Keeping the Commitment Model in the Air during Turbulent Times: Employee Involvement at Delta Air Lines

Keeping the Commitment Model in the Air during Turbulent Times: Employee Involvement at Delta Air Lines BRUCE E. KAUFMAN* This study provides a four-decade review and analysis of the commitment model of employment relations at Delta Air Lines and the role played in it by employercreated structures of employee involvement (EI) and voice. The company has undergone wrenching changes, including deregulation, 9/11, bankruptcy, mergers, and entrance of numerous low-cost competitors. This study chronicles the resulting ups and downs in the company’s fortunes and its efforts to maintain a positive win–win relationship with its employees despite the burden of management missteps, tens of thousands of layoffs, repeated pay and benefit cuts, and merger with conflict-embittered Northwest Airlines. The fact the company survives today and still has a discernible “spirit of Delta” among employees is not solely or perhaps even principally due to its advanced EI program; on the other hand, without it the company would probably no longer exist.

Introduction THIS STUDY EXAMINES THE EMPLOYEE INVOLVEMENT (EI) PROGRAM AT DELTA AIR Lines and the role it played in the company’s struggle over the last four decades to preserve its long-established but wounded commitment model of employment relations amidst the unprecedented turbulence of deregulation, 9/11, bankruptcy, and merger with conflict-ridden Northwest Airlines. Although the details differ, it is a saga in broad outline of the competitive gauntlet many other “high road” American companies have had to pass as they seek to preserve their productive core workforce and legacy of positive

* The author’s affiliation is Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA, USA. He is also affiliated with the Centre for Work Organization and Wellbeing and Department of Human Resource Management and Employment Relations at Griffith University, Brisbane, Australia; and Work and Employment Research Unit, Business School, University of Hertfordshire, Hatfield, UK. The author expresses appreciation to the members of the Delta Board Council and, in particular, Billy Morey, for making this study possible. E-mail: [email protected]. INDUSTRIAL RELATIONS, Vol. 52, No. S1 (January 2013). © 2012 Regents of the University of California Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford, OX4 2DQ, UK.

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344 / BRUCE E. KAUFMAN employee relations and at the same time react to survival pressures in a deregulated and globalized environment by dismantling long-standing internal labor markets, instituting substantial layoffs and wage/benefit cuts, and demanding “more for less” from the rank-and-file while executives often get lucrative salaries and stock options. The paper has something for nearly everyone. Persons with specialized interest in employee voice and involvement will find description of what is quite possibly the most extensive and formalized EI system in the United States, particularly with regard to indirect forms of participation such as councils and forums. Similarly, people interested in strategic management will find an interesting case study of how one company sought to adapt and preserve its long-time source of competitive advantage even as ongoing market developments threatened its viability and sustainability. For people interested in labor relations and unions, the Delta case well illustrates how industry deregulation has brought on a three-decade ratcheting down of wages and conditions that corrodes employees’ faith and identification with the company and drives a growing number to seek union representation for protection against what seems to be a never-ending race to the bottom.1 People interested in theory will find food for thought as the Delta case suggests important strands of the conventional wisdom regarding the much-discussed “commitment” and “high-performance” employment systems are flawed. Finally, on the historical side, the Delta case brings forward to the present time the evolution in the personnel/human resource system of one of the twenty-six large non‐union companies featured in Foulkes’ masterly study Personnel Policies in Large Nonunion Companies (1980). The Delta case illustrates in microcosm the often wrenching and painful process many of the large American icon companies featured in his book (e.g., IBM, Kodak, DuPont) went through in the last several decades as they tried to transition from one version of a high-performance system to another. The study develops these themes in a largely chronological order, starting in the era before airline deregulation and proceeding to the present time. Delta’s EI program only comes into the story about half-way through and gradually builds. Material for this study comes from personal interviews the author did over the course of a decade with numerous people at Delta from the top executive level to the ramp and cabin level, supplemented with material from Delta

1 Pilots and flight controllers, about 10 percent of the Delta workforce, have for many years been represented by unions. Most other companies in the airline industry are extensively if not completely organized.

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historical archives, newspaper articles going back four decades, and a variety of published books and articles on Delta and the airline industry.2

Rethinking the Commitment Model: Insights from Delta The remainder of this article turns around the concept of a “commitment” model of employment. It is a widely known theoretical construct in human resource management (HRM) and industrial-employment relations (IER). The Delta case indicates, however, the popular portrayal of the commitment model is theoretically and historically inaccurate. In particular, the commitment model is: (1) not an innovation of the 1960s–1970s, (2) not necessarily a version (even broadly defined) of a high-performance work system (HPWS), and (3) not necessarily an outcome of any type of structured or formal strategic planning process (i.e., it may be purely entrepreneurial). This first section of the study briefly establishes these points, partly for general scholarly purposes but also for accurate interpretation of the Delta story. An entry point is the recent book-length study of employment relations in the airline industry, Up in the Air: How Airlines Can Improve Performance by Engaging Their Employees, by Bamber et al. (2009; hereafter BGKN). They distinguish two different strategies and systems for managing employees. The first is control and the second is commitment. Their definitions are: Control: “managers specify what needs to be done and instruct employees to comply with those directions. The workplace is characterized by a fairly rigid hierarchy and narrowly defined jobs. Employees are expected to come to work and just do their jobs.” Commitment: “managers … seek to generate a deeper, more organic relationship between employees and the organization. Their focus is on engaging employees to understand the interests of the enterprise and its customers and act accordingly. Employees are encouraged to be committed to the enterprise and its decisions and in return the 2 Results from the first round of interviews in 2002–2003 are reported in Kaufman (2003a). For this paper, hour-plus structured interviews with a common set of questions (available upon request) were done in 2011 with six senior executives, two base managers (both former Northwest), the five members of the Delta Board Council (interviewed twice), and several dozen front-line members of four division-level employee forums. To ensure the division-level employees were not hand-picked by management and were representative of alternative points of view, the forums solicited volunteers who in a number of cases flew to Atlanta for the interviews, including a cross-section of people from merged Northwest Airlines and several former union local officers. Substantive revisions were made to the working draft of the paper based on forum and council feedback but none of significance from management feedback.

346 / BRUCE E. KAUFMAN enterprise promises commitment to the long-term well-being of employees. The commitment approach is usually characterized by greater use of teamwork or cross-functional coordination, higher levels of employee discretion, and more flexible job boundaries.” (pp. 11– 12) The control/commitment typology, as they note in citation, goes back to a Harvard Business Review article by Richard Walton (1985) which has over the years become very influential and widely adopted in the HRM/IER literatures. The modern and much-discussed concept of a HPWS, featuring employee teams, mutual-gain compensation systems, extensive EI, flat hierarchies, and egalitarian workplace culture, is mostly a synonym for commitment model (Appelbaum et al. 2000; Beer 2009; Huselid 1995). Delta gets relatively light coverage in BGKN’s book and, in particular, no coverage is given to its extensive program of employee engagement (see Cone 2000; Kaufman 2003a).3 BGKN do, however, identify Delta as an early practitioner of the commitment model (pp. 170–72) and note this status was at that time unique among legacy airlines (major trunk carriers, such as American, Continental, and United, operating before industry deregulation in 1978). They qualify Delta’s position as a commitment company, however, by stating that this model was effectively abandoned in the mid-1990s (figure 7.1 gives the date as 1994, p. 174 gives it as 1997), albeit for reasons not further explained. BGKN’s portrayal of the commitment and control models is conventional and well accepted in the HRM/IER literatures (Arthur 1992; Boxall and Purcell 2011; Pfeffer 1996). But, consideration of the Delta case reveals it is flawed. The problem is in the transition from the broad statement of purpose in the first and third sentences of BGKN’s definition to the last sentence regarding implementation. This problem has its origin, in turn, in Walton’s foundational article (1985). In it he observes that the traditional control model has “antecedents in the bureaucracy of both church and military [but] the model’s real father is Frederick W. Taylor, the turn-of-the-century ‘father of scientific management’” (p. 78). One paragraph later Walton starts a new section on the Commitment model. He states in the first sentence:

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A possible reason is that BGKN (p. 175) cite a combination of a commitment employment strategy and partnership union strategy as the “path to superior results for all three main stakeholders as well as lower volatility of outcomes.” Southwest and post-1994 Continental Airlines are cited as exemplars of this two-pronged approach and get in-depth coverage. Delta, on the other hand, does not well fit their model for BGKN claim it abandoned the commitment employment strategy in the mid-1990s and consistently practiced an avoidance union strategy.


