In defending his monopoly, Lorenzo hired a new general counsel named Sam Coats, a former Texas state representative who had grown up in Harlingen. Charged with rallying the hometown folks against Southwest, Coats failed to deliver anywhere near the support Lorenzo required. When dozens of Harlingen residents made the long trek to Austin for a public hearing on Southwest’s application (by bus, because Texas International was still on strike), virtually all of them promoted, rather than opposed, the new service by Southwest. The best that Sam Coats could do in Texas International’s behalf was to have a funeral director from Harlingen testify that he relied on Texas International’s connecting flights to ship snowbird caskets outside Texas for burial.
Southwest’s new intrastate route was readily approved, and suddenly, at the nice round figure of $25 each way, Southwest was carrying close to a thousand people a day where Texas International had been lucky to carry a few hundred at $40. Before long, passengers from Mexico were coming over International Bridge in droves to seize the low fares. Harlingen Airport was teeming with such business that the dirt parking lot had to be paved over.
Lorenzo, Burr, and everyone else at Texas International watched as Southwest launched one jam-packed plane after another. Texas International had to do something drastic, fast. Its executives launched themselves on a crash course in discount pricing economics, with Lorenzo joking that they were now enrolled at Southwest University.
The duty to develop a response fell principally to two of Don Burr’s subordinates. One was Gerald Gitner, who had been hired as Texas International’s marketing head a few years earlier at the age of 29. Gitner was one of the true prodigies of commercial aviation, an industry in which, everywhere outside of Texas International, the old fogies held sway. Hired at TWA in 1968, Gitner had soon become the youngest vice president in the industry. He was, among other things, one of the first people in the industry to discover the “portable” electronic calculator—a device the size of a salesman’s case that Gitner hauled around to route swaps and other complex bargaining proceedings among the airlines. Gitner reeled off numbers and analysis with such speed and intensity that his coworkers called him Gatling Gun Gitner. Eager for the chance to earn some equity, tiring of the dinosaurs who didn’t “get it,” Gitner abandoned his 40th-floor corner office at TWA, with its view of the harbor and Kennedy Airport in the distance, to work in the windowless confines of the Blue Barn in Houston. One of Gitner’s principal aides, in turn, was James O’Donnell, who had started his career conducting sales calls on pharmacies for the maker of Vicks Vaporub. O’Donnell had gone on to Mohawk Airlines, where he had become acquainted with Lorenzo, and later to Texas International.
Burr and his aides began their counterattack by trying to pack more seats into each airplane. Most of the industry in recent years had been going in the opposite direction, ripping out interiors and installing ever wider seats with more room between rows. One of Burr’s planners, however, read about the crash of an Aeromexico DC-9 in which some 90 people were killed, and exclaimed “Ninety? Shit! We’re only carrying 70 on a DC-9!” Burr began studying ways of packing seats more tightly, a complex undertaking that demanded reconfiguring the ballast of the planes, recalibrating takeoff speeds, and installing altogether different tires.
As they studied ways to answer Southwest’s advancements, Lorenzo’s boys quickly realized the virtue in working for one of the smallest airlines in America. With all departments under a single roof, they could analyze boarding patterns by walking down the hall to the revenue processing department and flipping through the ticket stubs for any flight. While bigger companies compiled and collated their operating data according to the reporting requirements of the CAB, Lorenzo’s people worked up their own spreadsheets by hand, according to their own curiosity, a task made infinitely simpler by Gitner’s experience in operating an electronic calculator.
It soon became evident to all of them that Texas International could not compete head-to-head with Southwest. The company could replace the business it had lost to Southwest only by raiding the bigger, more established carriers of passengers. But with its Tree Tops image, how could Texas International ever hope to distinguish itself from the bigger airlines? With a price discount—if they could ever convince the government to allow it.
