What's Next For Delta?


Corn Field
Dec 5, 2003
Although it has come as a surprise to many people, Delta has avoided bankruptcy in the near term, if not the long term. Grinstein and his management team have extracted large cost cuts through their doom and gloom rhetoric. They have obtained at least $1.5 billion of cost cuts from their ongoing employees and then significant amounts more from the shrinking of the workforce and closing of DFW as a hub. They have pushed back maturities on approx. $400 million worth of debt but have not reduced the overall amount - which still amounts to $20 billion when pension liabilities are included. DL employees will not have defined pension benefits any longer (it is very likely they will reduce the transition window for non-contract employees). The medium and long-term portions of the debt restructuring have not been successful, although ending the debt swap efforts will release nearly a billion dollars of collateral back to DL for other uses.

By not going into bankruptcy, DL has passed on the opportunity to turn over its pension liabilities to the government even though they are second only to UA. They also lost the ability to wipe out several billion dollars worth of unsecured debt which could have been eliminated in bankruptcy. Apparently, DL execs fully recognize that the survival rate for airlines in bankruptcy is very low and they would rather cut deeper and pay off their debts than dramatically increase the likelihood of bringing the company to an end. DL will pay as much as $1.5 billion in interest and pension payments over the next several years, an amount that is very large but certainly possible. Because the amount of debt service is largely fixed, DL can increase its financial flexibility only by increasing revenue, a task that is very difficult for DL given its network.

Competitively, DL is retrenching to the east where even AirTran is indicating that it is not as interested as competing as it once was (statements like DL being irrational by adding more capacity to the world's largest hub). US' pullbacks and shifts to international markets do provide DL with some breathing room in domestic markets. Independence's likely pullback from some of the point to point Florida markets will only help Delta - as well as US.

While DL employees clearly have taken a haircut, they still are at average pay levels for now. They also are getting nearly 1/3 of the company's stock - by far the largest of any of the legacy carriers.

The current management team seems to recognize the core requirements for running an airline despite the example two administrations left, making serious missteps unlikely. DL's costs should be near the bottom of the legacy industry - where DL historically has been, a position that enabled them to make money despite a less-premium revenue focused network than other carriers.

Delta is challenged, however. The east coast will continue to be a blood bath - particularly as US fights for survival and a number of carriers try to push them over the edge. Domestically, DL is stuck to largely slug it out in the east with an obvious focus on expanding from NYC and defending ATL and Florida. DL can hold its own in SLC and CVG but those are not likely to be growth markets. In the event US successfully restructures, they will be a very attractive takeover target given their access to key domestic markets and their low cost components (individual employee salaries and leases). If any other carrier acquired US or its remnants, DL's strength on the east coast would be markedly reduced.

Internationally, DL has very few additional international aircraft available to deploy and no deliveries of mainline aircraft for several years (which while helping the balance sheet provides little internal growth opportunities). Further, DL's international routes are almost entirely to continental Europe and relatively open access markets in Latin America. Reportedly, some domestic 767s can be reconfigured for international use and DL might acquire some over-the-water 757s but growth will still be focused on Europe and Latin America, given the aircraft that are available. At a time when every legacy airline recognizes the value of flying more international routes, DL is poorly equipped.

DL has the advantage of having the largest RJ fleet in the world - the majority of which are owned (along with the associated debt). DL's ability to maintain corporate revenue in the face of shrinking yields has come by deploying more RJs. ASA and/or Comair could certainly be spun off to help improve DL's balance sheet while ensuring that they don't become a competitor. DL also has the lowest maintenance costs in the legacy industry, an advantage that could also allow DL to sell off its heavy maintenance operations more successfully than other carriers - esp. given its non-union status.

DL has used acquisitions very effectively to grow its network over the years. Will Delta seize the opportunity to participate in industry restructuring by acquiring another carrier? Since DL obtains the smallest percentage of revenue from international markets than any other carrier except US, will DL take the opportunity to acquire international routes esp. in limited access countries through an acquisition? Since DL has the smallest large longhaul international widebody fleet in the US industry, will DL acquire used international planes, some of which are being rejected through bankruptcy at other airlines and are cheaper than what DL would have to spend for new ones? Will DL seek to strengthen its domestic presence by acquiring a carrier with hubs in much larger markets than CVG and SLC as well as a stronger presence on the west coast?

I believe the answer to these questions is "YES" and we will see DL lead industry consolidation, if not participate strongly in it. After monetizing some of its assets mentioned above, DL will have the financial strength necessary to particpate in consolidation - as does AA and potentially NW. CO, NW, and UA could all potentially be good acquisitions for DL but UA is clearly most in play at the moment. Is the time for industry consolidation now upon us?

