Updated from 1:14 p.m. EDT

At a time when Delta Air Lines' ( DAL) corporate leadership is needed to step up and help the troubled airline completely rethink its business model, executives are stepping out to take jobs elsewhere. As a result, Wall Street and investors are losing faith in the company, where the situation will almost certainly have to get worse before it gets better.

The day after Delta announced a first-quarter loss of $384 million, three times what rival Continental ( CAL) lost in the first quarter, the company said CFO Michele Burns is leaving the company to take the same post at Mirant's ( MIR) at the end of the month. The news comes a week after the retirement of Terry Erskine, a key negotiator with the company's labor unions, and less than a month after President and COO Fred Reid left to join Virgin's soon-to-be announced low-cost airline serving the U.S.

Shares were off 63 cents, or 8.2%, to $7.07, a hair shy of their 52-week low of $7 set in March. Including today's stumble, shares of Delta are off about 40% year to date.

"Michele was a valued member of Delta's management team, and we wish her well," said Katie Connell, spokeswoman for Delta, adding that CEO Gerald Grinstein will be meeting with the board and "announcing a replacement soon."

In reaction to the big loss and uncertainty around Delta's future, Prudential Equity Group analyst Dan Hemme downgraded the company to underweight from neutral weight, becoming the third brokerage to put a sell rating on the stock. Specifically, Hemme pointed out that the management changes have put the announcement of the company's restructuring plan off its original track, delaying it from June to late August.

Wrong Time for a Revolving Door

As Hemme notes, Delta's management woes not only exacerbate its present mission to review the company's business and wheedle a hefty pay cut from unions -- it also makes future management of the business an issue as well. Many of the structural changes the company is weighing may be made without the people who will, presumably, end up running the business once it's restructured.

"Most of the review process is being made without an acting COO who will likely be responsible to implement any announced changes and we believe it is unlikely that management will be able to make material assumptions and changes without the known outcome from pending pilot negotiations," said Hemme. " There's no foreseeable catalyst to propel the stock from the current lull."

Delta's pilots union appeared to take the executive departures in stride, but sounded a negative note on the course of negotiations: "Neither Reid nor Burns were directly involved in the negotiations. They were not individuals who were seated at the table," said Karen Miller, spokeswoman with the pilots union. "Erskine was, but the fact is, we'll sit down with whoever they have available, but we have not had a negotiating session since late January, so this has not affected the pace of negotiations. The fact is, nothing has been going on and we're not so happy about that."

One way Delta plans to work around the management crisis is by reassigning duties and eliminating executive positions. On a conference call discussing first-quarter earnings, CEO Gerald Grinstein said that he had no plans to replace Reid.

"I will say that in terms of the future, I don't plan to appoint another president and may not even appoint in exactly the same way a chief operating officer," said Grinstein. "My plan is to, at the board meeting next week following the shareholder meeting on March 23, review with the board my thoughts and plans about it. They'll probably be announced in the next week or 10 days after that."

With so many vacancies, Delta's plan, at least in the foreseeable future, is to shift responsibilities to lower members of the management team who worked closely with Reid. While Grinstein said it may have to hire some more personnel to bolster a negotiating team headed by Erskine, he said that people within the company will be promoted to the executive suite, after performing some of Reid's duties during the restructuring.

"This is a very strong and very passionate officer team and they've worked with Fred for a long time," said Grinstein. "I think they know what he thinks and how he thinks. Even though he may not be there in person, the kinds of views that he would have expressed are part of the consideration that we have in front of us. And so I don't think we're going to miss a beat."

Time Keeps on Slipping, Slipping, Slipping...

Analysts aren't so convinced. Not only are members of the strong and passionate officer team leaving, but the company has already missed a self-imposed June deadline to show the board a restructuring plan, and postponed its plan to lower its cost per available seat mile (CASM) by 15% in 2006. And with the loss of Erskine, and Grinstein insisting that pilots cut their pay by 30%, the hard-line stance likely will delay the negotiation process and weigh on shares until a deal is reached.

Optimism has faded fast, and few expect any movement on the issue until 2005. Originally, Morgan Stanley and other brokerages thought the deep losses would propel management and pilots to agree on wage cuts sometime in 2004, nearly a year before the contract expires in May 2005. In a worse-case scenario involving mediation requests and cooling off periods, which is often the case with airline negotiations, Lehman Brothers said Delta might not see wage concessions until fall 2005.

"It is much more likely that it will take negotiators until spring 2005 to reach terms acceptable to both pilots and management," said William Greene, analyst at Morgan Stanley, in a note. "In short, we believe things are likely to get worse at Delta before they get better."

Why Merely Bad Is Still Too Good

Indeed, the situation may have to deteriorate rapidly if Delta is going to convince pilots, who are some of the highest paid in the industry, to slash their wages. Delta may have lost $384 million but it's still a long way from a true liquidity crunch that would force union capitulation. With $26.2 billion in total assets against $12.5 billion in total debt, Delta management hasn't even invoked the dreaded b-word (bankruptcy protection) yet, despite having $3 billion in debt coming due over the next three years.

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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