Thursday, June 5, 2003

Delta focus: Labor costs

By James Pilcher
The Cincinnati Enquirer

Delta Air Lines Wednesday announced for the first time particulars behind its effort to cut $2.5 billion in costs by 2005, with "reviewing employee costs" contributing the most out of 15 different initiatives.

But Delta's senior vice president for finance and chief financial officer, Michelle Burns, said the $300 million in anticipated savings from employee costs does not include any more cuts in head count. Nor does it include any anticipated pay cuts to existing employees, she said.

She also said the labor figure does not include a 22 percent salary reduction that the company has proposed to its pilot union.

"We are in the process of a transformational change to create a new breed of airline," Burns said in an interview. "We're looking at changing the process and the way that we deliver our product and how we deliver that product and the kinds of product we deliver."

Delta operates its second-largest hub at the Cincinnati/Northern Kentucky International Airport, where it employs just over 4,000 workers. The nation's No. 3 carrier wants to lower its annual costs by 15 percent by the end of 2005. The cost cuts over the three years will total $2.5 billion.

That reduction would reduce the cost of flying one passenger one mile by 15 percent, a figure that last quarter stood at 11.11 cents.

Delta lost $466 million last quarter and has lost more than $2 billion in two years. The company has cut 16,000 jobs since Sept. 11, 2001, with many of those coming through voluntary reductions. The airline is in the process of 4,000 layoffs but has not said how many local jobs are being lost.

Burns said much of the employee cost saving has already been realized through new benefit programs, including the streamlining of its pension plan, as well as a review of contracted services.

But one Wall Street analyst said Delta needed at least $1.5 billion in savings from labor alone to really get costs in line.

"That would make them competitive with what American has done and Northwest wants to do," said Ray Neidl, analyst with Blaylock & Partners LP, who would not comment on the rest of Delta's plan. "And that will start with the pilots. After they get that, they can go to the non-labor groups and put the pressure on them."

Other areas that are being targeted for what Burns called "streamlining" include maintenance, which could contribute $250 million in savings; $175 million from improving its partnerships with other domestic and international airlines such as Air France, Northwest and Continental; and even $160 million from "enhancing airport self-service." That redesign of airport lobbies, such as Cincinnati's, to get customers to rely more on self-service kiosks, has begun, as has the maintenance program.

In addition, the company hopes to save $80 million by pulling new customers away from traditional low-cost carriers with its new Song airline, as well as $100 million from its Delta Connection Inc. subsidiary, which includes Erlanger-based regional carrier Comair. And the company said it hopes to realize an undetermined amount through shortening the length of time between when planes arrive and when they leave gates.


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