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Since the early 1970s, companies have experimented at the plant level with a radically different work-force strategy. The more visible pioneers—among them General Foods at Topeka, Kansas; General Motors at Brookhaven, Mississippi…—have begun to show how great and productive contribution of a truly committed work force can be. (p. 79) Then, like the last sentence of the BGKN quote, he gives this description of the model’s HRM system: In this new commitment-based approach to the workforce, jobs are designed to be broader than before, to combine planning and implementation, and to include efforts to upgrade operations, not just maintain them. Individual responsibilities are expected to change, as conditions change, and teams, not individuals, often are the organizational units accountable for performance. With management hierarchies relatively flat and differences in status minimized, control and lateral coordination depend on shared goals, and expertise rather than formal position determines influence. (p. 79) The reader will note that in Walton’s scenario, the control model goes back many hundreds of years (perhaps millennia) but the commitment model is largely a development starting in the late 1960s–early 1970s, takes place at a new vintage of relatively small-scale greenfield manufacturing plants, explicitly plans-in strategic alignment, and is based on new discoveries about work.4 Illustrative of the “new discovery” idea, Walton heralds the commitment model as opening up “the possibility of a revolution in industrial relations” (p. 78) and then states, “At the center of this philosophy is a belief that eliciting employee commitment will lead to enhanced performance” (p. 80). Dozens of books and articles extol virtues of the commitment/HPWS model and claim it yields higher performance (e.g., Becker and Huselid 2006; Combs, Liu, Hall, Ketchun 2006; Kochan and Osterman 1994; Pfeffer 1996). The field of Strategic Human Resource Management (SHRM), formed in the early 1980s, took on the commitment model as “best practice” (perhaps with 4 The General Foods plant (pet food) in Topeka started up in the late 1960s with 80 employees; the General Motors plant in Brookhaven (electronic dashboard components) started up at about the same time with 200–300 employees. A history of the HPWS idea, and case study of a HPWS start-up, is provided in Kaufman (1997). Walton often served as a consultant on these projects, as did UCLA professor Louis Davis (Davis and Taylor 1979).

348 / BRUCE E. KAUFMAN contingencies) but added emphasis on external and internal strategic alignment (Boxall and Purcell 2011; Huselid 1995). Illustrative of this marriage, McMahan, Bell, and Virick (1998: 197) call SHRM “strategic EI.” Likewise, leading writers in the Industrial-Employment Relations field touted a combination of HPWS and collaborative union governance, exemplified by GM’s Saturn division, as the “new industrial relations” (Kochan and Barocci 1985; Rubinstein and Kochan 2001). Interestingly, in his original article, Walton (1985) cites Delta as an example of the commitment model in action. He notes: “the spirit of these new initiatives is evident in the decision by workers at Delta Airlines [sic] to show their commitment to the company by collecting money to buy a new plane” (p. 79). The event referred to is a fund-raising campaign, begun by three flight attendants, which in late 1982 presented the company with an “I Love You” gift in the form of its first Boeing 767 bought with $30 million of gifts from employees, retirees and community partners. The plane was christened “The Spirit of Delta.” It is rare that employees feel so committed to a company that they donate their time and money to buying it a new piece of capital equipment; given that the size of the gift was $30 million, this may indeed rank as the single greatest collective expression of employee commitment in American business history. Of course, the next question is why the Delta employees felt so committed? Here is where the weaknesses in the modern interpretation of the commitment model come to light. The name given to the plane, Spirit of Delta, was chosen because executives and workers alike used it to describe not only what created the commitment bond but also to identify the source of competitive advantage that made Delta in the postwar period the consistently most profitable airline in the industry and its employees the best paid (Swiercz and Spencer 1992). Whitelegg (2005: 8) states on this matter: The “Delta spirit,” the airline’s brand of southern hospitality, became an effective marketing tool throughout the airline’s postwar expansion and the foundation for its workplace culture. With its “nice guy” family image, Delta fostered labor relations that were the envy of strikeridden rivals. A key term in this quotation is “family image.” A New York Times (1/ 27/1982) article, written the same year as the plane gift, leads-off with the title, “Sense of ‘Family’ Helps Delta Air,” and features a quote by a mechanic, “The Delta family, it’s like cohesion. There is not one job I would not do including pushing a broom.” Another New York Times article,


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written 2 years earlier (“Prosperous Delta Air Expands” 4/29/1980), notes that the company’s superior profit performance comes from a combination of good business decision making, tight cost control, and a flexible and high-morale workforce. The “flexible” aspect of its production system boosted profit because it could, as an example, turn around five planes at an airport, while in the same time unionized carriers could only do three. The “high-morale” part, in turn, added to profit because airline travel is a service business and happy employees give better customer service than disgruntled employees. Thus, the article just quoted observes, “The monthly tally of C.A.B. [Civil Aeronautics Board] complaint letters consistently shows that Delta gets the best marks for service. Consequently, Delta dominates many of its markets.” The “family” approach to employee relations came from Delta founder C.E. Woolman. Woolman started the company as Delta Air Services in 1928 and, at that time, its main business was crop-dusting for Louisiana farmers. When he stepped down as CEO in 1966, Delta had grown into a major passenger airline serving the eastern half of the country. In the modern HRM literature, writers (e.g., Dulebohn, Ferris, and Stodd 1995) often imply that only in the 1970s—parallel with and induced by the discovery of the commitment model —did companies start to think in strategic terms about human capital as a source of strategic advantage. Historical research reveals, however, that a large number of American company founders and leaders from the late nineteenth century onward (e.g., Patterson at National Cash Register, Rockefeller Jr. at Standard Oil; Watson Sr. at IBM; Kelleher at Southwest Air) not only grasped the commitment–performance relationship articulated by Walton but organized their companies around this idea (also see Gittell 2003; Jacoby 1997; Kaufman 2001, 2003b, 2010; Zahavi 1988).5 Indeed, the business value of employee cooperation and esprit d’corps was the fundamental idea upon which the modern field of HRM and the corporate Welfare Capitalism movement in the 1920s were based (Jacoby 2003; Kaufman 2008). In his book on large non‐union companies of the 1970s, Foulkes (1980) concludes that the companies pursued a “pro-employee” HRM strategy, and fundamental to this was the “philosophy-laden” view of most of their founders that successful business is built on achieving a climate with employees of “confi5 Gittell (2003) argues that Southwest’s most distinctive organizational competency is its “ability to build and sustain relationships characterized by shared goals, shared knowledge, and mutual respect … and intense focus on the quality of its relationships, and its willingness to forego quick solutions to invest long-term in the maintenance of relationships” (p. 12) What is inaccurate is to then assert that Southwest is unique in this regard [a “truly unique culture … unlike that of any other major U.S. airline” (p. 13)], since Delta earlier pioneered it. Her conclusions (e.g., pp. 262–63) about the business value of partnering with unions are also insightful but over generalized.

350 / BRUCE E. KAUFMAN dence, cooperation and trust” with careful attention to the “principle of equal treatment and avoidance of double-standards” (p. 328). As earlier mentioned, Delta was one of the companies in Foulkes’ study and Woolman is an exemplar of a founder committed to the “confidence, cooperation, and trust” strategy. The following three quotations from Woolman’s speeches give the idea: For years, Delta flew planes similar to those of other airlines, at identical fares. Delta’s success came not just from good operations and efficiency but above all from the friendly spirit of Delta and the way Delta employees handled the public. No one person is an airline. An airline is a team. It must be friendly, courteous, cooperative, efficient, and bound as closely as a devoted family. Good will pays dividends… and good will is an asset that won’t show up on any balance sheet, but is the most important factor in operating a successful airline.6 We see in the first quote the essence of the modern “resource based view” of the firm (Barney 1991) that SHRM theorists use to explain the positive commitment–performance link. In the second quote, Woolman uses the word “team.” Evidently, however, it is not in the modern HRM sense of a small autonomous group of production workers (e.g., a self-managed production team) but in the more inclusive and “top-to-bottom” sense of an extended corporate family. The family metaphor, in turn, reveals the essence of the Delta employment system that created the commitment bond so powerful that it moved the employees to donate $30 million for a new plane. W.T. Beebe, soon to succeed Woolman as Delta CEO, got to the core idea when he said, “Call it trite if you want to, but it works. We don’t try to keep unions away. We just take care of our people” (quoted in New York Times, “Labor is Key to Delta’s Profits,” 4/28/1974). “We just take care of our people” is a classic way of describing an employment strategy called enlightened paternalism. Paternalism is an employment system in which the company is run on the family model with the employer acting

Quotations from “Delta Air Lines Heritage Museum: C.E. Woolman” (www.deltamuseum.org). John Commons, co-founder of the HRM/IER fields, expressed the generic essence of the commitment model in nearly the same language of “goodwill” as Delta-founder Woolman (quoted above). Commons (1919) says, “So industrial goodwill is a valuable asset … because it brings larger profits and lifts the employer somewhat above the level of competing employers by giving him a more productive labor force than theirs in proportion to the wages paid” (p. 26). Goodwill, as both Commons and Woolman note, is an asset and as the example of Delta in the 1990–2010 period illustrates it may yield returns (albeit diminishing) to an employer for a substantial length of time. 6