What do you think Delta does next?
"W T",
Since I agree with almost all of your assessments of DL, IMHO this might be what DL does next.

I strongly believe that the following airlines will "never" be obtained by ANY airline:

I also think that AA WN NW AND DL will be looking for "pieces" of US and UA.

Now the only other legacy that I HAVE'NT mentioned is CO.

So IF DL does any aquireing, I suggest it would be DL buying CO !!

Yes, I think "like it or not," the Industry WILL consolidate.

As for selling off Tech Ops, I don't think that is a direction that is being persued at this time. They may be shopping the engine shops around, but I think the airframe side is in for a different fate. All we hear is if they can find sombody to take over the Heavy Checks for a significant cost sayings they are gone. The talk is a complete farmout not a buyout. The mechanics on the lower half of the ladder would be shown the door and the airplanes would be done at the contractors' facility. There are strong rumors the mechanics working on the planes would not be US residents. Many think only operations out of the US can give the cost savings that they are searching for.
I'm sure you have heard the rumors that Grinstein had a proposal to sell Tech Ops at one time but decided not to pursue it. I don't know if there is any truth to them today - only that DL must pull a wild card out of its back pocket in order to turn around the company's balance sheet. DL maintenance has the advantage of being very cost competitive so it seems to me that if the company outsources, there would be a market for DL facilities and mechanics to do work which they can obviously do cheaper than those at other airlines. If the yardstick is mechanics in other countries, the picture might be different. Every time I taxi past the TOC, I am amazed at the operation that has been built up over the decades.

Red Tail,
Thank you for your agreement. I agree with you as well regarding the likely survivors. However, since the four solvent network airlines in the US are all publicly traded, there is no certainty that any of them will be survivors if someone else wants to buy them. While a private owner can choose not to sell, a public company must respond to the desires of its stockholders, the majority of whom will choose to sell if the price is right.

Part of the reason I believe DL will have no choice but to be a survivor is because DL's debts are so large and its access to restricted access markets is so small that it really wouldn't be an attractive acquisition target. DL does have a history of buying access to key markets but has done little in the past 10 years to develop and expand the markets gained from Pan Am. As with most businesses, staying the same size is not an option - if you don't grow, you shrink.

I suppose it is possible to look at the list of airlines that aren't on your list of likely survivors to see how they might match up with the survivors.

CO at one time probably would have been a good match for DL. After a couple of failed acquisition overtures, DL has had to grow its JFK operations and pull the plug on DFW without the prospect of moving DFW operations down to IAH. EWR for CO is more profitable than JFK and IAH was more valuable than DFW while CVG is stronger than CLE. More importantly, however, CO does little for DL in the west or to Asia where DL needs to grow. While CO would like to be a survivor, it simply doesn't have the financial strength to engineer its own survival if it comes down to a match with AA, DL, or NW. Everything CO owns is mortgaged to the hilt. While it is very well run on an operating basis, it has no flexibility in its balance sheet. The fleet incompatibility issue between CO and NW could be solved if airlines swapped Airbus for Boeing fleets. Since there are essentially three primarily Airbus and three primarily Boeing operators in the US, fleet commonality could be obtained through swapping.

US still has valuable market access for someone. NW could be interested but CO is more valuable to NW than is US. While AA has picked off the biggest markets in the NE and to Florida and flies them point to point, they still are not competitive w/ DL in the East, a disadvantage they will have to address if the industry consolidates. While they are likely to dump just about all of US' fleet, I see them most interested in US. The new JFK terminal is not going to be big enough to become the hub AA once envisioned which makes PHL valuable. While LCCs are certain to enter the Caribbean, US has become something of a thorn in AA's Caribbean side. Even if LCCs enter the Caribbean, AA is better prepared to counter them than we US started its Caribbean expansion.

UA, of course, is the gem of the industry. They have the motherlode of international routes and even their shrinking domestic operations are in the biggest markets. You may recall that one of Leo Mullins' first acts at DL was to try and implement a codesharing arrangement with UA, a strategy that was soundly dumped by Delta pilots. Several years later and with UA in partnership with US, DL shrewdly convinced CO and NW to let it into their partnership while Air France sealed the deal by picking off KLM. Since the CO-DL-NW partnership only allows the operating carrier to put its code on local flights into the dominant carrier's hub (ie NW can code on DL connecting flights through ATL but not if ATL is the destination), CO and NW gain little they could not provide for themselves. NW certainly doesn't want to see DL become a player in Asia or to expand its presence in the midwest while CO knows that London and Asia routes from NYC would make DL a much more credible player from the NE. Once again, by monetizing some assets and using its unmortgaged collateral, DL would have the advantage in a bid for UA. AA only wants the Pacific routes and could probably only justify an acquisition of that part of UA to the government. NW has no need of UA's Asian presence, other than perhaps SFO. DL could make use of nearly all of UA, an advantage they could use in bankruptcy court. CO would be a match for UA but again, DL has the financial advnantage when matched with CO.

