Delta Becomes More Worldly in Chapter 11

One year after filing for bankruptcy protection, Delta Air Lines is a smaller, more worldly airline.

A year ago Thursday, the Atlanta-based carrier filed for Chapter 11 bankruptcy protection, where it remains today. Over that period, Delta has trimmed costs by eliminating jobs, cutting pay, reducing flying capacity and shedding pensions. It's also shifted more of its flying to potentially more lucrative international routes.

"International growth represents the future profitability of this company," says Delta route network chief Glen Hauenstein.

The changes made in bankruptcy keep Delta on schedule to exit bankruptcy next summer, Delta says.

Today, international routes account for one-third of Delta's flying capacity and 35% of its revenue. A year ago, the airline directed just 26% of its capacity to international flights. Just 20% of revenue came from international flying.

Delta's goal going into bankruptcy was to make international flights the source of 40% of revenue, and Hauenstein says he expects the carrier eventually to exceed that.

As of September, Delta's total flying capacity, as measured by the number of miles it flies each of its available seats, is down 7% from a year ago, according to a USA TODAY analysis of schedule data from Back Aviation Solutions.

With the heavily domestic route network and a high cost structure the airline had going into bankruptcy protection, Delta was vulnerable to low-fare discounters such as Southwest Airlines, JetBlue and, especially, AirTran Airways, which competes head-to-head with Delta in Atlanta.

Topping British Airways

Delta, the USA's No. 3 carrier, needed to shrink its exposure to the discount rivals and expand outside the USA, where it faces little low-fare competition.

Delta is now the world's leading airline between the USA and Europe in terms of number of flights, eclipsing British Airways. Delta has announced or launched 50 new routes to Europe, the Caribbean, Latin America and elsewhere.

Delta also has been ramping up its presence in New York, the world's biggest air market. Delta now considers New York's John F. Kennedy International Airport a domestic hub, joining Atlanta, Cincinnati and Salt Lake City. It launches about 170 flights a day from JFK, many of which go overseas.

While in Chapter 11, Delta spent months locked in battle with its pilots union over pay rates and pension benefits. The airline insisted on big pay cuts on top of $1 billion a year in concessions that pilots had given a year before Delta filed Chapter 11.

Just as the union was threatening a crippling strike in April, the company and the union struck a deal allowing Delta to cut pay.

The airline also negotiated termination of the pilots' underfunded pension plan in exchange for a $650 million note to compensate pilots for lost pension benefits.

Delta recently reported a second-quarter profit, excluding bankruptcy charges. It was its first in five years.

But on Aug. 27, a Delta flight from Lexington, Ky., crashed. The plane, operated by Delta regional carrier Comair, crashed and exploded after the pilots took off from the wrong runway. The crash killed 49, including all the passengers. One crew member survived.

The crash isn't expected to slow Delta's exit from bankruptcy, but it could affect Erlanger, Ky.-based Comair, a wholly owned Delta subsidiary.

Delta is seeking significant cost cuts at all its regional partners -- including Comair -- even as Comair is grappling with the crash fallout. Delta is threatening to give some of Comair's flying to other carriers if they can do it more cheaply.

Some who criticized Delta's slow start on reorganizing in Chapter 11 are now more upbeat. "They have learned from their mistakes," says Wall Street analyst Ray Neidl of Calyon Securities. He says Delta has a "good shot" at exiting bankruptcy on time in mid-2007.

Washington, D.C.-based airline consultant Mo Garfinkle praises Hauenstein and Delta's international growth.

"It was well-timed and smart," says Garfinkle, who has advised Delta in the past.

Delta is still weak in the Pacific. It has only one flight to Japan: Atlanta to Tokyo.

Delta this year failed to convince the U.S. Department of Transportation that it deserves authority to fly to China but hopes to win that right in 2008.