Hard Landing

by Thomas Petzinger, Jr.

  In November 1974 Eddie Carlson could tell the board of directors that United expected to report the highest profits in its history. At the same board meeting Carlson also shared his thinking about his own succession. Although he had spent only four years at United, Carlson was now 63. Now was the time to anoint a successor who could grow into the position of chairman while Carlson was still on the scene. An orderly transition was essential; after the ill-starred reign of George Keck, United could not tolerate another traumatic change in management.

  Carlson had spent weeks agonizing over the succession, isolating himself on his 40-foot ketch with a yellow legal pad and an evaluation checklist that a banker friend had developed in choosing his own successor. United, he knew, would need an aggressive competitor as well as an excellent manager at the top. Once again, he thought of Dick Ferris. True, Ferris was only 38 years old, much less experienced than other worthy contenders. But Ferris, he believed, could grow into the job.

  When Carlson nominated Ferris as his successor, the United board kept him waiting for two hours while deliberating over the choice. Finally Director Justin Dart, a California industrialist serving in Gov. Ronald Reagan’s “kitchen cabinet,” emerged from the boardroom. “Some of the fellows have some reservations about Ferris,” Dart said. “We like his drive.… We just wish he were a little older.” In the end the directors decided to go along with Carlson’s choice. While Carlson would remain head of the holding company, known as UAL, Inc., Dick Ferris would become president of United Airlines itself, assuming responsibility for the task of preserving United’s hard-won trophy as the biggest carrier in America.

  “So far,” the Chicago Tribune noted at one point, “Ferris has kept on course, and his story of ‘boy wonder’ success seems destined for a happy ending. But in the airline industry even a smooth flight can run into unexpected turbulence.”

  While Ferris was taking the controls at United, Bob Crandall was burrowing more deeply into the bowels of the computer system at American Airlines. Though the company remained in perilous financial condition, he demanded the funds to resuscitate the Sabre system. With all airlines charging identical prices on competing routes, a fast and reliable reservations operation remained critical in the battle for passengers, nowhere more so than in American’s continuing battles with United. United, for its part, had bounced back from its early missteps in its own effort to automate. Under Carlson and Ferris, United’s in-house computer reservation system, called Apollo, had quickly become the jewel of the airline industry.

  While warily watching United’s efforts, Crandall was jarred by the disturbing news that the travel agents of the United States were taking steps to build a giant computer network, like nothing ever seen, a mechanism to display flight schedules and reserve seats on the airlines of the United States from any travel agency location in the country.

  The travel agents’ motive was plain enough. By the mid-1970s travel agents sold nearly half of all airline tickets. (The airlines sold the rest directly to corporate accounts and individual passengers—by phone, by mail, at airports, and at downtown ticket offices.) Travel agents had been multiplying like delis in Brooklyn, and in some cases they were assuming the same mom-and-pop look. Entrepreneurs, retired couples, wives of the wealthy—almost anyone could start a travel agency merely by stocking the Official Airline Guide and leasing some storefront space or a cubbyhole in a suburban shopping strip. Some people went into the business simply because they enjoyed traveling themselves.

  The romance of travel was one thing, making a living from it another. Owning a travel agency was a tedious, detail-ridden vocation in which the profit margins were minuscule, particularly on air travel. Making an airline reservation required a travel agent to thumb through the OAG, which by now, 15 years into the jet age, was the size of the Manhattan phone book, with tissue-thin pages. Having identified the most appropriate flight for a customer, the agent would then telephone the airline—or multiple airlines, perhaps, in the case of connecting flights—and make the appropriate reservations. The agent wrote each ticket by hand or wheeled it through a typewriter, compiled a written itinerary, collected the fare, and sent the money (less the commission, then fixed by the CAB at 5 percent) to a central clearinghouse, which in turn disbursed it to the airlines. Travel agents had to maintain a bundle of phone lines and a stable of clerks, typists, and reservationists while managing a library of travel literature to advise clients on vacation destinations and business arrangements. But what if the travel agents could go on-line? With a few keystrokes they would have instant electronic access to the schedules, eliminating the need to turn all those pages in the OAG. With a few more keystrokes perhaps they could actually place and confirm a reservation, eliminating unproductive telephone talk time.

  The agents’ proposal struck terror in the heart of Bob Crandall. In addition to losing control of the distribution system, the airlines, Crandall feared, would undoubtedly have to pay a transaction fee for every reservation they received through an independent computer network—on top of the commissions they already paid to travel agents. That was how any such network was bound to work; the electronic age presented profitable and exciting new ways to distribute products, but the unwary were sure to wind up on the losing end of the fee structure. Crandall vowed that in this case the losers would not be the airlines; with more than 200 million tickets written each year in the mid-1970s, a small fee could quickly add up to hundreds of millions of dollars in expenses for the airlines. The agents’ project, Crandall decided, had to be stopped. A big meeting of the American Society of Travel Agents, scheduled to begin only a few days later in Rio de Janiero, was the place to start.

