DeltaExecsLetter

Ex-Delta execs fought pension move

By RUSSELL GRANTHAM

The Atlanta Journal-Constitution

March 30,2003

Text: Letter from retired Delta executives (following this article)

Text of a letter from Robert S. Harkey (following this article)

A group of 30 retired Delta Air Lines executives told current management last winter that spending millions of dollars to insulate top executives' pensions from potential bankruptcy claims was "morally wrong" and "unconscionable."

The group, which includes two former No. 2 executives at the Atlanta company, also warned the move would hurt Delta's reputation, as well as its ability to seek federal aid and uphold employee morale.

Their warning came in a Jan. 22 letter to Delta Chairman and Chief Executive Leo Mullin. Some of the retired executives decided to make the letter public after last week's formal disclosure by Delta that it spent $25.5 million in 2002 to start creating protected pension trusts for Mullin and 32 other top executives.

The airline also reported that it gave Mullin a $1.4 million bonus in addition to his $795,000 salary and awarded bonuses to other top executives. It said the bonuses and pension moves were needed to retain talented management.

Delta lost $1.3 billion last year, shed 16,000 jobs and often led industry appeals for federal aid. The executive pay disclosures, which came in a required annual filing, sparked criticism from the public and some members of Congress.

"I'm flabbergasted that they would do this," said Robert Coggin, one of the letter-signers. He spent 42 years at Delta before retiring as an executive vice president in 1998.

Delta responded to the retired executives' letter in a letter to their lawyer, Dean Booth, on Feb. 7.

In addition to rejecting their arguments, it suggested that some of the retired executives had previously sought to have their own pensions put into prepaid trusts. It also said the money spent on trusts for current executives was "not substantially more than the total of the severance packages" awarded in recent years to eight senior members of the group.

Delta's response, signed by General Counsel Robert Harkey, defended management's performance since the Sept. 11, 2001, terrorist attacks. Harkey said the executive team "has succeeded in outperforming most of its peers in maintaining liquidity, which we believe will allow us to weather the storm and then position Delta to continue its industry leadership."

Despite its losses and continuing cutbacks, Delta is considered in better shape than most big airlines. The trusts are "critically important to maintain the management team in place," Harkey wrote.

Signers of the Jan. 22 letter comprise a who's who of Delta leadership in the decade before Mullin was hired in a 1997 shake-up. In addition to Coggin, they included Maurice Worth, who retired as chief operating officer in 1999; Whit Hawkins, who retired as president and chief operating officer in 1993; Thomas Roeck, who retired as chief financial officer in 1997; and Harry Alger, who retired as executive vice president for operations in 1998.

According to Booth, a separate letter was sent by David Garrett, Delta's chairman from 1978 to 1987.

In their letter, the retired executives said they were "shocked" to learn last spring of the pension trust plan. Essentially, Delta is depositing amounts equaling the executives' accrued pension benefits in accounts that would not be subject to bankruptcy claims. Since the money spent is considered income for the executives, the airline also paid their immediate tax liability. According to last week's filing, it spent $8.2 million alone on the trust set up for Mullin, who got immediate credit for 22 years of pension service when he was hired.

"The use of Delta's funds for this purpose . . . left us in disbelief," the letter said.

It dismissed the retention argument, saying the current executives affected "are all highly paid," in many cases got hiring bonuses and special stock incentives, and enjoy "a multitude of other perks."

The former executives also worried the maneuver gives management less incentive to avoid a bankruptcy filing.

"The payments you have made . . . will shelter the officer if the company fails. It would appear bankruptcy is no longer considered a last resort, but will now become just another strategic plan alternative to eliminate costs and force pay concessions," the letter said.

Harkey disputed that.

"I can assure you that is not the case," he wrote. He noted that bankruptcy would wipe out executives' stock holdings, adding they are "determined to avoid that approach and all of the pain to all Delta people, both emotional and economic, that would flow from a bankruptcy."

