Date: June 7, 2004
To: All Delta Employees
From: Jerry Grinstein, Chief Executive Officer
Subject: Building Delta's Future Together
Since becoming CEO last January, I've had the opportunity to meet
personally with many of you. My visits over these past few months to
stations around our systemATL, CVG, DCA, DFW, JFK, LAX, LGA, SLC, and
othershave been a powerful reminder of the quality and dedication of Delta
people. It's easy to see what has enabled Delta to become one of the
world's great airlines, and great companies, over the past 75 years.
As you would expect, one of the principal topics of conversation in these
meetings has been what we need to do to remain a great company. Delta is at
a crossroads, and where we go from here will have a tremendous impact not
just on the company as a whole, but on the jobs and lives of every member of
the Delta family. But time is growing short and the damage is continuing.
The longer we wait, the more problematic and questionable our recovery
becomes.
I am writing to you today to address three specific issues: (1) The
fundamental, permanent and accelerating changes that are affecting our
industry, (2) What Delta must do to become a viable and successful company
in this rapidly evolving environment, and (3) What you can do to make a
difference.
A rapidly changing industry
Our industry has changed dramatically in recent yearsand continues to do
so. Many of the factors driving that change are permanent and structural.
One factor was, of course, 9/11, which caused many people to seek
alternatives to air travel. Others include the rise of Web shopping
channels, which has intensified price and cost competition, and the huge
increase in jet fuel prices over the past year.
But, the biggest threat to our profitabilityand survivalis the rapid
growth of the low-cost carriers, or LCCs. They (including the many that
have failed) have been a part of the aviation landscape since the industry
was deregulated in 1978. What is different today is that, unlike many
flash-in-the-pan LCCs that came and went in the eighties and nineties,
several of today's LCCs are well-capitalized, well-run, and very good at
taking business away from the legacy airlines based not just on price, but
on service, reliability, and perceived valueall the ways in which Delta and
other major carriers have historically differentiated themselves from their
LCC rivals.
Most important, today's LCCs have much lower cost structures, which allow
them to earn profits even as they offer highly competitive fares. Delta's
concentration of service along the Atlantic Seaboard and our reliance on
connecting traffic makes us particularly vulnerable to LCC growth. Almost
70% of our domestic revenues are currently exposed to LCC competition and,
as recently demonstrated by Southwest's entry into Philadelphia, that number
is certain to increase. Because we have sustained such heavy losses over
the past four years, we have had to go further into debt to cover them. The
company has a debt of $20.6 billion. This is a perilous situation; we no
longer have a financial cushion to offset losses going forward.
What Delta must do to become a viable company
What we are now experiencing is not just part of the traditional cycle of
ups and downs in the airline business. We are now in a new era, with new
cost structures and passenger expectations. Any notion that we can simply
grow ourselves out of this predicament is mistaken. It ignores the reality
of the marketplace. Many of our costs are higher than those of our
competitors and our customers will not pay us to cover the difference. We
must recognize this change and act quickly to address it.
We need to reinvent ourselves. We need to redefine our business model so
that it reflects today's, and tomorrow's, competitive environment. We need
to make sure we have the right strategy, cost structure, network, equipment
and organization. Delta's Board and senior management team have been
addressing this challenge in a number of ways, including the Profit
Improvement Initiatives (PII), which have already produced significant
results. Delta people throughout our organization have made many sacrifices
and contributed greatly to the success of these initiatives. In 2003 alone,
Delta achieved savings of $1.2 billion through the PII. A significant
amount of this total was achieved through staffing, productivity and benefit
changes among Delta's non-contract employees.
Earlier this year we initiated a comprehensive review to determine the
strategic, operational and financial steps we need to compete more
effectively and position Delta for long-term viability and success. We
expect to report some of our initial findings from that ongoing review later
this summer and will continue to update you on our progress.
We know there has been speculation in the media and elsewhere that Delta
may be heading for a Chapter 11 filing. Many companies have used the
Chapter 11 process to help them reduce their costs and strengthen their
balance sheets. Delta's Board and management team are working hard to
achieve a competitive cost structure and long-term viability without seeking
Chapter 11 protection.
But the outcome of these efforts is not fully within our control. Market
conditions, competitive forces, and our ability to achieve a realistic pilot
cost structure will each play a critical role. Because of our cost
disadvantage versus the LCCs, even an improving economy, better marketing,
lower fuel costs, further non-pilot productivity improvements, or any
combination of these factors won't be enough to achieve long-term viability
unless we eliminate what has become a huge disparity between our pilot costs
and those of our competitorslegacy airline and LCC alike.
