Delta’s CEO on Using Innovative Thinking to Revive a Bankrupt Airline

The Idea: Unconventional moves—from employee profit-sharing to the purchase of an oil refinery—have made the U.S. carrier an industry leader again. At Delta we understand the perils of the traditional airline business model. The industry has in recent decades been known for short-term thinking, destructive decision making, and poor employee relations. However, in 2007, after emerging from bankruptcy, our company decided that we would be different. Delta already had the right culture and values and the right people, including directors with diverse expertise. We knew that with the right strategies, we could break away from our competitors. We could see a clear path through the woods. The first step was to adjust—along with other airlines—to new market realities. We would need to add scale and expand our geographic reach by merging with another U.S. carrier and partnering with foreign ones. We would need to revamp and reorganize our fleet and airport operations. And we would need to change our pricing model. We did all those things. But we also realized that conventional moves would not be enough. To come back on top, Delta would have to further strengthen its culture and pursue more-innovative strategies. We started, just after our two-year restructuring, with an employee profit-sharing program that continues to differentiate us from our peers. Each year 10% of earnings before taxes and management compensation is paid out in bonuses. A year after our 2008 merger with Northwest Airlines, we added a stock ownership plan—also unique in the industry—that gave our pilots, flight attendants, ground crew members, and support staff 15% of the company’s equity. We have reclaimed our reservations system, becoming the only U.S. airline to own and control this key operations data. We have deepened our foreign partnerships by buying a minority stake in three overseas carriers—Aeroméxico, Brazil’s GOL, and the UK’s Virgin Atlantic—and strengthening our existing alliance with Air France–KLM. We have also moved toward vertical integration (and better management of fuel costs) by acquiring an oil refinery—a decision that shocked both aviation and oil industry observers. Thanks to these new ways of thinking about our organizational structure and operations and our determination to get employees invested—both literally and figuratively—in running a top-notch airline, Delta is now one of the healthiest, most profitable airlines in the world, with some of the best performance rankings (including on-time flight arrivals, cancellation avoidance, baggage handling, and customer service) in the industry. We have also returned to the S&P 500, underscoring our standing as a leading U.S. industrial transport company. After many years in the wilderness, Delta is a leader again. Emerging from Bankruptcy In 2004 this future was hard to imagine. Delta was in Chapter 11, along with many of its biggest competitors: United Airlines, US Airways, and Northwest. Gerald (Jerry) Grinstein, formerly the CEO of Western Airlines and then the chairman of Delta’s board of directors, came out of retirement to manage the restructuring. Almost immediately he tapped Ed Bastian, now Delta’s president, and Glen Hauenstein, now the executive vice president of network planning and revenue management, as pivotal players in the company’s evolution. In April 2007, when the company was solvent again, he asked me to join the board, and in September of that year I accepted the honor of becoming chief executive. The directors offered to combine the CEO role with the chairman’s seat (the two roles had been split in 2004), but we decided that dispersed power at the top, together with an active board of directors, is the healthiest way to run a global organization. Delta is a big, complicated operation, and I don’t have all the skills necessary to manage it well, so I need help from really smart people, such as Ed and Glen, who are great partners, and our chief operating officer, Gil West, who is an expert at the intricacies of getting our airplanes to take off and land on time. Many hands do indeed make lighter work, and a diversity of viewpoints leads to more-informed debate. Delta’s Road to Redemption One of our first big tasks as a leadership team was to kick-start the industry’s inevitable consolidation. We formed a committee to evaluate M&A opportunities and met nearly 30 times over the next 12 to 15 months to consider potential deals. It was a very deliberate process. We needed an airline with a network and assets to complement our own. We didn’t want to launch a hostile takeover—we had to be confident that we could get approval from the Justice Department and then successfully execute the merger, and we were determined to preserve our culture. Northwest, with its Pacific and midwestern U.S. routes, was the only airline that fit the bill. Less than a year after both companies came out of Chapter 11, we completed the