Delta deals with PR nightmare

Atlanta Journal Constitution ^ | April 6, 2003 | scott leith

[Fixit]

Within a day of the news that Delta Air Lines boosted executive compensation in 2002 -- a year of huge losses and job cuts at the airline -- upper management was taking a public thrashing.

Sen. John McCain (R-Ariz.) called such raises "insulting" at a time airlines were seeking more federal aid. Letter writers teed off in newspapers. Internet bulletin boards sizzled.

The backlash was swift, intense -- and completely predictable, experts say.

Company documents show higher-ups were warned that at least parts of the compensation changes could irk many people. They made them anyway.

Now Delta is stuck with a public relations migraine, following recent disclosures that the ailing airline spent more than $42 million last year on bonuses and pension trust payments for top leaders.

"It will end up being among the textbook examples that people like me use to teach what not to do," said Margaret Duffy, who teaches advertising and public relations at the University of Missouri. She said the problem lies not in bad public relations, however, but in the actions themselves.

Delta's situation is more than academic. The controversy complicates the debate over federal aid for the industry. It also has angered workers, including unionized pilots who are being asked to consider pay cuts.

"This makes absolutely no sense," said Atlanta PR consultant Al Ries. His advice to Delta is to apologize. "It's never too late to say, 'I was wrong,' " he said.

Delta Chief Executive Leo Mullin sought to quell the controversy last week by announcing he will forgo millions in compensation. That includes any 2003 bonus he would have gotten under a new formula adopted last year. It produced 2002 bonuses for 60 executives, despite the company's $1.3 billion loss.

The bonus plan apparently remains in place for other executives, and Mullin keeps his $1.4 million bonus for 2002. Delta has made no move to reconsider a controversial pension trust plan, in which 33 top executives' retirement benefits are being prepaid into special bankruptcy-proof accounts at an initial cost of $25.5 million.

Some image experts see Mullin's gesture as halfhearted. Duffy said Mullin is "really not apologizing."

Tom Slocum, Delta's chief of corporate communications, said the executive pay revisions were developed after the Sept. 11, 2001, terrorist attacks to hold together a good management team.

"We knew we would have to have conversations with our people to explain why these decisions were essential," he said. He said executives and managers now are doing that in employee meetings, "place by place and person by person."

Slocum said public attention was intensified by the timing of the annual regulatory filing in which the bonuses came to light. Its March 25 release, amid a new round of airline cutbacks and debate over federal aid, "heightened the commentary," he said.

Some say Mullin's move last week was a good one. Bob Dilenschneider, founder of a New York PR shop, said the head of a big, troubled company deserves a competitive pay package, but Mullin is smart enough to understand public sentiment. "Should Leo have explained it more fully? That might have been a good thing," he said.

Experts are puzzled over why Delta didn't heed concerns about backlash.

In a January letter to Delta protesting the pension trusts for top executives, some retired executives warned spending millions on such trusts would backfire badly "in a post-Enron environment." The retirees' concerns were dismissed; after the story broke they went public with their letter.

Internal documents also show the company considered perception risks to be "manageable."

Duffy said the decision-making, which included approval of a board of directors committee, was an example of executive "group-think."

"People get very caught up in their own kind of tunnel vision," she said. "It seems entirely sensible to them at the time."

Now they're paying the price, with the Internet fueling the negative buzz.

At TheStreet.com, columnist George Mannes last week bestowed Delta with two of his "five dumbest things on Wall Street." The first was the pay bonuses. The second was for Mullin's pay cut, which Mannes found lacking in sincerity or substance.

Julia Hood, editor of PR Week, said the brouhaha is a cautionary tale.

"We are in a time right now when I don't think any CEO can underestimate the frustration and fear of average Americans."

Staff writer Russell Grantham contributed to this article.

[livius]

Delta sucks. I live in an area served by Delta and USAirways, so in order to go to a bigger international airport, you have to go Atlanta to NY, or Charlotte to NY. I normally buy my tickets through Expedia, and choose the lower price fares, since I'm self-employed and nobody is paying my bills but me.

I fly to NY, the West Coast or Europe a few times a year, and I've been flying Delta regularly, even though changing in Atlanta was miserable because the connecting flight to my city (Gainesville) is almost always either (a) late or (b) cancelled.

Well, a few months ago Delta had the nerve to send me a letter telling me that unless I paid more for my tickets, they were going to "reduce" my Medallion benefits! You have to realize that the "benefits" are practically non-existent anyway, consisting of being able to board earlier and eventually accumulating enough miles for a ticket to someplace or another.

Result of the insulting letter: I went to Spain a couple of weeks ago, and drove to Jacksonville and flew Continental. I'm going to California next month and I wouldn't dream of flying Delta. I'm willing to drive an hour and a half to another city just to avoid Delta.

