I heard the points from this speech this morning, and found it on AJC right now.
Prepared remarks by Delta CEO Gerald Grinstein
Published on: 09/08/04
The Delta Solution: The Right Airline of the New Era / Remarks by Jerry Grinstein - CEO / September 8, 2004
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*****As prepared, not necessarily as delivered*****
Good morning, everyone; thank you for joining us.
As you know, we're here to talk about Delta's future. While I believe the story we have to tell is a good one, be forewarned. I cannot promise that my remarks this morning will live up to certain expectations – especially not those expressed in a recent Atlanta business publication.
In reference to the speech I am now giving, the article notes that, quote, "Everyone is watching and waiting to see what Grinstein's review says. I don't think Atlanta has held its breath like this since the Civil War started."
Atlanta and the Civil War. Think "Gone with the Wind." Think Clark Gable. Then look at me. And you probably will agree that comparison leaves a considerable gap.
That said, let me return to our topic.
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The Case for Change
This year, Delta celebrates its 75th anniversary. The strategic plan that we will review today lays the foundation for our airline to continue serving customers for the next 75 years. These steps are essential if we are to succeed in a marketplace that has undergone swift, massive, and permanent change.
The causes for the changes are many, from the events of 9/11 and the aftermath to on-line shopping and transparent pricing. As the impact of these and other factors accumulated, the industry reached a tipping point. The radical new marketplace became entrenched, and the old rules no longer applied. In this new environment, low-cost carriers are expanding quickly and Delta's yields are falling, even as our load factors reach record levels.
Delta realized early on that, as an old Chinese proverb states: "Unless we change our direction, we are likely to end up where we are headed."
Delta is not only changing direction, we're transforming our company. Our vision is for a newly structured, customer-focused Delta Air Lines, with a cost structure that allows us to be viable and compete aggressively wherever we choose to fly.
Our Guidelines
Earlier this year, Delta initiated a top-to-bottom strategic reassessment of our resources, assets, and tools. Except for any issue affecting safety, which forms the bedrock of all that we do, virtually every aspect of our company's structure and operation was fair game.
We did, however, establish a couple of guidelines.
First, we would create a "Delta Solution." Our airline has strengths that can be leveraged to benefit customers and provide unique competitive advantages. Avoiding the narrow definitions of either "legacy airline" or a "low-cost carrier," we mapped Delta's resources, assets, and tools against the marketplace to create a plan for the right airline for this new era.
Our second guideline was to develop a plan that allowed Delta to "do it once and do it right." The result is a comprehensive 360-degree strategy that retools Delta on a scale no airline has previously attempted. Our goal is to avoid the lost time, additional costs, and protracted confusion that occurs when the first effort is not sufficient.
The permanently changed 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.
Consequently, Delta's plans for achieving a viable cost structure are based on an understanding of what our customers value – and what they don't. To fund important customer improvements, we have built in reduced costs through simplification, efficiency, and the elimination of those things passengers do not value .
And two final notes: First, our plan is not static; it will instead evolve with developments in customers' preferences and the marketplace. Secondly, as you may know, our company has stated previously that, given the rapid deterioration of its financial condition due to low yields, our uncompetitive labor costs, high fuel prices, and debt burden, and other issues such as possible operational disruptions from anticipated pilot early retirements, bankruptcy is a possibility.
If the pilot early retirement issue is not resolved before the end of the month, or if all the pieces don't come together in the near term, we will be required to restructure through the courts.
The Delta Solution
Based on this foundation, Delta plans to launch the right airline for the new era by targeting more than $5 billion in annual cash savings by 2006, as compared to 2002, while simultaneously improving our customers' travel experience.
As part of our transformation, we will restructure 51 percent of our network by January 31, 2005, resulting in the largest single-day schedule transformation in Delta's history – the Big Bang.
Delta will also make significant improvements to our product and services, network, and fleet, as well as gains in operational efficiencies and productivity. The results of these efforts will be seen immediately and over the next 36 months.
And, in the face of additional sacrifices which Delta people will be required to share, we will also initiate a profit sharing program so that any success their efforts create will also be shared.
Achieve Viability
First and foremost, Delta must achieve viability. As our airline is structured today, we cannot compete effectively or succeed long term in the current marketplace.
Viability means more than temporary profitability when times are good. Delta's model requires our cost structure to be sufficiently below our revenue so that we can generate significant free cash flow when economic times are good and minimize financial damage when times are bad.