The $25.5 million spent by Delta to create the pension trusts only covered 60 percent of the total. Delta plans to fund the rest in payments this year and next, and make additions in future years.

The airline contends top executives' pensions could be substantially wiped out in a company failure, while other workers' pensions are partially protected by the government.

Northwest and Continental also disclosed executive bonuses last week, though smaller than Delta's. Sen. John McCain (R-Ariz.), who heads a committee overseeing airlines, called the airline bonuses "insulting." He said a proposed $3 billion industry aid package may bar executive pay increases.

Coggin said he has gotten about 500 e-mails from Delta employees upset by the bonus and pension moves. "There's a combination of anger and a feeling of disbelief and betrayal," he said.

Worth noted that during Delta's last financial crunch, in the early '90s, top executives took no bonuses. Nor did they spend money on pension trusts, he said.

Mullin got no bonus and a $200,000 pay cut in 2001, after the attacks. Mullin and Delta President Fred Reid are taking a 10 percent salary cut this year.

To justify 2002 bonus payments, Delta retooled its bonus formula, which had been based on profit and service measures. Besides bonuses for top executives, it paid $12.5 million in bonuses to 55 second-tier executives.

Delta shows no sign of reconsidering any of the moves, which were approved by a four-person committee on its board.

Spokesman Tom Donahue said pension trusts "are increasingly used as a retention mechanism" at other companies. He also questioned the former executives' motives.

"It seems curious that the retirees' philosophical objections were only expressed after their demand to be included in the program was unsuccessful," he said.

Worth acknowledged the retired executives first sought to be "treated equally." He said they decided not to pursue that demand after realizing the state of the industry was worsening.

"That's when we decided to go the letter route," he said. "The purpose of the letter was to say you made a real bad mistake and that it's going to come back and haunt you, which it has."

Letter from retired Delta executives to

Leo F. Mullin, CEO of Delta Airlines

January 22, 2003

Dear Leo:

We are retired officers of Delta Air Lines, representing diverse backgrounds, personalities and experiences. While most of us spent our entire careers with Delta, some came from other carriers. Many of us have had the opportunity of working with you and enthusiastically embraced you and your visions for our company. We have worked hard to make your transition successful and when we retired to help you build your own management team, you recognized our contributions and rewarded us fairly. Many did not have the opportunity to work with you, but all of us share a common objective. We have always been deeply committed to Delta, its people and Delta's continued success. It is for these reasons we feel compelled to write this letter.

Last spring a number of us were shocked when we learned from sources outside of Delta that a pre-payment of all accrued pension obligations to officers was proposed to the Board shortly after September 11, 2001. The payments, made in the spring of 2002, to the officers (or their trusts) of the present value of the Company's pension obligations were made because of concerns about approaching insolvency so that the Company's obligations to the current officers would not be at risk in the event that the Company should have to file for bankruptcy. The use of over one hundred million dollars of Delta's funds for this purpose, as well as the fact the action was taken in secrecy and only "disclosed" much later in an exhibit to an SEC filing (indicating an intent to keep the full information from shareholders and both active and retired employees), left us in disbelief.

As you know, prior to this pension pre-payment, all officers had been in a single special pension plan unique from other employees in that the majority of our pension payments were just paid from Delta's general funds, as required by the IRS, as opposed to being paid from the Delta Family Care retirement plan. For this reason, when this first came to our attention it appeared that the current officers had fully taken care of themselves, and that all of the retired non-officer employees' pensions would be protected because they were funded out of the Delta retirement plan. It appeared that the only group left whose retirement benefits would be severely exposed in a bankruptcy was approximately 40 retired officers, some of whom, in the event of bankruptcy, could see their pensions reduced by up to 85 percent. For this reason, we sought legal counsel.

Our legal counsel determined that the payments to present executives represented a preferential payment to a group of creditors with immature claims, at a time when the Company was deeply concerned about insolvency, and had other mature unsecured claims which were treated differently. The situation was made worse because the payments were made to insiders. We were advised that the business judgment rule did not abolish the fiduciary duty you have to creditors or else all preferential payments to insiders could be so justified.

