Problems at Delta Airlines
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Case Code: BSTR135 Case Length: 18 Pages Period: 2001 - 2004 Pub Date: 2004 Teaching Note: Available |
Price: Rs.500 Organization: Delta Airlines Industry: Airlines Countries: USA Themes: Organizational Culture |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Delta's Difficulties
Analysts said that Delta's problems were primarily a result of the airline's bloated cost structure and extremely high cost of labor. They said the operational elements of the airline were also more suitable to a time when people were willing to pay a premium for quality air service, and had become obsolete in the early 2000s. In the late 1990s and early 2000s, the airline industry had changed and many of the older airlines like Delta found it difficult to adapt to the new paradigm. It was estimated that Delta had lost over $5.6 billion in the period between 2001 and mid-2004. It was also burning cash very rapidly and had used up $700 million of its unrestricted cash reserves within the first six months of 2004. (Analysts expected the airline to burn cash at the rate of $350 million per quarter for the rest of 2004 as well.) Analysts said that one of the main reasons for the high cash burn rate was the contribution to pension funds, which rose drastically in 2004, as many of Delta's pilots opted for early retirement. However, there were several other problems which the airline also needed to tackle, before it could be restored to financial health...
Pilot Problems
In 2004, Delta was involved in long drawn negotiations with its pilots union - the Airline Pilots Association (ALPA), aimed at getting the union to accept pay cuts that would help the airline balance its precarious cash position. At Delta, pilots were the only category of employees that were unionized. Besides, according to company sources and analysts, Delta's pilots were the highest paid in the industry, earning on an average, between $100,000 and $300,000 a year. It was observed that the annual pay for a captain on Delta's smallest mainline jets (a typical mid-career position) was, on average, $195,000 a year. Comparatively, captains of similar-sized jets were paid around $113,000 a year at American Airlines and $152,000 a year at Southwest. Delta pilots also enjoyed more generous work rules, benefits and furlough protections than pilots at other airlines. Many analysts believed that excessively high pay and benefits for pilots were the main reason for the high labor costs at Delta...
The Road Ahead
By mid 2004, there was no doubt that a comprehensive restructuring program was the need of the moment at Delta. Analysts said that, while Delta had managed to stay in a relatively better position than United, US Airways and American, it was fast going downhill. Despite passenger numbers increasing marginally in 2004, Delta was not only still making losses, but the quantum of the losses was rising(Refer Exhibit VI). Analysts also expected the airline to keep posting losses, given that fuel costs were expected to rise by $680 million in 2004, and that its cash reserves were declining rapidly due to pension payments and increased operational expenses. In August 2004, Grinstein announced a comprehensive restructuring plan, called 'The Delta Solution', aimed to put Delta back on the growth path. "Decisive and comprehensive, this is a 360-degree plan which, when complete, will transform our product, fleet, network, and cost structure into an airline that is designed to carve out new and previously uncharted network airline territory," said Grinstein in his presentation of the plan to the board....
Exhibits
Exhibit I: The Hub and Spoke System
Exhibit II: Layoffs Immediately After September 11
Exhibit III: Annual Financials
Exhibit IV: Q2 2004 CASM for U.S. Airlines
Exhibit V: Labor Cost as a Percentage of Operational Cost in Q2 2004
Exhibit VI: Quarterly Profits/Losses for Delta Air Lines from First Quarter 2000 Through Second Quarter 2004. (Earnings in US Dollars)
Exhibit VII: Key Initiatives Under the Delta Solution
Exhibit VIII: Delta's Restructuring Plan
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