How will we do that? As noted, we've targeted annual cash savings in excess of $5 billion by the end of 2006, as compared to 2002 – and we've already made some headway in whittling down those numbers.
Since the launch of our Profit Improvement Initiatives, or PII, in 2002, Delta is on track to deliver $2.3 billion in total savings by the end of 2004. Taken altogether, the key initiatives announced today, the requested $1 billion in pilot savings, a significant expansion of the PII program, 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 management and overhead costs as well as employee-related costs, product and network changes, increased technology, and improved operational performance. I'll discuss some of the related initiatives in more detail shortly.
Create a Customer-Focused Culture
To deliver a customer-focused culture, Delta's second ace, we'll need to change our state of mind so that we always start by looking at things from the customers' point of view.
Our airline is recommitting to its heritage as we listen to what customers tell us they value, then deliver. Among their stated preferences are simplicity, comfort and style, flexibility, a great experience, and a great value.
So Delta is making it simple:
Our recently announced Simplifares in Cincinnati illustrate what we mean by simplicity, with an easy, affordable fare structure that removes complexity and increases customer value.
Initial customer response indicates we have succeeded. Since was launched, Cincinnati bookings have increased by 63 percent. And bookings through delta.com, our most efficient distribution channel, have grown by an even more amazing 113 percent.
We're making our SkyMiles loyalty program easier to understand and award seats simpler to redeem – especially through delta.com, our least expensive distribution channel.
And, we will continue to find new ways to provide passenger-friendly, self-service technology. Delta is expanding its customer-friendly airport model, which provides kiosk check-in and automated rebooking, to 15 stations – in addition to the current 81 – by the end of the year.
In short, we are planning to take the fine print out of the way we do business to make it easier for customers to do business with us.
To deliver the comfort and style customers value, we'll continue to provide two-class service in mainline operations but with a total renovation of the on-board experience.
In coach, we're installing new leather seats and for more comfort and legroom. In first class, we're initially recovering first class seats, to be followed later with new seats designed for additional comfort. Prototypes of both coach and first class seats are on display in the lobby, so please stop by.
Both cabins will be upgraded and updated with contemporary color schemes and whiter, brighter lighting, to offer a more inviting cabin. The seat lights.... LED ..The first MD-88 with the renewed interiors will begin flying by the middle of this month. In addition, newly designed uniforms by Richard Tyler are already designed and moving into the next phases of production.
The customer-focused changes we're making have additional benefits, too. Leather seats are more attractive and easier to maintain; LED lighting is appealing and costs less over time; and new uniforms are higher quality and less expensive to produce.
Because customers value the flexibility of more flights and better schedules, Delta intends to be a market leader in our hubs and focus cities.
To get our customers where they want to go, when they want to go, we will aggressively compete in our hubs and key cities and invest and grow where demand is greatest.
It's all about customizing our network and fleet to meet the customers' different needs. The Delta Solution provides customers with the benefits of strengthened hubs and focus cities, and increasing point-to-point flying.
In support of these network goals, we will restructure our primary hub at Atlanta's Hartsfield-Jackson Airport to create a constant, steady flow of flight arrivals and departures. The changes will increase capacity and allow Delta to operate more flights than any airline has ever flown from any one city.
As part of Delta's commitment to market leadership, we will grow our Salt Lake City and Cincinnati hubs. We'll also add 31 nonstop flights to 19 new destinations from our focus cities, including Boston; New York-JFK; Columbus, Ohio; Ft. Lauderdale; Orlando and Tampa.
We'll expand Song, initially with the addition of 12 aircraft, and also increase international service and domestic seasonal service, and capitalize on our alliance partnerships.
Delta also is simplifying its fleet with the retirement of at least four fleet types over the next four years and increasing aircraft utilization through more efficient hub scheduling.
Strategic network changes like these are central to our company's larger transformation plan, but they require significant resources. At a time when assets are seriously limited, unprofitable operations must give way to opportunities with higher potential for growth and revenue.
Consequently, Delta will discontinue its hub operation at Dallas/Ft. Worth International Airport and eliminate service to Amarillo and Lubbock, Texas, effective January 31, 2005.
This was a necessary but nonetheless difficult decision. Despite restructuring efforts launched in 2003 and the best possible efforts on everyone's part, Delta's operation at DFW has remained unprofitable.
A commanding market presence is crucial, and we didn't have that at Dallas/Ft. Worth. The dehubbing of DFW along with other actions support Delta's strategic objective of retaining and building a stronger competitive pattern of service at Atlanta, Cincinnati and Salt Lake City.
