By David Field in Atlanta. Photography by Etienne De Malglaive
Shaken by bankruptcy and internal dissent, Delta Air Lines is now rejuvenating itself under Jerry Grinstein, whose strategy hinges on regaining the trust of workers
As the saying goes, "You can't teach an old dog new tricks", but for Jerry Grinstein, who turned 74 last month, the saying is more like: "It takes an old exec to teach an airline new tricks." That, after all, is the challenge the former railroader knew he was taking on when he moved from the relative comfort and obscurity of the Delta Air Lines board of directors to its chief executive office in early 2004.
Grinstein, who had joined the Delta board after arranging to sell Western Airlines to it in 1987, came to a carrier long synonymous with customer loyalty engendered by high levels of personal service and the tradition of hospitality that have defined the US Southeast - where Delta had long been the dominant airline.
But years of increasingly intense competition had tarnished, eroded and then destroyed that dominance and that reputation. After $12.4 billion in losses since 2001, a disastrous cost-cutting campaign that neither cut costs nor maintained service levels, and two chief executives ousted since 1997, when the board removed Grinstein's predecessor, Leo Mullin, in late 2003, the airline was staring into the abyss of bankruptcy.
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| "Our objective has to be to restore a sense of candid leadership" Jerry Grinstein chief executive, Delta Air lines |
Grinstein, reflecting in his sun-dappled office sanctuary within earshot of the huge Hartsfield-Jackson airport, had thought Delta could avoid the courts and the complex, expensive and morale-sapping restructuring process that had already engulfed United Airlines and US Airways (twice). But that was not to be: by late last summer, hurricanes had sent fuel costs skywards and then, on 14 September, Delta went into federal bankruptcy court in New York to seek protection from creditors while it reorganised. Just 30 minutes later, Northwest Airlines did the same.
Bankruptcy was not Grinstein's preferred course. "You really don't need the incredible expense, the lawyers' fees, the public scrutiny, the complexity," he says. "It was for us in large part a matter of timing and the competitive market challenges unique to Delta. What we needed was a break - a break that could have come in several forms. It could have come in a drop in fuel prices, or in an abating of the competitive pressures. I felt we had a good chance of getting a break. It didn't pan out. I don't think it's the perfect storm, though. We would have needed a sustained break over a long period of time to restore ourselves."
Sitting at the desk long used by Delta's legendary founder and long-time leader, "CE" Woolman, Grinstein points out that Delta had long dominated the year-round holiday traffic to Florida from the northeast and other US regions. At one point, Delta was the official airline of Disney attractions in Orlando - the single largest tourist attraction in the nation. It was a title Delta had paid heavily for back in the 1980s.
That has now changed and market pressures have increased. Independence Air, which was a factor in north-east Florida markets, may be gone, but a revived US Airways, also strong in the region, is still a player and JetBlue Airways is growing substantially. If anything, Delta is retreating or retrenching, with its New York-Florida capacity expected to fall by 35%, year-on-year, this November, estimates Raymond James & Associates analyst Buck Horne. And at Hartsfield Jackson, AirTran Airways continues its rise, taking a 15% share of the airport's traffic and poised for more, with its new and larger aircraft arriving monthly.
"Our objective has to be to restore a sense of candid leadership," says Grinstein. "We're in a service business where all you're selling is attitude and ability." But his efforts to regain the customer loyalty that had been a Delta hallmark begins not so much with the passengers as with Delta's own family, its employees. They, after all, are the same people who bore the brunt of cost-cutting campaigns that have gone down as two of the worst-managed in US airline history. These were the self-eviscerating "Plan 7.5" of former Delta chief executive Ron Allen which was so poorly executed that it led to Allen's unceremonious 1997 ousting by the board, and cost-cutting efforts by Grinstein's immediate predecessor, Leo Mullin, a detail-oriented consultant who failed to establish a rapport with Delta's workers, management or customers.
