Corporate Turnaround Story: Delta Airlines

August 3, 2023

Background

In the early 2000s, Delta Airlines was the third-largest airline in the United States. The airline industry of the US struggled during this period due to soaring fuel costs, which had more than doubled to $53 per barrel in 2004 since 2001, leading to major bankruptcies. However, Delta managed to stay afloat and recover, even though it suffered significant losses. Since 2001, Delta lost over $10 billion, and its total debt was $28.3 billion. In 2005, the company declared bankruptcy. Additionally, Delta was rapidly burning through cash, using around $700 million of its unrestricted cash reserve during the first six months of 2004. Despite a slight increase in passenger numbers in 2004, Delta’s losses were still growing. By mid-2004, it became clear that a comprehensive restructuring and turnaround plan was necessary to save Delta.

Challenges

1- Declining Cash Reserves

Delta’s cash reserves were declining due to pension payments and higher operational expenses. A significant factor contributing to the high cash burn rate was the increased contribution to pension funds in 2004, as many of Delta’s pilots chose early retirement.
The airline’s pension plan policy was set decades ago and most of the plans depended on the stock market. Underfunded plans due to the volatility of investments required Delta to contribute $460 million in 2004.
Analysts were downgrading the rating of the airline at regular intervals which made it difficult for Delta to borrow funds to meet its financial obligations.

2- Inflated Cost Structure

Extremely High Labor Costs: Labor expenses constituted a significant portion of the airline’s overall cost structure. Delta faced high labor costs, with pilots earning an average of $100,000 to $300,000 per year. This was the third-highest labor expense among all airlines.
Rise in Fuel Costs: Fuel cost was a major challenge for Delta as fuel expenses accounted for 20-30% of the company’s operating expenses. With fuel prices increasing during the early 2000s, the airline’s operating costs escalated significantly.
Generous Pilot Benefits and Work Rules: Delta’s pilots enjoyed more generous work rules, benefits, and furloughs compared to pilots at other airlines. These additional benefits added to the overall labor expenses and contributed to the company’s bloated cost structure.

The Turnaround Strategy

Delta’s CEO, Gerald Grinson, unveiled ‘The Delta Solution’ in August 2004 as a comprehensive restructuring plan to drive the company towards growth. Over a period of 19 months, the company underwent financial and operational restructuring, implementing the following measures:

1- Operational

The company made significant changes to its network and infrastructure by reducing the size and types of its fleet, which helped lower operational costs. It also realigned its domestic and international routes. As a result, they were able to reduce over 130 aircraft, which amounted to an 11% decrease in cost. This restructuring process resulted in $98 million in non-cash benefits.
More than 50 new international routes were added to meet the increasing international demand.
In February 2005, the airline made a significant reduction in its flights to and from Dallas, reducing them by 90%. As a result, the airline’s operations at the Dallas hub were severely impacted and eventually, the hub had to be completely shut down.

2- Strategic & Organizational

The hourly pilot wage was reduced by 14%. Reduction in other pilot-related cost items led to a further 1% cut in the hourly wage. These measures resulted in an estimated $280 million in savings annually.
In 2005, 6000 to 7000 employees were made redundant, with $194 million in upfront charges including $142 million in special termination benefits and $42 million in employee severance.
Changes in union contracts and downsizing led to $1 billion reduction in labor costs.

3- Financial

The pension of pilots was frozen at the end of 2005 due to the relief for the cost structure, which was permitted by the bankruptcy court.
The company’s first objective was to obtain exit finance because of the size of its debt. Six financial institutions joined forces to co-lead the financing campaign. Delta Airlines ultimately collected $2.5 billion in exit finance.
Selling (Atlantic Southeast Airlines) to Skywest Airlines also relieved Delta’s cash flow constraints by generating $350 million.

Results

After 19 months of restructuring processes, Delta emerged from bankruptcy. In the first quarter of 2007, the company posted a profit of $155 million and reduced more than 50% of its net debt from $16.9 billion in 2005 to $7.6 billion at the end of 2007. In October 2008 the company merged with Northwest Airlines to become the largest airline with 786 aircraft.

Key Learnings

Organizations can avoid restructuring and bankruptcy situations by having an initiative-taking approach to strategic planning.
In the long term, small inefficiencies can lead to the downfall of large organizations.
Organizations should carefully design their cost structures and long-term commitments to ensure sustainability.
Prudent financial practices in times of crisis play a critical role in an organization’s survival and growth.
Strategic mergers and acquisitions can be instrumental in bolstering a company’s position in the market.

Disclaimer

The views and opinions expressed in this blog on Platform01 Consulting’s website are solely those of the respective authors. The information provided in these articles is for general informational purposes only and does not constitute professional advice.

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