Lorenzo’s former Harvard classmate, Bob Carney, urged caution; a price cut on the order of 15 percent, he argued, would be radical enough. The junior men in the group, Gitner and O’Donnell, pushed for something simple, something nobody could forget, something like half off. It reminded O’Donnell of his days selling Vicks Vaporub—half off if you order today! “A bargain isn’t a bargain unless it’s perceived as a bargain,” Gitner argued.
The arithmetic was obvious: flying a plane completely full at one half the fare was better than flying it one-third full at full fare. Lorenzo, though eager for the acceptance of his fellow airline chieftains and reluctant to break their pricing stricture, began to appreciate the logic of slashing prices. He told people how busy his father’s Third Avenue beauty salon became when a sign went into the window promoting a special on permanents.
Lorenzo gave his approval.
On November 2, 1976, Jimmy Carter defeated Gerald Ford. The following day, only a block north of the White House, Gerald Gitner of Texas International stood behind a lectern at the Hay-Adams Hotel to announce that the company was going to the CAB for permission to cut fares by 50 percent in a few markets—interstate markets. Texas International dubbed the new prices “peanuts fares.” It was a pleasant coincidence that peanuts were the airline snack of choice and that the newly elected president of the United States was a peanut farmer. Flying back to Houston aboard Braniff (Texas International did not serve Washington), Lorenzo’s staffers were delighted to overhear passengers marveling over the Washington Star account of that morning’s announcement. “Jesus Christ! Did you see this?” one man exclaimed. “You can fly half-price!”
These were not charter fares. They weren’t holiday specials. They were price cuts, pure and simple, of the kind for which the CAB was fully empowered to send people to jail, except that these fares would soon have the official blessing of John Robson and the other radicals who had moved into the CAB. For the first time in nearly 40 years, an airline flying people across state lines was allowed to institute an across-the-board price cut in response to market conditions.
Back in Texas it was off to the races. On the first day of peanuts fares, Texas International’s passenger loads doubled. They doubled again on the second day, then hit an increase of as much as 600 percent by the end of the first week—with no advertising except by word-of-mouth and the free publicity generated by the peanuts angle. A product that many people had never even contemplated buying was now, at half off, well within their reach. The notion of value, seldom explicitly applied as a marketing concept in those days, was in full flower. Now confinement to a middle income bracket no longer automatically denied one the excitement and convenience of flight (if one happened to live in a town served by Texas International, that is). Surveys showed that 25 percent of the people flying on “peanuts fares” would have otherwise made their trip in a car; an additional 30 percent otherwise would have stayed home. Some of these new, first-time fliers began to think about doing it a second time, and a third.
To consumer advocates, Frank Lorenzo was a hero. Better still, Texas International’s profit-and-loss statement, once dependent on handouts from the government and strike payments from the rest of the airline industry, began to glow. More flights were added, and the more Lorenzo’s people went to the CAB, the more John Robson’s people said yes. A number of other airlines offered their own versions of peanuts fares; Continental, for instance, introduced “chickenfeed fares,” which the wags at Texas International quickly dubbed “chickenshit fares.”
There was one drawback. The very success of peanuts fares strongly suggested that the airlines could manage their own affairs—that they could stimulate their own markets, wid
en the population of people who had shared in the privilege of flying, even create jobs and demand for new airplanes. But as delighted as he was at the outcome of peanuts pricing, Lorenzo did not want John Robson or anyone else in Washington getting the wrong idea about his intentions. Lorenzo went out of his way to say that peanuts fares were a limited, isolated demonstration of the virtues of flexibility in government regulation. They were not, he emphasized, an argument for doing away with it.
Lorenzo figured that Texas International would be annihilated in five minutes without the CAB. He could barely handle a single upstart such as Southwest Airlines, let alone survive being surrounded by them. Just as ominously, up the road a piece, in Dallas, American Airlines and Braniff had hundreds of airplanes between them. They sat there like caged gorillas. And United Airlines, the biggest in the United States, flew planes to all 50 states. It could suffocate a little carrier like Texas International if it ever had the freedom to do so.
Even to an innovator, even to Frank Lorenzo, the system was fine just as it was.
