Judge: Ok, lets get these proceedings started. I understand you are the attorney representing Delta Air Lines, and that Delta Air Lines is seeking protection under the chapter 11 of the federal bankruptcy code. Is this correct sir? Yes your honor.
J: As you are aware, in order to grant bankruptcy protection, the law requires that your company must have done everything reasonable in it's power to prevent a declaration of bankruptcy. Furthermore, this court must be presented with a viable business plan to ensure this situation does not happen again. I must now review actions by Delta Air Lines leading up to this situation. Please state your case.
DL: Your honor, for the past three years, Delta has suffered major financial losses and a dramatic increase in debt. We are now in a position whereby we cannot pay the debt service given our current revenue and costs. We feel, the primary culprit of our financial situation are pilot salary costs and we seek relief from the pilot contract.
J:That's it? Just the pilots?
DL:Uh, yes your honor.
J:Well looking at your quarterly financial reports for the past 7 years, it appears you have let your debt level to swell up to around 20 billion dollars, which causes roughly an annual debt service of a billion dollars per year. So I'd like to see where all this debt came from.
First, I see that your company engaged in a 2.5 billion dollar stock buy back program. How much is this worth now?
DL:Um, virtually nothing.
J:You also spent over 2.5 billion dollars purchasing Comair and ASA?
DL: Yes. Both these companies were subcontractors of ours previously. In the case of ASA, there were quality control issues we felt could be better managed if we owned them. As for Comair, by outsourcing to them so much work, we allowed to become a monopoly in our Cincinnati hub. We were afraid they could become a competitor, or be purchased by one of our competitors.
J: OK, I also see that your management then went on an aircraft spending spree, buying hundreds of regional jets for your Comair and ASA Delta Connection division at a cost of an additional few billion dollars. I hope these planes are a wise investment. Are they are cheaper to operate?
DL: Well not exactly. These regional jets have a seat cost of around 16 to 19 cents per seat mile whereas our existing mainline jets cost about 9.5 cents.
J: So then I hope they attract more passengers. They are more comfortable, right?
DL: No, they are smaller, offer no first class, no overhead storage, and you have to be a contortionist to use the lavatory. But they sure beat flying a turboprop. We believe we can we create greater demand due to higher frequency when we replace mainline flying with these jets.
J: So you offer more of a product your customer does not truly prefer?
DL: Yes, but they are profitable.
J: Well how can that be when they cost almost twice as much to operate?
DL: Oh that's easy. Delta mainline subsidizes them by purchasing their airplanes, paying for their facilities, providing marketing, as well as reservations, distribution, etc. etc. Basically, we pay all their fixed costs.
J: Well how would Delta mainline be doing if Delta Connection was actually paying their own expenses?
DL: Well it does not matter, we are all one big company and all the money goes into one big pot, so to speak.
J: Then how do you know if the regional jets are truly profitable?
DL: Um, I’ll have to get back to you in about four to six weeks on that one.
J: And if all your money goes into one big pot, how is it you figure that your mainline pilot costs are your problem?
DL: Look, we need to get our costs down and this is the easiest expense to go after, OK!
J: That is your plan? I did mention you have to have a viable business plan, right? How is your Song operation doing?
DL: Great! It is profitable, customers love it, and it has received great reviews from the press.
J: Because you have gotten lower cost pilots at Song?
DL: Well your honor, that is not exactly correct. Song uses the same mainline pilots at the same pay rates.
J: Bailiff, can you get me some aspirin? I am getting a headache.
Bailiff: Here you go sir.
J: All right, what about these charges of over a billion dollars for terminal improvements in Boston and New York?
DL: Well, our old terminals looked yucky.
J: Yucky? How about the 600 million you lost due to the Comair strike? I hope it was worth it.
DL: Well, we settled at our last offer, so we didn't really save anything. We figure the difference between what the Comair pilots wanted and what we gave them will have been worth it in about 20 years.
J: And I see a few hundred million dollars spend for stock equity in a South American airline?
D: That airline unfortunately went out of business, your honor.