As you also know, the above information resulted in our attorneys going so far as drafting a complaint and contacting Delta's attorneys to discuss the proposed lawsuit. Despite Delta's legal counsel's opinion that our case is without merit, we believe it to be a strong, compelling case and were prepared to go forward on behalf of all retired Delta officers as parties to the lawsuit. However, the following recent events and findings have caused us to reconsider legal action:

The sudden United Airlines bankruptcy filing and the resulting media coverage and speculation about the well-being of other carriers.

Your renewed and intense appeals on behalf of the industry to Congress for financial relief.

We learned from several sources, including a UBS Warburg report, that Delta's qualified pension plan is under funded by at least $3.5 billion dollars.

We also learned during the last few weeks of the significant impact a bankruptcy at Delta would have on all employees' pensions (except of course current officers) particularly those who received credit for age/service in early-out packages for the past ten years.

We believe this information to be motivation enough for you to do the right thing for Delta's former and present employees everywhere by rescinding the payments made to or on behalf of current officers. A lawsuit would not only involve a few dozen unsecured creditors but would also include all retired employees, making the suit a major media event. We believe this kind of publicity would be detrimental to the Company, its officers, its board, the shareholders and ultimately all of Delta's employees.

In light of business and industry developments over the past 14 months, the media's focus on corporate misconduct, the reduction of the employees' pension benefits, the necessity to reduce other benefits and staffing at Delta, we are surprised that you have not reconsidered your position related to paying in cash to, or on behalf of, the officers, the Company's accrued obligations to the current officers. In order to ensure that you fully understand the consequences associated with your actions and how the public will view this, we offer the following for consideration:

The idea of paying out the accrued pension liability was conceived in October of 2001 when some officers began to worry about bankruptcy as a result of September 11, 2001. The actual payment of money was delayed until February which had the effect, and perhaps the intent, of avoiding having to reveal it in the Proxy for the April 2002 annual meeting and delaying the financial disclosures until spring of 2003. Additionally, there is a one-year preference period for insiders that ends this coming February which coincidentally, is just before the proxy is released. The fact that this action was not announced and that you continue to withhold the fact of these payments from the employees (unless you consider an included exhibit to a IOQ as a communication) and the retirees, both of whom could be severely impacted, raises an ethical question in our judgment.

The fact that no other public company in the country has incurred the expense and used its cash to make a similar payment also raises disclosure issues.

In order to prepay these obligations, you took approximately $150 million of the Company's funds for the executives even when you were aware that the Company and its employees were struggling for survival and that the rank and file employees' pension fund was billions of dollars underfunded. To make matters worse, The Atlanta Journal Constitution reported that Delta's share of government financial assistance, as a result of the events which occurred on September 11, 2001, was $150 million net. We doubt the taxpayers or government would be pleased to know their entire financial assistance of $150,000,000 was used to prepay benefits to Delta's already highly compensated officers.

As spokesman for the industry, you have been relentless in lobbying Congress for financial relief for all airlines, which is desperately needed. However, by spending hundreds of millions of dollars to provide financial security for the officers, in spite of the threat of insolvency, and to further build their wealth in a post-Enron environment while Delta and the entire industry are in financial crisis and begging for government assistance, is not something the public nor the government would look upon favorably. Indeed, as noted earlier, the action is unique. We believe this will be damaging to your personal reputation and could have a very negative impact not only on Delta, but on the industry as a whole.

During the past 14 months you have required Delta employees to make many sacrifices. They have accepted reductions in their benefit programs, job reassignments and furloughs. Asking them to make these sacrifices while you and the other officers quietly spent millions of dollars prepaying your own benefit plan is morally wrong and violates the trust of Delta employees, retirees, and stockholders.

