Delta Airlines versus its pilots.

Delta Airlines versus its pilots.

Delta Airlines versus its pilots.

Moneybox
Commentary about business and finance.
June 22 2004 5:20 PM

Delta Dud

When an airline fights its pilots, everyone loses.

Delta plane
Delta: not enough change?

Could Delta Air Lines make money if its planes were flown by volunteers? The third-largest airline's financial condition is so perilous that it's trying to force pilots to halve their wages. Hey, why not go the full monty and cut wages to zero? Or better yet, how about pilotless airplanes? The Air Force has them. Why not Delta Drones?

Delta's 2003 10-K report reveals the extraordinary trouble at the Atlanta-based airline. For three years running, it has racked up major operating losses: $1.6 billion in 2001, $1.3 billion in 2002, and $786 million in 2003. Factor in the company's hefty interest bill ($696 million in 2003) and the picture looks even worse. In the most recent quarter, Delta notched a $388 million operating loss.

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In recent weeks, management has engaged in a public game of chicken with pilots. As Forbes noted, CEO Gerald Grinstein told employees recently that "pilot costs are the largest boulder in the road that must be dealt with," if the airline hopes to stay solvent. Micheline Maynard reported in the New York Times that Delta's pilot costs are "59 percent higher than American's, 62 percent higher than Continental's and 82 percent higher than United's." The gap is even greater when low-cost airlines are thrown into the mix: "Mr. Grinstein said Delta's pilot costs were 133 percent higher than Southwest's, 193 percent higher than JetBlue's and 207 percent higher than AirTran's."

Just how much do Delta's pilots get paid? In 2003, salaries at Delta represented 45 percent of total operating expenses, or $6.3 billion. Delta's 7,170 pilots, only about 10 percent of the company's 70,000 full-time employees, account for more than a  quarter of the wage bill. The company doesn't provide specific numbers on pilot compensation. But according to the Wall Street Journal, "Delta is asking for wage cuts and productivity improvements that would cut about 45 percent of the pilots' compensation and save more than $800 million annually." If so, that would put pilots' total annual compensation at $1.8 billion. Union spokesperson Karen Miller says pilot costs are about 12 percent of Delta's total operating costs, in the range of $1.5 to $1.6 billion. Salaries, based on an hourly rate that rises with the size of the aircraft flown, range from $100,000 to $250,000.

Miller acknowledged that Delta pilots are better-paid than pilots at rival airlines—which is one of the reasons the union has recently agreed to reopen discussions on wage reductions. But she argues that comparisons to Southwest aren't useful. Southwest, which operates on a point-to-point system rather than a hub-and-spoke, flies essentially one aircraft type. Delta flies 11. And, she adds, the company is getting what it's paying for. "Traditionally, the major airlines, because they had the higher salaries, have attracted the cream of the crop. Over 80 percent of Delta's pilots come from military backgrounds where they have eight years of flying experience."

But given the magnitude of the company's losses, even chopping 45 percent off pilot compensation wouldn't turn losses into profits. (In 2001, the company still would have run an operating loss if the pilots worked for nothing.)

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In its 10-K, Delta enumerated the problems it faces—beyond Captain Jones' six-figure salary. Virtually every component of its business plan is broken, and has been for a few years. The airline can do little to control the cost of gas. Its gas bill was $1.94 billion in 2001 and is projected to be $2.22 billion in 2004. There's been a sharp and sustained decrease in the volume of profitable business travelers. Low-cost airlines are increasingly challenging the big hub-and-spoke companies directly. Excess capacity stimulates price wars. And with the rise of the Internet, there's greater transparency in pricing. Delta degraded from one of the most thrifty hub-and-spoke airlines to one of the most profligate.

All these trends have been evident to pretty much every casual traveler for the last several years. But so far Delta's management has failed to take remotely adequate corrective action. Its effort to launch an in-house low-cost airline, Song, is already being scaled back. CEO Grinstein told investors recently that low-fare AirTrain Airways can undersell Delta in direct competition. Really? That's like Barnes & Noble, after years of losses, informing shareholders in 2004 that it was going to get serious about this newfangled means of buying books called Amazon.com.

Other big airlines have managed to force employees to take huge pay and benefits cuts by going bankrupt (United and US Airways) or by threatening to do the same (American). But Delta is poorly positioned to extract major concessions from pilots. It poisoned the atmosphere by approving a round of retention bonuses and other goodies for top managers.

Finally, the notion of hanging your airline's survival on the willingness of its key employees to work for half wages would seem to have some brand implications. American consumers love nothing more than cheap labor—but not in the cockpit.