Before long Lorenzo and Carney had accumulated enough in fees to afford a prestigious business address, in a small office on one of the top floors of the Pan Am Building. In February 1969 they had incorporated a new outfit, called Jet Capital Corporation, and made plans to sell stock in a public offering. The stock sale went forward in January 1970, landing $1.5 million, just before the great bull market of the 1960s began crashing to its end.
The shares of Jet Capital had been sold to the public at $10 each. But before the sale, Lorenzo and Carney had sold shares to a few of their friends at just $3.50 each. Before that, Lorenzo and Carney had sold shares to themselves at 12¢ each—and not just a few shares. The total of $44,700 that Lorenzo and Carney had personally invested put about three quarters of the stock of Jet Capital in the hands of Lorenzo and Carney. Members of the public, having invested $1.5 million, wound up with one quarter of the shares. On the strength of a well-written prospectus, Lorenzo and Carney controlled most of that $1.5 million, having spent less than $45,000 to get it. It seemed like magic.
Lorenzo and Carney had planned to use this money, in turn, as equity as flash money to borrow more money, with which they would buy jets, which, in turn, they would lease to the airlines at a profit. The leasing market, however, collapsed at about the same time as the stock market, dashing their plans—but leaving $1.5 million at their disposal, waiting for a new purpose to present itself.
Then one day, while packing for a European vacation, Lorenzo grabbed a pile of annual reports on small airlines—pleasure reading. Paging through them after his arrival in Spain, he decided that he and Carney could do a lot more than simply render advice to financially troubled airlines. They could use the money from the Jet Capital offering to participate in whatever financial turnaround they prescribed for their client. They could position themselves as financial advisors and the advice could be, Sell to us.
Sitting in Utica, New York, lay their first target, Mohawk Airlines, a local-service operator launched, like so many others, on the back of the DC-3. Mohawk linked Buffalo, Albany, and Syracuse, among other upstate towns, with New York City. Mohawk had management with vision. It was the first airline in the world to dedicate a newfangled device called a computer to the onerous task of managing reservations. It had also become, in 1957, the first airline in America to hire a black stewardess. It was the first of the little regional airlines to enter the jet age, but it had gone overboard. Mohawk by the early 1970s was suffocating under a pile of debt.
Lorenzo met with Robert Peach, Mohawk’s leader, a tempestuous and flamboyant former World War II aviator. Before long, with a contract to provide consulting advice to Mohawk, Lorenzo began putting in place a restructuring plan by which he would emerge in control. But Mohawk’s board grew apprehensive about the young, smartly dressed 30-year-old from Wall Street. With the company’s fortunes sinking fast, the directors arranged instead for Mohawk to be taken over by Allegheny Airlines, another local-service airline operating in the East. The purchase would help catapult Allegheny into becoming US Air, but Lorenzo and Carney left with $1.5 million still burning a hole in their pockets.
Bob Peach, for his part, had lunch with Frank Lorenzo shortly after the company had slipped from his grasp. Afterward Peach went home to prepare to present a speech to the Rotary Club. He walked into his closet to get dressed, grabbed a gun, and killed himself.
As Lorenzo was trying to acquire an operating airline, Don Burr was still managing mutual fund investments. One of the many holdings that the fund maintained was a package of securities in a little airline hardly anyone in New York had ever heard of. The company was Trans-Texas Airways.
For years the family owners of Trans-Texas had made a comfortable living by flying oil prospectors, rig salesmen, and cattle traders among the small towns of the Southwest. Still operating a fleet of unpressurized, 1930s-era DC-3S, the company in the 1960s made a small killing in the Vietnam troop buildup, collecting draftees from across Texas and delivering them to an induction center in Louisiana. Later, as South Texas became a kind of poor man’s Florida for retirees from the Midwest, Trans-Texas also did a lucrative trade shipping the remains of winter “snowbirds” in caskets back to their hometowns for burial. Among U.S. airlines, it ranked about 20th in size.