deal. In subsequent years we have restructured our fleet, beefed up joint-venture partnerships, invested in our product, and reframed pricing to better reflect costs (especially for fuel) and meet varying customer needs. As goals, these are pretty standard, in our industry and many others. The key to Delta’s outperformance has been our people and our anything-but-standard approach to doing business. Getting Employees Invested Delta’s first passenger flight, in 1929, was from Dallas to Jackson, Mississippi, via Shreveport and Monroe, Louisiana, with one pilot and five passengers. Eight decades later our leadership team reviewed the writings of our founder, C.E. Woolman, and took inspiration from his mission statements and employee handbooks to develop a set of basic principles that outline unifying behaviors for our people. We called the document “Rules of the Road” and handed it out to all our employees in late 2007. Every new hire since has received a copy, and the rules continue to evolve along with our business. They remain the foundation for everything we do. Our goal is to be clear about the courteous culture, open communication, financial discipline, and efficient operations that Delta should maintain. Some of the rules are extremely specific—for example, “Don’t interrupt”—because we believe that behavior matters. That is how you demonstrate values. I am 59 years old, but I still sometimes have to be told to keep quiet when others are speaking. Combined with the profit-sharing program that Jerry instituted, “Rules of the Road” set the tone for our employee relations and compensation strategy in the years to come. We wanted to continue rewarding people for their perseverance in tough times and incentivize them to help propel Delta into the future. In addition to the stock ownership plan, we found a way to give our employees raises even during the 2008–2009 financial crisis, when the price of oil spiked to more than $150 a barrel and our margins were shrinking. Under that philosophy we have also made sure to keep our benefits and retirement plans the same for everyone—executive, pilot, flight attendant, or member of the ground crew—and management compensation is relatively low for a company of our size. Valentine’s Day is a special day for us—that’s when profit-sharing checks are handed to employees. In 2014 each employee received the equivalent of 8% of his or her salary. This year we were able to pay out an advance on 2014 profit sharing in October, and even with that early payout, we expect the February 2015 payment to be the largest ever. No other blue-chip U.S. company shares profits at that level. Delta Facts & Financials Founded: 1924 Headquarters: Atlanta Employees: 77,755 Delta’s work groups have rejected nine proposals to unionize, making us the only major airline outside the Middle East that is largely nonunionized. And we have excellent relations with our only large union, the Air Line Pilots Association. Lots of people want to work for Delta: In our last push to recruit flight attendants, we received 100,000 applications for 1,400 openings. The demand is similar for most other positions. Our employee surveys show that 90% of our people would recommend working at Delta to friends and family. Virtual Mergers and Vertical Integration We have set ourselves apart from the industry in key areas—asset management, international partnerships, and supply chain. This type of innovation is a company tradition. Nearly 50 years ago Delta invented the hub-and-spoke pattern that is ubiquitous today. Our goals are greater efficiency and control. The decision to take our reservations system in-house is a case in point—we no longer have to rely on a third party to manage our data, which allows the system to evolve and grow to meet our needs. By taking equity stakes in leading Brazilian, Mexican, and British carriers, we have been able to create virtual mergers with strong partners in our most important international travel markets. Government regulations against foreign ownership of airlines prevents actual cross-border mergers, so these relationships are critical to giving our customers access to a truly global network. Our alliances must align with customer demand. Brazil accounts for the lion’s share of U.S.