J: I see. I mentioned that Delta needed a viable business plan. You do understand this would presume a management team capable of competent execution and decision making. It appears as though your management has exercised all the financial restraint, responsibility and competence of a spoiled sorority girl with her fathers Neiman Marcus charge card. Were they penalized?
DL: Um no. Actually we gave them bonuses. And a separate bankruptcy proof retirement trust fund. You have to pay top dollar to keep top talent!
J: And have been able to keep top talent?
DL: Well, the funny thing is.............um.......they kind of...........left.
J: All of them?
DL: Just about.
J: Well that is the first good news I've seen regarding this case so far. From what I have seen so far, I am very concerned about the debt accumulation which has been allowed. It appears Delta would be profitable now if there were not such huge debt service. Do you seek a restructuring of your debt? I see about half of it is unsecured. Your requests so far have been unusual in that with most bankruptcy proceedings, debt reduction and restructuring is the main priority.
DL: Uh, can we have our pilot pay cut now please?
J: Enough about operating costs and debt service. How about revenue?
DL: Well, demand is down so we have no pricing power.
J: Really? What are your load factors?
DL: In the 80% range.
J: That seems kind of high.
DL: Actually it is an all time record.
J: Shouldn't you raise ticket prices?
DL: I'll have to get back to you on that one as well, your honor. You see, a funny thing happened. We tried to save money by cutting out travel agent middle men by forcing our customers to the internet. And we kind of lost control of our product distribution. (Heh heh!) We believe the customer always goes with the lowest price.
J: So a low cost carrier like Jet Blue has cheaper tickets than Delta and therefore is profitable?
DL: Well no. Actually, Jet Blue tickets cost more than Delta on average.
J:So then why don't the passengers choose Delta of over Jet Blue?
DL: They will when they find out. For some strange reason, passengers think Jet Blue is a better value. We need to convince them otherwise. Unfortunately we spent our advertising dollars on retaining top executive talent instead.
J: Not that again.
DL: Look, our marketing department is very busy at the moment managing all aspects of our airline, they do not have time for marketing.
J: Regarding your pilot contract. You want me to allow you to basically throw it out?
DL: We want our pilot costs down where American, United and US Airways are.
J: But looking at your total operating costs compared to the airlines who have gotten employee concessions, you are presently cheaper than US Airways, about the same as United, and only slightly above American. In fact, you are also about the same as Northwest and Continental who turned a profit last quarter. Perhaps we should be addressing the revenue side of this equation.
DL: Yes but, we'd rather take it out of our pilots. Come on, most of all the other airlines got to do it. PLEASE!?
J: Because everyone else is doing it is not an acceptable business strategy in the opinion of this court. Besides, your haven't your pilots been offering you over $300 million annually in concessions?
DL: Yes but this would require a two year extension to the pilot contract, and should we need further relief, we would have to open negotiations with the pilots.
J: But isn't that what you are doing now?
DL: Yes, but we prefer not to negotiate. We find we can get more leverage with legal or political proceedings.
J: Have you tried to cut costs in any other areas? How are your other employee groups wages compared to the industry average?
DL: Above average, like the pilots. You see your honor, our competitors used bankruptcy, or the threat thereof, lower employee wages across the board. That is why our wages are relatively higher. We were hoping you could, you know, help us out.
J: You feel it is important to lower your workers wages to the match the industry's reduced average. Since you are not contractually bound to pay these other employee groups a certain wage, and since you claim Delta is in such dire straits as to need bankruptcy protection, why have you not lowered their costs to align them with the rest of the industry?
DL: We cut some of their benefits but left their wages intact. Overall, we feel that only the pilots should be paid less. Besides, we need a competitive salary to attract the best people.
J: God forbid you should want to attract the best pilots.
Counselor, the purpose of this bankruptcy proceeding is to serve as a last resort to help your company after all other possibilities have been exhausted. This court is not a tool for you to use in the management of your company, especially with regards to contract negotiation. That is what consultants, which your company seems all too fond of, are for.
