Delta Air CEO Mullin to Step Down --- Board Members Grinstein, Smith to Share Control

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Delta Air CEO Mullin to Step Down --- Board Members Grinstein, Smith to Share Control, As Carrier Still Has Losses
By Evan Perez and Rick Brooks

1421 words
11/25/2003
The Wall Street Journal
(Copyright (c) 2003, Dow Jones & Company, Inc.)

ATLANTA -- Delta Air Lines Chairman and Chief Executive Leo Mullin said he will step down, turning over control to two board members who now face the task of altering the course of a company mired in losses and stuck with high labor costs since the Sept. 11, 2001, terrorist attacks.
Passing over Mr. Mullin's hand-picked No. 2, Delta President Fred Reid, the board named longtime director Gerald Grinstein as chief executive effective Jan. 1, and said director and former General Motors Corp. Chairman John F. Smith Jr. will assume Mr. Mullin's post as chairman at Delta's annual meeting in April. It is the second go-around at the helm of Delta for Mr. Grinstein, a 71-year-old former airline and railroad executive who stepped in on a temporary basis after Delta's board pushed out Ronald W. Allen as chairman and CEO in 1997.

Mr. Mullin was an outsider when Delta turned to him after Mr. Allen was forced out amid internal rancor that followed another financial tailspin in the 1990s. Mr. Grinstein led the revolt that resulted in the ouster of Mr. Allen, a Delta lifer who was blamed for low employee morale and the exodus of senior managers.

Some former Delta executives weren't surprised by the decision since Mr. Mullin has been dogged by a feud over executive compensation and special pensions for top officers, which have hurt employee morale and made negotiations with the unionized pilots group more difficult. "Leo came here to restore employee morale and customer service," said Harry Alger, former executive vice president of flight operations. "How can you restore employee morale when you jump into the lifeboat ahead of anybody else?"

Mr. Mullin said the change was his idea, and that he had told the board earlier in the year that he wanted to step down. The last 26 months have been difficult for the top executives of all the major airlines, with the CEOs of AMR Corp. and UAL Corp. also stepping down in the wake of huge losses and labor challenges after the terrorist attacks.

Mr. Mullin, a 60-year-old former utility and bank executive known for his friendly demeanor and intellectual approach, has been a public face of the airline industry over the past two years, with frequent trips to Washington to lobby for legislation friendly to the industry. Back home in Atlanta, he has faced a grueling conflict in recent months with Delta's pilots; the airline is seeking major concessions to help lower Delta's labor costs to the levels of competitors such as American and United. In a major misstep that hurt negotiations with the pilots, Delta paid retention bonuses to executives and put in place a plan to guarantee their pensions even as it continued to lay off workers and cut pension benefits for others.

The departure of Mr. Mullin allows his successor to attempt a fresh start with the Air Line Pilots Association, the powerful union that represents the airline's 9,000 pilots. Mr. Grinstein, who helped lure Mr. Mullin to Delta, said that he isn't an interim CEO, saying he will remain "as long as is necessary." But he indicated he envisions staying about three years. "Our job is to make Delta competitive and consistently profitable," he said in a statement issued by the airline. "To do that, we must further reduce Delta's costs substantially and permanently."

In 4 p.m. New York Stock Exchange composite trading, Delta shares were at $12.25, up 82 cents, or 7.2%.

Mr. Grinstein said he plans to focus on rebuilding Delta's customer service, which he says has suffered while the company was busy trying to ensure its survival. To do that, he said, he will spend the next month traveling to Delta's operations to rally employees. Customers "have to be well-handled and made to feel the company cares about them," he said. "Our job is to make sure the front line is inspired to do just that."

Mr. Grinstein's reputation is buying him goodwill from some retired Delta employees, who sacrificed during past downturns and were angered by the bankruptcy-proof trusts awarded to Mr. Mullin and other current Delta officers. "We'll be very supportive of Gerry and do anything we can to help him," said Cathy Cone, a retired Delta flight attendant and chairman of a recently formed committee of Delta retirees.

Trying to steer companies out of trouble is nothing new to Mr. Grinstein. The Seattle native walked away from his law partnership in 1983 to take over struggling Western Airlines, which he revived and then sold to Delta for $860 million in 1987. The successful turnaround propelled him to the top job at Burlington Northern Inc., where he had a mixed record. Mr. Grinstein ultimately made his mark by sparking a railroad-industry consolidation with a $4 billion acquisition of Santa Fe Pacific Corp. in 1995.

At Delta, Mr. Grinstein is likely to rely on the persuasive powers that have been a crucial part of his management style. Mr. Grinstein helped make Western profitable by chatting with employees and persuading labor unions to trade wage and work-rule concessions for company stock and seats on the board. He brought a similar formula to Burlington Northern.

The surprising timing of Mr. Mullin's departure prompted Standard & Poor's Ratings Service to place Delta's debt on "CreditWatch with negative implications." S&P cited the company's continued losses and heavy debt problems. Delta reported a third-quarter loss of $164 million, compared with the $326 million loss in 2002's third quarter. Delta has posted losses of $2.87 billion since the start of 2001. It expects a fourth-quarter loss of between $365 million and $415 million.

Delta officials emphasized that Mr. Mullin wasn't being forced out and that despite being passed over, Mr. Reid has agreed to stay on. A long time acquaintance of Mr. Mullin's said Mr. Mullin informed the board early last summer that he was getting ready to retire and that directors should begin looking for his successor.

Delta said Mr. Mullin will receive a retirement benefit valued at about $16 million before taxes, reflecting his years at Delta and an additional 22 years of credited service to reflect pension benefits he left behind when he joined the airline. Mr. Grinstein will get an annual salary of $500,000, and Mr. Smith will receive an annual retainer of $200,000 as nonexecutive chairman, plus other director fees.

Mr. Mullin leaves a legacy that included successes such as acquiring regional carriers Comair and ASA, co-founding the global SkyTeam alliance with Air France and a relatively strong balance sheet that allowed Delta to weather the Sept. 11 crisis better than most hub-and-spoke carriers. He also took on the job of leading the industry's effort to get federal financial help to rescue the nation's carriers.

However, the disclosure of sizable compensation packages for Mr. Mullin and other airline CEOs -- as well as special individual retirement trusts for top senior Delta executives -- infuriated some key Washington lawmakers and complicated the industry's second campaign for a multibillion dollar federal-aid package last spring.
 
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