As was mentioned earlier in this letter, we have learned from pension/ERISA experts, financial professionals, bankruptcy attorneys and government agencies that based on Delta's current pension liability and financial situation, in the event of a bankruptcy at Delta, many retiree pensions would be significantly reduced. We will not go into the details as your finance and human resource department should be quite familiar with this issue. It appears that all retired Officers/Directors' nonqualified pension benefits, which in some individual cases represent as much as 85 percent of their total pension, would go away and would be treated as unsecured debt. Additionally, the qualified pension would also be reduced to reflect the reality of the shortfall in the pension fund, with enhanced benefits (credit for age/service provided in early retirement packages) and benefits over PBGC maximum of $28,000 - $44,000 per year being eliminated first. Therefore, most all retired Officers and Directors regardless of their exposure in the unqualified plan would have their pensions reduced, as would all retired non-pilot employees, particularly those who have taken early retirement packages over the last ten years.

In order to summarize the issues here, you have been concerned enough about bankruptcy to take care of yourselves by paying all of your accrued benefits in cash now (and even causing the Company to "gross up" the prepayment by paying the income tax liability as an additional benefit), yet you have encouraged employees to take early retirement packages knowing full well that they would not receive the promised benefit if the Company goes bankrupt. Additionally, you have made no attempt to inform the thousands of employees who have already retired of the impact of insolvency on their pensions, particularly early retirees.

We assume that you will have to mention the dollar cost of these payments in the proxy for 2003. Based upon the previous limited disclosures, we assume it will be mentioned as little as possible. It will be difficult to characterize this publicly as a retention issue when you have already spent millions of dollars on bonuses for officers/directors, established a bonus program for those staying for a few years, and have issued two stock options within the year at deflated prices to be vested in one year. Additionally, many of the current Officers/Directors have less than six years of service but were given pension credit for as much as twenty years of service when they joined the Company. They are all highly paid, many receiving significant signing bonuses, restricted stock, large stock option grants, employment contracts and a multitude of other perks and expenses associated with their employment and positions. They are hardly destitute or in need of special, unusual pension payments not afforded to other employees. Just characterizing payments as made for "retention purposes" does not shield the payments from creditors' claims. If such were the case there would be no need for lengthy insider preference periods as well as the imposition of very high levels of fiduciary responsibility to creditors on officers when a company is in the vicinity of insolvency.

We are concerned that when the proxy comes out, you will try to characterize the payments made to the officers' individual trusts as being similar to the cash balance plan for current employees and done early as a precursor to their plan change. The fact that the cash balance plan results in LOWER pensions on average (how else would you reduce pension costs for the rank and file by $500,000,000?) while you spent millions of dollars to make payments to or for officers based on the FULL VALUE of their accrued benefits (including a gross up to provide money for the executives to pay taxes they would have otherwise had to pay themselves), shows that there is no comparison to the employee plan. Any attempt to try and make that comparison will further erode your credibility when the details of your payments are revealed.

Throughout Delta's history, officers have always had their incentives tied to making the Company successful. The payments you have made in satisfaction of the officers' accrued pension liabilities as well as the Bonus Plan for three years will shelter the officer if the company he/she serves fails. It would appear bankruptcy is no longer considered a last resort, but will now become just another strategic plan alternative to eliminate costs (including pension liability) and force pay concessions. We see little incentive now for you or the present executives to attempt to avoid bankruptcy after the insider preference period expires in February.

In summary, it seems unconscionable that thousands of employees who have worked and sacrificed to build the Company, which created a career opportunity for you and the other officers, have been left to fend for ourselves, while you and the current officers continue to use Company funds to build your wealth and future financial security at the expense of all other Delta stakeholders. At a recent analyst conference you were quoted as saying "the airlines are not seeking special treatment, but an end to special treatment". In short we are asking you to end the special treatment for yourselves.

We recognize that our mutual and ultimate goal must be to secure the long term viability of Delta Air Lines and to avoid bankruptcy. We therefore respectfully implore you and your management team to accelerate and move decisively to execute your recovery business plan and make those difficult, but absolutely necessary, decisions that will reverse the unacceptable and unsustainable, financial hemorrhaging.