Despite the sacrifices already made by many in the Delta family, including
the reduction of more than 16,000 jobs over the past three years, changes in
benefits and in other areasour unit costs are now, along with those of US
Airways, by far the highest in the industry. While we are aggressively
exploring every possible opportunity to make, and save, money, the biggest
factor in our current financial situation is no secret. Virtually every
major airline, in or out of bankruptcy, has made dramatic modifications to
the historical pay structure of its pilotsexcept Delta. As a result, based
on pilot costs per block hour, Delta's pilot costs are 59% higher than
American's, 62% higher than Continental's, 82% higher than United's, 133%
higher than Southwest's, 193% higher than JetBlue's, and 207% higher than
AirTran's. These numbers do not yet reflect the latest 4.5 percent pay
raise Delta pilots received beginning May 1, 2004.
Our pilots have been key players on the Delta team for many years, and
their contributions are appreciated. But in today's airline industry
environment, marked by increasingly intense competition and (at best)
razor-thin profit margins, we simply can't afford to pay pilotsor any
employee group, for that matterat non-competitive levels. We will continue
to urge ALPA to accept a modified labor agreement for our pilots that, while
still competitive, reflects the new economic and industry environment.
It has been a year since Delta put its proposal on the table. Responses
from ALPA to our requests for relief have fallen far short of what is needed
to allow Delta to achieve a sustainable future. Unfortunately, Delta's
situation has become far worse in the year since we first presented our
proposal, and that must now be reflected in our discussions with ALPA. The
company's new proposal cannot be a bargaining position from which to
negotiate down. It will represent the minimum savings amount that Delta
must obtain from the pilots, however painful, if this company, and their
jobs, are to survive.
ALPA understands how serious this situation has become. In the more than
a year since we first talked with the union about needing to significantly
reduce pilot costs, we have opened our books to ALPA and its advisors. Our
objective has been to have a completely open process with detailed
information available to all.
The urgency of our situation is clear. No matter what our business plan
looks like, there can be no doubt that pilot costs are the largest boulder
in the road that must be dealt with if we are to have a chance to address
our other challenges.
To: All Delta Employees
From: Jerry Grinstein, Chief Executive Officer
Subject: Building Delta's Future Together
Since becoming CEO last January, I've had the opportunity to meet
personally with many of you. My visits over these past few months to
stations around our systemATL, CVG, DCA, DFW, JFK, LAX, LGA, SLC, and
othershave been a powerful reminder of the quality and dedication of Delta
people. It's easy to see what has enabled Delta to become one of the
world's great airlines, and great companies, over the past 75 years.
As you would expect, one of the principal topics of conversation in these
meetings has been what we need to do to remain a great company. Delta is at
a crossroads, and where we go from here will have a tremendous impact not
just on the company as a whole, but on the jobs and lives of every member of
the Delta family. But time is growing short and the damage is continuing.
The longer we wait, the more problematic and questionable our recovery
becomes.
I am writing to you today to address three specific issues: (1) The
fundamental, permanent and accelerating changes that are affecting our
industry, (2) What Delta must do to become a viable and successful company
in this rapidly evolving environment, and (3) What you can do to make a
difference.
A rapidly changing industry
Our industry has changed dramatically in recent yearsand continues to do
so. Many of the factors driving that change are permanent and structural.
One factor was, of course, 9/11, which caused many people to seek
alternatives to air travel. Others include the rise of Web shopping
channels, which has intensified price and cost competition, and the huge
increase in jet fuel prices over the past year.
But, the biggest threat to our profitabilityand survivalis the rapid
growth of the low-cost carriers, or LCCs. They (including the many that
have failed) have been a part of the aviation landscape since the industry
was deregulated in 1978. What is different today is that, unlike many
flash-in-the-pan LCCs that came and went in the eighties and nineties,
several of today's LCCs are well-capitalized, well-run, and very good at
taking business away from the legacy airlines based not just on price, but
on service, reliability, and perceived valueall the ways in which Delta and
other major carriers have historically differentiated themselves from their
LCC rivals.
Most important, today's LCCs have much lower cost structures, which allow
them to earn profits even as they offer highly competitive fares. Delta's
concentration of service along the Atlantic Seaboard and our reliance on
connecting traffic makes us particularly vulnerable to LCC growth. Almost
70% of our domestic revenues are currently exposed to LCC competition and,
as recently demonstrated by Southwest's entry into Philadelphia, that number
is certain to increase. Because we have sustained such heavy losses over
the past four years, we have had to go further into debt to cover them. The
company has a debt of $20.6 billion. This is a perilous situation; we no
longer have a financial cushion to offset losses going forward.
What Delta must do to become a viable company
What we are now experiencing is not just part of the traditional cycle of
ups and downs in the airline business. We are now in a new era, with new
cost structures and passenger expectations. Any notion that we can simply
grow ourselves out of this predicament is mistaken. It ignores the reality
of the marketplace. Many of our costs are higher than those of our
competitors and our customers will not pay us to cover the difference. We
must recognize this change and act quickly to address it.
