Delta Air Lines Inc. (DAL) Tuesday said it will reduce executive and employee pay by 10 percent starting in January and its CEO will go unpaid for the rest of the year as it tries to cut costs to avert bankruptcy.

Separately, Delta pilots on Tuesday ratified an agreement that will allow the carrier to use retired pilots if staffing levels fall dangerously low.

Shares of the Atlanta-based No. 3 U.S. airline rose as much as 21 percent.

Delta also said it will increase employee costs for health care coverage, reduce maximum vacation time, eliminate a subsidy for retiree medical benefits and offer two voluntary exit packages to employees.

As part of its cost saving measures, Delta said earlier this month it will cut up to 7,000 jobs, or about 10 percent of its work force, over the next 18 months and drop Dallas/Fort Worth as one of its hubs.

Chief Executive Gerald Grinstein (search), in a memo to employees Tuesday, said the changes — in addition to the $1 billion in annual savings the company is seeking from pilots — are essential to Delta's survival.

"We have a small window of opportunity available to us to avoid Chapter 11 that some other carriers do not have," he said. "It is in everyone's best interest that we protect Delta's future by taking these steps together now."

Grinstein said he had hoped increased productivity, the lack of pay increases since 2000 and the reduction of 16,000 jobs would eliminate the need for additional sacrifices.

But Delta is strapped with high costs, weak revenue and rising competition from discount carriers. It said its fuel costs this year will be $680 million more than last year.

The changes are part of its plan to save $5 billion a year by 2006.

Joe Schwieterman, transportation expert at DePaul University (search), called the 10 percent pay reductions "real and meaningful cuts."

"Grinstein is taking a bold preemptive move to take a potentially explosive issue off the table if the cuts aren't fairly distributed," Schwieterman said. "This will help ease fears that (pilots) are being unfairly singled out."

Delta has previously said Grinstein's annual salary is $500,000. Grinstein's predecessor, Leo Mullin, stepped down last year after being sharply criticized for his pay package.

The airline has been in concession talks with its 7,400 pilots, its only major unionized group, since last year.

In exchange for use of the retired pilots on a contract basis, Delta has assured the union it will not file notice to cancel the pilots' pension plan before Feb. 1, even if the company files for bankruptcy before that date.

Waves of Delta pilots recently have taken early retirement, raising concerns that a decline in staffing levels could require the carrier to ground a portion of its fleet.

Capt. John Malone, head of Delta's unit of the Air Line Pilots Association (search), said ratification of the deal on retired pilots allows the union to refocus efforts on an overall agreement as part of the company's restructuring.

Delta shares were up 41 cents, or 14 percent, at $3.35 on the New York Stock Exchange Tuesday.