It is likely that DL or any other airline will need outside investors in order to make consolidation happen. DL probably has a a greater need for consolidation than other carriers and they can demonstrate it to financiers to the benefit; if DL can prove that it can make its cost cuts work and demonstrate that it knows how to manage in the current business environment, investors will be likely to again be drawn to Delta as a well run company after years of being in the opposite position.

A couple things are clear.

1. DL is not dead, although many were ready to write it off. DL is a survivor and has used downturns in the industry to its advantage.

2. The solvent airlines will dictate how consolidation will occur in the industry. Although UA and US would like to control their destiny, in reality they are at the whims of their creditors who are simply looking for the best settlement. If other airlines can provide it, those names will perish.

3. The airlines that have the strongest balance sheets will have greater options over others. At this point, AA probably is in the best shape with DL and NW comparable, and CO at the bottom of the solvent network carrier list.

I don't know if DL is thinking this way at present but I have a feeling they will soon be thinking about long term strategy again now that they are not going to descend into bankruptcy.

Clarification...DL & UA had an FFP agreement to counteract CO/NW. US & AA had a similar agreement for a similar reason. All were torn up (except CO/NW) when UA tried to buy US...since then, we know what has happened.

As for why DL will survive, they are the only network carrier with a plan to truly change their business. UA has yet to figure out they need a plan (even with the judge asking for one), US has a plan simply to slash costs until the pizza is so cheap nobody wants it. AA has slashed costs, but not really changed the plan. NW will continue to live so long as no LCC can put a major presence in one of their hubs. CO can be a survivor by way of their agreement with NW whereby NW has first right of refusal for someone to buy CO...I see CO doing the buying because they have pretty cheap labor (makes takeover company fall under CO contracts), and better culture/leadership.
you are right. DL and UA did get as far as the FFP but never codesharing.
I'm not sure I agree that AA hasn't changed its business. I think AA's announcement about their new fare structure in MIA this past week goes hand in hand w/ what DL has done in CVG. It will be between those two to continue to push for systemwide fare restructuring. As for other elements of what it takes to restructure, I think both DL and AA have elements. Can you elaborate on the elements you think DL has figured out but AA has not?
As for the cheaper labor at CO being an advantage for being an acquirer, history shows that it is pretty well impossible to acquire an airline with higher cost elements. The reason UA and US will be attractive acquisition targets is that their employees and leases will be below rates paid by AA, DL, NW. UA and US particularly are struggling because their managements cannot utilize their assets as efficiently as the other carriers - esp. CO, NW, and DL which have been more productive than AA, UA, and US. I honestly haven't seen productivity statistics in about a year so I don't know how they compare but it can be somewhat deduced by comparing the CASM to total revenue.
Thanks for your contributions to the discussion.
I don't see where DL will be in any position to acquire anything or anyone for quite a while. Given DL's debt burden and low cash balance, they are going to be in pure survival mode for the next year or two. DL could still easily find itself in CH11 by early 2006 if UA/US both survive and fuel prices remain high.

As you mentioned, DL has little in valuable assets other than ATL. SLC is a money loser that DL is keeping only because they need a Western presence. CVG isn't much better...a bunch of high CASM RJ's carrying low yield connecting traffic. Even with Simplifares, the O+D of CVG is still way too low. DL's JFK facility is a dump and DL has been unable to successfully grow international operations there. That leaves ATL as the one crown jewel in the system.

Instead of worrying about acquiring other carriers, DL's prime focus should be getting their own house in order. The last few months of effort represent only a tiny amount of what DL needs to do to survive.

Customer service at DL is still in the toilet. The frequent flyer program is poor and has driven business customers away. DL's fleet mix is still a mess (too many 50 seat RJ's, no 100 seat aircraft, too few int'l widebodies). DL is still relying on RJ's to fly a large number of low-yield routes where RJ's can't make money.

The only assets DL could possibly acquire would be from a liquidation sale of US/UA. However, as long as those carriers are able to survive, DL will be in no position to acquire anything.