At this time, I find no cause for action to allow you to move forward with bankruptcy proceedings. I would recommend that you negotiate in good faith with your pilots, and get back to the task of running your airline.
This court is adjourned.
J: As you are aware, in order to grant bankruptcy protection, the law requires that your company must have done everything reasonable in it's power to prevent a declaration of bankruptcy. Furthermore, this court must be presented with a viable business plan to ensure this situation does not happen again. I must now review actions by Delta Air Lines leading up to this situation. Please state your case.
DL: Your honor, for the past three years, Delta has suffered major financial losses and a dramatic increase in debt. We are now in a position whereby we cannot pay the debt service given our current revenue and costs. We feel, the primary culprit of our financial situation are pilot salary costs and we seek relief from the pilot contract.
J:That's it? Just the pilots?
DL:Uh, yes your honor.
J:Well looking at your quarterly financial reports for the past 7 years, it appears you have let your debt level to swell up to around 20 billion dollars, which causes roughly an annual debt service of a billion dollars per year. So I'd like to see where all this debt came from.
First, I see that your company engaged in a 2.5 billion dollar stock buy back program. How much is this worth now?
DL:Um, virtually nothing.
J:You also spent over 2.5 billion dollars purchasing Comair and ASA?
DL: Yes. Both these companies were subcontractors of ours previously. In the case of ASA, there were quality control issues we felt could be better managed if we owned them. As for Comair, by outsourcing to them so much work, we allowed to become a monopoly in our Cincinnati hub. We were afraid they could become a competitor, or be purchased by one of our competitors.
J: OK, I also see that your management then went on an aircraft spending spree, buying hundreds of regional jets for your Comair and ASA Delta Connection division at a cost of an additional few billion dollars. I hope these planes are a wise investment. Are they are cheaper to operate?
DL: Well not exactly. These regional jets have a seat cost of around 16 to 19 cents per seat mile whereas our existing mainline jets cost about 9.5 cents.
J: So then I hope they attract more passengers. They are more comfortable, right?
DL: No, they are smaller, offer no first class, no overhead storage, and you have to be a contortionist to use the lavatory. But they sure beat flying a turboprop. We believe we can we create greater demand due to higher frequency when we replace mainline flying with these jets.
J: So you offer more of a product your customer does not truly prefer?
DL: Yes, but they are profitable.
J: Well how can that be when they cost almost twice as much to operate?
DL: Oh that's easy. Delta mainline subsidizes them by purchasing their airplanes, paying for their facilities, providing marketing, as well as reservations, distribution, etc. etc. Basically, we pay all their fixed costs.
J: Well how would Delta mainline be doing if Delta Connection was actually paying their own expenses?
DL: Well it does not matter, we are all one big company and all the money goes into one big pot, so to speak.
J: Then how do you know if the regional jets are truly profitable?
DL: Um, I’ll have to get back to you in about four to six weeks on that one.
J: And if all your money goes into one big pot, how is it you figure that your mainline pilot costs are your problem?
DL: Look, we need to get our costs down and this is the easiest expense to go after, OK!
J: That is your plan? I did mention you have to have a viable business plan, right? How is your Song operation doing?
DL: Great! It is profitable, customers love it, and it has received great reviews from the press.
J: Because you have gotten lower cost pilots at Song?
DL: Well your honor, that is not exactly correct. Song uses the same mainline pilots at the same pay rates.
J: Bailiff, can you get me some aspirin? I am getting a headache.
Bailiff: Here you go sir.
J: All right, what about these charges of over a billion dollars for terminal improvements in Boston and New York?
DL: Well, our old terminals looked yucky.
J: Yucky? How about the 600 million you lost due to the Comair strike? I hope it was worth it.
DL: Well, we settled at our last offer, so we didn't really save anything. We figure the difference between what the Comair pilots wanted and what we gave them will have been worth it in about 20 years.
J: And I see a few hundred million dollars spend for stock equity in a South American airline?
D: That airline unfortunately went out of business, your honor.