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the role of the father-figure (wise, benevolent, order-giver, strong character, disciplinarian) and the employees as the metaphorical wife and children (order-takers, help mates, dependents, needing supervision and discipline). The “team” model espoused by Woolman, therefore, was in fact a strongly hierarchical system where he (and to lesser degree, his CEO successors) served as the corporate patriarch who took care of the employees’ security needs, treated them with respect, and listened to their concerns and grievances.7 Foulkes (1980) noted this when he referred to some of the founders’ “paternalistic attitudes” (p. 328). We know Delta circa the 1970s and early 1980s had an effective commitment model and that employees felt a strong identity and unity of interest with the company (aka “unitarism”), but how were these operationalized in terms of HRM/IER policies and practices? Interviews and archival research find the following seven key elements; they closely match, in turn, the major HRM/IER components Foulkes (1980) lists from his study of Delta and similar companies. 1. Employment security through a no-layoff policy and carefully reviewed “last resort” termination. 2. Industry-leading wages and benefits. 3. Outside hiring for entry-level jobs; promotion-from-within for higher-level jobs. 4. An effective “open-door” policy from the CEO to supervisor level. 5. Extensive “hands-on” managerial interaction and communication with employees. 6. An influential personnel function and careful/selective hiring. 7. An egalitarian culture with modest managerial status and compensation differentials.8 Lewis and Newton (1979) describe Delta under Woolman as a “people-oriented airline” (p. 361) but managed by a “patriarch” (p. 360) and system of “one man rule” (p. 359). Woolman’s successors shifted from “one man rule” to a tightly knit “collective leadership” (p. 396). Thus, under Woolman Delta used a command and control method to coordinate operations but a commitment and partnership method to attach/ motivate employees. Walton and a number of subsequent writers do not adequately distinguish these two dimensions. A paternalistic model can be very informal, as in direct employer–employee interactions in a small firm, but at large companies such as Delta, IBM, and Kodak, it was considerably formalized and sophisticated. Part of the business motivation behind the new HPWS of the 1980s was to achieve commitment and coordination with more flexibility and less cost. 8 Delta CEOs until 1997 all came up through the ranks and, almost unique to a large American corporation, a Delta CEO was expected at some point to head the personnel department and two (Beebe, Allen) started their careers in personnel/labor relations (Swiercz and Spencer 1992). Delta COO Maurice Worth started his career as a baggage handler in Boston and even thirty-plus years later as COO drove the author in his stock-model Ford. To keep in contact with employees, Woolman made “ceaseless swings around the Delta route system (Lewis and Newton 1979: 400) and, regarding the “open door,” CEO Beebe could say even after employment had passed the thirty thousand mark, “My rug has to be cleaned once a month. Mechanics, pilots, flight attendants—they all come in to see me” (Davis 1988: 139). For an historical parallel of this type of “face-to-face” leadership style, see Zahavi (1988). 7

352 / BRUCE E. KAUFMAN Several of these items overlap with commonly listed characteristics of a modern-day HPWS (e.g., employment security, selective hiring, above-market wages); however, in spirit and implementation, the Delta model at this time was much more a half-century extension of the 1920s Welfare Capitalist model of unitarism than the 1970s HPWS model springing to life in Topeka, Brookhaven, and elsewhere (Jacoby 1997). Both versions may well be “strategic” in the sense of an executive-level fitting of HRM means to ends; nonetheless, one is far more entrepreneurial-driven, value-guided, and top-down than the other. The differences in the two versions are even greater at two other places. The first is the nature of the psychological contract between company and employees. Both the paternalism/welfare and HPWS models involve higher fixed and variable labor cost and require more mutual trust and confidence than the traditional “hire and fire” control model; hence, they are only competitively viable if productivity and customer service increase more than proportionately. This much is common; what differs is that in the paternalism/welfare model, the “quid pro quo” is understood in the family context of “the company takes care of the employees and provides a great place to work” and “the employees pay back this ‘gift’ through hard work, loyalty, following directions, and going the extra mile.” In the HPWS, the commitment bond comes less from “we are a family until death do us part” and more from “our relationship is collaborative but in the end a pragmatic business proposition that continues only as long as working harder, smarter and more efficiently keeps the enterprise profitable.” Going the extra mile, team spirit, and company loyalty are also part of the HPWS but these behaviors have a relatively greater base in a “business performance” consciousness than “I love and appreciate my company” consciousness.9 The second substantial difference regards the topic of this study—EI. By many accounts (e.g., Cappelli and Neumark 2001; Lawler, Albers, and Ledford 2001), a broad and deep program of EI across the business is the linchpin practice in a HPWS.10 Although a number of leading welfare capitalist companies in the 1920s espoused EI and implemented it with project teams, plant committees, and company-wide employee representation plans (Basset 1919; Kaufman 2000; Pencavel 2003; Taras 2003), Delta did not follow this practice through the 1980s—even though the Railway Labor Act (unlike the

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Delta’s employees could be readily spotted in Atlanta traffic in the early 1980s because they put bumper stickers on their cars that had the Delta logo and the words “We Love To Fly.” In their study of Silicon Valley start-up companies, Baron, Burton, and Hannan (1999) identify four alternative employment systems (Star, Engineering, Commitment, Factory) and the foundation of employee attachment in the commitment model is “Love.” 10 The definition of EI commonly heard at Delta is “to be heard and make a difference.”


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National Labor Relations Act) provides the company with legal space to do so.11 Delta was a very much a “top-down” company and managers made the decisions and the attendants, pilots, and ramp crews said (with grace and courtesy) “yes sir.” The only formal channels for EI at Delta were the open door and the annual Personnel Audit. In the latter, an operating officer and high-level HRM manager went to various bases and facilities, and held a half-day “town hall” meeting in which part was used to talk about the “state of the company” and another part to let employees ask questions and voice complaints. All complaints were written down and investigated and the employees got a formal response from a company representative. The tenor of the meetings and the “hot button” issues were passed up the line to senior executives. It appears that the open door and the Personnel Audit at Delta were examples of employee “voice” but only tangentially “involvement” in the sense of giving workers a meaningful role in managerial and operational decision making.

Commitment Model and EI at Delta: The Allen Era The early 1980s version of the commitment model at Delta Air Lines has been described. But, industry deregulation started in 1978 and soon Delta and other legacy carriers started to feel the effects. It is here that the next phase of the story begins. I divide it into two subsections; first, a review of general events and conditions at the company and their effect on the commitment model and, second, a description of the emergent EI program at Delta that grew out of the business challenges and pressures of this period. The two are linked, although at first not in a strategic way. As the story features a number of different Delta CEOs, financial ups and downs, and diverse business events, a visual outline is provided in Figure 1 as a helpful guide.

11 The NLRA bans all forms of “joint dealing” over terms and conditions of employment between a company and one or more representatives of employees if the representative(s) are not from an independent union; thus, a representational group can deal with quality and productivity but not compensation or employee relations. The only stricture the RLA puts on non‐union representational forms and activities is that they not interfere with workers’ exercise of free choice in choosing independent representation. Thus, Delta and other non‐union carriers can operate employee councils and forums and discuss (but not negotiate) employment terms and conditions that most companies are forbidden to implement by the “company union” ban in the NLRA (Kaufman 1999; LeRoy 2000). Non‐union employee forums and councils in airlines have a long but almost completely invisible history.

354 / BRUCE E. KAUFMAN FIGURE 1 DELTA AIRLINES: EARNINGS

PER

SHARE, CEOS,

AND

MAJOR EVENTS, 1988–2010.

Delta Airlines: Earnings per Share, CEOs, and Major Events, 1988 -2010

$

Earnings per Share

+

Leadership 7.5

9/11

Bankruptcy

NWA Merger

0

-

1988

Ron Allen 1987 - 1997

Leo Mullin 1997 - 2004

Gerald Grinstein 2004 - 2007

Richard Anderson 2007 Present

2010

Business Developments: Cost-Cutting Takes Hold. Unlike other legacy carries, Delta did not make layoffs in the steep recession of 1981–1982—a substantial factor motivating the “Spirit of Delta” gift from the employees. However, over the 1980s Delta’s competitive position began to erode (Davis 1988). New low-cost carriers (LCC) were eating away market share on high volume/high-profit routes, more competition meant lower ticket prices, airline travel was becoming commodified, and the company’s commitment to “best wages/benefits in the industry” kept its cost structure high and rising.12 Things only came to a head, however, in 1991–1994. CEO Ron Allen, a relatively young, more aggressive, and risk-taking kind of leader, wanted to make Delta an international carrier and outbid United and American to secure the assets and routes of bankrupt Pan Am. Unfortunately, at the same time, passenger demand sank due to the recession of 1991–1992 and the first Gulf War while jet fuel prices spiked. As a result, Delta suffered large losses in fiscal year 1991 ($506 million) and again in 1992 ($540 million). The first tangible threat to the traditional 12 Even after substantial cost-cutting in the 1990s legacy carriers operated at a one-third labor cost disadvantage relative to new entrants (Bamber et al. 2009, figure 4.4; also Hirsch and Macpherson 2000). Southwest was a significant exception since it was both highly unionized and opted for a relatively high wage policy (Gittell 2003). Delta’s pension costs, however, were considerably higher. Delta pioneered the hub and spoke (network) system, which has competitive pluses and minuses (e.g., as opposed to Southwest’s pointto-point model); a distinct minus is that it entails higher fixed costs and in air travel downturns produces very large losses.


