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Hard Landing

Page 13

by Thomas Petzinger, Jr.


  Bakes and Breyer could only hope that the airline industry would crack.

  In the late sixties and early seventies, a few soul-searching CAB staffers were regularly going to lunch to debate whether they were discharging vital federal duties or playing roles in a fantastic farce. Soon this small band was boring into the writings of the academic theorists who specialized in the narrow field of commercial regulation, writings heretofore widely ignored. There was a seminal 1951 book by economist Lucile Keyes, who attacked “the inherent tendency of regulation to favor existing carriers” as opposed to newcomers. There was a 1965 article in the Yale Law Journal by a young professor named Michael Levine, who stated that CAB policies “fostered unnecessarily high fares, encouraged uneconomic practices, and limited the variety of services available to the public.” There were extensive writings by Cornell’s Alfred Kahn, who argued that the policies of the CAB “tended to raise cost to the level of price,” a phenomenon that benefited neither the airlines nor the public.

  Monte Lazarus, the highest-ranking careerist at the CAB, was among the staffers most deeply questioning the agency’s role. Lazarus finally decided he had had enough when he picked up the CAB legal brief in a case involving tariffs on cargo shipments of live animals and birds. “For purposes of this case,” he read, “a rat is a bird.” In 1973 Lazarus walked out to take a position with United Airlines.

  In his new job Lazarus’s duties included briefing top management of the airline on the latest public policy issues. It was precisely when the issue of regulatory reform had burst onto the Beltway in 1975 that Lazarus found himself with a newly appointed president to brief, Richard Ferris. Lazarus was surprised to learn that Ferris had an open mind on the subject. Ferris, in fact, demanded to hear the arguments on both sides. Having come from the hotel industry barely five years earlier, Ferris was not steeped in the culture of protecting “the world’s finest air transportation system” from “ruinous competition.” What was the matter with competition? Ferris wanted to know. Competition certainly had not ruined the hotel business.

  What benefits had United received from government protection? Ferris asked. True, the CAB had blocked troublesome, price-cutting newcomers from the industry, but the agency had also restricted United’s own ability to grow. Whenever United applied for a new route, the CAB either turned it down flat or, if finding the route worthwhile, awarded it to a smaller company instead.

  In August 1976, four months after becoming chief executive, Ferris presented the United directors with a long report saying that legislation reforming regulation at least in some limited way was inevitable. By making itself part of the debate—by taking a stand, one way or the other—United could influence the outcome to its benefit. The bottom line, Ferris said, was this: However the airlines fared as a group under regulatory reform, United would fare better than others. United was the biggest airline, the proverbial 800-pound gorilla. It had more than 300 airplanes. It was sitting on a cash hoard approaching $1 billion. As in a game of marbles, whoever had the most planes and the biggest route system and the most money at the beginning of the game was bound to be the winner.

  “United has little to fear from numerous small competitors,” Ferris assured the board in his presentation. “We should be able to compete effectively by advertising our size, dependability, and experience, and by matching or beating their promotional tactics.… In a free environment, we would be able to flex our marketing muscles a bit and should not fear the threat of being nibbled to death by little operators.” There was no need yet for formal action by the United board; Dick Ferris and Monte Lazarus would watch the situation further as it unfolded on Capitol Hill.

  But as the next few weeks passed, it became obvious to some of the people around him that Dick Ferris was growing enamored of the notion of deregulation. Unshackling the airlines would give United—and Dick Ferris—the opportunity to compete, not just with jingles and champagne flights but with fares and routes. Bob Crandall had bested Ferris in the computer wars, there was no doubt of that. But when the contest came to airplanes, Ferris was sure he would win.

  Ferris ordered his staff to continue studying the situation in Washington. There was no point in taking a public stand yet.

  As a crusader for regulatory reform, Bakes felt the same kind of win-at-all-costs compulsion that motivated him following his expulsion from Brother Rice High School. We’re gonna win this one, he told himself. We’re gonna deregulate an industry. Bakes threw himself into a manic research effort. There were details and intricacies to nail down. Everything had to be perfect. No one was asking to abolish the CAB, other than a few academics in Cambridge and Ithaca. Deregulation—the word itself was just being born. It was a concept without a constituency. Nobody had ever written his congressman asking for it. This was policy making from whole cloth. Every small advantage had to be seized, every tiny argument mustered.