[philetus]

The bonus plan apparently remains in place for other executives, and Mullin keeps his $1.4 million bonus for 2002. Delta has made no move to reconsider a controversial pension trust plan, in which 33 top executives' retirement benefits are being prepaid into special bankruptcy-proof accounts at an initial cost of $25.5 million.


"F*ck the public, F*ck the shareholders,
We're getting ours.
Bummer about that public relations nightmare." said the Delta executives

[buickmackane]

I live in MA and decided to try flying out of Providence instead of Logan on Southwest. The flights themselves were extremely pleasant and relaxed. I traveled with my 5-year-old and they let us pre-board so we didn't have to fret over their policy of no advance seat selection. My little girl has expressed an interest in becoming a pilot, so the flight attendants let her help them as they went up and down the aisles serving the passengers, and they even gave her have a tour of the cockpit. In the tense post-9/11 atmosphere of air travel, I was astounded at how friendly they were. We will soon be traveling on Delta via Logan, and I highly doubt the experience will be anywhere near as cheerful. It's too bad that neither Manchester nor Providence are really convenient enough for us to make this a regular routine, but I definitely recommend Southwest to anyone who can travel to alternate airports!

[RLJVet]

Southwest operates on an entirely different plan from other airlines in many ways, but I am not smart on what they do enough to discuss it. For one thing, if I am not mistaken, their pilots are non unionized.

[Zetman]

What is Southwest's secret?? They take in more money than they spend!!

There are many reasons why this is true. The "big" airlines, like American and United, have EXTREMELY high-priced union labor contracts that they cannot simply break on a whim. At United, labor is the company's biggest expense (fuel is second, in case you were wondering!!). The "large" airlines have been around for a long time, and hence have entrenched unions with very restrictive work rules. All of this adds up to a lot of money. The big airlines are not allowed to make changes to their labor "situations" as the market dictates. It is difficult for them lay off workers, or farm out work to cheaper sources. This costs a lot of money too.

In addition, the big airlines maintain their own fleets. This means paying their own unionized mechanics (who hold down the highest wages in the industry), running large maintenance facilities, making sure everything is up to FAA standards, and all of the other overhead associated with running an "in-house" maintenance operation. In actuality, it would be cheaper to contract out aircraft maintenance to outside vendors.

Also, as someone mentioned earlier, the big airlines fly several different types of aircraft (737's, 747's, etc...), not just one. It is expensive to fly different types of aircraft. Each fleet requires a different maintenance regiment, and has it's own unique set of engineering and FAA standards. This multiplies the overhead tasks required. The maintenance manual for a single type of airliner can run many of thousands of pages. The people servicing the aircraft have to be certified to work on the type of aircraft they are maintaining. Pilots have to be trained and their certifications maintained for each type of aircraft they fly. A 737 pilot can't fly a 747. If you have a 757 pilot get sick, you have to find another 757 pilot to replace him/her. What this means is that the airline has to keep trained flight crews and service people on-hand for each type of aircraft they fly. These people are frequently not interchangeable, so there is a lot of redundancy of personnel. In addition, union contracts frequently mandate that the airline has to pay to keep all personnel certified and trained to work on the type of aircraft they support.

In addition, the union "work rules" cited above frequently restrict the airlines from closing down facilities that are no longer needed. At United, for example, they would like to shut down their huge maintenance base in Indianapolis, but they cannot due to contract restrictions with their mechanic's union. In addition, United would like to contract out more of it's maintenance, but again the mechanic's contract states that 70% of all of United's maintenance must be performed by United employees. The problem is that it is actually cheaper to "farm out" the maintenance of a given aircraft, and let an outside vendor handle it.

By contrast, Southwest does not suffer from these restrictions. Southwest flies only one type of aircraft: the Boeing 737. For the reasons mentioned above, this makes it much less expensive to maintain their fleet, and keep it in the air. In addition, Southwest does not maintain their own aircraft, they contract out all of their maintenance. As a result, they do not have to pay a lot of mechanics, or keep open huge aircraft maintenance facilities.

The same is true across a lot of Southwest's organization. They do not have expensive union contracts to deal with, at least not to the extent of the larger, older airlines. When these newer discount carriers were started, they learned lessons from their larger and older bretheren - they kept union contracts and union labor to a minimum. They pay much lower wages as a result, and as such are able to make profits more easily, and weather economic storms much easier than the big airlines.