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commitment model appeared at this point; in 1991–1992 Delta cut non-union wages and salaries 5 percent, laid off several hundred pilots (the union refused the 5 percent pay cut), and cut six thousand jobs in other parts of the airline through attrition, elimination of part-time jobs, and early retirement. No layoffs were done among the non‐union full-time workforce, however. Large losses continued in 1993 and 1994 and the company felt forced to take additional cost-cutting measures. In 1994, Allen announced a new costreduction program called “Leadership 7.5.” The name comes from the goal of cutting Delta’s average cost per seat-mile from 9.8 (an industry leader) to 7.5 (industry average) through $2 billion of savings. The largest savings came from an unprecedented reduction in force of fifteen thousand people, accompanied by more wage cuts, rollback of benefits, and abandonment of the strict promote-from-within policy. Allen described the company’s strategy as “to be a high-value airline for the customer, but to do it at low cost” (“Delta Air to Pare Up to fifteen thousand Jobs,” The Globe and Mail, 4/29/ 1994). An airline stock analyst applauded Delta, saying its cost-cutting was “now the most aggressive in the industry” (San Antonio Express, “Delta Air Lines Said Thursday It Will Cut,” 4/29/1994), and indeed Delta staged a dramatic profit rebound for the rest of the decade. A newspaper, however, quoted a Delta insider as saying, “There was a breaking of the covenant” (“Delta CEO Sets Goal of Friendlier Skies,” USA Today, June 1999) which another described as “employees feel betrayed … [and] fear the Delta family is dead” (“Delta Air’s Allen to Quit,” Wall Street Journal, 5/13/1997). In addition to all the give-backs, employees felt the program was abruptly announced, unilaterally imposed, and a sacrifice imposed on them because of Allen’s ill-advised purchase of Pan Am. On top of it, Allen seemed dismissive about employees’ concerns; when asked in a news interview about sagging employee morale he remarked, “so be it.” Soon afterwards “So Be It” buttons started to appear on the chests of Delta employees at ticket counters and on planes (“So Be It: Why Delta Air Lines Decided It Was Time for CEO to Take-Off,” Wall Street Journal, 5/30/1997). Not coincidentally, as morale sagged so did Delta’s once-vaunted reputation for excellent customer service. By 1999, it had plunged from first to last among the legacy carriers. Allen was forced by the Board of Directors to resign in mid-1997. Even though profits were high and rising in 1995–1997, Allen’s distinct unpopularity with the workforce was tied to the tanking of morale and service quality. He had under estimated the push-back that came from unilaterally changing the “family understanding” that Woolman and successors had so assiduously cultivated.

356 / BRUCE E. KAUFMAN Employee Involvement: First Steps and Challenges. Organized EI began at Delta in the last year of Allen’s tenure as CEO. It took two forms. The first initiative was the creation of the Delta Board Council (DBC). In May 1996, the pilot’s union requested a seat on the board of directors. The company compromised on a non-voting seat; management believed, however, it could not grant the pilot’s request without also giving representation to the other sixty-four thousand unorganized employees. So, the DBC was created with a mission to serve as the “eyes, ears, and voice of Delta people in the boardroom” (Cone 2000: 470). The council began with seven members from different non‐union divisions of the company (e.g., Flight Attendants, Reservation Sales, Tech Ops, Administrative Personnel) and initially three were selected by the DBC to attend the board meetings on a rotating basis. All DBC members began attending board meetings in 1997. Each DBC person was selected by division peers through an application and interview process, could be based anywhere in the Delta route system, and served a 2-year term. The second EI initiative was formation of a Flight Attendant Forum (FAF). It was largely the impetus of the senior vice president of Delta’s In-Flight division Jenny Poole (a former flight attendant who worked her way up) and grew out of a prior flight attendant scheduling committee. The forum was a two-tier structure. Employees at each of Delta’s sixteen flight attendant bases formed a local council with elected representatives (on a 1:100 ratio) to work with base management on local issues affecting flight attendants and In-Flight services (e.g., crew locker rooms, boarding procedures). Local bases then selected representatives (on a 1:1000 ratio) to serve on a system-wide council headquartered in Atlanta. The System Forum met three times a year, had twenty-six people, met separately from management to formulate a consensus of what were the most pressing system-wide issues affecting In-Flight and flight attendants, and then met with senior management to present and discuss the issues. Topics could include anything affecting the In-Flight division, such as scheduling, per-diem compensation, cabin food service, and work rules; off the table, however, were companywide personnel issues such as compensation and benefits. The commitment model at Delta was at this point under significant strain. These EI initiatives, however, did not originate as part of some larger strategic plan to put the commitment model back on track. Delta basically “backed into” formation of the DBC because of the pilot’s contract and, once formed, was unsure what to do with it (other executives somewhat dubiously regarded it as “Allen’s baby”). Likewise, the FAF had top-level approval but was not part of a new company-wide HRM strategy. Thus, although EI was later to become strategic at Delta, it did not start out this way.


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Once created, both councils began to take on a life of their own that executives had not fully anticipated or perhaps entirely desired. The DBC’s initial charter, for example, allotted each representative only 8 days per year for council meetings and activities, plus additional time “as needed.” The new DBC members, however, came to their positions charged-up to “make a difference” for both company and employees and quickly pressed to expand their mission and resources. When the DBC was formed, neither Allen nor other executives could have anticipated that within a year DBC members would have successfully lobbied for permission to fly around the Delta system on “city visits” where two to three members held a day-long series of meetings with frontline employees and then reported back to Atlanta. A benefit of these fly-ins was that they helped break up an insulated “old boys” network and exposed a number of hidden poor performers in local base management; a draw back was that base managers quickly started to feel the DBC was an enemy threat and end-run on their authority rather than a helpful colleague and constructive problem solver. The FAF also had teething problems. Some employees were prone to turn the forum meetings into “bitch and moan” sessions that alienated managers; likewise, some managers alienated the employee representatives by too quickly going to “can’t be done” and doing it with an attitude that mixed superiority, impatience, and excessive control. The two EI initiatives at Delta were not in response to an overt union threat, such as start-up of a union organizing drive.13 Delta had long practiced a “make unions unnecessary” strategy by providing better terms and conditions than unions could obtain at other airlines (aka “union substitution”). Employee restiveness and dissatisfaction in In-Flight was one motive behind formation of the FAF and, to the degree it resolved grievances and restored commitment, was a successful part of Delta’s union avoidance strategy. Similarly, the DBC had a direct link to unions to the extent it was pressure from the pilots’ union for a board seat that motivated management to also give representation to the non‐union workforce; however, the reactive and ad hoc nature of the DBC’s formation points against a more immediately timed or strategically planned union avoidance motive. Paradoxically, EI initiatives such as Delta’s can easily backfire and actually promote unionization (Gollan 2006a). When the DBC and FAF were created, the company in effect sent out a memo to employees saying “Delta is going to more actively listen to you and address your concerns.” If the company does The first union election at Delta in over 30 years occurred February 2000 and involved ten thousand ramp workers and the Transport Workers Union. The union received 17.3 percent of the votes of eligible workers. The union had begun the organizing campaign in 1997, although “feelers” from various unions always periodically came along. 13

358 / BRUCE E. KAUFMAN not live up to this commitment, it not only further alienates employees but also makes more credible a key union campaign message: “you cannot trust management to live up to its promises” (Timur, Taras, and Ponak 2012).14

The Commitment Model in a Downdraft: The Mullin Era The “promote-from-within” policy for CEOs was broken in 1997 when the company hired an outsider, Leo Mullin, to take over from Allen. Mullin not only came from outside Delta but also outside the airline industry (banking, utilities, McKenzie Consulting).15 Mullin’s intended role at Delta was similar to Lou Gerstner’s at IBM—shake-up, slim-up, and turn around a company grown too inbred and behind the market curve. Unfortunately, Mullin did not quite have Gerstner’s savvy touch and good luck. Mullin got off to a good start in restoring employee morale and commitment and the airline’s sagging reputation for quality service. The company invested in new Boeing 777s, substantially refurbished its existing fleet, and improved baggage and departure/arrival reliability. Now that Delta was again earning large profits, Mullin also felt he had financial room to repair the Allen era damage to the vaunted “spirit of Delta.” Mullin reversed the wage and headcount reductions of Leadership 7.5, in effect making them temporary cuts. He pledged to employees to keep their pay “at or near the top of the industry” (“Delta Unveils Plan to Increase Pay,” Wall Street Journal, 11/19/1998). Within 2 years employment rebounded by 20 percent to seventy-six thousand (partly due to acquisition of commuter carrier Atlantic Southeast); pilots got a new contract restoring their wages to 4.6 percent above the next highest-paying company; and the non‐union workforce got raises in 1997, 1998, and 1999. The honeymoon started to sour in 2000 and ended in divorce in 2004 when Mullin was encouraged to step down. Interestingly, in broad outline, he largely repeated the Allen performance and lost his job for the same reasons. Delta had a long history of relatively amicable relations with its pilots’ union (Air Line Pilots Association [ALPA]) but under Allen, the relationship eroded. As earlier indicated, Mullin tried to restore peace by restoring the

14

Non‐union councils train employees in collective action; a member of the DBC later became a leader of an outside group that mounted a vigorous and somewhat adversarial campaign to protect retirees’ pensions. 15 Also of significance, Mullin changed the name of the people department from Personnel to Human Resources and brought in an executive from General Electric to run it. Needless to say, GE was far from traditional Delta.


