of its own renewed prospects, its Pacific route rights used as collateral and the global capital glut, Northwest had no problem refinancing older loans at better interest rates. Its equity was back on the New York stock exchange. Its closest rival, Chicago-based United, which competed for many of the same connecting passengers, never did quite restructure so dramatically, emerging from its bankruptcy with uninspiring financial results—the “do it once/do it right” line was an allusion to this.

So Northwest, like Delta, entered 2008 feeling—in so many ways—better than ever. But also like Delta, Northwest had reasons to feel insecure, reasons to feel its progress, however monumental, would be no match for the violent forces of the airline business. The real estate bubble had popped, and the international financial system was in flames, with nobody certain just how fast and far that fire would spread nor how much damage it would do. Unemployment in the U.S. rising.

America’s auto industry, so critical to Northwest because of its Detroit hub, was in deeper trouble than even the airlines. But troubled the airlines were too, with the industry still excessively fragmented. Northwest, for its part, for all its strength in Asia, the U.S. heartland and Canada, was virtually absent in Latin America and the southeastern U.S. Its hubs were small, requiring lots of lower-yielding connecting traffic to support international service.

Memphis was America’s bankruptcy capital. Tokyo’s airports were building more airport capacity, implying future opportunities for competitors. Detroit was losing population. And Minneapolis-St. Paul, although growing, was still only the 16th largest metro area in the U.S., just ahead of San Diego, St. Louis and Tampa—not exactly the best platform to exploit a boom in international traffic.

And something else made Steenland nervous too. Northwest had “an awful lot of eggs” in one basket, namely the KLM relationship. And now KLM was controlled by Air France, which was clearly hitching itself to Delta’s wagon. So what would happen if Delta chose to merge with, say, United, taking Air France and KLM with it? This would leave Northwest with not only an uncompetitively small domestic market but also a giant hole in Europe. Losing KLM would be like Sonny losing Cher.

Then there was the matter of Northwest’s labor relations, which were still—to understate the case—less than serene. In one highly publicized incident, management handed booklets to some ground handling employees suggesting ways in which they could save money in their daily lives to adapt to post-bankruptcy wages. One of the suggestions: Don’t be shy about fishing things out of the trash. More meaningfully, Northwest suffered a major operational disruption in the summer of 2007.

Even though Northwest pilots (unlike those at Delta) hadn’t lost the pension benefits they had accumulated so far, the Northwest pilots had swallowed even deeper pay cuts and work rule concessions than the Delta pilots. One of the changes proved exceptionally unpopular: Pilots would now commute to work more often, no small matter in an industry where commuting often means not a short car or subway trip to work, but standing by for an empty seat on a flight to a hub airport. Sick calls began to rise.

At the same time, management was eager to use every last ounce of its newly won authority to schedule the airline more efficiently. But there turned out to be such a thing as too much efficiency. The FAA restricts how many hours pilots can work each month, and Northwest’s crew schedulers were coming so close to those limits that normal flight delays, plus the higher-than-average number of sick calls, led to inevitable pilot shortages by the end of the month.

Timing magnified the problem: This was the busy summer season, meaning large numbers of outraged travelers and few empty seats on other flights to accommodate the passengers from canceled flights.

“To be completely honest, we probably got one work rule concession too many out of the pilot group,” Steenland allowed. “People who had built their entire life schedule around having three trips a month that they then had to commute to, now they were looking at a fourth.” So management agreed to relax the onerous new commuting requirements in exchange for other productivity improvements that the pilots didn’t mind as much.

Then there was the matter of oil prices. Happy New Year? On Wednesday, Jan. 2, 2008, the price of a barrel of benchmark West Texas Intermediate crude touched $100 for the first time in history.

Even adjusted for inflation, this was similar to levels last seen after the Iranian revolution and the start of the Iran-Iraq war some 30 years earlier. Like Delta and other U.S. carriers, Northwest had asked for so many painful concessions from its employees, its business partners and its investors to counteract the cancerous effects of constantly escalating fuel prices. If oil prices had gone from

$20 to $50 to $75 and now $100 in a matter of a few years, who was to say to what levels they would reach next? Delta and Northwest had done so much to become profitable businesses again. But because of fuel prices, it might not be enough.

Perhaps, many people were concluding, the answer was consolidation.

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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