Delta's competitive advantage has always been its people. The Delta family made up of thousands of retired and current employees is poised to stand shoulder to shoulder with you to do whatever is necessary to avoid bankruptcy and secure Delta's future. We call upon you to lead us with a commitment of SHARED sacrifice and risk.

For the reasons we have articulated in this letter, we are asking you to immediately rescind the pension change for current officers and return the money to the Company and share in the risks and sacrifices of the other employees and retirees. We believe that to do otherwise will cause harm for our Company and will hinder your ability to seek the trust and cooperation of the government, shareholders, retirees and employees in the future. In short, we urge you to do the right thing.

We request that you or Bob Harkey communicate your response to the issues expressed in the letter by February 5, 2003 to Dean Booth, the attorney who represents the undersigned partial list of retired officers/directors. Otherwise, we will be compelled to consider further action. Very truly yours,

Robert Adams

H.C. Alger

Bill Berry

Marty Braham

Pete Caldwell

Jim Callison

Robert Coggin

Richard Colby

Bob Cowart

Russ Crawford

John Davis

W.E. Doll

Doug Dunn

David Greenberg

Julius Gwin

Whit Hawkins

Russ Heil

John Hoover

John Hume

Dave Huss

Marvin Johnson

Julian May

Rex McClelland

Robert Oppenlander

Foy Phillips

Jenny Poole

Tom Roeck

Bobby Suggs

C.A. Thompson

Maurice Worth

cc: Ed Budd, Chairman Personnel and Compensation Committee

Board of Directors

Text of a letter from Robert S. Harkey, Senior Vice President, General Counsel and Secretary of Delta to Dean Booth, attorney for retired Delta executives

February 7, 2003

Dear Dean:

This is in response to the letter to Leo Mullin dated January 22nd which is signed by a number of retired Delta officers. We are responding to you in accordance with the request set forth in the letter.

I have reviewed this matter in some depth with Leo, and this response expresses his views, as well as my own. We are perplexed and disappointed by the letter.

We are perplexed because we previously received a draft complaint which you had prepared on behalf of the clients you then represented, which included some, but not all, of the individuals who signed the January 22nd letter. The thrust of that complaint was to demand that your then clients be included in the funding of the non-qualified retirement benefits under the excess benefit plans applicable to officers and other key managers (the "Funding Program"). In the January 22 letter, however, your clients demand that the Funding Program be rescinded because of a number of recent events indicating further distress in the industry. I am afraid we do not understand, however, why those events would change the conclusion that was the premise of the Funding Program, i.e., retaining an officer team that could help Delta to survive and then prosper under the increasingly difficult circumstances. (In this regard, I would point out that one of the key decisions that was made in the aftermath of September 11 was that it was critically important to maintain the management team in place to address the challenges the industry and Delta were clearly going to face.)

We are disappointed because the January 22 letter seems to be based in large part on incorrect facts concerning the Funding Program and other matters, as well as an apparent failure to attempt to verify those facts before making serious allegations of inappropriate actions by the current officer group, and, by implication, the Board of Directors. In particular, you and the group should be aware of the following:

It is incorrect that all accrued benefits have been funded -- rather the funding (1) is limited to retirement benefits under the non-qualified plans; (2) occurs over three years (60% in 2002; 20% in 2003; and 20% in 2004); and (3) is expressly tied to retention.

The amount funded in 2002 was not $150 million or "hundreds of millions of dollars," as the letter states; rather, it totaled approximately $25.6 million, including income tax withholding, for 33 individuals.

To put this in perspective, it should be noted that the total amount paid for 33 key members of management is not substantially more than the total of the severance packages that were received by eight of the most senior executives among your clients who retired in the last few years. The total value of the severance packages to those retired officers from 1997 to date is a little over $17 million. Moreover, the severance package for the retired COO in your group was approximately three times the funding for the current COO under the Funding Program.