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pilots to industry-leading pay but the adversarial genie seemed to have escaped the bottle. In 2000, ALPA demanded a further hike in pay, arguing that Delta’s resurgence of profit justified an increase. In what appeared in hindsight to be a bargaining disaster (Mullin had no labor relations experience), the company caved in 2001 and agreed to a pay deal that not only maintained wages at an industry-leading position (senior captains now earned $300,000+) but in fact boosted pay 20 percent above the average for other legacy carriers and more than double the pay of pilots at hometown LCC rival AirTran. The agreement came, however, only after protracted acrimony and, finally, a work-to-rule slowdown by the pilots that forced cancellation of thousands of flights. This episode drove a further wedge between the company and its customer base. Internally, it further frayed the “we are a family” climate, put another dent into the morale of the rest of the Delta workforce, and seemed to signal the nonunion employees that perhaps a union can indeed make a difference. The pilots’ bargaining snafu was nothing compared to what came next. The terrorist attacks of 9/11 sent the entire airline industry into a deep tailspin and Delta was no exception. Within 2 weeks, the nation’s airlines had cut the number of flights in half, over 100,000 people were gone from the payroll, and losses exceeded $8 billion (Bamber et al. 2009). The Delta president told the author in an interview that managing the company during the immediate aftermath of 9/11 was like piloting a plane through a thick fog bank with all the dials spinning. By the end of September, Delta cut employment by thirteen thousand (15 percent) and posted a $1 billion loss. Delta, however, was the last of the legacy carriers to make job cuts, and most (84 percent) were accomplished through voluntary separation and leave programs. Other companies, such as Northwest and U.S. Air, invoked the “force majeure” clause in their union contracts, allowing them to nullify labor protection language and institute immediate layoffs with no severance pay; on the other hand, several LCC airlines, such as Southwest, made no lay-offs (Gittell 2003). The airline industry hoped for a cyclical rebound from 9/11 but instead was hit by more demand shocks (e.g., SARS epidemic, second Gulf War), supply shocks (e.g., surging oil prices), and intensified price competition from lowcost carriers. Delta began to hemorrhage money; losses mounted to $4 million a day and by 2004 cumulated to over $5 billion. Several other network carriers (U.S. Air, United) fairly soon nosedived into bankruptcy. The Mullin executive team was faced with either working out dramatic cost savings or the likely prospect of a Delta bankruptcy. The story of 2002–2004 at Delta was indeed more cost-cutting, albeit with one additional upsetting event thrown into the mix. The headcount reductions

360 / BRUCE E. KAUFMAN of 2001 (16,000 total) were followed by another eight thousand—approximately one half through voluntary means and the other half through layoffs. Compensation and benefits for the non‐union workers were cut back (10 percent pay/benefits cut, higher health care contributions, less vacation, eliminating healthcare coverage for new retirees). And the company went back to the pilots in 2003 and said the union either rolls back pilots’ pay by $1 billion a year or the company files bankruptcy. A major uncertainty, however, was fuel cost (about 25 percent of operating cost), which had gone up greatly and put a major squeeze on profitability. The company communicated to employees, in a sort of industry economics lesson, that the size of pay and workforce reductions was linked in a “sliding scale” manner to the price of oil —the more oil went above $60 a barrel the larger had to be the offsetting cuts in labor cost (“Cost of Saving Delta: Nine Thousand Jobs,” Tribune Business News, 9/23/2005). Mullin was adept at the financial side of running a company but, like Allen, lacked rapport with the workforce and ultimately lost their confidence and the confidence of the Board. Like Allen, the manner in which the cost-reduction program was carried out was ham-handed—characterized by an industry magazine (“Trust Seeker,” Airline Business, 8/2006) as “cost-cutting campaigns that have gone down as two of the worst-managed in U.S. airline history” (pp. 49– 50). Mullin then added insult to injury with two maladroit moves in the area of executive compensation. As frontline employees were taking big cuts, the company announced that sixty top executives had received $17 million in bonuses in 2002, and in 2003, Mullin was not only keeping his $795,000 base salary but was also getting a $1.4 million bonus (he later gave it back). Then, worse, even as employees grew increasingly fearful for the safety of their pensions,16 word hit the street that the company was spending an estimated $65 million for bankruptcy-proof “pension insurance” for 33 top executives— several who promptly took early retirement.17 With Delta’s financial condition hurtling out of control and employee discontent at an all-time high, the Delta Board of Directors forced Mullin to resign in late 2003. The commitment model appeared to be in shreds and per16 The company in 2002 announced it was shifting the non‐union pensions to a less expensive cash-balance approach (done earlier by IBM, sparking considerable employee discontent and a major law suit) but then shortly after ceased making contributions and the unfunded liabilities rose to over $10 billion. 17 Critical to the commitment model is that executives live up to their promises and do not undertake self-aggrandizing actions. Commitment suffers, therefore, when an Executive Vice President conducted town hall meetings around the system in 2003 and declared “I have never been so confident about our company being successful as I am today” and then strategically takes a well-noted early retirement shortly before bankruptcy (“Delta Air Lines Executive Discusses Ways to Rejuvenate Operations,” Tribune Business News, 8/11/2003).


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haps mortally wounded. A Delta employee said, “You had an overwhelming reaction that bordered on a sense of betrayal” (quoted in “Changing Pilots,” Wall Street Journal 10/4/2007). Employee Involvement: Losing the Battle but Saving the Day? Mullin exited on a decidedly down note. One can say that had it not been for Delta’s developing EI program during his tenure that the results would probably have been considerably worse. Ironically like Allen, this was mostly not a product of strategic choice on Mullin’s part. The details of Delta’s EI program in this period have been described elsewhere (Kaufman 2003a) so only an overview of key points is given here. By the end of Mullin’s tenure, Delta had what can safely be described as the most formalized and highly developed EI program in any American (mostly) non‐union company. The program was a cascading set of councils, forums, and project teams that extended from the board room to hangar floor. At the top was the DBC. It continued to have seven members, but now the position was full time (typically days, nights, and many weekends). Its role had expanded to six major functions: 1. Give top executives an unfiltered “pulse of the company” view as seen from the front line. 2. Communicate to the front line an unfiltered account of where the company is going and why. 3. Represent the interests and perspective of employees to top management and the board. 4. Serve as a consultant to management on new policy initiatives, particularly in the people area. 5. Partner on or lead special projects (e.g., revision of the compensation review process). 6. Conduct 1–2 day site visits to Delta facilities around the world. At the next level down were five divisional-level employee councils/forums (in parentheses are the number of represented employees in 2003): FlightAttendant Forum (19,500), Technical Operations Employee Council (9,500), Airport Customer Service Employee Forum (20,000), Cargo Partnership Council (1,450), and Reservations Sales Voice in Partnership (9,000). These groups (except Reservation Sales) held periodic meetings in Atlanta where representatives (some peer elected, others peered selected) flew in from around the country/world for several days of caucuses and meetings with senior management. The mission of the groups was to identify problems and issues that could be jointly worked out to increase business effectiveness and employee satisfaction. Company-wide pay and benefit policies were off the table, but on the

362 / BRUCE E. KAUFMAN table were a wide range of topics from relatively mundane (putting ATMs in crew lounges) to “big deal” items (e.g., maximum monthly flying hours, a peer-review termination panel). The next level down was base/city level councils and forums. For example, each city with a reservation sales office or a flight attendant base had employee forum representatives chosen by peers. The local groups send up the line employee feedback on division-level issues (e.g., a policy/IT problem with booking a certain class of reservation), work with base managers on local issues (e.g., turning planes around faster), and provide a skip-level channel of communication to Atlanta on local managers who are either above or below the performance bar. The bottom level was approximately one hundred continuous improvement teams (CIT) scattered across all parts of the company. Typically composed of volunteers at a base or facility, they tackled a specific issue or problem and recommend a solution to management. In Tech Ops, for example, a team was formed to reduce the cost of engine overhaul so Delta could win more contract work. The growth of Delta’s EI program, particularly at the middle-to-top (DBC and division forums), was to a substantial degree not a strategic choice at the CEO/President level (they had to be “educated”) but came from a proactive push by vice presidents at the next lower level, many of whom were still long-time Delta people (known as “Real Delta” in company vernacular). As employee morale sank and discontent rose in the years after 9/11, Mullin and senior executive team made extensive use of the DBC and forums and acknowledged their contributions to both operational efficiency and better employee relations; the problem, however, was that the “EI spirit” was not in their blood. The commitment model deteriorated further during Mullin’s tenure and, indeed, threatened to disintegrate. As described shortly, after a near-death experience in 2003–2005, the commitment model rebounded at Delta. Arguably what saved it was the EI program and, behind it, certain Board members, higher-level executives, and key employees who hung in as “partnership champions.” The most telling example of EI’s contribution to preserving the commitment model was Delta’s force reduction immediately after 9/11. Other network carriers abrogated their union contracts and peremptorily laid-off tens of thousands of employees within days. Although every day of delay cost Delta hundreds of millions of dollars, it took 2 weeks to partner with employee councils and work out six voluntary leave programs. The wage/benefit reductions in 2002–2003 were also worked out with the councils, thus avoiding some of the unilateral and surprise element Allen engendered with Leadership 7.5.


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Skeptics of non‐union councils and forums claim they only ratify what management wants to do in the first place and, in particular, they earn their way by helping sell employees on the need for pay cuts. The reality, at least at Delta, is considerably more complex and generally positive. Labor compensation at Delta was the highest in the industry and had to substantially come down for the company to survive in the new post 9/11 environment; further every unionized carrier went through drastic layoffs and wage concessions. So, the question is how is this process going to be most effectively and fairly done? At Northwest where union-management relations were rancorous and bitter, working together with unions was not a realistic option in the short time frame available and therefore management used unilateral force to wring concessions from labor and the unions reciprocated by resisting management at every step, battling in court and on picket lines, and conducting a hate campaign against the executive team. Productivity and customer service fell accordingly. At Delta, the non‐union councils knew they did not have an independent power base and so their best hope was not resistance but cooperation in order to gain what they could for employees. Likewise, management knew that Delta’s business model depended on above-average customer service and productivity and they therefore had to preserve a critical element of employee morale and goodwill; hence self-interest led them to not only work with the councils but also give some “wins” for employees.18 Evidence cited in interviews indicates the EI program at Delta during the Mullin era more than paid for itself through enhanced productivity and preserving a modicum of partnership. However, an EI program no matter how effective (and Delta’s certainly had shortcomings) cannot make a company profitable if its fundamental business model is non competitive or the economic environment has turned unduly hostile. Indeed, at some point, these negative fundamentals start to undermine the viability of EI because it becomes demoralizing for both sides to realize they are frantically bailing a ship that is most likely going to sink anyway. One sign that the commitment model was not yet dead at Delta, or that employees wanted independent representation in place of non‐union councils, was relative lack of union activity. As noted earlier, the first union election in decades was in early 2000 for ramp workers and the union got 17.3 percent of the eligible vote. Only one other union (Association of Flight Attendants) was able to muster enough employee support to call for an election during Mullin’s tenure and it got 29 percent of the eligible vote. 18

In academic terms, both executives and employees realized they were confronting a Prisoners’ Dilemma situation (Miller 1991) and both managed enough cooperation to avoid the lose–lose trap.