Excel at Operational Performance
In addition to simplicity, comfort and style, and flexibility, passengers also want a great travel experience.
Giving customers a great travel experience that runs smoothly and efficiently from beginning to end requires us to excel at operational performance, the third Delta ACE.
The planned continuous, "unbanked' structure in Atlanta is a good example of this. Unique in its design because it is truly continuous and not a series of smaller "banks", it will create a continuous flow of arrivals and departures that increases capacity while reducing congestion. Customers benefit, with less of a wait in a less-crowded airport.
Delivering the essentials of a great customer experience – including a safe, clean aircraft, friendly service, on-time performance, and reliable baggage service – require flawless execution and greater productivity from every member of the Delta team, each one a great professional. We'll be doing more with less, but we'll also make changes that improve efficiency and remove complexity, such as keeping flight crews together throughout the day.
All these improvements and changes add up to great value for our customers. By investing only in the things customers value, streamlining our operation, and getting our cost structure in order, Delta is working towards its goal of becoming an efficient, respected competitor positioned to grow profitably.
Finally, the fourth of the ACES is to Sustain Profitable Growth
Sustained profitable growth is more than a goal; its accomplishment is how we will know that Delta has succeeded. Our airline must grow if we are to accomplish what we have set out to do, which is move this airline from a state of uncertain survival to a level of prosperity and security.
Sustained profitable growth is essential to our company and all stakeholders, including customers, employees, shareholders and the communities we serve.
In another of its series of moves to promote profitable growth and expand its global network, the company today announced its intent to file for new U.S. – China service.
We can only pursue such growth once we have restored certain basics, such as an appropriate cost structure, significantly reduced debt, and reasonable access to capital – and these are issues that Delta's plan, built on the foundation of the four ACES, addresses.
We'll have to work together to win together.
The changes necessary for viability will add customer value and contribute to our company's survival and any future success. Regrettably, they also will impact Delta people.
One of the necessary but painful areas our company must address is employment costs.
Delta's employment costs continue to rank above those of both legacy and low-cost airlines, making further restructuring a necessity.
Delta has requested approximately $1 billion in savings from the pilots to bring our pilot costs in line with the competition. The company and ALPA continue to meet in an effort to find mutually acceptable solutions – but time is running out.
Other employee- and management -based cuts will be required to achieve Delta's transformation as well. While full details are not yet available, I believe Delta people want to know the facts as they are now, so I'm not going to sugar-coat them.
There will be:
—A reduction of between 6,000 and 7,000 jobs over the course of the next 18 months;
—An additional 15 percent reduction in administrative overhead costs, including further management headcount reductions;
—Reductions in compensation throughout the company;
—And an additional increase in shared healthcare benefit costs.
A basic principle in this process to which I am fully committed is that the sacrifices necessary for Delta's recovery will be mutually and fairly shared, and that employees will benefit from any recovery.
Achieving our goals will require enormous change. At a time when Delta people are already putting forth enormous effort, we are all being called upon to work harder and more efficiently for less. That is why Delta is adamant that everyone has the opportunity to share in any success their contributions help make possible.
Details about Delta's employee reward program, which will include a combination of equity, profit sharing and incentive payouts tied to company performance have not yet been finalized, but we expect to have them later this year.
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 working to create the right airline for the new era, through actions that include:
—Updating and upgrading customer products and services, including cabins and online functionality, and maintaining two-class service;
—Re-designing Atlanta's hub operation to add flights for greater customer choice and reliability while simultaneously reducing congestion;
—Discontinuing Delta's Dallas/Ft. Worth hub operation and re-deploying those assets to grow hub operations in Atlanta, Cincinnati and Salt Lake City;
—Adding 31 new nonstop flights and 19 additional destinations from key focus cities;
—Growing Song initially by 12 aircraft;
—Reducing fleet complexity by 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. (of course as soon as they pull a profit, the can yank it away from the non-contract employees)
In this dynamic, intensely competitive industry, Delta's comprehensive plan will remain flexible and open to change so that our company is always able to adapt and work toward the right goals.
Also, because the plan is comprehensive, its execution will require the coordinated, unflagging best efforts of a team that will never, never, never give up.
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.
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I'm not one to bang a drum for unions, infact I don't like them at all, but this is one situation that I'd actually like to see a written contract gone over by a lawyer working for the employee's
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