Delta's Chapter 11 Reinvention

The airline didn't just reorganize in bankruptcy, it remade itself into an international player.
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Among airlines, Delta (DALRQ) seems to have broken the mold when it comes to bankruptcy filings.

That's because rather than just focusing on cutting expenses, Delta has made aggressive moves to reinvent itself outright since it filed for Chapter 11 bankruptcy protection in September 2005.

"Delta is no longer a large regional airline -- it is a large international airline," Chief Executive Gerald Grinstein said last week as the carrier introduced nine new international flights.

The latest flights build on the 50 new international routes it has added or announced since the summer of 2005.

During that time, Delta's

international revenue has grown from 20% to 35% of its total, and the carrier has an eventual target of 50%.

In nearly every other airline bankruptcy dating back to the first Continental filing in 1983, the overriding intent has been to reduce costs, primarily the amount of money spent on labor. Any other purpose, aside from facilitating a merger or asset sale, has seemed to be a distant second in importance.

The failed 1989 Eastern bankruptcy focused on labor costs, and on flying through a strike. Pan Am's 1991 bankruptcy was viewed as a way to reduce costs and then to sell assets in order to save jobs.

It was only partially successful: Delta bought its European routes, but at the 11th hour backed away from funding a new Miami-based Pan Am focused on Latin America.

The second

US Airways


bankruptcy in 2004 was successful because the cost-cutting led to a merger that created a stronger carrier and saved more than 20,000 jobs.

TWA's three bankruptcies had various causes; the final one, in 2002, was intended to pave the way for a takeover by

American Airlines



Recent bankruptcies, at

United Air Lines





, seem primarily focused on labor-cost reductions. To be sure, unlike Delta, both carriers had strong international route systems before filing.

It is no wonder the 74-year-old Grinstein is talking publicly about retirement, now that he is close to the end of an effort that seems both unprecedented and successful.

Last week, he reiterated that he will remain at Delta through the end of the bankruptcy and depart soon afterwards.

Grinstein says he is often asked when exactly he plans on retiring and he often prefaces his response by quoting Warren Buffett: "Before I answer that, which way do you want it to go?"

Although the airline industry is awash in merger talk -- primarily because two carriers remain in bankruptcy -- Grinstein says he doesn't foresee any mergers at all, either with or without Delta.

Asked about the possibility of consolidation, he says: "I don't look for it to take place in the near term ... I don't look for it to take place anytime." Two years from now, Grinstein says, he expects the major carriers to be aligned, by and large, in the same way they are now.

Necessity, the Mother of Reinvention

In bankruptcy, Delta's plan has been to improve results by $3 billion annually -- $1.1 billion in network improvements including new revenue, $900 million in employee-cost reductions and $1 billion in reduced costs, primarily for aircraft and facility leases.

Beyond the international expansion, Grinstein and his team have made several other major structural changes.

They have cut back on the overabundance of service in the intensely competitive Northeast-to-Florida market, which historically kept Delta's revenue per available seat mile low.

In 2005, Delta RASM was around 86% of the industry average. This year, it is around 93% of the industry average.

Building service from the Northeast to Kennedy International Airport in New York has eliminated a syndrome where Delta used its strong Southeast presence to feed both its Atlanta and Kennedy hubs. "We competed with ourselves," Grinstein explains.

In a typical example of the changeover's impact, Delta's share of Buffalo, N.Y., to Europe traffic has increased from 5% a year ago to 22% today.

Meanwhile, building the Salt Lake City hub to 334 daily departures, with nearly 30 nonstop destinations added since the fall of 2005, means Delta has established a hub that competes with Denver to serve the West Coast and Northwest.

The Salt Lake hub came to Delta in the 1987 Western Airlines acquisition, as did Grinstein, who was Western's CEO. It's considered one of the few successful mergers in the airline sector.

Most mergers are last resorts, Grinstein said, that enable carriers to survive when they would otherwise fail.

When US Airways merged with America West, when TWA merged with American and when Reno Air merged with American, "It was merge or be gone," he says.

Delta, it now appears, is not going anywhere.