Delta Air's Revival Plan Preaches Austerity

Updated from 12:26 a.m. EDT

Delta Air Lines (DAL) will cut employees and benefits but give a bigger-than-expected role to Song, its low-cost unit, in a widely anticipated but still unannounced overhaul, TheStreet.com has learned.

In a memo to employees sent Wednesday, Delta CEO Gerald Grinstein said the company will have to eliminate jobs, slash benefits and cut paychecks in order to reduce costs and avoid filing for bankruptcy. The nation's third-largest carrier is asking 6,900 unionized pilots represented by the Air Line Pilots Association for $1 billion in annual wage concessions. The union, whose contract is not amendable until mid-2005, has offered a package worth about $700 million.

"When our plan is successfully implemented, we will be the leaner, simplified, more productive airline we must be in order for us to survive and compete," said Grinstein, in his memo. "Regrettably, one of the consequences will be fewer jobs and additional changes to pay and benefits for all of our employees as we make operational changes to achieve the necessary cost savings."

More speculation surrounds the fate of its low-cost startup, Song, which Delta launched 19 months ago as a response to AirTran (AAI), a low-cost carrier who shares Delta's hub in Atlanta, and JetBlue (JBLU), which flies lucrative north-south routes on the Eastern seaboard. Many on Wall Street have said the restructuring could spell the end of Song, but two sources close to the company said this view is incorrect. In fact, the well-branded unit may provide inspiration for the rest of Delta to follow, because it is more efficient and cheaper to run, despite the fact its pilots are paid the same wages as Delta's regular Boeing 757 pilots.

"Wall Street has it wrong," said the source. "Song is doing just fine. Song is growing. John Selvaggio [head of Song] knows what he's doing. And good things are coming down the pike in the coming weeks."

On Thursday, Delta shares were unchanged at $4.07, coughing up earlier gains of 9% after oil hit $48.75 a barrel midafternoon and Standard & Poor's cut Delta's corporate credit rating again, citing bankruptcy risk. On Wednesday, Delta gained 16%.

But in order to win deeper concessions from pilots, the company's only unionized work force, Delta will have to give something up as well. With time running out, ALPA has said it won't come to the negotiating table unless the union is given an equity stake in the revitalized Delta. In his memo to employees, Grinstein said the company's board was reviewing such a step after receiving the Delta Solution on Wednesday.