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Hard Landing

Page 15

by Thomas Petzinger, Jr.


  The result was a “people’s program” for Texas International, compiled in a set of black three-ring binders distributed to the officers of the company. A meeting on the plan was scheduled for a morning in April 1978, the week after the Senate had passed the Deregulation Act.

  To soften up Lorenzo, Burr made a point of leavening the presentation with windy tributes to the financial turnaround for which Lorenzo was principally responsible. “We are a highly financially successful airline, and the focus of the entire airline industry, the public, and the legislators in Washington,” the presentation read. “Maximization of the financial (e.g., cost cutting, marketing, peanuts fares, debt structure, etc.) was historically correct and absolutely essential for this company’s survival at one time in our history.

  “But when low fares become universal,” the report went on, “we will be left in large part with the ‘people’ equation as the chief component of competitive leverage.” Success and failure in the airline business, the report said, would be decided on customer service.

  Happily, Burr went on, the workforce at Texas International abounded with “friendly, Southern types,” but relying on regional characteristics alone would be insufficient. Texas International had to begin taking account of “every emotional and psychological need of the human animal.” There were many variables in managing a successful airline, the report noted, but “manipulation of this variable can make it the most productive.”

  The black binders laid out a program of “leadership and love,” which Burr proposed to effect through psychological indoctrination, open work spaces, jogging trails, and other steps to persuade employees that they were not only cared about but trusted. The Blue Barn would be abandoned in favor of a headquarters campus Burr proposed to construct in the woods north of Houston. The scheme would cost money, yes—that was where Frank would no doubt object—but every 1 percent increase in business attributable to newly happy and productive employees, Burr determined, would be worth $1,441,660 of additional revenue to the company. “All in all, those bucks buy a lot of people’s programs,” Burr’s report concluded.

  Having distributed the big black books in advance, Burr trooped from the Blue Barn to Lorenzo’s newly established downtown executive offices to present the people’s program to Lorenzo and other officers of the company. Burr was petrified. The plan meant everything to him. He had been thinking about these issues for years. He desperately wanted Lorenzo’s approval.

  After about 10 minutes Lorenzo interrupted the presentation. “Don, come here a minute,” he said. The meeting ground to a halt as Burr walked out with Lorenzo. The two men entered Lorenzo’s office.

  “This is complete bullshit!” Lorenzo snarled, slamming the book on his desk.

  The fact was that Lorenzo at that moment was involved in an altogether different strategy with Bob Carney, his most tenured associate.

  Carney, although thrown over by Lorenzo when Burr had made the scene, remained part of the action at Texas International. Carney was still a partner in Jet Capital, the company that he and Lorenzo had established nearly a decade earlier, in 1969, and Jet Capital in turn continued to control Texas International. Some people thought that even Lorenzo did not share Carney’s gift for numbers. Nobody could pick apart a set of financial statements with greater insight. “Carney rolls the spitballs,” Sam Coats, the general counsel of Texas International, liked to tell people, “and Frank shoots them.”

  Shortly after rejecting Don Burr’s people program, Lorenzo traveled with Carney to Cambridge for the 15th reunion of the Harvard M.B.A. class in which they had first become friends. The time away from the office enabled them to discuss the future in earnest. They knew that Texas International had to get big fast, and that meant buying another airline. But which one?

  The process of elimination narrowed the field quickly. Taking over any of the Big Four—United, American, TWA, or Eastern—would require leverage on a scale that even Lorenzo and Carney could not muster, for the moment. The next four—Delta, Pan Am, Western, and Braniff-were also too large by orders of magnitude. But the remaining two of the Top 10 were something different. Number nine was Continental. Ten was National. Though each did well over a half-billion dollars in business a year, they were a mere four times the size of Texas International. That put them well within striking distance.

  Between them National was the more obvious target, the proverbial bird on the ground. Financially National was as conservatively managed an airline as one could find, a fact that appalled Lorenzo and Carney while whetting their appetites. National, they readily discovered, had practically no debt, meaning that it failed to tap fully the earning power of its assets. If National was not going to exploit the leverage inherent in the company, then Lorenzo and Carney would. Texas International, they determined, could seize National and borrow enough money against National’s own assets to pay for the entire acquisition. Lorenzo and Carney could essentially buy another company for free. The phrase “leveraged buyout” had not yet come into common usage by Wall Street, but that was precisely what Lorenzo and Carney had in mind.

  Going after National would be radical in another respect. In the 40 years of regulation by the CAB, there had never been a hostile takeover in the airline industry.

  Lorenzo and Carney had secretly studied the possibility for weeks. Then, in their old stomping grounds of Cambridge, they decided to make their move.

  Slowly and imperceptibly, at Lorenzo’s direction, Texas International began buying National Airlines stock in the open market in trades as small as 100 shares. In four weeks Lorenzo picked up 9.2 percent of National’s stock outstanding. Then, as he prepared a public announcement of his intentions, Lorenzo decided to give the head of National the courtesy of letting him know that he was about to lose his company. As he reached for the telephone, Lorenzo’s hands were trembling.

  Shortly after Juan Trippe had retired in 1968, a breathtaking route map was mounted in the 46th-floor executive offices of the Pan Am Building. In gold lines the map displayed Pan Am’s tentacles across the world, not just to such great capitals as Tokyo and London but to such exotic climes as Karachi, Cartagena, and Pago Pago.

  Inside the borders of the United States, however, the map was utterly blank.

