Only a week after filing for bankruptcy protection, Delta Air Lines Inc. unveiled a sweeping plan Thursday to shrink the nation’s third-largest airline by slashing as many as 9,000 jobs, or 15% of its workforce.
Atlanta-based Delta said it also would reduce its U.S. capacity by as much as 20%, cut its chief executive’s salary, lower wages for most remaining workers and expand its international service in hopes of reaping better gains.
Although analysts expected Delta to streamline during its Chapter 11 reorganization, the airline’s speed in slashing its operations caught some by surprise.
Delta has only one major union, which represents its pilots, “so they have the freedom to move quickly” without having to renegotiate concessions with other employee groups, said Robert Mann, an industry consultant in Port Washington, N.Y.
Delta has lost $10 billion since 2000 and is still being pummeled by competition from discount airlines and soaring jet-fuel prices. The airline has to move quickly “if we are to survive and thrive as a stand-alone company in control of our own destiny,” Delta CEO Gerald Grinstein said in a statement.
Delta filed for bankruptcy protection Sept. 14, the same day that rival Northwest Airlines Corp. sought Chapter 11.
Although Delta didn’t immediately specify where the job cuts would be made among its nearly 60,000 employees, its actions are likely to be felt in California. The airline employs nearly 3,000 in the state, including more than 2,000 people in the Los Angeles area.
Delta is the fourth-busiest carrier at Los Angeles International Airport, with 38 daily flights, or 7.6% of the airport’s traffic. The operations include flights by Song, a Delta discount carrier. Delta also serves Orange County, Ontario, Burbank, San Diego and San Francisco.
Once one of the nation’s strongest airlines, with award-winning service and warm management-employee relations, Delta has been on a downward spiral -- along with the other large, traditional airlines -- since the Sept. 11, 2001, terrorist attacks. Delta has eliminated 21,000 jobs since 9/11.
Besides Delta and Northwest, No. 2 UAL Corp.'s United Airlines and No. 7 US Airways Group Inc. also are in bankruptcy protection. The U.S. industry overall has lost $32 billion since 2000 and is expected to lose as much as $10 billion this year.
Delta said it expected its overhaul to save the airline $3 billion a year in operating costs by the end of 2007, on top of $5 billion in annual cost savings that the company already had announced.
Some of the reorganization plan, including Delta’s effort to reduce its aircraft fleet by renegotiating leases, is likely to require approval from the Bankruptcy Court. But the airline probably is free to make many of the job reductions and salary cuts on its own, said William J. Rochelle III, a bankruptcy lawyer with Fulbright & Jaworski in New York.
Delta currently flies about 301,370 passengers daily on 3,250 flights to more than 200 cities. Besides Atlanta, its hubs include Cincinnati and Salt Lake City.
The restructuring plan calls for savings of $325 million from Delta’s pilots and $605 million from the remaining workforce.
Grinstein, 73, said that the cost cutting would “be shared by all Delta people equitably” and that it would include a 25% reduction in his $450,000 annual salary. Last year, when Grinstein’s salary was $500,000, he voluntarily accepted only half of that as Delta continued to flounder.
Other top Delta executives would take a 15% cut, and most other employees, such as ticket-counter agents and baggage handlers, would see their pay reduced by 7% to 10%. The pay cuts would not apply to workers earning less than $25,000 a year.
But as Delta restructures to survive, it creates opportunities for low-cost carriers such as Southwest Airlines Co., JetBlue Airways Corp. and AirTran Airways Inc. to strengthen by rushing into any markets where Delta has pulled back.
AirTran, for instance, also has a hub in Atlanta, and the stock of its parent company, AirTran Holdings Inc., jumped 46 cents, or 4.6%, to $10.50 a share Thursday after Delta’s announcement. Southwest gained 6 cents to $14.28 and JetBlue rose 21 cents to $17.99.
Delta’s stock rose 5 cents to 82 cents a share, but the stock is highly speculative now that the airline is in Chapter 11. During a bankruptcy reorganization, a company’s stock is usually rendered worthless.
The speed of Delta’s restructuring plan also raised questions as to why the airline didn’t take those steps sooner and perhaps avoid Chapter 11.
“Hope springs eternal,” said Mann. He said Delta executives probably thought, “ ‘We’ll see if the other guys fail, hope that the fare environment improves, hope the energy prices go down.’ Of course, none of that’s happened.”
But Delta’s rush to slash costs does put pressure on its largest rivals to cut their costs even more, or risk being less competitive than a streamlined Delta.
“The airline industry these days is playing leapfrog” in lowering expenses, said Rochelle, the bankruptcy lawyer. “The fact that you reduced costs six months ago may not mean you still enjoy that advantage today.”