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Delta Air Lines Outlines Transformation Plan

Delta Air Lines’ top executive
today outlined key elements of the company’s transformation plan intended
to launch “the right airline for the new era” by improving its customers’
traveling experience while simultaneously targeting more than $5 billion
in annual cash savings by 2006. The company is on track to deliver by the
end of this year through its previously announced Profit Improvement
Initiatives (PII) approximately $2.3 billion of the total savings target.
CEO Gerald Grinstein, in remarks to employees, described the top-to-bottom
overhaul as a “comprehensive, 360-degree plan that reinvents Delta.”

The plan calls for over 51 percent of the company’s network to be
restructured by January 31, 2005, resulting in “the largest single-day
schedule transformation in Delta’s history,” along with improvements to
its product and services, network and fleet, and operational efficiencies
and productivity immediately and over the next 36 months, Grinstein said.

In announcing that a simpler, more efficient airline would mean fewer jobs
and reductions in pay and benefits throughout the company, the CEO also
reaffirmed his commitment to providing meaningful opportunities for
employees to share in the company’s future success.

Key initiatives include:—Updating and upgrading customer products and
services, including cabins and online functionality, and maintaining
two-class service in mainline operations;—Redesigning Atlanta’s hub
operation to add more flights for greater customer choice and reliability
while simultaneously reducing congestion;—Dehubbing Delta’s Dallas/Ft.
Worth operation and re-deploying those assets to grow hub operations in
Atlanta, Cincinnati and Salt Lake City;—Adding 31 new nonstop flights
to 19 additional destinations from key focus cities;—Growing Song,
initially by 12 aircraft;—Reducing fleet complexity by retiring at
least four fleet types in four years and increasing overall fleet
utilization and efficiency;—Eliminating 6,000-7,000 jobs over the next
18 months, lowering management overhead costs by 15 percent, and reducing
pay and benefits; and—Creating an Employee Reward Program to include
equity, profit sharing and performance-based incentive payouts.

The company has stated that as a result of the rapid deterioration of its
financial condition due to low yields, high fuel prices, its uncompetitive
labor costs, and its high debt burden, coupled with a possible operational
disruption from anticipated pilot early retirements, bankruptcy is a real
possibility. “We’re working hard and fast to avoid it,” Grinstein said,
“but if the pilot early retirement issue is not resolved before the end of
the month, or if all of the pieces don’t come together in the near term,
we will have to restructure through the courts.”


Grinstein said four strategic cornerstones guided his new leadership
team’s intensive strategic assessment process that produced the
transformation plan. Referred to as Delta’s “ACES,” these key principles
are to Achieve viability, Create a customer-focused culture, Excel in
operational performance and Sustain profitable growth.

“The permanently changed aviation marketplace and Delta’s unsustainable
financial losses confirm that our survival requires a viable cost
structure. At the same time, increasing competition dictates that Delta’s
success depends on customer satisfaction, which in turn requires both
operational excellence and motivated employees,” Grinstein said of the
company’s four-pronged approach.

Achieve Viability

As the result of its PII launched in 2002, the company is “on track” to
deliver a total of $2.3 billion in annual cash savings by the end of this
year, as compared to 2002. Together, the key initiatives announced today,
the requested $1 billion in pilot savings, a significant expansion of PII
and contributions from other stakeholders, such as lessors, lenders and
vendors are intended to deliver the additional savings needed to reach the
2006 goal of more than $5 billion in annual cash savings.

Delta’s expanded PII will include reductions in organizational overhead as
well as employee-related costs, product and network changes, increased
technology and improved operational efficiencies.

Create a Customer-Focused Culture

To create a customer-focused culture, Grinstein said Delta is
“recommitting to its heritage” by listening to its customers and
delivering what they want: simplicity, comfort and style, flexibility and
reliability, and a great experience, all at a great value.

“Our recently announced SimpliFares(TM) in Cincinnati illustrate what we
mean by simplicity,” Grinstein explained. “We’re making our SkyMiles
loyalty program easier to understand and awards simpler to redeem,
especially through, and continuing to find new ways to provide
passenger-friendly, self-service technologies. We are going to take the
fine print out of the way we do business to make it easier for customers
to do business with us,” he declared.

As part of these technology improvements, Delta will increase by 15 the
number of cities with kiosk check-in capabilities, and expand its services
offered through the website. The company plans to introduce
capabilities to allow customers to find lower fares and obtain refunds and
reissues online. Delta’s goal is to migrate 50 percent of its customer
transactions to

In addition to maintaining two classes of service, upgraded and updated
cabins, with features such as leather seats with more comfort and better
lighting, will be phased in over the next 18 months to offer more inviting
interiors. The first MD-88 with the new interiors will begin flying by the
middle of this month.

“Importantly, we’ve built in cost savings to help pay for these
improvements,” he noted.