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Delta Hits Bankruptcy: The Grinstein Era and the Difference a Leader Can Make The major Atlanta newspaper observed in June 2005, “The idea that Delta Air Lines might file for Chapter 11 bankruptcy protection once would have provoked astonishment” (“What Would Bankruptcy Mean for Delta Air Lines?,” The Atlanta Journal-Constitution, 6/29/2005). In September, however, the company did just that, having lost more than $10 billion since 2001 and now burdened with more than $28 billion of debt. The industry’s strongest balance sheet had within a decade gone bust. Business Developments. Mullin was replaced in January 2004 by long-time Board member Gerald Grinstein. Grinstein had been on the Board since 1987 when Delta purchased Western Air Lines. As CEO at Western, Grinstein had restored profits and employee relations in a business turn-around situation and then, from 1989 to 1995, did much the same at railroader Burlington Northern. As a Board member at Delta, he took the lead in forcing out both Allen and Mullin and was a consistent spokesman for employees and supporter of EI. Everyone realized 15 years earlier that Delta had to lower its cost structure to compete in a deregulated marketplace and yet after Leadership 7.5 and another decade of large cuts Delta’s cost per seat-mile remained at a ballooned-out 11 cents. The challenge facing Grinstein in early 2004, therefore, was how to cut $5 billion more from the cost structure, keep employees onboard, and at the same time, rebuild a reputation for superior service upon which a large part of Delta’s competitive advantage rested. In many respects, Southwest and AirTran posed the same low-cost/high-quality challenge to Delta that Toyota posed to General Motors and Canon posed to Xerox (Bamber et al. 2009). Grinstein ultimately had to take Delta into bankruptcy in September 2005 but when he stepped down in 2007, the airline was clearly on a rebound. In a retrospective, a Business Week article notes, Less than four years after being on life support, Delta is now the picture of health. Thanks to a management overhaul, a rigorous shift towards more profitable international routes, aggressive cost-cutting, and a shrewdly timed merger with Northwest Airlines [done by Grinstein’s successor], Delta is now viewed by many analysts as the country’s top-performing major carrier. (“How Delta Climbed Out of Bankruptcy,” 3/14/2009)


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As this quote indicates, the turn-around rested on a number of sweeping organizational changes, along with further deep cuts for all stakeholders. The elements of the “new Delta,” however, are best viewed as new operational spokes fitted to the traditional but freshly rejuvenated hub of employee partnership. Revealingly, this same article states, “Everything was built around Delta’s paternalistic culture …; the path to renewal and recovery was a willingness on the part of management and employees alike to make sacrifices.” Starting out as CEO, Grinstein observed that “the delicate social contract had been damaged and must be restored” (“Muted Celebration,” St. Petersburg Times, 4/24/2004) and “We’re in a service business where all you’re selling is attitude and ability … [so] we have to show [Delta] people that we care about where they work, so that they will care too” (“Trust Seeker,” Airline Business, 8/2006). The most immediate and visible way Grinstein signaled disgruntled employees his commitment to restored partnership was in rearranging compensation. On the management side, he canceled the executive pension insurance program, capped his own salary at $500,000, took zero bonus and stock options, cut 41 percent from the compensation budget for executives (in part by forcing out people from the president on down), and ordered that no executive would receive a salary increase until the wages of frontline workers were restored to the industry average. On the employee side, he stipulated that on emergence from bankruptcy workers get a 3.5 percent equity stake in the company, $400 million in pay raises and bonuses, and a profit-sharing plan designed to disburse at least 15 percent of pre-tax earnings. One tangible result of Grinstein’s move toward renewed partnership was his ability to get the pilot’s union in 2004 to accept more than $1 billion in concessions; shortly after emerging from bankruptcy, a Delta manager reported, “This is as inspired as I have seen the team in 17 years since I started at Delta” (“A New Dawn for Delta,” Airfinance Journal, 3/2007).19 By comparison, Northwest came out of bankruptcy 4 weeks after Delta, the CEO took a $26 million bonus, and employees received no equity but bankruptcy claims of $1 billion and a considerably less generous profit-sharing plan. In turn, the flight attendants’ union blasted the Northwest CEO’s bonus

Grinstein appreciated the value of symbolism. He drove a Chevrolet and told a reporter “I do not know how we can expect our people to understand when we make job cuts and we’re driving Mercedes.” At age 75, he also led a team of senior executives in a night of scrubbing carpets and seats in a 767. (“Changing Pilots,” Wall Street Journal, 10/4/2007). A balanced account also notes, however, that Grinstein was an advocate for hiring Mullin and was on the Board that approved the executive compensation and pension protection measures. 19

366 / BRUCE E. KAUFMAN as “obscene, unfair, and out of spirit with any sense of shared sacrifice” (“Changing Pilots,” Wall Street Journal, 10/4/2007). A newspaper in 2007 spoke of the renewed “love affair between management and employees” at Delta and observed how this had translated into better business performance. In February 2007, the company announced it had earned the first annual operating profit since 2000. The article goes on to say, By the end of 2005, Delta’s on-time performance had climbed to No. 5 among the 10 big carriers from last place. It rose to No. 3 for all of 2006 and the first half of 2007. Toni [X], a flight attendant …, said changes under Mr. Grinstein began to restore morale, as did conference calls in which managers sought flight attendants’ input. (“Changing Pilots,” Wall Street Journal, 10/4/2007) This last part of the quote leads directly to the role of EI. Employee Involvement in the Grinstein Era. Grinstein had been a strong behind-the-scenes supporter of EI since the DBC was formed in 1996. One might have expected, therefore, that the EI system would expand again when he became CEO. In several respects, the more formal/structured part of the EI program actually contracted (particularly in bankruptcy); in other less formal ways Grinstein ramped up EI. Delta founder Woolman had spoken of employee goodwill as an asset (earlier quoted). Grinstein was able to cut another $5 billion from Delta’s costs, including lower pay, benefits, and vacations, but still emerge with a “renewed love affair” with the employees by calling on and then rebuilding the goodwill asset. The goodwill asset had been severely depleted since the Allen days but had begun so large in the early 1980s—per the “Spirit of Delta” gift—that some still remained in 2004 at the start of bankruptcy. Grinstein observed in 2006 that employees had a “considerable sense of loyalty, a loyalty that has been tested but has been sustained by the lengthy tenure of employees. There’s still an incredible sense of history throughout the airline” (“Trust Seeker, Airline Business, 8/2006). He also noted, however, that to tap into the remains of this goodwill asset Delta had to regain the trust and confidence of its workers. It is undoubtedly the case that without EI, this would have been impossible. Grinstein substantially cleaned house in the executive ranks, money was extremely tight through the bankruptcy period, some of the employee councils needed a shake-up, and employees and managers were embroiled in crisis and fire-fighting. Hence, the middle part of the Delta EI system was allowed to contract as several division-level councils were downsized or disbanded. This was reflected in a downsizing of the DBC from seven to five members. How-


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ever, in terms of activities and outreach, the top and bottom ends of the EI program remained fully engaged and even expanded. At the top end, Grinstein revitalized the role of the DBC and gave it a renewed strategic direction. He gave the DBC full access to Board meetings, a seat on the Finance and Audit committees, and made it a central connecting node between management and employees. Just as four decades earlier Woolman had made “ceaseless swings” through the route system to stay connected with employees, Grinstein used the DBC as his surrogate. Delta was now spread across four (soon five) continents and many dozens of American cities and it became increasingly difficult for executives in Atlanta and base management and frontline employees in dispersed places such as Rome, Lima, Tokyo, and Albuquerque to effectively coordinate and communicate—particularly in a time of bankruptcy reorganization. DBC members, therefore, shuttled around the system to hold Q&A meetings, shoot down some of the wilder rumors and fears, report on bankruptcy proceedings, give an overview of the company’s new strategic direction, and report back to senior management in Atlanta what they heard and saw (but this time with more partnership with base management). Akin to the old Personnel Audits, the DBC also served as a listening and feedback group for frontline employees. Better than the old Personnel Audits, however, the DBC in certain respects carried more legitimacy and credibility with the front line because it was an employee group outside of management. The DBC had also from its earliest days served as an internal consultant and employee representative to senior line management and HR leadership on anything affecting the people end of the business. Since a key part of Grinstein’s turn-around strategy was to restore trust with the workforce, he insisted that the DBC be given a more consistent and involved voice in decision making so new policies affecting the workforce were not “tossed over the wall” from guys in suits who had never loaded baggage or served a meal. A very sensitive frontline issue, for example, was whether the company would use bankruptcy to contract out a significant amount of work. The DBC not only lobbied on behalf of employees to keep jobs in-house but also worked with executives to find cost-effective means to do so. Another place the DBC played an important role was in giving more credibility to corporate communications to the workforce. In a climate of low trust, employees often discount or completely ignore messages from top management and search for anticipated hidden agendas and self-serving spin. To help close this gap, Grinstein had the DBC actively review and revise management communiqués before they went out to the workforce and disseminate to employees an independent version via the DBC web site, emails, newsletter, and employee meetings. Coming from fellow frontline employees,