  For instance, had the CAB formally declared a route moratorium, or had it simply discontinued approving route requests? Bakes had to know; it would make a difference in how villainous the CAB could be portrayed at the hearings. Monte Lazarus would know, Bakes suddenly realized.

  It was late at night when Bakes tracked Lazarus down at the Continental Plaza Hotel in Chicago. Lazarus picked up the phone just as the hotel fire alarm began blaring.

  “Monte, was there a formal route moratorium or not?” Bakes demanded. Bakes was the kind of person who talked loudly, in exclamation points, when he was charged up.

  “Phil, I can’t talk now! I think I smell smoke!”

  “If there’s a fire you might as well stay in your room!” Bakes snapped impatiently, demanding more details of the route moratorium.

  When the Subcommittee on Administrative Practice and Procedure finally came to order in the Dirksen Senate Office Building on February 6, 1975, Senator Kennedy made himself the lead-off witness. “Regulation,” he began, “has gone astray.… Either because they have become captives of regulated industries or captains of outmoded administrative agencies, regulators all too often encourage or approve unreasonably high prices, inadequate service, and anticompetitive behavior. The cost of this regulation is always passed on to the consumer. And that cost is astronomical.”

  For eight days, spread over the months of February and March 1975, a parade of witnesses came forth, carefully arranged by Breyer and Bakes to cast the regulators and the industry as evildoers. Proponents of deregulation generally got the chance to make their case first, putting the beneficiaries of the status quo on the defensive. Ralph Nader, an ardent deregulation advocate, was sworn in to lend his populist imprimatur to the cause. Ford administration officials were carefully chosen to make sure they personally favored and fully understood deregulation, even if their agencies had taken no official position. Among the academic theorists, Alfred Kahn of Cornell was chosen to testify because of his rapier intellect. (“I have been asked to hold my testimony to ten minutes,” he began, “which means that I will have to talk terribly fast.”) Computer studies and other evidence were introduced establishing how lack of regulation had created low fares within Texas (thanks to Southwest Airlines) and California (thanks mainly to Pacific Southwest Airlines).

  As the hearings continued, Bakes felt that something was missing. There was too much emphasis on routes and rates and such inaccessible concepts as price elasticity. “We’ve got to find a scandal!” he said.

  Watergate—perhaps it provided an opening. From their work on the staff of the special prosecutor, Bakes and Breyer probably knew more than anyone else on Capitol Hill about the airline angle in Watergate. American’s off-the-books contribution to the Nixon campaign had violated not only federal election laws, they knew, but possibly CAB regulations as well—in particular, a law requiring the airlines to notify the agency when they paid fees or gave gifts to anyone. If American had violated this regulation, then the CAB was obliged to investigate. Had it done so, or had the Republican-controlled agency swept the case under the rug?
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br />   With the subcommittee hearings still under way, the Kennedy staffers launched a muckraking expedition. Sure enough, they discovered, a few CAB officials had begun looking into the matter. But the internal investigation had been scuttled; the investigation files of the CAB staffers had even been taken away and locked in a safe. “The only word that was flashing through my mind was cover-up,” a CAB lawyer named Stephen Alterman would later say. Bakes was ecstatic. Here at last was a handle on a scandal.

  The subcommittee immediately called on William Gingery, the head of the CAB’s enforcement division, to appear as a witness. Gingery had nothing to hide; on the contrary, he was among the CAB staffers who had been trying to get to the bottom of the industry’s Watergate role. But Gingery was humiliated at having been duped by his bosses and frightened at having to appear publicly. He wrote a long, rambling letter to Bakes and other Kennedy staffers, expressing dread at earning “the dishonor of the fool.” A short time later, a few days before he was scheduled to testify, William Gingery shot himself dead.

  Though Breyer and Bakes had succeeded in drawing the Beltway’s attention to regulatory reform, there seemed little hope that the airline industry would crack. “Total deregulation would allow anyone to fly any route,” The New York Times pointed out after the Kennedy hearings had concluded, “a situation that is unlikely ever to occur.”