What are your assumptions re: RJ's based on? If they can't make money on the routes they are flying why are ASA & Comair the only profitable untis of the corporation? The reality is that the RJ's in CVG and more recently announced point to point service are exactly what the markets they serve need from a demand standpoint. I agree that the lack of a 100 seat aircraft is a big whole, but as noted, the new contract with the pilots includes payrates for the 737-700...so I imagine that whole will be filled. In addition, the fleet rationalization seems it will be corrected by possibly going with 737-900's to replace 767-200's & 757's....so that's a move in the right direction...
flyhigh said:

What are your assumptions re: RJ's based on? If they can't make money on the routes they are flying why are ASA & Comair the only profitable untis of the corporation? The reality is that the RJ's in CVG and more recently announced point to point service are exactly what the markets they serve need from a demand standpoint. I agree that the lack of a 100 seat aircraft is a big whole, but as noted, the new contract with the pilots includes payrates for the 737-700...so I imagine that whole will be filled. In addition, the fleet rationalization seems it will be corrected by possibly going with 737-900's to replace 767-200's & 757's....so that's a move in the right direction...

ASA/Comair are only as profitable as DL wants them to be. DL chooses how to compensate ASA/Comair in any manner they desire. DL has invested billions in RJ lift in the past few years (and virtually nothing in mainline lift) and what does DL have to show for it? Billions of dollars of losses. DL has made every effort to make ASA/Comair look profitable, because they have to somehow justify the capital expenditures to shareholders.

And from a customer service standpoint, the RJ's are a poor product. The CRJ is an inferior product and everybody knows it. How well will DL CRJ's hold up against JetBlue EMB190's next year?

Don't get me wrong, the RJ has a place in DL's network.

PNS-TPA...that's a good point-to-point use of an RJ.
ERI-CVG...that's a good hub feed from a small market.

The problem is that DL relies on RJ's to fly up against LCC/mainline competitors and it doesn't work.

It didn't work in DFW.
It didn't work in DCA where DL tried to fly RJ's to MCO,TPA,PBI,FLL against US mainline planes.
It isn't going to work next year against JetBlue either.
Oh $h*t.....where is PollyAnna????

World should be here any moment to apply your rose colored glasses.


Ok, they're on.....go ahead World, enlighten us! :D
I think you have been convinced like many others by Grinstein and his crew that DL’s finances are on the verge of collapse. You’ll recall that for 2 years after 9/11, Mullin and CFO Burns continued to take on debt to build a cash stash while sustaining significant losses. When Grinstein arrived, he decided that strategy would end and the doom and gloom talk began. It also became apparent that the only way he was going to win was to run DL’s cash balances down to a level that everyone believed would trigger bankruptcy if a pilot deal was not obtained. He also said there would be no more borrowing but no one knew exactly how much unencumbered assets DL had left. It was a given that DL would leave some assets to secure debtor in possession financing should it be needed; how much beyond that was the question.
After the pilot deal was announced, low and behold DL secured financing using older aircraft – the fleet wasn’t fully encumbered after all, receivables, and the equity value of Delta Connection (note that this is the first attempt DL has made to quantify the value of Delta Connection which was assessed to be approx. $2B). Given the types of assets that were pledged for collateral, I think DL is probably pretty close to being tapped out on assets but there is still the $800M, a large portion of which will be released when the medium and long-term debt restructuring efforts are unsuccessfully ended. The Amex loan is essentially an advance against future transportation so it will be paid off in 2 years with the $500M in collateral released accordingly.

As for cash, DL’s cash balance will be buoyed by the sale of the MD-11s and Orbitz until the employee cost cuts take effect in Dec, Jan, and beyond as DFW is shuttered. The terms of the GE and Amex money have been met so the first deposits from those financings could be arriving at DL very soon. DL brushed very close to the bottom of the barrel but is in the rebuilding stage on cash – although it is still all borrowed.

At the very least, based on the cost cuts DL is getting they will soon be profitable on an operating basis based on current yields, the current yield decline trend, and fuel in the $50 neighborhood. Add in debt service and pension obligations and DL should be close to cash neutral (they have said they need about $150M of cash by ’06 but are essentially OK for ’05). If anything happens to DL’s benefit in the industry such as a competitor shutdown, DL’s financial recovery will be accelerated. If anything negative further happens to the industry, DL is probably poised to hold on while someone else will fail, which will help DL.

The point of this is that DL has done a good job of convincing the world the sky was falling even though they weren’t quite at the end of their ropes. They still need a solid turnaround or they will simply bump along, but conditions that keep DL just bumping along might be enough to push someone else over the edge. By using their newfound lease on life, DL could soon be in a position to make some strategic moves even if the cash is not immediately available. Investors will be receptive to a plan that will improve revenue while strengthening DL’s financial position. Legacy carrier consolidation, if it happens in the future, will be because the surviving carriers recognize that pushing forward with consolidation will strengthen them down the road.

