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Delta Air Lines COO Shares Lessons in Leading a Turnaround

Delta Air Lines Chief Operating Officer Jim Whitehurst (HBS ’94) spoke to over 60 MBA and AMP students on March 28th at Spangler Auditorium to discuss his view on the airline industry and Delta’s rapid turnaround from bankruptcy. The event was sponsored by the Hospitality & Travel Industry Club.

Citing conclusions of recent research in which the airline industry was the only sector to have under-performed the S&P 500 in every type of economic cycle, Whitehurst nevertheless characterized it as among the most fun, exciting and dynamic of all industries.

Whitehurst, who is on the shortlist to become CEO once Delta emerges from the “fastest major bankruptcy in airline history” on April 30th, outlined several key distinctions between Delta’s journey through Chapter 11 and that of UAL, the parent company of United Airlines. Speaking on the day before RCs were scheduled to tackle UAL’s bankruptcy challenges in FIN2, Whitehurst asserted that some of the problems that prolonged United’s bankruptcy were rooted in poor leadership.

He pointed to UAL CEO Glenn Tilton’s $33 million incentive pay package for guiding United out of bankruptcy, a process that required drastic cuts in the compensation of United’s rank-and-file. While wages and benefits were also reduced at Delta, Whitehurst affirmed that Delta’s current CEO, Gerald Grinstein, would not earn a penny in cash or shares when the carrier emerges from bankruptcy. Following the principle that “Generals eat last,” Delta’s executives will earn incentive compensation only after achieving future milestones and rewarding employees first.

Whitehurst, 38, a former BCG consultant who joined Delta as Assistant Treasurer shortly after 9/11, pointed to other leadership initiatives that have helped Delta achieve its turnaround. He said that he is currently is traveling around the globe, visiting all 45,000 employees worldwide in order to communicate openly and honestly about Delta’s state of affairs.

The significance of “signaling” was another leadership lesson Whitehurst emphasized. Delta, despite being in Chapter 11, has been spending an incremental $25 million per year to keep its planes the cleanest in the industry. Not only does he believe that this has been a positive signal to customers, but also he asserts that it has kept flight crews happier and healthier. It is an idea that has paid for itself just in the reduction of flight attendant sick time. He also mentioned chic new flight attendant uniforms, the installation of live TV in the cabins, fresh organic food options, as well as a new “carbon neutral flying” initiative as being additional signals to employees and customers that Delta intends to thrive as a safe, clean, and reliable airline for the long-term.

Stressing that “basic product quality matters a lot,” Whitehurst said that Delta has focused on improving customer service, on-time performance and dependable baggage delivery-all areas in which Delta has vaulted to positions of industry leadership. Moreover, he mentioned several operational decisions that have helped the company regain its financial footing. Noting that Delta already had the lowest cost per available seat of all major U.S. carriers when it entered bankruptcy, Whitehurst stated that what they really had was “a revenue problem.” This led the company to re-assign its pricey wide-body aircraft from its domestic network to higher revenue-yielding long-haul international routes.

Rather than remaining stagnant in the face of adversity, Delta has decided to face its distress head-on by opening 70 new international routes in the last 15 months. The airline will soon take delivery of new Boeing 777-200LRs, the world’s longest-range commercial aircraft, which will be deployed in the Middle East, Africa and Asia. Delta has identified huge opportunities in connecting the U.S. to overlooked markets in Africa and India in particular (place your bets on JFK-Bangalore!).

Another key strategic move that differentiated Delta’s strategy from United’s was related to each carrier’s dual-branded “airline within an airline.” The idea behind United’s “Ted” and Delta’s “Song” was that on certain leisure routes in which legacy carriers had to compete with low-cost airlines such as Southwest and JetBlue, it made sense to operate an efficient, low-cost subsidiary in place of the traditional mainline carrier. Although there were some modest unit cost benefits to Song, Delta concluded that they were losing too many of its high-yield elite frequent flyers who had previously chosen to fly its mainline for its full-service and premium cabins.

One member of the audience questioned Whitehurst on the rationale for its opposition to US Airways’ hostile takeover attempt, which officially died earlier this year. While not opposed to industry consolidation in general, he emphasized the extent of substantial network overlap that would have resulted from such a marriage. With essentially overlapping hubs in Atlanta and Charlotte, along with Salt Lake City and Phoenix/Las Vegas, and a heavy combined concentration in New York, Delta management felt that such a merger would have resulted in a substantial reduction in both capacity and in the number of employees. This, in turn, would have allowed an opening for newer, low-cost carriers to back-fill capacity and permanently take away market share. Although Whitehurst declared that there was no need for six hub-and-spoke carriers in the U.S., Delta saw this particular proposal as one that would have caused a very negative “mini-9/11” type impact on its business.

Many in the audience were surprised that Whitehurst, being so young, was able to reach the top echelons of the world’s third-largest airline so quickly. In response to one student’s inquiry, he suggested that, in planning one’s career, it is sometimes wise to look for opportunities at fundamentally sound companies that are operating in cyclically depressed industries. Having been promoted to COO just six weeks prior to Delta’s anticipated bankruptcy filing, Whitehurst advised that the best time to join and climb the ladder of a great company sometimes may be when everyone else is running for the hills. He now takes pride when entering Delta airplanes to be received with a hero’s welcome by pilots and flight attendants alike who give him credit for helping to save one of aviation’s most respected and storied franchises.

April 10, 2007
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