We need to reinvent ourselves. We need to redefine our business model so
that it reflects today's, and tomorrow's, competitive environment. We need
to make sure we have the right strategy, cost structure, network, equipment
and organization. Delta's Board and senior management team have been
addressing this challenge in a number of ways, including the Profit
Improvement Initiatives (PII), which have already produced significant
results. Delta people throughout our organization have made many sacrifices
and contributed greatly to the success of these initiatives. In 2003 alone,
Delta achieved savings of $1.2 billion through the PII. A significant
amount of this total was achieved through staffing, productivity and benefit
changes among Delta's non-contract employees.
Earlier this year we initiated a comprehensive review to determine the
strategic, operational and financial steps we need to compete more
effectively and position Delta for long-term viability and success. We
expect to report some of our initial findings from that ongoing review later
this summer and will continue to update you on our progress.
We know there has been speculation in the media and elsewhere that Delta
may be heading for a Chapter 11 filing. Many companies have used the
Chapter 11 process to help them reduce their costs and strengthen their
balance sheets. Delta's Board and management team are working hard to
achieve a competitive cost structure and long-term viability without seeking
Chapter 11 protection.
But the outcome of these efforts is not fully within our control. Market
conditions, competitive forces, and our ability to achieve a realistic pilot
cost structure will each play a critical role. Because of our cost
disadvantage versus the LCCs, even an improving economy, better marketing,
lower fuel costs, further non-pilot productivity improvements, or any
combination of these factors won't be enough to achieve long-term viability
unless we eliminate what has become a huge disparity between our pilot costs
and those of our competitorslegacy airline and LCC alike.
Despite the sacrifices already made by many in the Delta family, including
the reduction of more than 16,000 jobs over the past three years, changes in
benefits and in other areasour unit costs are now, along with those of US
Airways, by far the highest in the industry. While we are aggressively
exploring every possible opportunity to make, and save, money, the biggest
factor in our current financial situation is no secret. Virtually every
major airline, in or out of bankruptcy, has made dramatic modifications to
the historical pay structure of its pilotsexcept Delta. As a result, based
on pilot costs per block hour, Delta's pilot costs are 59% higher than
American's, 62% higher than Continental's, 82% higher than United's, 133%
higher than Southwest's, 193% higher than JetBlue's, and 207% higher than
AirTran's. These numbers do not yet reflect the latest 4.5 percent pay
raise Delta pilots received beginning May 1, 2004.
Our pilots have been key players on the Delta team for many years, and
their contributions are appreciated. But in today's airline industry
environment, marked by increasingly intense competition and (at best)
razor-thin profit margins, we simply can't afford to pay pilotsor any
employee group, for that matterat non-competitive levels. We will continue
to urge ALPA to accept a modified labor agreement for our pilots that, while
still competitive, reflects the new economic and industry environment.
It has been a year since Delta put its proposal on the table. Responses
from ALPA to our requests for relief have fallen far short of what is needed
to allow Delta to achieve a sustainable future. Unfortunately, Delta's
situation has become far worse in the year since we first presented our
proposal, and that must now be reflected in our discussions with ALPA. The
company's new proposal cannot be a bargaining position from which to
negotiate down. It will represent the minimum savings amount that Delta
must obtain from the pilots, however painful, if this company, and their
jobs, are to survive.
ALPA understands how serious this situation has become. In the more than
a year since we first talked with the union about needing to significantly
reduce pilot costs, we have opened our books to ALPA and its advisors. Our
objective has been to have a completely open process with detailed
information available to all.
The urgency of our situation is clear. No matter what our business plan
looks like, there can be no doubt that pilot costs are the largest boulder
in the road that must be dealt with if we are to have a chance to address
our other challenges.
What you can do to make a difference
Although pilot costs are the single most important element in achieving a
competitive cost structure, those changes alone will not completely address
our cost issues. As we calculate what it will take to make Delta a viable
competitor, other significant cost savings and structural changes must be
put into place.
All of us, at every level of the organization, will have to look for
additional and better ways to increase efficiency and productivity. At the
same time, of course, we must continue to focus on providing safe, reliable
operations and delivering outstanding service to our customers. These are
the qualities that will keep customers flying with us and help us win new
ones.
Although it won't be easy and it will require great sacrifice, I believe
thatif we work together, and do what we need to do nowwe can deal
successfully with our challenges and position Delta to compete for the
long-term.
Thank you for working so hard and well for Delta.
Jerry Grinstein
Although pilot costs are the single most important element in achieving a
competitive cost structure, those changes alone will not completely address
our cost issues. As we calculate what it will take to make Delta a viable
competitor, other significant cost savings and structural changes must be
put into place.
All of us, at every level of the organization, will have to look for
additional and better ways to increase efficiency and productivity. At the
same time, of course, we must continue to focus on providing safe, reliable
operations and delivering outstanding service to our customers. These are
the qualities that will keep customers flying with us and help us win new
ones.
Although it won't be easy and it will require great sacrifice, I believe
thatif we work together, and do what we need to do nowwe can deal
successfully with our challenges and position Delta to compete for the
long-term.
Thank you for working so hard and well for Delta.
Jerry Grinstein