  Arriving in Rio, Crandall proposed to turn the travel agents’ plan on its head. Instead of their establishing a reservations network, Crandall said, they should allow the airlines to create one—a single giant communication system reaching into the office of any travel agent anywhere, owned and operated by a consortium of the major airlines.

  In a perfect world Crandall would never have pushed for a system jointly owned by all airlines. He would instead have made his own system, Sabre, available to individual travel agents for subscription. But Sabre was still recovering from its years of neglect, and American’s finances remained lackluster at best. Moreover, if American began hooking travel agencies up to Sabre, United undoubtedly would begin doing the same, but with its more powerful system and financial resources that Crandall could only dream about. By urging the creation of an industrywide network, Crandall would score two victories, blocking the travel agents from establishing their own system while preventing United from forging a proprietary link with them. And for good measure, in the creation of a single system, United, as the largest airline in the industry by far, could be expected to shoulder the greatest share of the development expense.

  Of course many of the expenses incurred in the use of this system—ticket printers, for instance, and computer screens—would be borne by the travel agents. But, Crandall argued, the agents would receive tremendous benefits from the network, not only in making reservations and issuing tickets but in printing itineraries and maintaining their books. Crandall managed to convince the agents that at least a joint study should go forward.

  At United, Dick Ferris shared Crandall’s view that the travel agents should never be permitted to establish their own computer reservations network. But Ferris had figured out Bob Crandall’s game, and looked warily on the idea of creating a single system owned by the airlines. The airline business, Ferris knew, was a game of controlling the passenger. These computers were unspeakably powerful—that much was already clear, even in the mid-1970s. If United could begin installing its own computer terminals in travel agencies, it could garner untold additional passengers. United, of course, would have to display all airline flights, not just its own, on the agents’ terminals; otherwise, the system would be of little value to the agents and their clients. But the presence of an Apollo terminal on their desktop
s was bound to put any travel agent in the habit of choosing United over its competitors.

  Ferris and his aides spent months studying the issues. We’ve got a competitive advantage, Ferris thought. Why throw it away so everyone else can benefit? Why, he wondered, should United play the patsy by shouldering the greatest cost of a solution that would benefit all of its competitors—including American? Finally, at a daylong meeting, Ferris decided to quit dilly-dallying with the rest of the industry. On January 28, 1976, United announced that it would not join in any collective efforts. Instead it would in the months ahead begin making its Apollo system widely available to travel agents.

  Without the participation of America’s largest airline, the industrywide effort led by Bob Crandall was doomed. Now, it was every man for himself, a contest to see which airline could hard-wire its reservation system into the most travel agencies. Ferris and United Airlines had just launched history’s first computer war. The computer reservations network, the greatest back-office tool ever created by the airlines, was now a weapon as well.

  Bob Crandall was furious that Ferris had foiled his plans, but he had been bracing for the outbreak of battle. Crandall had ordered his field managers to listen for “competitive intelligence,” demanding that they pass along anything they might hear about what United was telling travel agents. Max Hopper, one of Crandall’s top data processing executives, had learned that United was warning agents away from an industrywide system, vaguely promising that it would soon have something better to offer them. So while they were publicly promoting the industrywide alliance, Crandall and Hopper were privately developing plan B, a strategy for having Sabre terminals, rather than a jointly owned system, installed in any travel agencies willing to pay for the equipment. The development costs would be huge, but Crandall would come up with the money somehow. This was the future. American, he believed, had no choice.

  Shortly after Ferris had fired the first shot, Crandall flew to Dallas-Fort Worth Airport to address a meeting of American Airlines managers. “Where do we go from here?” he asked. “There is only one place we can go, ladies and gentlemen, and that’s to battle.… American is going to fight on the agency automation front, and fight hard!”

  While Ferris’s forces at United were just beginning to plan their effort, American dispatched a wave of salespeople to the agencies that gave it the greatest business. The smooth talkers in the sales force were joined by technical people—“guys in short white socks,” as they became known inside the company. They opened up big notebooks showing that a travel agent working on a Sabre terminal could book $800,000 worth of flights a year instead of $350,000 by flipping through the OAG and spending all day on the telephone to the airlines. American also paid consulting fees to a few of the country’s largest travel agencies, ostensibly for their ideas about what the system should do; the promise of fees assured that these agents would choose Sabre, helping to create a groundswell that discouraged other agents from signing with United’s Apollo.

  On the rare occasions that United got the better of American, Crandall blew his stack and demanded immediate countermeasures. At one point United obtained an exclusive software license from a Florida company for a series of bookkeeping and other programs that could be made available to travel agents over the Apollo network. Crandall ordered his people to jump on the next flight to Florida, where they arranged to buy the very company that had sold the software license to United. American gained the benefit not only of owning the technology but of employing all the people who had developed it.

