In a move that surprised Wall Street,

Delta Air Lines

(DAL) - Get Report

said Chairman and Chief Executive Leo Mullin will be stepping down as CEO at the end of the year while vacating his chairman's seat in May 2004.

Delta said, "Mullin's decision follows discussions he initiated with the board of directors earlier this year regarding his desire to retire. After careful consideration of all alternatives, Mullin and the board finalized the succession plans and date of retirement at a board meeting on Nov. 23."

Mullin's dual roles will be assumed by a pair of long-term Delta veterans, both of whom have experience as CEOs.

Delta's new CEO will be Gerald Grimstein, who has spent 16 years on Delta's board and is a former CEO of

Western Airlines

and

Burlington Northern

. Delta's new chairman will be Jack Smith, who has been on Delta's board for three years and is a former chairman and CEO of

General Motors

(GM) - Get Report

.

"The board of directors is grateful to Leo Mullin for his strong, vigorous and effective leadership and dedication to Delta Air Lines," said Smith. "Immediately after joining Delta, he and the senior management team renewed the company's spirit, restored its focus on customer service and rebuilt its financial standing. Since Sept. 11, 2001, Leo has led the company and the industry through the most difficult years in aviation history."

Indeed, Mullin's tenure at Delta covered both 1999's boom times and the post-Sept.11 economy, in which airlines lost billions of dollars. But Delta, which has tried to revitalize its revenue side with new products like its low-cost Song unit and new in-flight entertainment options, still has to do a lot of work on the cost side, where it hopes to renegotiate pilots' contracts as

AMR

(AMR)

unit American Airlines did.

With a contract signed in early 2001 that isn't amendable until May 2005, Delta will need to wheel and deal to get pilots to cut their own pay a year before they have to. In recent weeks, negotiations between Delta and its pilots' union, the Air Line Pilots Association, or ALPA, have not been productive.

Some analysts said that Grinstein may be a more effective choice than Mullin, given his experiences with unionized labor in the late 1980s at both Western Air and Burlington Northern. Investors seemed to agree with this view, boosting Delta shares 67 cents, or 5.9%, to $12.10 in the early part of Monday's session.

"We think that Mr. Grinstein may be a better fit at Delta. Not only does he have the airline background to quickly assume the leadership role, but Mr. Grinstein also contributes seasoned labor negotiation experience from his prior days at Burlington Northern/Santa Fe railroad," wrote Susan Donofrio, airline analyst at Deutsche Bank, adding that Grinstein has political experience as well, serving as chief counsel to the Senate Commerce Committee.

As CEO, Grinstein's top priority will be cutting wage costs. On Friday, the company's debt rating was downgraded to B from B+ by Fitch Ratings analyst Bill Warlick, who expressed doubt about the carrier's ability to generate enough of an improvement to cash flow in 2004 and 2005 to avoid liquidity problems. This follows news from Nov. 14 that Delta would have to pay another $70 million in charges related to a sale of 11 Boeing 737 aircraft.

In his first statement after being named Mullin's successor, Grinstein stressed his initial priority will be to talk with Delta's employees while stressing the importance of reducing expenses.

"As a first priority in this new position, we will meet and talk with Delta people in order to hear their ideas and enlist them as partners in building our future," said Grinstein, adding later, "Our job is to make Delta competitive and consistently profitable. To do that, we must further reduce Delta's costs substantially and permanently. That is an unshakable imperative if Delta is to be competitive in an industry adapting to the economics of low-cost carriers and restructured hub-and-spoke airlines."

In a statement, the ALPA said the news was "unexpected" but stressed that "Delta pilots remain focused on protecting the piloting profession and helping Delta Air Lines return to profitability. This remains unchanged regardless of the leadership team in place at Delta. The union wishes Mr. Mullin the best in his retirement and looks forward to a productive working relationship with new CEO Gerald Grinstein."

Mullin, who is 60 years old, will walk away with a $16 million retirement package, as previously disclosed by the company when Mullin signed on as Delta's CEO in 1997.

"I made this deeply personal decision to retire after a great deal of thought and reflection," said Mullin, in a statement. "Delta is at a transition point between the good work of the past and the hard tasks ahead. This is a good time for me to move on to new challenges. There is vital work to do, and Delta has the strategy and the talent throughout the company it needs to succeed."