Bringing Delta home

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RICHARD PINKHAM ATLANTA

Delta hired industry novice Leo Mullin as chief executive in mid-1997. His focus on customer service and employee relations has the carrier soaring once more

By all accounts, Leo Mullin arrived at Delta Air Lines as an outsider. More East Coast banker than airline boss, he had not worked in the industry until being invited to take up the top job at Delta in late 1997. At the time he was vice chairman at the Unicom electricity corporation in Chicago and boasted extensive experience in electric power, banking, and even rail freight, but not aviation. Yet Mullin has found himself at home at the Atlanta-based airline, as becomes immediately clear on walking into his spacious suite of offices near Hartsfield Airport. Throughout are models representing Delta's early years, such as the Douglas DC-7 and Lockheed Electra. This as much as anything typifies Mullin's tenure at the airline: a demonstrated respect for Delta traditions, especially those of putting its customers and employees first. This respect is not limited to his office decor, either. It has coloured everything he has done at the carrier, from labour relations to alliance strategy.

When Mullin went to Delta, it was in desperate shape. Although the company recently had returned to profitability after years of heavy losses, the manner in which Ron Allen, Mullin's home-grown predecessor, had engineered the revival - the Leadership 7.5 programme - exacted a heavy toll. In an attempt to reverse Delta's financial woes, which had been caused by industry-wide malaise in the early 1990s and an inability to absorb the European routes it had purchased from Pan Am, Allen focused his sights on the carrier's costs.

Leadership 7.5 was so-named because it represented an attempt to bring Delta's seat-mile cost to the level maintained by low-fare paragon Southwest Airlines. Although costs fell to a majors-leading 8.8ó per seat mile (5.5ó per seat kilometre), the penalty to the carrier in terms of employee morale and customer perception was incalculable, as long-time staff were laid-off and - often dirty - aircraft seldom arrived on time. The situation culminated when the Delta board chose not to extend Allen's contract.

First steps

Into this situation walked the Boston-bred Mullin. What his first moves would be was a matter for much speculation in Atlanta. As it turns out, the former investment banker, management consultant and holder of a Harvard MBA went to Delta with an immediate goal that few would have guessed. Rather than make the numbers his first priority, Mullin concentrated on returning the company to its accustomed spot of top-flight airline by concentrating on customer service and employee re-engagement. For Atlantans, who still bitterly recall Yankee General Sherman burning their city to the ground during the Civil War, he must represent an unlikely saviour.

Mullin, who remarks that "7.5 is a name that will live in infamy here," remembers the situation on his arrival. "Delta had historically been perhaps the most service-oriented airline. Having been a road warrior myself, I travelled on all the airlines in the world. Whenever I could, I travelled on Delta, because it had the best service. That was certainly not true in 1997." Then, the company ranked last in on-time performance and near the bottom of the heap in terms of lost bags and passenger complaints.

He cites as an example the fact that Delta spent practically nothing on the refurbishment of the interior of its aircraft during the 7.5 period. This meant, he says, that the flight attendants "were always apologising for the appearance of the airplanes from the moment the customer walked through the door." Within six weeks of Mullin's start-up, he ordered the overhaul of every aircraft's interior. Although the move added almost $125 million in unbudgeted costs, Mullin describes it as "a real boon to the company." Among other benefits, he says the flight attendants "could get around to true customer service."

Delta's workforce had once been among the most dedicated in the country, so much so that it famously bought the company one of its first Boeing 767s. But by 1997 it was largely alienated from management. Mullin believed that a lot of the damage done to employee morale came from workers having little confidence in Delta's direction and a universal feeling of shame at what was being done to their company. Therefore, he felt it was important to illustrate to them that theirs was an airline that was going places. "The restoration of employee morale started with fostering a sense that the company has a winning strategy and a winning future."

Top pay for top performance

Mullin, who makes a point of greeting employees whenever walking through the airport, realised that moves like this, while important, could only go so far. Knowing that the fabric of the one-time "Delta family" had been badly torn by the lay-offs and pay-cuts, he saw that it was also vital that "employees share in the gains." In addition to mandating pay hikes for all non-union employees, he instituted a policy of "top pay for top performance". It is with justifiable pride that he cites the fact that over the past two years Delta has been the only hub-and-spoke carrier in the top three of the US Department of Transportation's performance indices measuring on-time performance, baggage handling and customer complaints. As a result of these achievements, he says, the company is "paying all categories of employees at the top of the line."

Such goals at first seem out of character for a former hard-nosed investment banker. But the thoughtful Mullin - who at his first press conference with Delta quoted General Electric head Jack Welch's mantra that the three most important things in measuring the worth of a business are customer satisfaction, employee satisfaction and cash flow - saw that fixing the people situation was the key to fixing Delta. He recognised that if he could solve the fundamental problems that plagued the carrier when he arrived, the financials would follow. The results thus far would seem to bear this out. For example, Delta's seat-mile revenue, at 10.5ó, is near the top of the industry and is well up from when he first landed in Atlanta. This growth hints that customers with a choice - and, more importantly, customers for whom price is not the first consideration - are choosing the new Delta.