–South America flights, and GOL is its number one domestic industry player. Mexico is thriving under NAFTA—businesses like its stable economy and eager workforce, while vacationers enjoy its beaches and historic sites—and we have an exclusive relationship with its flagship carrier. Virgin Atlantic has an impressive European network and the number two position at Heathrow, the most important hub in the region if not the world; when Singapore Airlines decided that it wanted to divest its 49% share in the company, we carefully evaluated and then seized the opportunity. These investments have resulted not only in more-seamless travel for our passengers but also in deeper relationships with all three airlines, including seats on their boards. Unlike some of our competitors, we view our partners as equals and work to make sure they are as successful and profitable as we are. That attitude extends to every carrier with which we ally ourselves. For example, although we have no equity stake in Air France–KLM, we operate jointly and share the bottom line on a $12 billion to $13 billion transatlantic business. That’s a model no one else has. Delta’s most unconventional move in the past few years, however, was acquiring the Trainer oil refinery, outside Philadelphia. Jet fuel is our single largest expense—about $12 billion annually—so we want to be the world’s best at securing it and supplying it to our operations across the globe. Along with the rest of the industry, we’ve learned to use hedging and options strategies and to dynamically price our tickets to insulate ourselves from oil price fluctuations. But we decided a few years ago to go a step further. Rather than be controlled by producers (particularly those in OPEC, which would be an illegal cartel if it were subject to U.S. law), we wanted to get into the business—vertically integrate and gain control over our supply chain. A number of East Coast refineries were shutting down; the reduction in refining capacity and the resulting price rises would have been costly for us. Initially we looked at a facility in Louisiana. It turned out to be a poor fit, but we hired the plant manager and several members of his team to start building in-house expertise. Then the Trainer refinery came up for sale. Under my tenure at Delta, it has been our policy to refrain from engaging too many consultants. We feel that we know our business better than outsiders do. But in this case we did hire advisers to help us weigh our options. We concluded that if the refinery closed or was consolidated, our fuel prices would rise 10%–15%. If we bought it, we could begin to lower our fuel costs. At about $150 million, the price was reasonable—that’s roughly the cost of a new Boeing 787. So we went for it. We knew we were on the right path when people in both the airline and oil industries immediately criticized the acquisition. If our competitors didn’t like it and the refineries and cartels didn’t like it, we were clearly doing something right. We have moved toward vertical integration by acquiring an oil refinery—a decision that shocked both aviation and oil industry observers. We have since expanded our oil team to include several crude traders and the former president of Total Gas & Power North America. We have also signed an exclusive long-term lease for a ship that can move Gulf Coast crude up the East Coast so that we can self-supply at significantly less expense. With boots on the ground in this commodity business, we have become a lot smarter about hedging, buying, refining, and transporting fuel. As a stand-alone entity, the refinery earned modest profits during the past two quarters. But the real advantage is the impact on prices: Our average cost of fuel per gallon has been five to 10 cents less than the industry’s over the past two years. Constantly Innovating The U.S. airline industry remains beleaguered—out of favor with investors and often derided by consumers. But Delta stands apart. We have become consistently profitable, we are rewarding our employees and shareholders, and we are investing in providing the industry’s best customer service. Thanks to our unique people, culture, and strategy, we are stronger than ever. Every day the Delta team works with determination to apply innovative thinking throughout the organization. For example, we recently became the first major airline to switch to a dollars-spent, rather than miles-flown, frequent-flier program. We have been aggressively pursuing ancillary businesses, including airplane maintenance, repair, and overhaul; a private jet service; and vacation consolidation, and requiring them to be significant cash-flow generators. While many of our competitors are tying up their capital in new airplanes, we have adopted an opportunistic fleet strategy that combines new aircraft with used jets that we refurbish and operate at a much lower overall cost. Delta was also the first airline to take steps to dramatically reduce the number of 50-seat aircraft in operation; they had become extremely inefficient when fuel costs spiked. The list goes on and on. More often than not, Delta chooses the road less traveled. And what makes that possible is our dedication to teamwork. We have a saying at the company: “We hunt in a pack.” From the C-suite down, we approach every challenge and opportunity as a group in which each member feels valued, and that ability to work together gives us the freedom and clarity of thought to do business in a different way. This culture—the Delta culture—has allowed us to bring innovation back to an industry that was once known for it.

Delta’s CEO on Using Innovative Thinking to Revive a Bankrupt Airline

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