Delta Seeks Higher Altitude With Buyback

Nearing his one-year anniversary at the controls of Delta Air Lines Inc., Leo F. Mullin took steps Tuesday to lift Delta’s value on Wall Street, just as he’s strived to improve the giant carrier’s tarnished service record and its employees’ sagging morale.

Delta hired Mullin--a former utility executive, consultant and Harvard MBA who had never worked for an airline--as chief executive after it ousted his predecessor. The action signaled Delta’s determination to prosper by ending its hidebound ways, and Mullin has been trying to meet that mandate.

In his latest move, Mullin and the rest of Delta’s board announced plans for the Atlanta-based airline to buy back up to $750 million of its stock over the next 18 months and to split the shares 2 for 1 this fall.

The actions were warmly received by investors, who sent Delta’s stock soaring $6.31 a share to close at a 52-week high of $142.19 in New York Stock Exchange composite trading. The stock has now surged 73% over the last 12 months.

Indeed, Delta is riding the crest of the airline industry’s overall bonanza. The carriers are flourishing thanks to the robust U.S. economy, strong passenger demand for tickets, low fuel costs and rising fares for business travel.

But while those trends and Mullin’s actions have been welcome, they have not yet quelled analysts’ concern that Delta still doesn’t extract enough revenue and profit from its business compared with its competitors.

Mullin wasn’t available to comment Tuesday, but “he’s aware [of the problem] and is putting people in place to improve that performance,” spokeswoman Tracey Bowen said. Meantime, the stock buyback and split “are clear indications of Delta’s strong financial position,” she said.

To be sure, Mullin is working hard to steer Delta--the nation’s third-largest airline behind UAL Corp.’s United and AMR Corp.’s American--in a better direction, analysts said.

He’s hired a crop of new senior executives, bolstered employee morale, improved Delta’s on-time performance, beefed up its Latin American and Far East routes to better complement its huge transatlantic service, and expanded its low-cost Delta Express shuttle subsidiary.

This spring, Mullin also struck a major marketing alliance with United. But that came only after Mullin’s bid to have Delta buy Continental Airlines Inc. was rejected by Continental, which instead opted for a strategic alliance with Northwest Airlines Corp.

Some of Delta’s changes were started by Mullin’s predecessor, Robert W. Allen, a hard-nosed manager and fierce cost-cutter who successfully led Delta out of huge losses in the early 1990s and got it profitable again.

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Yet while Allen’s tactics successfully slashed costs, they also took a heavy toll on Delta’s once-superb customer service and employees’ morale, so much so that in May 1997, Delta’s board declined to renew Allen’s contract.

Delta then shocked the industry by hiring Mullin--the first time in Delta’s history that the carrier had gone outside its headquarters for a chief executive. Mullin, in turn, has hired new executives in finance, marketing and customer service.

“He’s made some important management changes, which are infusing the airline with new blood,” said Brian Harris, Salomon Smith Barney Inc.’s airline analyst. “Improving the service [at Delta] also is critical, and we’re seeing some of that happen.”

But when they look at Delta’s numbers, analysts assert that the airline is not improving enough.

In its fiscal third quarter ended March 31 (Delta’s fiscal year ended June 30), Delta’s net income rose only 4% from a year earlier, to $195 million, helped in part by reduced debt and jet-fuel costs. And its revenue fell 1%, to $3.4 billion. Delta’s fourth-quarter results are expected later this week.

Another key indicator--its revenue yield, which effectively measures average prices passengers are paying to fly with Delta--was nearly unchanged from a year earlier. American’s yield, in contrast, rose 5% in the quarter.

All of which means Delta could better manage how it deploys its planes--in terms of matching the right-size aircraft with passenger demand on specific routes--and how it divides its sale of seats between business fliers paying higher fares and leisure travelers paying discounted fares, analysts said.

“They really need to improve their yield management,” said Michael Lowry, an analyst at the investment firm Black & Co. in Portland, Ore.

Delta said its stock split, if approved by shareholders at its Oct. 22 annual meeting, would be payable in mid-November to holders of record on Nov. 2.

The company’s buyback, meanwhile, will remove about 5.3 million of Delta’s shares at Tuesday’s closing price, or about 7% of the airline’s total shares outstanding.

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Enough Lift?

Delta Air Lines’ strong stock got another boost when the carrier announced a stock-buyback program and proposed a 2-for-1 split. But analysts worry that Delta isn’t generating sufficient profit amid the booming environment for airlines. Weekly closes on the New York Stock Exchange, and latest:

Tuesday: $142.19, up $6.31

Source: Bloomberg News