J: I see. I mentioned that Delta needed a viable business plan. You do understand this would presume a management team capable of competent execution and decision making. It appears as though your management has exercised all the financial restraint, responsibility and competence of a spoiled sorority girl with her fathers Neiman Marcus charge card. Were they penalized?
DL: Um no. Actually we gave them bonuses. And a separate bankruptcy proof retirement trust fund. You have to pay top dollar to keep top talent!
J: And have been able to keep top talent?
DL: Well, the funny thing is.............um.......they kind of...........left.
J: All of them?
DL: Just about.
J: Well that is the first good news I've seen regarding this case so far. From what I have seen so far, I am very concerned about the debt accumulation which has been allowed. It appears Delta would be profitable now if there were not such huge debt service. Do you seek a restructuring of your debt? I see about half of it is unsecured. Your requests so far have been unusual in that with most bankruptcy proceedings, debt reduction and restructuring is the main priority.
DL: Uh, can we have our pilot pay cut now please?
J: Enough about operating costs and debt service. How about revenue?
DL: Well, demand is down so we have no pricing power.
J: Really? What are your load factors?
DL: In the 80% range.
J: That seems kind of high.
DL: Actually it is an all time record.
J: Shouldn't you raise ticket prices?
DL: I'll have to get back to you on that one as well, your honor. You see, a funny thing happened. We tried to save money by cutting out travel agent middle men by forcing our customers to the internet. And we kind of lost control of our product distribution. (Heh heh!) We believe the customer always goes with the lowest price.
J: So a low cost carrier like Jet Blue has cheaper tickets than Delta and therefore is profitable?
DL: Well no. Actually, Jet Blue tickets cost more than Delta on average.
J:So then why don't the passengers choose Delta of over Jet Blue?
DL: They will when they find out. For some strange reason, passengers think Jet Blue is a better value. We need to convince them otherwise. Unfortunately we spent our advertising dollars on retaining top executive talent instead.
J: Not that again.
DL: Look, our marketing department is very busy at the moment managing all aspects of our airline, they do not have time for marketing.
J: Regarding your pilot contract. You want me to allow you to basically throw it out?
DL: We want our pilot costs down where American, United and US Airways are.
J: But looking at your total operating costs compared to the airlines who have gotten employee concessions, you are presently cheaper than US Airways, about the same as United, and only slightly above American. In fact, you are also about the same as Northwest and Continental who turned a profit last quarter. Perhaps we should be addressing the revenue side of this equation.
DL: Yes but, we'd rather take it out of our pilots. Come on, most of all the other airlines got to do it. PLEASE!?
J: Because everyone else is doing it is not an acceptable business strategy in the opinion of this court. Besides, your haven't your pilots been offering you over $300 million annually in concessions?
DL: Yes but this would require a two year extension to the pilot contract, and should we need further relief, we would have to open negotiations with the pilots.
J: But isn't that what you are doing now?
DL: Yes, but we prefer not to negotiate. We find we can get more leverage with legal or political proceedings.
J: Have you tried to cut costs in any other areas? How are your other employee groups wages compared to the industry average?
DL: Above average, like the pilots. You see your honor, our competitors used bankruptcy, or the threat thereof, lower employee wages across the board. That is why our wages are relatively higher. We were hoping you could, you know, help us out.
J: You feel it is important to lower your workers wages to the match the industry's reduced average. Since you are not contractually bound to pay these other employee groups a certain wage, and since you claim Delta is in such dire straits as to need bankruptcy protection, why have you not lowered their costs to align them with the rest of the industry?
DL: We cut some of their benefits but left their wages intact. Overall, we feel that only the pilots should be paid less. Besides, we need a competitive salary to attract the best people.
J: God forbid you should want to attract the best pilots.
Counselor, the purpose of this bankruptcy proceeding is to serve as a last resort to help your company after all other possibilities have been exhausted. This court is not a tool for you to use in the management of your company, especially with regards to contract negotiation. That is what consultants, which your company seems all too fond of, are for.
At this time, I find no cause for action to allow you to move forward with bankruptcy proceedings. I would recommend that you negotiate in good faith with your pilots, and get back to the task of running your airline.
This court is adjourned.
