Delta Has to Defend Tech-Dependent Business Plan

Delta Air Lines says technology will be a key part of its transformation from a bankrupt to a viable airline, but first it’ll have to convince creditors that its yet-to-be-selected 2006 projects are worth the effort.

And it will have to pitch those projects without a permanent CIO.

Former CIO Curtis Robb retired in April and his replacement, Brian Leinbach, lasted until September.

Leinbach, who joined Delta in 2000 and held multiple positions within the company, left to be executive vice president of systems development at Federated Systems Group, a subsidiary of Federated Department Stores Inc.

Delta’s acting CIO is Shirley Bridges, chief operating officer at the company’s Delta Technology unit.

Why does Southwest Airlines’ CEO say that high tech equals low cost? Click here to read more.

Delta filed for Chapter 11 bankruptcy protection on Sept. 14, ahead of a more stringent bankruptcy law that went into effect Oct. 17. The law limits the time a company can spend reorganizing and makes it more difficult to cancel debts.

Northwest Airlines and auto-parts supplier Delphi Corp. filed for bankruptcy on Sept. 14 and Oct. 8, respectively.

Delta aims to make technology a part of its turnaround. In general, however, projects at bankrupt companies face high hurdles to be approved, said Ron Rittenmeyer, former chief executive of Safety-Kleen—a $1.5 billion industrial and hazardous waste management company that restructured under bankruptcy—and current executive vice president of service delivery at Electronic Data Systems Corp.

“When a bankruptcy occurs, your view of the world changes,” Rittenmeyer said. “You used to focus on shareholders, not creditors, but above all you have to conserve cash. [Technology projects] get a phenomenal amount of scrutiny.”

Delta wouldn’t comment on its 2006 technology plans, which are being budgeted, but said in a statement to Baseline on Oct. 12 that it will “focus on those projects that will increase revenue, reduce costs and enhance the customer travel experience.”

On Oct. 28, Delta said it would fold its Song discount airline. Indeed, cutting costs will be crucial. Delta hasn’t had an annual profit since 2000, reported a $1.45 billion net loss for the first six months of 2005 and lost $5.2 billion in 2004.

The company owes Hewlett-Packard Co. $4.56 million, reservation services firm Worldspan $2.3 million and software vendor SAS Institute Inc. $1.2 million, according to its Sept. 14 bankruptcy filing. Delta’s total technology tab: $12.7 million.

It remains to be seen whether Delta can refashion itself as a low-cost carrier in bankruptcy, but analysts note there is precedent. United Airlines is expected to leave bankruptcy proceedings in early 2006, and US Airways emerged from Chapter 11 after completing a merger with America West Airlines on Sept. 27.

Yet, there are a few things Delta can do to ensure its success, according to business and technology consultants. Among them:

Keep creditors happy: To sell a technology project to bondholders, the bankruptcy court and a bevy of creditors, the effort must meet their primary desire: to get their money back.

“The creditors’ committee decides whether you’re worth saving, so that means you have to keep them happy or they’ll liquidate you,” said Richard Gritta, a professor at the University of Portland. “You have to focus on what saves time, fuel or labor, or increases revenue.”

That reality doesn’t mean every technology project will be squashed in bankruptcy, Gritta said. For instance, if Delta were liquidated, bondholders would maybe get 5 cents on the dollar.

However, if Delta survives—through technology and reducing pension and health care liabilities—creditors may get 20 cents on the dollar, he said.

At Safety-Kleen, the company implemented a system to allow drivers to use handheld computers instead of paper, Rittenmeyer said. However, the project wasn’t pitched as a way to develop strategic advantage.

It was approved because it would improve cash management and ultimately allow the company to manage invoices and order information better. Another key factor in getting that project approved: There was a payback in six months, according to Rittenmeyer.

Leverage what you have: Former Delta CIO Robb said technology investment in good times is the best protection before Chapter 11 hits the radar. If a company has invested well, it can leverage its existing technology through bankruptcy as well.

“The time to manage costs is when you can afford to do so,” said Robb, who is now the principal of The Robb Group, a consultancy that focuses on helping companies cut costs. From 1998 to 2003, Delta spent $1.5 billion on technology to create the Delta Nervous System (Delta’s Last Stand, April 2003), a network that linked 30 to 40 databases tracking customer reservations, ticketing, baggage handling, and flight and crew operations.

The components of the network broadcast information to messaging software from Tibco Software, which then carries it to Delta computing systems. Robb said that network, which Delta couldn’t afford to build today, will be the foundation for any new Delta projects in bankruptcy.

Retain your key employees and vendors: Maintaining continuity is an important goal in any circumstance, but when a company is in bankruptcy, greener pastures look a little greener.

Case in point: Leinbach’s departure. Leinbach wasn’t available for comment, but Robb said Delta’s technology team did what it could to retain key executives before bankruptcy.

“It’s very important that you maintain stability because you will need to keep projects rolling,” Robb said. “But it’s hard when you know you’re heading to bankruptcy.”

Robb’s primary methods were to update workers on the company’s situation, and be honest about the prospects. Performance incentives were also important, but Robb said better pay isn’t always possible. “It’s a tough balancing act since there is continual pressure on what you pay people,” he said.

Delta also focused on restructuring vendor contracts and consolidating suppliers. Robb said a lot of emphasis was put on communicating to large suppliers such as HP that they will get paid in bankruptcy, because the court is likely to view information technology as essential to keep the airline running. HP wouldn’t comment on the Delta account.

Whether Delta—a company that has shed 24,273 of 76,273 jobs since Dec. 31, 2001—can keep its key executives in bankruptcy remains to be seen, but Robb wouldn’t count the airline out. “Never underestimate the capability of Delta people,” he said. “They are very resilient.”