CHAPTER 3
NETWORK WARRIORS
Among the personality types reigning in American corporations, the aggressor is commonplace. He has an instinct for the jugular. He wishes to dominate. He enjoys the battle as well as the conquest. He breathes inspiration into his subordinates. He seizes on the unexpected. A vastly different species, the bureaucrat, is just as frequently found, and in his own way is as essential to corporate success. He thrives on detail. He revels in systems and processes. He emphasizes reaction over action. On occasion these divergent traits combine in a single executive. One such individual was C. R. Smith, who built American Airlines. Another was the executive who would later follow Smith to the top of American. His name was Robert Crandall.
Crandall would ultimately become the most feared and powerful man in the global airline industry. His very appearance intimidated people. He had thick lips, a hard, lean body, and blue eyes that flashed intensity, all bearing him a resemblance to the rock star Mick Jagger. He slicked back his hair with “greasy kid stuff,” his part so perfect it looked as if you could cut your wrists on it. Crandall’s canine teeth hung lower than the surrounding teeth. “Fang,” some people called him, though not often in his presence.
Appearance alone did not account for Crandall’s sobriquet. Crandall simply loved to triumph over his adversaries, to vanquish them utterly, to run up points on the scoreboard. “Go ahead,” he told a marketing group. “Be ruthless. Be driven. Don’t let anything get in your way.” Though no fan of professional sports, he went out of his way to invoke Vince Lombardi, Lou Holtz, and other coaches whose teams he rarely watched but whose ruthlessness he admired. At a company dinner dance Crandall once cried, “We’ll crunch our competitors so hard even Lombardi will hear it, and nobody will need a hearing aid to know we knocked them off their feet!” And with that he commanded everyone to the dance floor.
He pounded his desk, sputtered when he shouted, and spit out the vilest curse words—not merely the hell! and son of a bitch! typical of the executive vocabulary but caustic and abrasive words like fucker and cocksucker, with a plume of blue cigarette smoke trailing behind or gathering overhead. Crandall was aware that he inspired fear in many of the people who worked for him. He once joked that when turning to the mirror while shaving, he expected to see black wings.
But while seized with such emotion, Crandall also had a passion for logic and analysis—for hierarchies, systems, and structures. Let the other guys play poker; Crandall loved bridge, the logician’s game. Crandall settled in a region where country and western and rock and roll reigned supreme, but he brooded to the rational scales of Mozart. Typographical errors, word misuse, and grammatical lapses hit him like strikes to the brow; they signaled untrustworthiness. Order was everything. At home his shop tools hung precisely, even if he was seldom there to use them. In later years, he ordered the placement of four custom-made podiums at strategic locations, for quick shipment wherever he happened to be giving a speech; Crandall refused to speak from any lectern failing to meet his specifications. If he noticed his wife’s purse sitting on the kitchen counter, he might pry it open for inspection; finding it in the same condition as any purse, he would dump it out and reorganize it, throwing away the bits of grit that had accumulated in the creases at the bottom. “It drives her batshit,” he would remark with a raspy nicotine cackle.
Above all, Bob Crandall was stricken with personal ambition. Was there a moment, he was once asked, when he realized that he wanted to run American Airlines? “Yeah,” he answered. “When I was born.”
• • •
Robert Lloyd Crandall came into the world at the midpoint of the Great Depression, on December 6, 1935. His father was rescued from unemployment by Franklin Delano Roosevelt’s Civilian Conservation Corps, which caused the family to abandon its Rhode Island roots and travel to wherever the work was. Later his father sold life insurance from territory to territory. In his 12 years of public education, Crandall attended 13 schools.
He would later say that his peripatetic youth taught him how to meet and relate to new people. But it also taught him to fight. As a youngster Bob Crandall was a fat boy with quick fists. Every time he got to a new school, he felt an intense urge to get into a scrap. A decent fistfight was the only way to break in, he thought, the truest path to acceptance. Bob Crandall also studied, working hard to get good grades. Report cards, after all, were a kind of scoreboard in a competition of peers, a way of ranking oneself against another. Forty years after his graduation, an interviewer began to inquire about his academic record. “What kind of grades did you—?”