  Taking no chances, the airlines were soon dispatching troops of lobbyists to stomp on the embers of deregulation. One after another they called on Bakes, who, following the end of Breyer’s sabbatical, found himself leading the subcommittee crusade on his own. Every airline executive who walked into Bakes’s office spouted the same rhetoric about preserving the world’s finest air transportation system, often to the word, as if they were cribbing from the same briefing book.

  A few of the airlines distinguished themselves for originality, however. Eastern Air Lines dispatched 47 flight attendants to Washington for a lobbying excursion. They all descended on blue-eyed Phil Bakes, who felt like a rooster, relentlessly flirting while holding forth on the virtues of deregulation.

  Bakes was also taken with Frank Lorenzo, the chief executive of Texas International. Lorenzo, for one thing, was natty in a way people seldom saw on Capitol Hill—New York fashionable, almost too well dressed. More substantively, Lorenzo was one of the few executives who called on Bakes without an aide in tow, the only one who stayed longer than 20 minutes, and the only one who did not sloganeer about the world’s finest air transport system. Though adversarial, it was a notably professional and stimulating encounter.

  Bakes also had a memorable rendezvous with Al Casey, the man brought in to rescue American in the wake of George Spater’s Watergate-hastened demise. Bakes knew that Casey was a glad-handing, backslapping Bostonian whose élan could fill a room, so he resolved in advance to overpower Casey with the force of his logic and the passion of his arguments and above all with his cool demeanor.

  As Casey and his aides entered the office, Bakes made a point of putting his feet on his desk to appear relaxed and unimpressed. He listened calmly as Casey argued against deregulation and dropped names at every chance—“I was talking with Eunice and Sarge the other day …”—and before Bakes knew it Casey and his entourage had waved and departed, without ever letting Bakes put forward a case of his own. Casey had gotten the better of him.

  “Son of a bitch!” Bakes shouted, kicking his heel and shattering the sheet of glass on his desk.

  • • •

  When a president-elect prepares to assume the White House, the first real clues about his policies, as opposed to his campaign promises, are revealed in the appointments to his transition committees. A transition committee on regulatory policy might ordinarily draw little notice, but two weeks after Jimmy Carter defeated Gerald Ford in November 1976, the airline industry could not ignore the appointment of a 26-year-old lawyer named Mary Schuman to Carter’s transition team for transportation matters. She came from the office of Nevada’s Senator Cannon.

  Even after Carter had denied Kennedy the Democratic nomination, the rivalry of the two men had persisted. Nevertheless, Bakes of the Kennedy staff and Schuman of the White House staff maintained a personal alliance in behalf of deregulation. As the White House and subcommittee staffers began working more closely together, Schuman would even begin dating one of Bakes’s colleagues on the Kennedy staff, a Yale lawyer named David Boies, who was preparing to push the deregulation campaign to the trucking industry. Before long, Boies and Schuman would be married.

  Within a month of her appointment, Schuman and a few associates wrote a paper for Carter on airline deregulation. Airlines, the paper said, were “naturally competitive.” Regulation was “inappropriate.” The policies of the CAB had brought about “inflated fares” and “half-empty planes.” Airlines were “heading the way of the railroads,” the memo said. Ted Kennedy, looming as a potential Carter rival in the next presidential election, was out in front on the issue.

  There were five bills for airline deregulation already pending in Congress, Schuman told the president. But Carter, the memo added, might be able to turn all the action in Congress to his own political advantage. “Existing Congressional support,” she wrote, “makes this issue one on which you may be able to score a relatively ‘quick hit.’ ”

  A quick hit. Every new president could use one.

  While Schuman and her colleagues were preparing Carter’s position paper, the airline industry was tying itself in knots attempting to forge a unified front against deregulation. For several months in early 1977 the airline industry enjoyed the best of two worlds, preserving its protection from upstart airlines while gaining some pricing freedom from the new CAB chairman, John Robson. But the galloping success of Frank Lorenzo’s peanuts fares and Bob Crandall’s super savers had only strengthened the call for complete deregulation. If the airlines had the freedom to lower prices selectively, it was only a matter of time, people realized, before the CAB would allow them to increase prices as well. And the surest way to control price increases was to unleash the full power of the free market—by allowing newcomers into the business.