Equally important is Delta's 9.6ó seat-mile costs, also among the industry's best. Seemingly at odds with "top pay for top performance", this fact arises in large part because no segment of the company's workforce, save for the pilots, is unionised. This status - which seemed certain to change during the final hours of the Allen regime - allows the carrier to achieve productivity levels that would be impossible with organised labour.

However, not all is harmonious on the labour front. Relations are strained with Delta's pilots, who feel they made major concessions in 1996 to help the carrier get over its financial troubles, and now are demanding a new, industry leading contract. To make their seriousness known, most pilots have not requested overtime assignments, upon which the company depends to complete its schedule. As a result, Delta had to cancel approximately 5% of its flights in the fall (although the company won a recent Federal Court decision to force the pilots to accept the typical level of overtime). While thought unlikely, it is conceivable the pilots could go on strike the first week of April.

For his part, Mullin says labour relations in the airline industry are always difficult and he recognises that "appetites got whetted" by United Airlines' record-breaking flight deck contract, acceded to in large part to obtain pilot sign-off of the US Airways purchase. Although it must be tempting, he says he does not blame United for raising the bar for all carriers. "They were in a merger discussion and did what they had to do. That's just the way it is. Delta's situation is Delta's and I don't blame United for that."

And while what he perceives as a concerted job action by the pilots rankles him, Mullin maintains that Delta's commitment to top pay for top performance means the carrier is "prepared to match the pay scale of United before we're through." In October, the company proposed an eight-year deal that would bring flight deck compensation slightly over United's, but would link future raises to company profitability and earnings - something which would be an industry first. The negotiations have gone back and forth and, while Mullin characterises communications between the two sides as "rhetoric and posturing," he adds, "that is usual for the negotiation process." He says a conclusion is months away, but that he believes the end result will be a mutually beneficial contract.

In addition to taking care of the people side of the business, Mullin recognised that Delta's overall strategic vision needed revamping. For years, the carrier's planning team had a reputation as one of the least outward-looking in the industry, seemingly content to rely on the power of its Atlanta hub to keep the company profitable. This manifested itself in everything from alliance building to responding to market share challenges. When Mullin came in, he established a new strategy to position Delta for future growth and defend itself from competition.

The programme called for four specific actions: to retrench in its core markets along the East Coast and in Transatlantic flying from New York; to extend its customer service goals to its regional affiliates; to expand in a meaningful way into Latin America and the Caribbean; and to reshape its alliance picture.

Progress has been made on all these objectives. "If you look at Delta, there's no question that strategically we've put all that together and we have a very good strategic future," he says. For instance, Delta has staked a claim to be the leading carrier at Boston and LaGuardia, introducing new flights, facilities and regional affiliates in both cities. From its international gateway at Kennedy, the carrier has enhanced its overall and international service levels, increasing the number of foreign destinations served, from 16 in 1997 to 24 today.

Delta has also confounded industry analysts who said Atlanta's local market was too small to challenge the dominance of American Airlines' Miami hub in Latin American/Caribbean flying. Capitalising on Hartsfield's geographic positioning and continuous feed, as well as the introduction into the fleet of the more appropriately sized (154 seats) Boeing 737-800, Delta's service to 23 Latin/Caribbean destination has become profitable sooner than most thought possible.

Delta took the strategic lead in the regional carrier market by purchasing important affiliates Comair and Atlantic Southeast Airlines and signing a deal with Atlantic Coast Airlines to provide regional services at LaGuardia (although the latter has started slowly owing to a slot moratorium at the airport). More importantly, Delta has used the relatively lax scope clause in its pilot contract to introduce massive numbers of regional jets. This move provides most regional passengers with desired jet service and gives Delta a competitive leg up in small- and medium-sized communities throughout the country.

Alliances is another strategic area in which Delta had under-performed. While United and American inked deals with keystone partners Lufthansa and British Airways, Delta signed up smaller carriers, often with few logical synergies. Global Excellence, its first alliance attempt, was a low-key effort featuring, at different times, Singapore Airlines, Swissair, Virgin Atlantic, Sabena, and Austrian Airlines. Predictably, given its incompatible route networks - Delta never flew to Singapore - and the small local markets of its partners, the grouping produced lacklustre results. When Singapore defected to the Star Alliance, Global Excellence became an even weaker Atlantic Excellence before ultimately dying altogether.

The SkyTeam cometh

Under Mullin, Delta seized its chance to enter the alliance picture in earnest when a new bilateral air service agreement with France was signed in 1998. Delta, which already had a loose agreement in place with Air France, persuaded the French flag carrier out of its concurrent tie-up with Continental Airlines to form the foundation of SkyTeam. Since then, the two have added Aeromexico, Korean Airlines and have tabbed CSA Czech Airlines for membership. Mullin is pleased with SkyTeam's results thus far, especially with how cooperation with Air France has evolved.