It was in 1969 that Trans-Texas, also variously known as Tree-Top or Tinker Toy Airlines, changed its name to Texas International Airlines, an aggrandizement it justified by its service to a few sunbaked destinations on the southern side of the Rio Grande. But the company had problems that no name change could cure. Like Mohawk, Texas International had overwhelmed itself with debt in the transition from propeller planes to jets, and creditors were beginning to close in. Perhaps worst of all, after years of coexisting with Braniff Airways in a cozy oligopoly over the air routes of Texas and neighboring states, Texas International had unsuccessfully assisted Braniff in its legal assault on the encroaching Southwest Airlines. Its courthouse remedies exhausted, Texas International was left to adopt the unfamiliar practice of competing to defend its routes.
Don Burr had an idea that his friend Frank Lorenzo could come in as a consultant and develop a plan to help save Texas International. With his standing as a mutual fund investor in the airline, Burr convinced Texas International to pay Lorenzo and Carney $15,000 a month to evaluate the company and recommend a regimen for recovery. The prescription ultimately urged by Lorenzo and Carney was to sell the company to Lorenzo and Carney.
They looked on the plan as the failed Mohawk bid redux. Lorenzo told the Texas International directors that he would convince the company’s creditors to refinance the airline’s mountain of debt on new, easier terms. And he, Lorenzo, would persuade them of the company’s worthy prospects by raising $5 million in needed new equity—including most of that $1.5 million still accumulating T-bill interest in the accounts of Jet Capital. Don Burr took the vital step of arranging for his fund to inject some of the fresh equity as well.
The board of Texas International, like the board of Mohawk a short time earlier, looked warily upon Lorenzo. As the directors debated, Herb Kelleher caught wind of the Lorenzo plan and immediately swung into action in behalf of Southwest Airlines. Kelleher had been sure that Texas International was doomed; now, even if Lorenzo’s refinancing plan ultimately flopped, it would indefinitely prolong Texas International’s death throes. That would hardly be in Southwest’s interests.
Kelleher showed up at a Texas International board meeting offering to reorganize the company on the same terms that Lorenzo was proposing. But when Kelleher walked into the boardroom, he noticed that Lorenzo was seated with the Texas International directors, awaiting Southwest’s presentation. Lorenzo had one of the company’s major investors, Don Burr, already in his corner. Kelleher was too late.
As it turned out, a third would-be buyer of Texas International had also made the scene: none other than Howard Hughes. A decade earlier Hughes had been ousted from TWA by the company’s lenders. He now appeared intent on recreating the kind of vast, coast-to-coast route network that he had once controlled at TWA. The great recluse had recently grabbed control of a company called Air West. Integrating Texas International and Air West would, essentially, put Hughes two thirds of the way toward creating another transcontinental airline.
Howard Hughes’s aides marched to the CAB and demanded disapproval of the Lorenzo deal. They argued that Lorenzo had hog-tied Texas International with conflicts of interest—conflicts mostly involving Frank Lorenzo and Bob Carney. Lorenzo fought back, arguing that his plan represented the last best hope of saving the airline. In the end, at a point when the creditors were preparing to pull the plug, the Texas International board decided to back the Lorenzo plan. The CAB, too, ultimately approved.
It was a proud moment: with a big boost from his friend Don Burr, Lorenzo had vanquished both Herb Kelleher of Southwest and Howard Hughes himself. His personal holding company, Jet Capital, soon owned 24 percent of Texas International’s stock, using money rais
ed from other investors. And having acted as the airline’s financial advisor, Lorenzo had structured the transaction so that his one-quarter ownership gave him 58 percent voting control.
In an industry rife with overachievers, Frank Lorenzo, 32 years old, had just become the youngest president in the history of commercial aviation since Juan Trippe had entered the industry more than 40 years earlier. Now he needed help in running his new airline.
From boyhood Donald Burr had passion—passion and glibness, the attributes of an evangelist. As a grammar school pupil he became a proselytizer for his church, chauffeured from town to town to recruit other youngsters into an organization called Pilgrim Youth Fellowship. He seemed destined for a career in the ministry until, as a sophomore in high school, he was thrown into a ferocious statewide election contest for the leadership of the fellowship. The adults took over the campaigning, and the electioneering grew ugly and dirty. Burr broke with religion in disgust, never again to set foot in a church except for the occasional ceremony.
