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After navigating the airline through bankruptcy, its CFO talks about his new boss and the future of air travel.
Lori Calabro, CFO Magazine
November 1, 2007
Delta Air Lines has encountered its fair share of turbulence this year. The nation's third-largest carrier not only spent the first quarter of 2007 in Chapter 11, it also had to thwart a $9.5 billion hostile-takeover bid from US Airways Group Inc. and convince creditors and shareholders that its new international business model is viable. For CFO Edward Bastian, who oversaw the bankruptcy process, the best reward must have been the impressive profits the airline racked up after emerging on April 30. The rub, however, was that the board opted to name Richard Anderson, the former CEO of Northwest Airlines, to the top spot, instead of Bastian, who was named president in late August. But, as the 50-year-old Bastian recently told CFO, "This is not a business for the faint of heart."
You've just been through some turmoil in the management ranks at Delta. How distracting was the protracted CEO search?
It's impossible not to be a little distracted at a time like that, but with the benefit of the strong business plan with which Delta emerged from Chapter 11 protection, the company continued to execute its sound business strategy. We have a very strong management team leading this company, and I am glad we have retained the significant majority of that team through this process.
For the first six months of this year, Delta recorded net income of $1.64 billion compared with a loss of $4.28 billion during the same period last year. What made the difference?
We are rebalancing our network. [Previously,] Delta was really a domestic carrier with an international business. We're now an international business. And that move into the international market doesn't mean just traditional transatlantic routes. It means going into India direct, going into Dubai, going into Africa, going into economies that are growing at a double-digit pace with metal that we already ownÂÂ . We're also pulling the big widebodies out of the U.S. and sending them internationally, where they're more profitable. And we're downsizing — or right sizing, depending on your perspective — domestic aircraft.
When you look back at the whole bankruptcy process, what lessons did you learn?
This is a process that can overtake you with the number of creditors, lawyers, and advisers, and when you're trying to run a business and also manage all these constituencies it can become very distracting. So first, make certain that you've got a strong plan going in, not just a strong plan going out. Second, attack the business model. While our focus was primarily on securing the financial foundation of the company during bankruptcy, we also reinvested the savings in tools like airports and ground equipment. As we told our creditors and our employees, at the end of the day it's the customers, not a bankruptcy judge, who will decide whether this airline is successful. Finally, you have to have open and honest communication with everyone. I can't tell you how many sessions — we called them velvet-rope sessions — we held in which we took our employees, a couple hundred at a time, behind the scenes to look at where the business is going.
What effect did US Airways's hostile bid have on your efforts?
We had worked darn hard for well over a year to fix the business. Then, it was as if you were on the football field and you got the ball down to the five-yard line and someone runs in from the bench saying, "Here, hand me the ball, I can take it from here!" And you say, "No, no, we're going to finish this play ourselves." It was personal because we had put so much of our heart and soul into saving the place, but in hindsight it was a real blessing because it got everybody on the same page.
One of the most interesting aspects of the bid was that you never showed US Airways your financials. How did you get away with that?
The deal was a nonstarter right out of the box. [Had we been] willing to even enter into due diligence it [would have been] an explicit implication that we thought that the deal had some possibility of going forwardÂÂ . Of course, we had to convince the creditors not to force us to open the books. We made the case that by staying the course and giving the company the ability to get out of bankruptcy on an expedited basis, [the creditors] were going to get a much better return and get real currency in their hands [as opposed to] the promise of a deal that we believed could never get done.
Once Delta and Northwest emerged from bankruptcy this year, it was the first time in five years that no one big airline was in Chapter 11. How does that change the industry dynamics?
It allows the industry to hopefully settle down and provide a more stable outlook for customers and employees. Chapter 11 is a very onerous, very challenging environment because of all the volatility and the great fear of the unknown. This industry provides enough of that on its own. So when you layer in the volatility on top of it, it really [creates] a pretty dysfunctional environment. I would hope, going forward, that the industry now has the ability to manage its affairs.
Still, so many analysts say that there does need to be consolidation. Do you agree?
You want to make certain that any deals you do are the right deals, meaning that they are deals employees gain from, customers gain from, communities gain from, not just Wall Street. And if we can structure the right deal with the constituents truly winning together — not the U.S. Air deal, which was predicated on take-aways, that employees were going to lose their jobs, that customers were going to lose service, that communities were going to lose a tremendous amount of critical airline serviceÂÂ I do think consolidation can play an important role in helping the industry manage the cycle.
There are still plenty of obstacles to growing this business. What are the biggest ones?
The price of fuel is a big one. There is the constant impact of geopolitical forces. As a deregulated industry, we are still heavily taxed and regulated. Getting the airspace fixed is another obstacle; the current airspace is still working on 1950s technology.
What about airport congestion?
Airlines can act responsibly by doing things like making changes to schedules and equipping aircraft with next-generation technology. But Congress must address the very real need for air-traffic-control modernization that is fairly funded and does not unduly burden commercial air travel customers, who are currently paying more than their fair share and subsidizing business jets that use the same airspace.
The White House recently made some recommendations concerning congestion that included curbing flights at the busiest airports. Do you agree with the proposals?
We're glad the Department of Transportation and Federal Aviation Administration are starting a process to address the national airspace capacity shortfall and develop a plan with the industry to reduce congestion. We applaud these efforts and agree that action is needed to prevent a repeat of last summer's unacceptable delays and passenger inconvenience.
Delta recently announced its plan for continuing to meet growing customer demand at JFK while addressing delays — an effort that complements our ongoing work with the Federal Aviation Administration and the Port Authority of New York and New Jersey to reduce aviation congestion.
Since you are moving into a new role, Delta will obviously need a new CFO. What are the top three things you are looking for in a successor?
Keys for me in the new CFO, in addition to the obvious technical qualifications, will be an individual of the highest character, who is able to quickly integrate and have impact within a strong leadership team while working in a very dynamic — and sometimes volatile — environment. I am also looking for someone who is competitive. We are in a tough industry and we fight hard to win our customers' loyalty.
Obviously, every new CEO wants to put his or her mark on a company. What is your best argument in favor of proceeding with the restructuring and growth plan that was developed during the bankruptcy process?
Delta's new business plan is producing positive financial results. That's all the proof we need.