Case #1: Strategy and HRM at Delta Airlines



Adapted from Noe, Raymond, et al., Human Resource Management Gaining a Competitive Advantage. McGraw-Hill Irwin, 2010.

Case #1: Strategy and HRM at Delta Airlines Instructor’s note: The airline business is unusually treacherous. It is highly competitive with lots of carriers going to the same places, it is also subject to incredible regulatory requirements, and overnight changes in fuel costs. With very little customer loyalty, airline seats sell almost like a commodity where the lowest fare usually determines which airline many consumers use. With this in mind, welcome to 1994 and your first written case in HRM. In 1994, top executives at Delta Airlines faced a critical strategic decision. Delta, which had established an unrivaled reputation within the industry for having highly committed employees who delivered the highest quality customer service, had lost more than $10 per share for two straight years. A large portion of its financial trouble was due to the $491 million acquisition of Pan Am Airlines in 1991, which was followed by the Gulf War (driving up fuel costs) and the early 1990’s recession (causing people to fly less). Its cost per available seat mile (the cost to fly one passenger one mile) was 9.26 cents, among the highest in the industry. In addition, it was threatened by new discount competitors with significantly lower costs – in particular Valujet, which flew out of Delta’s Atlanta hub. How could Delta survive and thrive in such an environment? Determining the strategy for doing so was the top executive’s challenge. Chairman and chief executive officer Ron Allen embarked upon the “Leadership 7.5” strategy, whose goal was to reduce the cost per available seat mile to 7.5 cents, comparable to Southwest Airlines. Implementing this strategy required a significant downsizing over the following three years, trimming 11,458 people from its 69,555- employee workforce (the latter number representing an 8 percent reduction from two years earlier). Many experienced customer service representatives were laid off and replaced with lower paid, inexperienced, part-time workers. Cleaning service of planes as well as baggage-handling were outsourced, resulting in layoffs of long-term Delta employees. The numbers of maintenance workers and flight attendants were reduced substantially. The results of the strategy were mixed as financial performance improved but operational performance plummeted. Since it began its cost cutting, its stock price more than doubled in just over two years and its debt was upgraded. On the other hand, customer complaints about dirty airplanes rose from 219 in 1993 to 358 in 1994 and 634 in 1995. On-time performance was so bad that passengers joked that Delta stands for “Doesn’t Ever Leave The Airport.” Delta slipped from fourth to seventh among the top ten carriers in baggage handling (lost bags). Employee morale hit an all-time low and unions were beginning to make headway toward organizing some of Delta’s employee groups. In 1996, CEO Allen was quoted as saying, “This has tested our people. There have been some morale problems. But so be it. You go back to the question of survival, and it makes the decision very easy.” Shortly after, employees began donning cynical “so be it” buttons. Delta’s board saw union organizers stirring blue-collar discontent, employee morale destroyed, the customer service reputation in near shambles, and senior managers exiting the company in droves. Less than one year later, Allen was fired despite Delta’s financial turnaround. His firing was “not because the company was going broke, but because its spirit was broken.” Delta’s Leadership 7.5 strategy destroyed the firm’s core competence of a highly skilled, highly experience, and highly committed workforce that delivered the highest quality customer service in the industry. Human Resources might have affected the strategy by pointing out the negative impact that this strategy would have on the firm. Given the strategy and competitive environment, Delta might have sought to implement the cost cutting differently to reduce the cost structure but preserve its source of differentiation. With the family atmosphere dissolved, and the bond between rank-and-file employees broken, employees have begun to seek other ways to gain voice and security. By fall 2001, Delta had two union organizing drives under way with both the flight attendants and the mechanics. Labor costs have been driven up as a result of the union activity. The pilots union signed a lucrative 5-year contract that will place them at the highest pay in the industry. In an effort to head off the organizing drive for a new union, the mechanics were recently given raises that also put them at the industry top. Now the flight attendants are seeking industry-leading pay regardless of but certainly encouraged by the union drive. As part of the new leadership team, what are your observations and plans?