Growing up in blue-blood Connecticut, in a house with Revolution-era bullet holes in the shutters, Burr was one of those maddening kids who seem perfect in all ways. He played piano and saxophone; sang professionally; was a class officer, championship soccer player, and one of the leading scorers on the Ellsworth High School basketball team. His grades, however, were excruciatingly average.
He fell in love with a cheerleader named Bridget. One day, after making his way across country to attend Stanford University, Burr decided that he just had to see her, he needed to see her, he couldn’t wait another day, so he got on a motorcycle and drove all the way back to Connecticut, the last two days without sleep, his face wind-burned and splattered with bugs and mud, until he got home, took a shower, set out in search of Bridget, and found her. Approximately forty weeks later he became a father. Along the way, they married.
Burr had wanted to become an English professor—anything but a businessman. His father, who was sclerotic and infirm even in his 30S, was an engineer whose career never really got off the ground. Business is dirty and bad, his parents had told him. You’ll certainly not be a businessman. But after a while in college, Burr decided that the anguish of writing was too great for him to consider a career in literature, and he had a family to think of besides. At Stanford he met David Packard, who was catapulting Hewlett-Packard into the ranks of big business. Judging Packard to be of impeccable integrity, Burr decided it was okay after all to become a businessman, and he switched into the business curriculum, ultimately arriving in the M.B.A. program at Harvard about the time Frank Lorenzo was leaving.
Burr ultimately succeeded in his quest to become president of National Aviation, the mutual fund operator. His office at 111 Broadway looked down on the Trinity Church graveyard, where one of the soot-blackened headstones belonged to Alexander Hamilton, killed in a duel by one of Donald Burr’s distant forebears, Aaron Burr. But after becoming president, Donald Burr began to fight with the conservative men who served on his board. Tired of buying a little United Airlines stock here and selling a little Boeing there, Burr wanted to run something, the way his friend Frank Lorenzo, with Burr’s help, had firmly taken charge at Texas International. Burr grew passionate, arguing with his board so strenuously that his arms flailed.
Burr’s frustration became dangerous. He owned a small single-engine plane called a Mooney, known for speed—a hot-rod plane, as Burr thought of it. The plane was his escape vehicle for the weekend. One weekend Burr climbed into the Mooney with his wife, then nine months pregnant, and his two children in the back seat, bound for a weekend of skiing in Vermont. Though the weather was threatening, Burr took off. Soon the plane was caught in a snow squall. It pitched and dove. His children began to vomit all over the back seat. He couldn’t make sense of his instruments. Airports were closing; he could not find a place to land. Soon he was running low on fuel. A controller finally talked him through a landing in the blinding storm. Never again would Burr pilot an airplane.
Burr left Wall Street in 1973 to work at Texas International, headquartered near Hobby Airport in Houston. Texas International made its home in a windowless building constructed of galvanized metal whose azure hue caused employees to call it the Blue Barn. Figuratively the Blue Barn resembled Peyton Place, with Byzantine intrigue and office politics that eyewitnesses would later describe as Kafkaesque.
Burr accepted Lorenzo’s job offer, making it clear he wanted a full partnership: the same pay, stock options, and responsibilities that Lorenzo had. They would become co-chief executive officers of Texas International, as Burr understood it. But when Burr arrived in Houston, he found Lorenzo had made him chairman of the executive committee, whatever that was. Then, when the two of them paid a visit to Alvin Feldman, the head of Frontier Airlines in Denver, Feldman looked at Burr’s business card and remarked that at some companies, the most powerful executive carried that title. Lorenzo soon made Burr an executive vice president instead.