  Sabre was not only a way of making fees, of course, but also a distribution system for American’s own flights. Although agents could book flights on nearly any airline through Sabre, Crandall began enticing agents to skew their bookings toward American with an addictive new financial arrangement. The greater the dollar value of an agency’s business with American, the greater the percentage the agency received on the entire sum. The standard 5 percent commission might be increased to 6 percent, say, on ticket sales over $1 million, or 7 percent on sales over $3 million. (American could easily pay the higher rate, since each additional passenger put so much money on the bottom line.) The more American flights an agency booked through Sabre, the greater its incentive to buy still more flights on American.

  Most agents did not, of course, choose less convenient flights for their customers for the sake of the bonus rate. But “override” commissions, as they became known, certainly created the incentive for an agent to resolve close calls in American’s favor. The whole matter, in any case, was considered highly sensitive. At an American Airlines management meeting, one of Crandall’s top sales executives remarked that the incentive programs were “highly confidential” and that among the biggest and best travel agency accounts, “It takes constant attention, better cooperative programs, and in some cases a big bag of money to solidify and retain these relationships.”

  United had no idea what hit it. Convinced that he had started out with an advantage over the rest of the industry, Ferris immediately found himself a distant second in the race to hard-wire the travel agents. American had coordinated its Sabre sales effort from the top; United had allowed regional managers to handle the sales efforts in their individual territories, and some had pushed much less aggressively than others. United had established a policy of signing up only financially healthy travel agencies; American took anybody who could pay the equipment rental. And when United caught wind of the special commission structure that American had introduced to Sabre subscribers, it judged the scheme to be a questionable business practice. United then quickly adopted the same policy for itself.

  The two remaining members of the Big Four, Eastern and TWA, would also push their in-house computer systems into travel agencies, but they would never overcome the early lead of American and United. Between the two leaders American remained way out in front. Even if American didn’t have the most planes in the industry, it had the most distributors.

  • • •

  Crandall’s moves as American’s marketing chief, though radical, did not test the limits of federal regulation. The steps he took to muscle in on the preferred listing positions in the flight guide, or even to create his massive electronic network, required either perfunctory approval by the CAB or no approval at all. It was in the far more critical areas of routes and rates that the CAB served as the airlines’ Big Brother.

  One of the agency’s most persistent missions was to whack down the pesky breed of flying operation known as the charter airline. Charterers flew planes for hire, but they could not fly on a regularly scheduled basis; only the incumbent airlines with their congressional sinecure had that privilege. Once every decade or so, when the established airlines rushed out to buy the newest and biggest airplanes, another generation of charterers would spring up on the used airplanes that the majors were dumping. Offering deep discounts to the most popular tourist destinations (Las Vegas was always a leader), the charterers gave rank-and-file Americans the opportunity to taste what the established airlines priced for the well-heeled. The charterers could afford to offer such low rates not only because they flew inexpensive old aircraft, but because they scheduled only as many flights as they had sold all the seats for; a customer often had to purchase a seat weeks or months in advance. So long as the charterers functioned solely as a poor man’s airline industry, carrying passengers who would otherwise never fly, the CAB largely left them alone. But in each cycle of rebirth, it seemed, the charterers would get bigger and bigger, serving more destinations with more frequent service, ultimately stealing passengers from the half-empty planes of the major airlines. At that point the established airlines would cry, the CAB would lower the boom, and the charterers would go away.

  To the dismay of Bob Crandall, yet another generation of charter operators was cropping up in the mid-1970s as the major airlines cast off their first round of jets to make room for the jumbos and other second-generation jet planes. By all practice and tradition, the CAB
had a duty to impose onerous new operating restrictions on these charterers as well. But there was a new chairman at the CAB, John Robson, a man with no background in the airline industry. He was a loose cannon; the CAB had even approved a 50-percent-off sale—“peanuts fares”—on a couple of Texas International’s routes. Instead of slamming the charterers, Robson, unbelievably, had taken steps to loosen their operating restrictions.

  As American’s marketing chief, Crandall was beside himself. American had planes sitting on the ground for lack of passengers, and the charterers were flying full. They were bleeding the leisure business from the airlines’ regular operations. The kind of simple, straight-off-the-top fare cut that Frank Lorenzo’s people had come up with was no solution for Crandall; American’s most important customers were business travelers, who did not care about price. There was no point in offering to fly business travelers for half off. Instead American and the other majors had gone to the hypocritical step of using some of their remaining excess airplanes to start their own advance-booking charter operations, engaging in the very practice of which they complained. But for Crandall, having an in-house charter operation was no panacea either; American was soon losing charter business not only to the upstart operators but also to United Airlines, where Dick Ferris’s people had built up the biggest charter operation in the industry. United, in fact, was landing jet charters in Las Vegas every few hours.