In addition, I have heard that Southwest cuts costs in labor where ever they can. For example, I read once that at Southwest, the flight attendants clean the planes between flights. At the big airlines, unionized airplane cleaners come in and clean the planes between flights. The work rules (there's that term again!!) in the flight attendant's contract at the big airlines would prohibit them from performing such duties. I'm sure that if one took a closer look at the airline industry, one could find countless examples of such differences between the newer discount carriers, and the older mainline carriers.

Does all of this say that the union's greed is mainly at fault for the predicament the big airlines find themselves in?? To a large extent, yes. However, management shares some of the blame too, for allowing labor relations and compensation to deteriorate to such a level to begin with, and for various bad decisions made over the years which cost their airlines a bundle. Being a huge corporation can induce a certain amount of complancency, as well as burocratic bloat.

For years, the big airlines have relied on the high-paying business traveller, paying huge last minute and first class fares, to be their bread and butter. Well, in the current economic climate, and after 9/11, that revenue source has essentially dried up. And the big airlines don't have a "Plan B" to fall back upon. Now everyone in the flying public, including the business traveller, wants to fly economically in coach. This means that the high-paying business traveller's fares are no longer covering up for bad management decisions, over-bloated staffs, and rediculously high union labor contract costs.

So far, the newer discount carriers have avoided falling into this trap. If management maintains good realations with labor, doesn't make too many stupid decisions, and if labor doesn't become greedy and self-serving over the years, they will continue to be successful.

United Airlines, currently in chapter 11, is trying to remake themselves to be more like Southwest, at least partially. They want to create a seperate discount airline within United. It will have seperate management, seperate pay scales, and seperate access to capital markets from the "main" United Airlines. It would be a seperate entity from the main airline. Pay scales at this low-cost carrier would be less, it would fly only a single type of aircraft, and would fly only domestic routes. United wants to convert 30% of it's routes to this carrier. Predictably, the unions are screaming bloody murder over this idea. They don't want to see their current sweet deals stripped away from them. They have a million bogus reasons why the low-cost carrier won't work. However, I think that United's management realizes that it is a new world out there in the airline industry, and they can either adapt, or go the way of Pan Am and Eastern. They are trying to use Chapter 11 to accomplish a re-make of the company. There are many opinions about whether or not they are doing the right thing, or whether or not they are doing enough. Only time will tell.

Sorry, I typed a much longer explanation than I had planned about why Southwest makes money, while the big airlines do not. As you can see, it is a complex problem. That means the solutions are also complex!!!

[Jhoffa_]

I don't like government bailouts to begin with.. But it's ironic to hear the unions shreeking.

I suppose there really is no honor among theives.

[staytrue]

management at both UAL and American have taken pay cuts along with the rest of the workers.

[captnorb]

As well as Jet Blue and Hooters

[Neanderthal]

"On the subject of airlines, what makes SouthWest so exceptional? They seem to be the only U.S. airline that is still profitable and expanding. What is their secret?

I've got to fly to LA on Tuesday from the Bay Area. United wants $350 for a one-way ticket from SFO. Southwest wants $95 one-way from Oakland, fully refundable. You do the math.

[SamAdams76]

Thanks for your detailed post. So I would assume that Southwest would stick with the 737 and eventually migrate over to the "next-generation" version of the same plane? I do not like the older 737s but the newer versions are much improved. Although the 737 I flew out of Manchester a couple weeks ago had more room than I was accustomed to on a 737. I think it was one of the "500" series.

The only thing I didn't like about Southwest was their "cattle car" boarding system. They line you up in three groups ("A", "B", and "C") on a first-come, first-serve basis but an hour before flight time, people were already lined up so that they could get a good seat. I think Southwest ought to assign a numbered boarding pass so that you don't have to line up in this way. So for example, if you are the 32nd person to check-in for that flight, you get boarding pass #32. Then they can board the plane by groups of numbers rather than letters. This will allow everybody to sit down and chill out instead of jostling for position at the gate.

[Tijeras_Slim]

I've flown SW for 12 years now, and have only been delayed once (airport problem, not SW).

The cattle car system is part of the charm, just like the Skymall magazines. :)

[LibertarianInExile]

Amen. I actually LIKE the cattle car system, because SWA's 737's fly with some 3-3 rows so that you can sit flying backwards, facing another row. No one else likes them, but if you're a tall person like I am, you can't hack the tiny space most airlines give you. I love them because with those 3-3's, I can always find a place to sit where I CAN stretch my legs, even if I have to scoot backwards during takeoff.

If they had reserved seats, I guarantee you there would either be 4-foot-tall old women or families in those rows every time, and I'd be eating my knees in a window seat with my neck cricked into the person next to me. And I don't reserve late--I just never manage to get exit rows. If I take other airlines, those rows are inevitably full of midget grammas or three-year-olds with their moms. It's infuriating knowing they'll be swingin' their legs and playing racquetball in the exit aisles but I have to time my breathing to the guy in front of me who's reclined his seat.