368 / BRUCE E. KAUFMAN the corporate messages have more credibility and often are less likely to generate the automatic email “delete” response. At the bottom level of the EI structure, dozens of special project teams were used to improve operations, wring out more cost, and improve customer service. Seemingly mundane but cumulatively important places employee teams had input were adoption of self-service ticket kiosks and redesign of flight attendant uniforms. Grinstein also greatly expanded “contact with employee” initiatives. For example, thousands of employees from around the world were flown to Atlanta for town hall style meetings and dinners with Grinstein and his executive team; likewise, Grinstein and team flew around the system holding dozens of similar events. Grinstein also held monthly employee call-ins, breakfasts, and recognition events. These activities seem small and perhaps inconsequential; however, they collectively represent a huge investment of executive time and in both substance and form helped communicate to the Delta workforce that senior management is “walking the talk” on renewing partnership. This renewed investment in employee goodwill paid unexpectedly huge dividends in early 2007. In late 2006, U.S. Air launched a hostile take-over of Delta (the much larger company), hoping to get the assets cheap before Delta came out of bankruptcy. By all accounts, U.S. Air’s threat to Delta’s survival brought the company together as a team in a way not seen in two decades. Employees staged rallies across the country to “Keep Delta My Delta” and the DBC frequently traveled to Washington to lobby Congressmen and testify before regulatory agencies. Against this unexpected wall of opposition, U.S. Air withdrew its bid in early 2007. The Delta COO looked back and said, “The strength of employee voice was absolutely critical. So was the depth of the individual [DBC] committee members. Doug Parker [U.S. Air CEO] didn’t understand that” (“Employee Support Saved an Airline,” Financial Times, 3/28/2007). A number of insights about EI emerge from this part of the Delta experience. For example, one concludes that the formal structure of EI is far less important than management commitment to the process. In particular, peopleoriented leadership at the top with trust and credibility at the rank-and-file level is crucial. Delta’s EI councils and teams were able to creatively help the company through the crisis because they already had a decade of experience and company knowledge. Had they been created in reaction to the crisis it would have no doubt been “too little too late.” The Delta experience also brings to the surface another reality. EI of a significant nature is not cheap or easy because it consumes thousands of valuable management and employee hours, requires significant complementary support


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expenditures, can slow and constrain managerial decision making, requires difficult personal interaction and problem-solving skills, and inexorably finds new and sometimes expensive ways to spend money on employees when a major goal is to save money. EI also has substantial pay-offs, however. At Delta during the Grinstein era, the teams and councils contributed to hundreds of millions of dollars of improved operational efficiencies. The larger pays-offs, however, were motivating discretionary effort toward organizational goals and (re)building employee goodwill and loyalty. These EI intangibles come from positive feelings and cannot be purchased on the market or created from a “how-to” manual or “program of the month.” In a crisis situation, such as during bankruptcy or the hostile U.S. Air bid, the loyalty and commitment of the Delta workforce probably kept the company from going under; over the longer run, they provide a source of sustained competitive advantage for Delta, albeit also requiring an aligned and competitive business model.

Delta in the Anderson Era: Rebuilding and Repositioning Commitment Grinstein retired in early 2007 having successfully navigated Delta’s way through bankruptcy. Shareholders were wiped out, employees had taken steep pay and benefits cuts and many thousands had lost their jobs, yet Grinstein was widely regarded as a hero who had saved the airline and brought the Delta family back together. A newspaper reported, “Grateful workers greeted Mr. Grinstein’s retirement with 5 months of farewell dinners and a $25,000 ad in Delta’s in-flight magazine” (“Changing Pilots,” Wall Street Journal, 10/4/2007). True, the ad was not in the same class as a $30 million new plane but it was nonetheless evidence that commitment had not entirely boiled away. Business Developments. The Board did a CEO search and passed over Delta insiders in favor of someone outside the company. To the concern and consternation of some inside Delta, they chose Richard Anderson, former CEO at Northwest Air Lines (2001–2004). Given Northwest’s reputation for deeply adversarial labor relations and hard-nosed management, Anderson seemed an incongruous choice to follow Grinstein. However, the Board appears to have made a wise choice, and at the time, this article is written (late 2011) Anderson is widely popular at the company and credited with adroitly leading the company through more turbulence (spiking fuel costs, the 2008–2010 financial crisis, merger with Northwest in 2008). In 2008–2010, Delta was the largest

370 / BRUCE E. KAUFMAN airline in the world (until the 2011 merger of United and Continental) and after significant losses in 2008–2009 returned to modest profitability. Bamber et al. (2009) suggest that after the mid-1990s, Delta no longer practiced the commitment model. The more accurate reading is that (1) Delta has partially repositioned the commitment model, (2) has partially restored the breadth and depth of employee commitment, and (3) it is impossible in today’s environment to recreate the level/style of commitment achieved in the pre-1990s. Anderson has, on one hand, assiduously linked the current Delta back to the traditional Delta of Woolman’s era. His speeches are sprinkled with references to Woolman, every employee in 2008 received a booklet Anderson wrote called “Rules of the Road” and Woolman is cited three times, a new $2.5 million Woolman Café was opened in 2009 at Atlanta headquarters, and every passenger on a Delta flight today is greeted before take-off with a video featuring Anderson, standing in front of Woolman's desk, who links the flight experience coming up to the “serve the customer” values passed down from the founder. The “Rules of the Road” booklet also heralds what has changed at Delta. It still strikes the “pro-employee” and “partnership” themes. Section I lists seven “Basic Business Principles” (e.g., annual revenue growth of 7 percent, always fly safe) and if one counts lines almost exactly one half are devoted to employees and their interests (“the best employee relations,” “employer of choice,” “treating them with respect and dignity”). Section II is devoted to “Connecting with our Business” and the second of three principles is vintage Delta: “Know Your People and Care for Them.” However, a person knowledgeable of Delta’s history also sees four distinct differences. First, Anderson’s pledge about compensation shifts from “industry leading” to “fair and appropriate”; second, the “family” term is missing and instead one reads “We run a meritocracy”; third, the old paternalistic “management by a few” is replaced by the title of Section VII, “People: Encourage Employee Involvement…”; and fourth, job security shifts from a corporate entitlement to a performance-based reward (“people who meet goals get advanced” and “no ‘new’ jobs for non-performers”). Thus, on one hand, the basic Delta business model has not changed; that is, it still strives for unitarism and uses unitarism to gain competitive advantage through premium pricing for superior customer service delivered by committed “go the extra mile” employees. On the other hand, the basis of unitarism and the commitment model has shifted. Much downgraded is the family, corporate welfare, paternalistic, and lifetime job basis of employee commitment and substantially in its place is a new psychological contract based on mutual perfor-


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mance and sharing of wins and losses, collaborative team work, reasonably secure jobs at a good place to work, and active voice and fair treatment. As described in a moment, Delta’s EI program is central to this new version of the commitment model. So also is a much reconfigured compensation system. For Delta, bankruptcy had the beneficial effect of allowing it to put in place a lower-cost and more performance-contingent reward system than it otherwise could. Thus, the base pay level was lowered from “industry leading” to “industry average” but with new or expanded contingent forms of pay (e.g., monthly company performance-related bonuses to all frontline employees, annual profit-sharing) added to the system so total pay can still be industry leading if the company does well. Also, the pension system was revamped from defined benefit to defined contribution; unlike other bankrupt legacy carriers, however, Delta did not default on its non-pilot pension funds and, instead, resumed contributions after bankruptcy.20 Employee Involvement. The structure of EI at Delta remained largely the same in the Anderson era. In terms of formal organization, EI cascades downward in three steps: 1. DBC at the apex with five employee members selected from major divisions. 2. Four division-level EI groups: Flight Attendants (18,000), Airport Customer Service and Cargo (21,000), Technical Operations (8,000), and Reservation Sales and City Ticket Offices (4,000). The first three groups have a two-tier structure with city/base forums (elected members) and system-wide forums (elected members from the city/base forums); the reservation sales group has only city/base forums. 3. Dozens of Project Teams, some cross-divisional and others specific to a worksite. Several of the division-level councils that had become inactive were re-launched.21 Also, a peer-review dispute resolution program (formerly found 20 In the end every legacy carrier had to bring down its cost and debt structure through bankruptcy; while Delta and Northwest did this “purging” in 2005 American Airlines struggled on only to finally declare bankruptcy in 2011. 21 The FAF was at the time of writing being restructured into a new Employee Involvement Group (EIG). The company placed the initiative in the hands of an eighteen-person employee project team; team members flew to Atlanta for periodic 2- to 3-day meetings at an off-site location and were given considerable discretion and autonomy. For example, the group decided to use elections rather than structured interviews to choose new members to give highest priority to the EIG’s perceived legitimacy and independence among fellow flight attendants. Elections were not necessarily top management’s preferred choice.

