Brain Drain Hobbling Delta Air

Furthermore, Delta's situation is improving on some fronts. The company is making strong progress in cutting other costs and pension issues may be easing. Excluding pilots, analysts note Delta has the lowest costs of any of the legacy carriers, thanks in part to efficient use of planes and the fact none of its other work groups are unionized. All in all, CASM fell by 3.6% in the first quarter, despite a 12.3% rise in fuel costs.

"We think having the lowest costs, and now, pension relief signed into law by President Bush will make it tough to convince pilots that they need to provide the kind of relief management is asking -- about $950 million in annual savings," said Daniel McKenzie, analyst at Citigroup Smith Barney, in a note. "Delta will have to reinvent itself as a pseudo low-cost carrier to succeed long term."

The situation is unquestionably bad at Delta, but in the eyes of the people who are being asked to take a 30% pay cut a year ahead of schedule, the performance may not be bad enough for them to cut deeply enough. If this happens, Delta could end up like US Airways (UAIR), which used Chapter 11 bankruptcy protection to lower costs and wheedle wage concessions from employees, only to exit bankruptcy, feel the heat of competition and have to seek additional pay cuts.

Ultimately, Delta management will have to make a very convincing case to sell pilots on a pseudo low-cost model, like the one employed profitably by America West (AWA). And with the lead negotiator retiring, the CFO leaving the company and a president seat likely to be empty for the time being, Delta's front line needs some unity to win back Wall Street.

"Given our concerns and management statements indicating that everything is on the table [with regards to restructuring], Delta for us is like a box of chocolates," said McKenzie. "We're not sure what investors will get in one or two years."

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