I fly SWA every time I have that option. They are a genuinely fun, genuinely friendly, airline. And I have never been unhappy on any of the tens of flights I've taken with them, except with whiny passengers.

[pepsionice]

Having ridden on Southwest a number of times...I can tell you that there are 3 secrets to their success. They fly only into airports that show business profit...otherwise...they don't go there. They would never go into places like Birmingham or Knoxville or Walla Walla. Second, they fire incompetent management. If you go into a job and really start to screw it up...they let you know asap...then after a couple of months to fix your problems...if you can't then adios. And finally...the profitibility of the airline is tied to a lot of their incentives for the employees. The employees actually work to make you happy and make you want to return to the same airline. We could also add that they do a lot of Vegas traffic....and that is a major plus for the airline...but its simply part of their grand scheme of things.

[SamAdams76]

Actually Southwest does fly into Birmingham. I know this because I am about to book a flight there for late May. But I get your point. Southwest appears to avoid routes that are not profitable. For example, they do not use Logan Airport, Kennedy or O'Hare, and instead fly into regional airports in those areas instead where the costs are much lower.

[Zon]

Gosh "kids", where do you suppose Delta got the idea from...

Sen. John McCain (R-Ariz.) John Q. Public Taxpayer called such pay raises for congress "insulting" at a time airlines were congress is seeking more federal aid to raises taxes and government spending.

[SauronOfMordor]

"F*ck the public, F*ck the shareholders, We're getting ours. Bummer about that public relations nightmare." said the Delta executives

The problem with American corporations today is that they are run by management for the benefit of management. Once you make it into the "inner circle" of murual back-watchers, you are set.

[pragmatic_asian]

When Soutwest came close to operating at a loss, the management actually cut their own pay first, unlike Delta. That should tell you the type of corporate culture they have.

[dcwusmc]

I recall one time coming back from a deployment to Germany. Our Marine Air Group was tired, P.O.'d and more than a little unhappy with the Major who had made the travel arrangements. We were scheduled to fly out LATE that day (we arrived at Norfolk EARLY in the day) but Delta bent over backwards to get a couple hundred people on the next flights out to the west coast. Sad that they have gone so far downhill since that time!

[AlexW]

I also had a fondness for Delta, going back to the 50s when it was Delta-C&S, and when they had a big presence in Memphis. For many years they had an outstanding safety record, but thats ancient history.

I used AirTran for a multi-point trip a few years ago. I thought they were quite nice.
The only glitch was for my first flight from Memphis to Atlanta, the plane could not start due to a dead battery, hahaha. They had to wait for a new battery to be flown in from Florida....4 hour delay :(

Memphis is now ruled by NW/KLM, and it has been good for me.
I can take the KLM direct from Memphis to Amsterdam, and never have to see the nightmare airports like NY, Chicago, or Atlanta.

[sphinx]

The big reason is labor relations/unionism. Prior to airline deregulation (one of the handful of things Jimmy Carter got right), the industry was a highly protected cartel. Among the predictable results were high operating and labor costs, as everyone could play gouge the consumer with federal protection. Then came deregulation. While the operating costs could be adjusted over time to meet new market realities, the labor costs were locked into bloated union contracts which the old line carriers have been largely unable to unravel.

A new carrier like Southwest has the luxury of a fresh start. They pay less, which the unions hate, but this is a classic example of market pricing vs. an entrenched union goldbricking system. They also don't have the tradition of crummy labor-management relations that characterize so many old line unionized companies. The only reason a gradually dwindling number of the old line carriers have been able to struggle along to this point is the fact that they control most of the landing slots at the top airports. Airport expansion is difficult in most places and very few new airports have opened in 30 years. Slots are at a premium and, even under deregulation, constitute a significant barrier to entry. That's why Southwest has grown in secondary markets. (Around here, Southwest is a major reason sleepy, out-of-the-way BWI has replaced Reagan National and Dulles as the airport of choice for many of us.)

It's instructive to compare deregulation of the airlines with the railroads and trucking. In rail, the existing rights of way and trackage amount to a quasi-natural monopoly. This creates a barrier to entry which can be exploited by predatory unions, and so the railroad industry continues to stagger under ridiculous labor contracts a generation after deregulation. In trucking, anybody can buy a truck and go into business, which is why deregulation has worked much more smoothly there.

The familiar principle is that unions are fine in a free labor market but chronically abuse their power in non-competitive situations. Any unionized industry that deregulates -- or that faces a new source of competition, e.g. foreign autos and steel after about 1965 -- is in for a rough ride. That's why restraint of trade is the Holy Grail of organized labor.