The former state-run basket case has in recent years become a leading carrier in Europe, both from a performance and financial perspective. Also, its Paris hub is rapidly becoming the region's best, with superior facilities and considerable room to grow. Mullin, who happily acknowledges the fortune of having a home at Charles de Gaulle, is quick to tout Air France's renaissance and Delta's role therein. "I repeatedly read that Air France's increasingly outstanding financial performance, which is recognised as unique compared to its competitors in Europe, is something the carrier attributes a very substantial component of to its SkyTeam association and in particular its association with Delta." SkyTeam also has been beneficial to Delta. Mullin points out that around $500 million of its $16 billion in revenue flows directly from alliance operations.

He does concede that SkyTeam still has much to do, especially in terms of coverage (it is essentially limited to the North Atlantic), but he is certain that further progress is coming. "We need a partner in Southeast Asia," he says, adding that SkyTeam is talking with carriers there, South America and Europe and that several new partners are anticipated "before too long."

Mullin is steadfast, however, that quality passenger service must be the first priority and ambitions of size must not interfere with this mission. "We don't have to have a lot of members. We have five and my best estimate of the optimal number would be eight to 10. I think the complexity of operations that comes with an alliance operation is that you have to marry your systems to theirs and understand their policies. It's hard enough to do that when you have a bilateral relationship, but when you start multiplying that by three, or four, or five, there's an exponential increase in the complexity."

So although Mullin concedes that Star is the best alliance right now, his plan to catch them is not tied in with adding members galore, but in continuing the emphasis on serving the customer. "I'm not sure that having 15 or 16 members, as Star has, [is the best strategy]. I have a suspicion that you can go too far in adding new companies, that the complexities begin to outweigh the benefits." So how does SkyTeam plan to catch Star? "By being the best. Our goal is to make it a lot easier for people to go from anywhere to everywhere and make sure the experience on SkyTeam is better than on anyone else." While admitting that Star has more aircraft, more carriers and more destinations, he says these are not the variables SkyTeam will pursue. "We want to be the best for 90-95% of the travellers who really do take advantage of alliance activity."

On the domestic front, Delta is preparing to face challenges arising from new competitive realities in its core East Coast region, where United and American are trying to make a renewed push for supremacy. The two have bought parts of East Coast stalwart US Airways, and American also put in a bid to purchase Trans World Airways. With American and United now awaiting Justice Department vetting of their new acquisitions, the industry views Delta as the player with the most to lose if approval is granted.

Consolidating worries

Delta would be hurt more than most because its network would most come under attack from the bulked-up giants and also because it would go from being only a few national market share points behind both to a much more distant third. An otherwise likely player in consolidation, Delta could well find itself left out in the cold, as Continental is off the market until Northwest -whose shareholdings allow it to veto any sale of the Houston-based carrier - decides to let it go. Northwest itself is viewed as an imperfect fit with Delta, especially as regards workforces and fleets.

Given his company's position, it is perhaps surprising that Mullin does not think American and United's deals should be struck down immediately because of competition issues. "I'm a firm believer that mergers and acquisitions have been a very powerful tool in the United States," he says. "And the ease with which these transactions have been done in this country is one of its major strengths. That ought to apply to airlines as it does any other industry; I don't buy that there's anything so unique about airlines that says the US needs six major hub-and-spoke carriers and Southwest Airlines."

Furthermore, Mullin believes it is appropriate for US Airways and TWA to seek out partners to extricate themselves from their problems and also for United and American to try to construct whatever deal they could with their "troubled partners" in a way that improves their competitive situation. That said, he believes the Department of Justice (DoJ) must scrutinise the deals closely. Specifically, he states: "The DoJ will need to make a determination as to whether things can be done to remedy the anti-competitive aspects of this ... if remedies are not possible, you don't do the deal." He also insists that if the American and United deals go through, the DoJ must keep the playing field level by not closing the door on future merger activity.

On the issue of Delta's targets in a consolidated environment, Mullin is less forthcoming, saying only that Delta is always talking with other carriers, looking to improve its competitive situation. One thing seems certain, however: no matter what choice Mullin makes, the head of Delta will not sacrifice quality and attention to customer service to achieve his goals.

Leo F Mullin

In addition to heading Delta, Leo Mullin is the current chairman of the International Air Transport Association, a board member of the Air Transport Association, serves on the boards of BellSouth Corporation and Johnson & Johnson, and is a member of the President's Export Council.

He has a degree in engineering and applied physics from Harvard College, an MA in applied mathematics from Harvard Graduate School of Arts and Sciences and an MBA from the Harvard Business School.

1973-1976 Partner in Washington DC office of management consultantancy McKinsey & Company

1976-1981 Senior vice-president for strategic planning at Consolidated Rail Corporation in Philadelphia

1981-1995 Served in several key management positions at First Chicago, the USA's 10th largest commercial bank

1993-1995 President and chief operating officer of First Chicago

1995-1997 Vice-chairman of Unicom Corporation and its chief subsidiary, Commonwealth Edison

August 1997 Appointed chairman and chief executive of Delta Air Lines

Mullin lives with his wife, Leah and their two children.