  This is where the airline industry drew the line. Although few of them had the nerve to say so publicly, the airline chieftains harbored a deep fear that new competitors would start out as nonunion rivals; what chance would an established old company with entrenched unions have against a competitor like that?

  The major airlines conducted their Washington lobbying through a group called the Air Transport Association. The ATA operated on consensus, essentially giving any major airline veto power on any major issue. Vetoes, of course, were practically unheard-of. Higher fares, lower airport taxes, accelerated tax write-offs there was rarely a dispute among the airlines over the usual Washington fare. But as the ATA desperately tried to craft some meaningful opposition to the growing threat of deregulation, United held back, coyly refusing to declare its position.

  The situation became urgent as another round of Senate hearings approached, and this time the host would be not the upstart Kennedy but the all-powerful Cannon, who was reasserting his dominion over aviation matters as a way of telling Kennedy to quit frolicking on his turf. Unless United stopped equivocating, the airlines’ trade group would be forced to go into the hearings fractured, with no position, abstaining from the most significant legislative debate in airline history.

  United had studied every angle. Ferris and his aides recognized the risk that deregulation would provoke a tumultuous and uncertain phase, with would-be airlines cropping up everywhere and zany pricing taking hold, but this phase would last only three to four years at most. Deregulation was a safe bet for United.

  When United’s board of directors had assembled for their January 1977 meeting, Ferris called on Monte Lazarus to make the presentation. “Properly written, new legislation can unlock regulatory shackles, open the way for new market opportunities for United and others, all without destroying the system, and all in the publ
ic interest, as well as United’s.…”

  Lazaraus declared, “We must report that the industry is sharply and, we think, hopelessly split.… We shall have to pursue our interests ourselves.” He did not mention that United itself was responsible for the fissure.

  With Ferris watching for the board’s reaction, Lazarus concluded the presentation. “If you agree with these recommendations … we shall implement our action program immediately.” There was silence. Then in the back of the room a single director slowly and deliberately began to applaud. Everyone turned to look. It was Justin Dart, the wealthy California industrialist, one of the best friends Gov. Ronald Reagan ever had.

  At one of his earliest press conferences as president, Jimmy Carter announced that airlines represented the “first question” his administration would take up in his mission to reform government. The move was counterintuitive—a Democrat proposing to dismantle regulation. But as when President Nixon went to Red China five years earlier, partisanship was in retreat. Airline deregulation was transcending party lines, which vastly increased its chance of adoption. On March 4, 1977, Carter sent a message to Capitol Hill. “As a first step toward our shared goal of a more efficient, less burdensome federal government,” he began, “I urge the Congress to reduce Federal regulation of the domestic commercial airline industry.”

  The president had just scored his quick hit.

  Nine days later Ferris made his own announcement in a speech at the Commonwealth Club of San Francisco, saying that United backed the “general philosophy” of deregulation. Deregulation, he later added, would become “the greatest thing to happen to the airlines since the jet engine.”

  Though he was immediately the goat of the industry, Ferris was the hero of Capitol Hill. Phil Bakes of Kennedy’s staff and Monte Lazarus of United immediately went to work scheduling their bosses together, knowing that despite some powerful differences in political ideology the two young, handsome, up-and-coming leaders would hit it off, which they did. Ferris also scheduled a fund-raiser for Sen. Charles Percy from United’s home state of Illinois; Percy, for his part, would take position papers from United and have them inserted whole into the Congressional Record. Ferris also recognized that United looked a little conspicuous backing deregulation all by itself, so he turned to Al Feldman, who was running Frontier Airlines in Denver, with whom he had become close friends. As the 14th largest airline in the country, Frontier was big enough to count as a national player but small enough to present some political balance when paired with United. Frontier was locked in a vicious battle for market share in Denver, and Feldman was eager to expand. Southwest Airlines, confined to the four corners of Texas by federal regulation, also joined the deregulation bandwagon.

 

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