Greater flexibility for the customer will be accomplished by offering more
flights and better schedules. “To get our customers where they want to go,
when they want to go, we will aggressively compete in our key hubs and
cities and invest and grow where there is the greatest demand,” Grinstein

“It’s all about customizing our network and fleet to meet the customers’
different needs,” he added. The Delta Solution provides customers the
benefits of strengthened hubs and focus cities and increased
point-to-point flying, in part, by:

—Redesigning Delta’s primary hub at Atlanta’s Hartsfield-Jackson
International Airport to add more flights than any airline has ever flown
from any one city, while at the same time reducing congestion;—Growing
Cincinnati and Salt Lake by re-deploying aircraft currently used at
Dallas/Ft. Worth; and—Adding 31 new nonstop flights to 19 additional
destinations from its focus cities of Boston; New York-JFK; Columbus,
Ohio; and Ft. Lauderdale, Orlando and Tampa, Florida.

“Difficult decisions had to be made,” the CEO added when explaining that
in order to afford the expansion and pursuit of new opportunities, the
company needed to dehub its Dallas/Ft. Worth operation and discontinue all
service to Amarillo and Lubbock, Texas. “A commanding market presence is
critical,” Grinstein asserted, “and we didn’t have it in Dallas.” The
dehubbing of Dallas/Ft. Worth will help the company retain and build a
strong, competitive pattern of service in Atlanta, Cincinnati and Salt
Lake City.

Delta anticipates that it will record accounting charges in connection
with the decision to dehub Dallas/Ft. Worth, the amount and timing of
which have not been finalized.

Other strategic network changes central to the company’s larger
transformation include growing Song initially by adding 12 aircraft to its
current fleet of 36 beginning in the late Spring of 2005, increasing
seasonal domestic service, capitalizing on alliance partnerships and
expanding international destinations. In addition, Delta plans to simplify
its fleet by retiring at least four fleet types in four years, while
increasing aircraft utilization through more efficient hub scheduling.

Excel at Operational Performance

“Giving customers a great experience also means excelling at operational
performance,” Grinstein emphasized. The planned continuous, “un-banked”
hub in Atlanta is unique in its design. It will create a constant flow of
arrivals and departures that will increase capacity while reducing
congestion because of the efficiencies built into the system.

By eliminating the peaks and valleys and decreasing the amount of time it
takes to turn an aircraft, the company said it would able to add 81
flights daily and seven new destinations, while decreasing hourly
departures and arrivals by approximately 20 per hour. “This is great for
the customer because it means less of a wait in a less-crowded airport,”
the CEO said.

Grinstein noted that to deliver the essentials of a customer’s great
travel experience - including clean aircraft, friendly service, on-time
performance and reliable baggage handling - will require flawless
execution and greater productivity from every member of the Delta team.
“We’ll be doing more with less,” he said.

Plans were also unveiled to keep flight crews together throughout the day
in an effort to help the airline and its crews be more efficient.

Sustain Profitable Growth

“All of these improvements and changes add up to a great value for our
customers,” Grinstein said. “By investing only in what our customers
value, streamlining our operation, and fixing our cost structure we will
be able to take it to the competition and win. Our goal is to become an
efficient and respected competitor and to be in a position to grow

In another in its series of moves to promote profitable growth, the
company today announced its intent to file for new U.S.-China service in
order to expand its global network.

Profit sharing planned in the face of additional job losses, pay cuts and
benefit reductions

The CEO emphasized that the changes necessary for viability will add
customer value and contribute to Delta’s survival and any future success.
“Regrettably, the changes also will impact Delta people,” he said.
“Achieving our goals will require enormous change. To take it to the
competition, we will have to work harder and more efficiently for less,
but if we work together, we should win together. That is why Delta is
adamant that its employees have the opportunity to share in any success
their contributions help make possible.”

The further restructuring of Delta’s employment costs is a “necessary but
painful” part of the company’s long-term viability and growth equation,
Grinstein said. The airline’s employment costs continue to be higher than
those of network and low cost carriers.

Delta has called for approximately $1 billion in annual savings from its
pilots, and the company and the pilots’ union continue to meet in an
effort to find mutually acceptable solutions. In addition, the company
today announced further employee- and management-based cost saving

“Our people want and deserve the facts as we know them, no matter how
difficult, so there’s no sense sugar-coating the situation,” Grinstein
said before providing employees with the available details of the
reductions, which included:

—a reduction of between 6,000-7,000 jobs over the course of the next 18
months;—a 15 percent reduction in administrative overhead costs,
including management reductions;—reductions in compensation throughout
the company, to be announced by the end of September and implemented at a
later date; and—increased employee contributions to health care costs.

Delta anticipates that it will record accounting charges in connection
with the employee job reductions, the amount and timing of which have not
been finalized.

In noting the top-to-bottom reductions, the CEO restated his commitment to
the principles that the sacrifices necessary for Delta’s recovery must be
mutually shared, and that employees will benefit from any recovery.

Delta is set to unveil the employee reward program when it is finalized
later in the year, which will include a combination of equity, profit
sharing and incentive payouts tied to company performance.

“From the outset, our plan was to achieve long-term viability by pursuing
a ‘Delta Solution’ unique to us to carve out new territory in the aviation
marketplace, and to ‘do it once and do it right.’ In doing so, we’re
trying to create the right airline for the new era,” Grinstein said.
“Given the severity of our financial situation, there are no guarantees
for success and there is no time to waste, but with this plan and the
commitment of Delta people, who are second to none, I am realistically
hopeful about Delta’s future.”