"Our challenge is not unlike Arpey's challenge at American Airlines," says Grinstein, referring to American's chief executive, Gerard Arpey, who has achieved considerable savings through workforce co-operation and consensus. "We have to show people that we care about where they work, so that they will care too. That's why we spent money that we really didn't have on new uniforms for flight attendants and why we're spending so much more on deep-cleaning the aircraft. They're so sensitive to on-time and cleanliness. We were deep-cleaning once every 18 months and now we're cleaning every 30 days."
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| "There's an incredible sense of history throughout the airline, and there's a tension between honouring the past and creatingthe future. We need to get our competitive confidence restored" Jerry Grinstein chief executive, Delta Air lines |
But Delta faces a different challenge than other US carriers that have gone through bankruptcy reorganisation. It is a very large airline, now larger than United domestically, and it is, above all, an old, established and proud carrier that is shaped by its history as a near-ubiquitous presence in the south. Delta, which began flights in June 1929, is long past such emotional or psychological experiences as re-fighting the war between the states, as the Civil War is still referred to in the region, but it is a huge, self-contained community in which memories are fresh. Many workers were around in the 1980s when employees chipped in to pay for a Boeing 767-200 dubbed the "Spirit of Delta".
Local institution
| Transport veteran Delta's chief executive since January 2004, Jerry Grinstein grew up in Seattle, in the far Pacific north-west corner of the USA, a city with a small business community that has long had unusually widespread power through a large part of the nation. After law school at Harvard, he ended up working for Washington's legendarily powerful senator Warren Magnusson. Grinstein sometimes muses that he "wanted to be a Supreme Court justice" until he became fascinated with transportation. He led Salt Lake City-based Western Airlines, arranging the sale of the mega-regional carrier to Delta in 1986-7, when he joined the Delta board. Grinstein then became chief executive and later chairman of the Burlington Northern, now the Burlington Northern Santa Fe Railway, one of the nation's two largest freight haulers. His favourite saying, which he often quotes, is from his wife Lyn, who said to him: "You're 74. You don't HAVE to do this, you know." |
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He brings a unique attribute to the process of change: his age. With other executives, no matter how charismatic, reasoned or persuasive, employees will have at the back of their mind a suspicion that they are just looking to make their mark and move on. Not so with Grinstein, because, as he says: "This is not about padding my resumé or about making money. I've already run companies and established myself and it's not as if I'm looking for a job. That brings a certain element of trust to the process."
The way Grinstein will reshape the airline is most apparent not on a map of the southeast, but on a map of the world. "Ultimately, Delta must be a bigger player in the New York City area," he says, and that will come with its European expansion.
The European expansion relies on the same thinking that has motivated other US carriers into looking across the Atlantic. "We can put fuel surcharges on international, whereas people just won't accept them in the USA, and we face much less low-fare competition," says Grinstein. "It's harder for the low-fare carriers to get the routes or the proper types of aircraft." He adds: "Our operating costs are 25% to 30% lower than those at Lufthansa, Air France or British Airways."
Delta's other advantage is the natural strength of its hub at Atlanta and, when New York is built up, in the northeast. By 2007, Delta will generate 30-35% of its revenues from international flying, compared with 20% now. This plan turns one of Delta's greatest liabilities into an asset - aircraft utilisation. Grinstein concedes the airline was using its fleet in the wrong applications, such as operating 767s in transcontinental services or on other US routes. "It made no sense flying wide-bodied domestically, into Florida. Those planes are natural for international service." They are likely to be joined by 787s that Delta is poised to order, possibly in summer 2007.