As for Delta Connection, I think you underestimate the quality of the revenue DL carries through CVG. Yes, CVG is a relatively small market but DL has enormous reach from CVG because of the RJs (I believe I read that DL and DLC serves more domestic cities from CVG than any other Midwest carrier serves from its hubs). Fares out of many of those cities are not necessarily cheap and by having so much coverage DL is not forced to take the lowest passengers. Also if you look at the amount of seats DL offers to Florida and other typically low yielding markets, there are relatively few seats to those types of destinations in comparison to other types of cities.

I’m not sure Delta can get by with preferentially showing revenues or costs for Delta Connection. Besides, profitability for Delta Connection and mainline is comparable to other airlines that report their mainline and regional operations separately and have similar costs. I do think the pressure on Delta Connection to reduce costs will grow as United succeeds at reducing its regional carrier costs. Mainline cost reductions are probably just the first step. And, if mainline costs are reduced and Delta Connection costs remain unchanged, there should be opportunities for mainline to take over some routes which previously were not profitable – particularly given the size of the mainline cost reductions.

Fly just wishes she could be as hopeful about her airline but since she can't she'll settle for the position of town nay-sayer.

While the legacy carriers all face major obstacles, there will be differences in the way each of the US big six adapt to the changing environment. Quite frankly, some will make it and some will not. While Delta has flirted with death, it is far from dead and is poised to make a major comeback.

Thanks for stopping by, Fly!
Outside of ATL, DAL has major strategic problems. SLC and CVG are marginal hubs at best. Neither one of these can support daily O/D to Europe or Asia as well as multiple major domestic markets. The population/business base is too small. They're basic connecting hubs with strategic locations. This traffic can be poached by other carriers. The growth of LCC point to point also hurts.

IMO, one needs to be locked into major class 1 cities to survive. ATL fits this profile. NYC is another. CAL in EWR is a major anchor. AA in JFK (wait until new terminal in mid 05) is another. W/o access to LHR and jetBlue taking domestic traffic, DAL is at a serious disadvantage. The remaining anchor cities include MIA, PHL, BOS (somewhat), ORD, DTW, DFW, IAH, LAX, SEA, and SFO. SJU because it's on an island could be included too. AA in LHR and UAL/NWA in NRT is another. DAL needs to become a dominant player in one of these markets or its long term future is in major doubt.
you've got it switch. I have a feeling DL execs recognize the predicament you and I see.

one question for you. Will you work for DL if they acquire UA?

Another major part of the problem is the mass quantity of 50 seat RJ's owned by DAL. The CASM is way too high. Given the current fuel price and high load factors w/ lousy fares I believe this is a huge drain on the company. For example, AMR only has 184 RJ's in its entire fleet. What's the count of CMR and ASA? Lets not forget that AMR is quite a bit bigger than DAL.

Of the "legacy" carriers I believe AA is in the strongest position by far. Access to LHR/NRT, huge hubs in SJU, MIA, NYC (especially w/ new JFK terminal in mid '05), DFW, and ORD place AA in very strong O/D domestic and international markets. Major operations in BOS, LAX, and SFO will supplement an already dominant network.

NWA also has a strong network. They face almost no competition in DTW, MSP, and have exclusive rights at NRT. NWA is a long term player. CAL is smaller but dominates lucrative cities like EWR and IAH. I'd bet on NWA bidding for CAL.

DAL must be looking at U and UAL scraps. The problem is that LUV is on the move in PHL, and UAL has assets that AA, NWA, and CAL would also bid on with DAL. AA would pay top dollar for ORD and outbid everybody else. SFO would be the ultimate move for DAL. But it will be real expensive. NWA, CAL, and AA would see to that.
I find comical that you are over here picking and choosing pieces of an airline when a few weeks ago DAL was days away from entering the grave themselves. DAL HAS NO MONEY TO BUY ANYTHING! Get over it.

World asked: Would I work for DAL? ummmmmm, No! Not that Delta isn't a great airline but I'm not prepared to start over at any airline (especially one that repeatedly kicks their flight attendants in the teeth one day and then plays nice to keep them out of a union on the next) Besides Delta isn't going to make the mistake of acquiring parts of an airline with employees as part of the package, I'm sure they noticed what a roaring success it was over at AA. Retirement for this girl. Shopping, working out and raising my family are in my future!