Delta's total compensation under the Stabilization Act was $668 million, not $150 million as stated in the January 22 letter.

Adoption of the Funding Program was not "taken in secrecy" and "only 'disclosed' much later in an exhibit to an SEC filing." Rather, this matter was handled like other Board actions and our disclosure was both timely and in full compliance with SEC rules. Moreover, we will discuss the Funding Program in the upcoming proxy statement.

Payments under the Funding Program which occurred during the March 2002 quarter were not, as the January 22 letter suggests, to avoid disclosure, but because it was a complex matter that was carefully reviewed by the Personnel & Compensation Committee, its outside benefits consultant and management prior to being reviewed with the Board in january of 2002, when it was approved.

It is incorrect that no other public company has funded similar programs. A number of companies have, including Abbot Labs, Bausch & Lomb, Booz Allen, Brown and Williamson, Chubb, Marsh and McLennan Companies, MCI, Philip Morris, and Sara Lee.

Delta is not "approaching insolvency." At December 31, 2002, we had cash and short-term liquidity totaling $2.6 billion. We also have unencumbered aircraft with an estimated value of approximately $4.6 billion.

Concern is also expressed in the January 22nd letter about the underfunding of the Company's qualified pension plans. The underfunding is largely caused by the decline in asset values and interest rates which have similarly affected many other companies. While nothing can be absolutely ruled out, it is not likely that the underfunding will result in any reduction of the benefits of current retirees because current assets, even at their deflated values, are sufficient to cover pension payments to retirees for many years, and the pensions would be impacted only in the event the plans were terminated. A termination would occur only under the most extreme circumstances, which we do not foresee. In this regard, it is important to note that the pension plans have approximately $7 billion of assets, that we have met all ERISA funding requirements, and that the management has consistently said that we intend to remain in compliance wih those requirements.

The January 22 letter also states that Delta officers no longer have incentives to avoid bankruptcy and that bankruptcy "will now become just another strategic plan alternative to eliminate costs (including pension liability) and force concessions." I can assure you that this is not the case. In addition to the fact that bankruptcy would almost surely wipe out the value of all Delta common stock (including the direct holdings of the officers and all of their stock awards, including stock options and restricted stock), this officer group is determined to avoid that approach and all of the pain to all Delta people, both emotional and economic, that would flow from a bankruptcy. Our strategic plans reviewed with the Board last month include no bankruptcy alternatives.

Importantly, you should recognize that the management team, which has stayed in place since September 11, has succeeded in outperforming most of its peers and in maintaining liquidity which we believe will allow us to weather the storm and then position Delta to continue its industry leadership. As noted earlier, as of December 31, 2002, Delta had $2.6 billion in liquidity. Moreover, our plan for 2003 is intended to increase liquidity during the year. Additionally, the codeshare alliance with Continental and Northwest, our industry leadership in deploying regional jets, our low cost subsidiary initiative (Song), Leo's leadership in attempting to secure fair treatment of the industry from the government, and many other initiatives should provide your clients comfort that this management team is working very hard to take actions that will allow the Company to succeed and prosper.

Finally, I am sure that you and your clients must recognize that creating the "media event" mentioned in the January 22 letter could only harm the Company and ultimately all retirees. I assume that in any event they will not publicize the incorrect and unfounded allegations set forth in the letter. Moreover, I think that all of your clients will also recognize that they are not here, now, on the firing line dealing with the unprecedented challenges which no Delta management team has been faced with in the past. The current team is working very hard to get through these challenges successfully with guidance and direction from the Board of Directors. So far, we are succeeding. While we realize that others could always take different approaches to any decisions that are made, we hope that with the benefit of the facts provided in this letter, your clients will not question that the decisions were made in good faith.

We would, of course, be happy to discuss any questions you or clients may have.

Sincerely,

Bob

Mr. Dean Booth

Schreeder, Wheeler & Flint

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