Once Burr was on the scene, Lorenzo’s longtime partner, Bob Carney, was all but yesterday’s news. Though Carney continued his probing financial investigations and maintained vital contacts in the banking community, it was Burr who became Lorenzo’s soul mate. Despite their misunderstanding over Burr’s titles, they worked, ate, and drank together—and always the conversation was airlines, their airline. When Lorenzo married, Don was his best man. When Burr’s son Cameron was born, Frank was the godfather. But they also fought. Burr would grow emotional, yelling and gesticulating, until Lorenzo would cut him down, elliptically targeting some vulnerability, playing a “conversational crossword puzzle,” as Burr called it, to keep him and others off balance.
How come our on-time performance was so bad last month?
Frank, you may remember that we had a hurricane!
Well, then, why didn’t you have the planes tied down?
“He would make you feel despicable,” Burr later said.
Yet still they grew closer. They began jogging together, eventually competing in the New York Marathon, skiing together, spending holidays together, and always, it seemed, quarreling.
On one issue, though, they were in complete agreement. With Southwest Airlines having replaced its fourth airplane, it was soon bringing in its fifth and sixth 737s. Texas International had an edge over Southwest since it had many connecting routes outside of Texas on which Southwest was prohibited from competing. But Lorenzo and Burr would have to cut costs if they had any hope of competing inside Texas.
Burr and his operating aides therefore hung tough when a labor contract for the airline’s ground employees came up for renegotiation. Finally Burr went to Lorenzo for approval of a final offer that everybody at the bargaining table had resolved to live with. Burr, hearing no objection from Lorenzo, then gave the go-ahead to the company’s chief negotiator. The negotiator, bargaining late into the night, at last closed the deal, and Burr once again called Lorenzo.
“Frank, great news,” Burr said. “We got the deal.”
“What deal?” Lorenzo asked.
“You know, the deal we discussed!”
“I didn’t agree to that.”
Burr was stunned. Of course Lorenzo had approved the deal, he thought. But now the company’s negotiators had to go back to the bargaining table and take it all back. The union, outraged, promptly launched a strike, the first in Texas International’s history. The strike, one of the longest in the industry in years, lasted some four months, but it was no financial calamity for Texas International. The industry had a program known as “mutual aid,” in which all airlines subsidized the losses incurred by any one of them that took a strike. It was the airlines’ way of assuring that wages never got disproportionately high at any one employer—that they would all remain in the same boat, so far as wages were concerned. During his long strike, Lorenzo raked in more than $10 million in mutual aid from the rest of the airline industry. He had turned adversity into gain. As he later confided to Burr, “We needed the strike.”<
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The strike was a blessing for Lorenzo in another respect: it forced him to come to terms with Southwest, in a way that would revolutionize the airline industry.
The showdown came over service to the unlikely locale of Harlingen, Texas. Harlingen was a dusty border town in the southernmost tip of Texas, a Hispanic-settled agricultural center that seemed as much a part of Mexico as America. Texas International had served Harlingen for years. Although the city never seemed to produce more than a handful of passengers, the fare was always high. A remote six or eight hours by car from just about anywhere, Harlingen was vitally dependent on that air route. When the strike shut down Texas International’s service, the townsfolk of Harlingen felt betrayed.
Southwest’s operating chief, Lamar Muse, saw Harlingen as the perfect place for Southwest to take its next step; Harlingen was only a few minutes by car from the coastal resort of South Padre Island, which Muse recognized as an up-and-coming tourist spot. But Harlingen was among Texas International’s most dearly held destinations, a monopoly route with high fares. Lorenzo vowed to block Southwest from Harlingen, sparing nothing in the effort.
Lorenzo’s aides launched an advertising campaign depicting Southwest as a Trojan horse with wings, claiming that if Texas International were forced to abandon service from Harlingen, the city would lose its vital route connections to destinations all across America. Texas International, after all, could pick up business passengers and cargo in Harlingen and arrange their shipment to any region of America, if not on its own system, then on Braniff or another airline. Southwest, by contrast, was strictly a point-to-point carrier. Southwest did not write connecting tickets. It did not “interline” baggage or freight to other airlines. Southwest didn’t even carry U.S. mail. (Doing so caused too many late departures.)
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