372 / BRUCE E. KAUFMAN only in the Tech Ops division) was established in In-Flight. The company also provides support to six system-wide employee diversity/identity groups, such as Asian-Pacific and gay/lesbian. Numerous other EI activities take place in the company (e.g., monthly CEO breakfasts with several dozen employees, monthly phone-ins for employees from around the system with division level executives) but are too numerous to be described further. Two developments regarding EI most deserve note in this concluding section. The first is the role of EI in facilitating the merger between Delta and Northwest Airlines (NWA). The Delta/NWA integration, according to insiders and news accounts, was remarkably smooth and efficient. Mergers in the airline industry are notoriously difficult because they require integrating two hugely complex systems with different route structures, aircraft, IT systems, cultures, and employment programs while flight operations continue 24/7. Particularly contentious is integrating seniority lists. What made this merger go better was forming twenty-seven new special project teams to tackle issues from the most complex to mundane.22 To create a sense of shared interests and identity, Anderson also insisted that all project teams have equal representation from the two companies, even though by tradition the acquiring company decides the new rules and procedures. The second issue is the role of EI in integrating Northwest employees into the Delta culture, the former being adversarial and unionized and the latter partnership and mostly non‐union. For this article, I interviewed a number of former Northwest employees. They sounded similar themes: we have heard about the Delta commitment model but are highly skeptical; Delta management says the right things (e.g., no layoffs because of the merger) but later they will break their promises; without a union, we have no one to protect us and stop more give-backs; and employees from the paternalistic “aw shucks” South may have bought the Delta family culture but don’t expect northerners with roots in auto factories and sit-down strikes to “drink the Delta Kool-Aid.” Knowing these sentiments, Anderson was very careful that promises were kept: for example, jobs that had been outsourced were brought back in and, similarly, even though Delta suffered a large loss in 2009 because of fuel costs 22 Complex issues included choosing city hubs to expand and contract, integrating a Boeing-based fleet (Delta) and Airbus-based fleet (NWA), and integration of 1200 separate computer systems; mundane issues included the following: Delta served Coke products and NWA served Pepsi, Delta pilots sounded the “take your seats” bell four times but NWA pilots did it twice, and Delta cut limes in ten slices while NWA did sixteen. Without EI, executives and managers make the decisions even though often unfamiliar with the specific issues; with employee teams value-creating solutions are worked out at a low level that satisfy both sides and get better buy-in. For example, teams decided to serve Coke drinks but Pepsi food products and cut limes in only ten slices since the extra customer satisfaction of first-class passengers was deemed worth the extra $500,000 cost.


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and low demand, it went ahead with promised pay increases. In another move, thousands of NWA employees were flown to Atlanta for “get acquainted” meetings and NWA employees were quickly added to division and base forums. Several told me in interviews that they were surprised to see the councils were “real,” could achieve positive results faster, and gave genuine protection to people.23 The purpose of the EI program at Delta is to improve operational efficiency, internal communication, and employees’ sense of satisfaction and fair treatment at the company. It is not secret, however, that Delta prefers to operate without unions and both experience and research suggests that employees who like their company, feel well paid and treated, and have a channel for voice are less likely to want outside representation (Gollan 2006b; Timur, Taras, and Ponak 2012). In an indirect sense, therefore, the more successful the Delta EI system the less desire employees have for union representation. Council and forum members I have interviewed all understand that this is part of the company’s motive; nonetheless, they do not see the company’s EI program (or certainly their role in it) as “anti-union” but rather as a constructive “build a better Delta” project that yields benefits for all stakeholders. In particular, three things help keep the Delta EI councils and forums out of issues or activities that cross the line into anti-unionism. First, some council/ forum representatives are union supporters or former union members and say they would not participate in overt anti-unionism. Second, both the company and EI representatives know that the councils and forums lose credibility as a genuine voice for employees if they take sides with the company on the union issue. Finally, the company does not want the EI groups to give unions a reason to file an interference charge in a representational election and, hence, all are instructed to remain strictly neutral and their members receive legal training.24 The “spirit of Delta” has been badly frayed and torn over the last three decades and the merger with Northwest added twenty-five thousand union mem23

Two examples came from an interview with members of the Tech Ops council. The company wanted to put “winglets” on planes and needed to transfer mechanics from one work area to another; the non‐union council worked with the affected employees and in several weeks got buy-in with regard to transfers, scheduling, pay, etc. while doing this with a union at NWA, I was told, would probably take a number of months. As a second example, a former NWA mechanic related that a NWA manager after merger had terminated an outspoken employee, the case was presented to the Tech Ops peer review system, and the outcome was the employee was reinstated and the manager let go. He said this was the true test if the Delta non‐union system had integrity. No executive in my 2011 set of interviews would volunteer a guesstimate of the cost to Delta from unionization, but in 2003, one cited $1 billion—not from higher wages/benefits but lower productivity and customer service. 24 Interference by an EI group has not been found by the National Mediation Board (NMB) in any Delta union vote.

374 / BRUCE E. KAUFMAN bers to the Delta ranks. Not surprisingly, therefore, unions representing various airline crafts, including In-Flight, ramp, mechanics, and reservation/gate workers, filed for elections in 2008–2011. The largest group took place in late 2010, covered fifty thousand workers across Delta, and was the largest union organizing effort since Ford Motor in 1941. The unions lost all the elections, in several cases by a relatively wide margin (e.g., 76–24 percent in reservations/gate) but with a much closer vote in what both sides regarded as the key contest—the flight attendants (53 vs. 47 percent).25

Conclusion A gallows-humor joke in the airline industry is if you want to make a fortune in this business then start off with two. Since even in prosperous companies employee relations often range from indifferent to adversarial, the ability of Delta Air Lines to maintain a commitment employee relations model in such a turbulent and money-losing environment is no mean feat. As chronicled here, the commitment model at Delta has traveled a roller-coaster since the early 1980s and has evolved to a different managerial style, organizational structure, and psychological contract. Nonetheless, it still survives today as a discernible “spirit of Delta,” even if somewhat bruised, diminished, and less evangelical. A maxim often heard at Delta headquarters, attributed to founder C.E. Woolman, is “Happy Employees Make Happy Customers Make Happy Shareholders.” This idea, even if overly simplistic in certain respects, is the foundation of a “strategic advantage through people” approach to business that today goes under label of commitment model, unitarist model, or HPWS. A contribution of this article is to provide a case study of this competitive strategy in action, including its implementation, evolvement under stress, near failure, and partial turn-around. Another contribution is to use the Delta case to suggest that a portion of prior academic writing on these models has itself been overly

The flight attendants’ union lost an earlier election in 2008 by a wider margin (60 vs. 40 percent). It claimed Delta management in 2010 ran “the largest anti-union campaign that this country has ever seen” (“Delta Attendant’s Say No to Unions,” Star Tribune, 11/4/2010). The union filed interference charges (not against EI groups) and requested a re-run election but the NMB in late 2011 let the election stand. The 2010 election was closer, in part because the unions successfully petitioned the NMB to change the longstanding standard for certification from “majority of eligible voters” to “majority of votes cast.” This was widely regarded as favoring the unions (since people not voting were effectively casting “No votes”). However, on the minus side for unions, the legal wrangling at the NMB delayed the elections for over a year and gave the company more time to repair employee relations and successfully integrate the NWA people into the Delta culture. 25


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simplistic and snared by a “one best way” preoccupation with the HPWS concept. As realized nine decades ago by the HRM/IER fields’ co-founder John Commons (1919), and as illustrated by the Delta (and Southwest) experience, employee commitment (“goodwill”) is always a competitive advantage but can be attained through considerably different business models and HRM systems.26 One dimension of an HRM/IER system is the breadth, depth, and formal structure provided for EI and voice. Today, measured by these three features, Delta is perhaps the leading non‐union EI company in the United States, particularly with regard to representational councils and forums. In keeping with the “no one best way” theme, this case study demonstrates that Delta’s original commitment model was quite successful but with almost zero EI and, further, that EI was introduced piecemeal and tactically in the 1990s without reference to a larger HPWS vision. However, in the last decade, Delta has been forced to transition from its traditional paternalistic/welfare version of the commitment model to a more HPWS-like version anchored around continuous improvement, worker-management collaboration, and mutual gain and loss. In this version, EI is a strategic component of the HRM system and driver of business performance. Although some writers (e.g., Bamber et al. 2009) claim that union partnership is “best practice” for effective EI in the airline industry and cite cases such as Southwest and Continental, the Delta case once again points to no “one best way.” At Delta headquarters one today sees blue buses taking employees to the airport emblazoned with large banners proclaiming “World’s Best Employees.” Whether this is mostly empty talk or meaningful partnership is the key issue in determining the success of the commitment model. The Boeing 767 named “Spirit of Delta” housed in the nearby Delta Museum hangar says that commitment and unity of interest were once deeply felt realities. My impression from talking to dozens of people from the top to bottom of Delta, combined with the inability of unions to successfully organize workers even after the company’s bankruptcy and merger with Northwest, is that the buses and banners may indeed be a come down from the old days but still capture a real-life commitment model in action. The great danger in non‐union companies, however, is top executives back-slide on EI, or new ones come in with no commitment to EI, and here lies the future challenge.

26 Blasie and Kruse (2006) conclude a relatively complete version of an HPWS is found in only a tiny minority of American companies so tying the commitment model to an HPWS, even loosely defined, is quite limiting.

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Keeping the Commitment Model in the Air during Turbulent Times: Employee Involvement at Delta Air Lines

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