By the end of this summer, Delta will have more than 50 daily transatlantic flights, reaching 29 cities in 17 nations, and will be the number one US carrier in transatlantic capacity, departures and destinations. It ties for number two on these three categories into both South and Central America and number three into the Caribbean and Mexico. It will try to gain China rights, which Atlanta business leaders have long identified as the biggest gap in their international coverage. The city's tight-knit business community, intent on overcoming the view of it as a sleepy southern city, campaigns aggressively for more international air service, and never tires of pointing out that Atlanta is home to six of the world's biggest corporations, and is ninth in the world as a business headquarters city, on a par with Munich or Osaka. Among its locally based businesses are the Coca-Cola companies, telecoms giant Bellsouth, Home Depot, the nation's largest DIY retailer, and air cargo giant UPS.
But there are inherent risks to the strategy. Standard & Poor analyst Betsy Snyder cautions: "When the next downturn comes, corporate travel to Europe is the first thing that will be cut." And transatlantic competition is growing, with Continental embarked on a major expansion into Europe from the New York City area, and United and American pushing for US-Europe Open Skies. Grinstein admits that "probably some of the new routes won't work", but is confident overall.
The European expansion has another different dimension - because the name Delta is not as well known in Europe as that of American or United, Delta will rely heavily on its SkyTeam partners for marketing in Europe. "We'll play off their brand a lot with advertising, marketing, billboards, posters and so on," says Grinstein. "We are crucial to Air France for feed and they are to us for flights into eastern Europe and Africa. Occasionally there may be tensions between us but they have a good management team and we are able to work through the issues."
Domestic drive
Grinstein's domestic strategy is a little different from the restructurings of other US carriers, whose usual approach has been to create a low-cost offshoot, as United did with its Ted unit or as Continental did with Continental Lite. Delta, however, has ended its low-cost, low-fares experiment, Song, folding it into the mainline domestic product. Grinstein confesses openly: "I was against Song. It was just the wrong size airplane - a 199-seat Boeing 757. Even if you fill every seat with low fares, it's too large an airplane, but it was a good learning experience."
The Song unit brought a vastly different marketing technique and goals to Delta by seeking to gain the discretionary and impulse travel dollars of a slightly richer, slightly more sophisticated and definitely more feminine clientele. Many of the elements of flair that Song tried, such as music downloads for iPods on board, custom-designed uniforms and menu items from trendy restaurants, will be migrated to the mainline domestic service. This is what Grinstein calls "defunkifying" the airline. Essentially, this means making the airline a little more hip, a little less old-fashioned and staid. Delta is doing the basics, such as installing new seating in domestic economy class, but is also going for trendiness with on-board cocktails such as the Mojita (Grinstein confesses he isn't quite sure what it is, and neither were some cabin crew on recent flights). It has also co-ordinated with designer Henri Bendel on fashion shows and new couture for some of its lead flight attendants.
Grinstein hopes the adaptations from Song will have a "halo effect" of changing the travelling public's perception of domestic mainline Delta. He says: "So much of it is a perception. You know, if you ask people what airline serves the best food, they'll say JetBlue, even though JetBlue only serves snacks. At Song, we learned the power of perception in making us fresh, stylish, clever, upbeat." But Snyder, the S&P analyst, cautions: "It will take a lot more than new uniforms to regain employee morale. After the pay cuts and layoffs, it will be difficult." Other analysts say Delta's hard-fought pilot contract fell short of the kind of savings needed because Delta was assuming US Congress would grant it (and other airlines) enough relief on pension obligations to make up the difference.
However, Grinstein is confident that Delta, now posting slim net and operating profits, will be able to emerge from reorganisation by the summer of 2007, although the continued fuel-price shock may make it more difficult than planned to finance its emergence. None of his plans assumes merger or consolidation, and despite widespread industry speculation, he will only joke about mergers. After taking a private phone call, Grinstein winks broadly and says: "Say, we just bought Northwest. But don't tell anyone - okay?"
By next summer, Grinstein says he will be ready to move on. "I've already stayed two years longer than I had originally thought I would. I'll go when I know for sure that we are coming out of bankruptcy and that we have a clear succession plan in place. We have some strong leaders in the company who will be ready to take over Delta for the long term. I'm just a transitional leader." ■
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