“Straight A’s,” he snapped, as if he were reliving the thrill of a championship ball game.
And he worked, and loved doing so, from the moment of his first job—digging out a basement for a new home, a boy and his shovel, blistering his hands and sweltering in the heat of a North Carolina summer; he was not yet an eighth grader. In later years Crandall found himself working in grocery stores. Because such stores opened early and closed late, he could get in a lot of hours before and after school. As a checkout clerk he enjoyed seeing how fast he could ring up a pile of groceries. His high school annual for his graduation year of 1957 said he was most likely to be found at the grocery store. His “pet peeve” was listed as “Democrats.” The yearbook editors also observed that he was “noted for arguments.”
A slimmed-down Bob Crandall worked his way through the University of Rhode Island, where he loved staying up until all hours debating—religion, current events, anything that could set off a round of intellectual jousting. With a scholarship to the Wharton School, he earned his M.B.A. while holding a job that allowed him time to study: the 5 P.M.–to–2 A.M. shift as a supervisor at WFIL-TV in Philadelphia. Before long he landed at Eastman Kodak, in the credit department, collecting money from film processors around the country.
But it was not photography, and certainly not bill collecting, that most captivated Crandall’s interest. It was computers. Kodak had installed a state-of-the-art electronic system for tracking the money it had coming in. In 1960 Bob Crandall found himself one of the few executives in the country—in the world, really—with responsibilities in a new field of management called data processing.
He moved on to Hallmark Cards in Kansas City, which operated a computer system that monitored the sales of individual illustrations and inscriptions on a store-by-store basis: a four-line happy-gram with a rose might be going briskly in Sheboygan, for instance, while a five-line message with a violet was doing well in Los Angeles. The system alerted Hallmark’s marketers when a price change was called for; if a particular package of 25¢ cards sold out faster than predicted, the next package might be shipped with 35¢ price tags.
Crandall was in awe of Hallmark’s system. As he once explained, “They sold the shit out of greeting cards.” But Crandall knew that Hallmark would not keep him forever. An urgent need for massive computer systems, the biggest e
ver built, was emerging in another industry.
An airline seat is like fresh food—a grapefruit, say—in that it spoils after so much time on the shelf. Every empty seat taking off on every flight is a spoiled grapefruit and exactly as valueless. Both required time, effort, and money to create, and both came to a wasteful, meaningless end. And on an exceedingly large number of flights, the sale of one last seat, according to the First Rule of Airline Economics, could easily decide whether the plane flew the entire distance in the red or the black.
As the builder of American Airlines, C. R. Smith had agonized continually over the problem of matching passengers with seats before the latter perished upon departure. The trick was to balance reservations against inventory, a far greater task than it might seem. At first, in the early 1930s, a single ledger had passed from hand to hand as agents in a central office recorded reservations and erased those that were canceled. With the advent of the DC-3, as the fleets and schedules of the airlines swelled and as the seating capacity of each plane increased, a single book became impractical, so multiple books were maintained. These had to be reconciled frequently—a massively time-consuming process—and even so, each book was inherently out-of-date at all times. Books gave way to chalk and slate boards and eventually to electric light boards. More and more agents were crammed into the reservations offices, with the line of sight to the blackboard limited by the space between structural support columns—22 feet in most buildings of the time. Some agents peered through opera glasses. Teletypes clattered. Clerks known as “card boys” scurried from desk to desk, eventually to be replaced by mechanical conveyors. One blackboard gave rise to multiple blackboards, which quickly encountered the same problems that multiple ledgers had caused. A science called “reservations theory” was born to cope with the exponentially worsening challenge, but to little avail; as with so much else in the airline business, there was no economy of scale in handling reservations. The more the airlines grew, the less efficient they became.
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