  As the chosen instrument of international aviation policy, Pan Am traditionally had little need for domestic routes. The other major airlines could carry passengers as far as the borders of America, where anyone continuing overseas would transfer to Pan Am (or to a foreign airline with reciprocal landing rights in the United States). In Trippe’s view Pan Am did not have to stoop to the banality of carrying passengers within U.S. borders.

  Everything was fine until President Truman began to weaken Pan Am’s monopolies in the immediate postwar years. Northwest Orient became the second U.S. airline with authority to fly passengers over the Pacific. Braniff won a few routes into the Pan Am stronghold of Latin America. TWA under the wily Howard Hughes became an additional U.S. carrier over the Atlantic. Further deterioration occurred in the Nixon years, when several additional airlines won the right to fly the Pacific. One of Trippe’s successors, Najeeb Halaby, tried gamely to plead against further encroachment, but as a former Federal Aviation Administration official in the Kennedy administration, he was wearing the wrong colors to help Pan Am in the Nixon years. “Switch over to our side,” Nixon aide H. R. Haldeman told him, “and we may be able to help you.”

  The Carter administration was soon making things worse than ever. With his hands-across-the-water inclinations, Carter was allowing new foreign airlines to serve the United States, skimming even more passengers from Pan Am: KLM into Los Angeles, Lufthansa in Miami and Atlanta, and British Caledonian in Houston, for instance. Where Pan Am had once conducted 100 percent of the flights into and out of the United States, it now had less than 10 percent.

  Pan Am might have coped with the competition—except for the empty space in the middle of its route map. The approach of deregulation awakened t
he company to the need to collect its own passengers within the United States, but by that time Pan Am had so alienated every branch of the U.S. government that no one in Washington was willing to say yes. Pan Am, as one historian noted, was “the only airline in the world without a country of its own.” Finally, when deregulation became law, Pan Am’s beleaguered management resolved to fill the hole in the route map as quickly as possible.

  The first chance came when Frank Lorenzo put National Airlines in play. Pan Am would have been wiser not to bite at National, an airline whose fleet, route system, and corporate culture were almost wholly incompatible with theirs, but Pan Am was panicking. Though its predicament was decades in the making, it wanted a solution overnight. In competition with Texas International, Pan Am jumped into the bidding for National Airlines.

  The companies tussled for weeks, trading charges and countercharges, trying to outrace one another’s stock purchases, and enlisting high-powered legal and lobbying aid. Pan Am deployed Sol Linowitz, the noted lawyer, corporate executive, and diplomat who had just negotiated the Panama Canal treaties for the United States. Lorenzo hired Leon Jaworski, a former Watergate special prosecutor. Lorenzo also borrowed from the underdog strategy that Herb Kelleher of Southwest Airlines had used against him, showing up at hearings and local community meetings with only one or two executives in tow, in contrast to the platoon that Pan Am always dispatched.

  As he watched the takeover drama play out from the distance of the Blue Barn, Don Burr realized that his friend Lorenzo had once again maneuvered himself into a position of indifference, in line to score a victory no matter which way the action unfolded. If he won the battle, Lorenzo would catapult Texas International well into the ranks of the Top 10. But if Pan Am outbid Lorenzo, then Pan Am would have to buy the shares of National that Lorenzo had already purchased—at a much higher price than Lorenzo had paid. Lorenzo would reap such a windfall, a Pan Am official observed, that “it would put him in a position to gobble up United Airlines.”

  In the fall of 1979 Lorenzo capitulated, crying all the way to the bank. Pan Am bought 100 percent of the shares of National Airlines for $374 million. Of that amount $108 million went to Texas International, and when the accounting was over, more than one third of that was pure after-tax profit. Lorenzo, who had turned $44,700 into $1.5 million a few years earlier, had just multiplied that sum into $35 million. And immediately the money was burning a hole in his pocket.

  Within several days of toting up his winnings, on an autumn Saturday night in Los Angeles, Lorenzo arrived at the house of Continental Airlines chairman Bob Six and his wife, former Honeymooners star Audrey Meadows. Lorenzo rang the bell. Six came to the door.

  Lorenzo was expecting dinner and a serious conversation about a merger between Texas International and Continental. It all made so much sense, Lorenzo believed. Continental flew a small fleet out of Houston. So did Texas International. If Lorenzo could convince Bob Six to combine his company with Lorenzo’s, they would have a large fleet, enough to compete with Southwest or American or just about anybody who came their way.

  At that moment in 1979, with C. R. Smith long departed from American, Rickenbacker gone from Eastern, Patterson long gone from United, and Howard Hughes out of TWA—at that moment, with Lorenzo standing on his front stoop, Bob Six was the greatest living figure in the airline industry. Swept up in the leather-helmet hysteria following the Lindbergh flight, Six had been fired from his job as a utility company executive for taking flying lessons on company time. He bought part of an airline called Varney Speed Lines in 1937 and changed its name to Continental, eventually making it one of the Top 10 airlines in the country.

  Six foot four, with thick lips and beefy hands, he seemed larger than life. Before Audrey Meadows he had been married to Ethel Merman. He hunted grizzlies, owned a pet jaguar, and talked in a stream of put-downs, invectives, and profanity. He left a pile of cigarette ashes on the floor alongside his desk, too distracted to think of reaching for the ashtray. He was friendly with presidents, employed some of the best lobbyists in Washington, and did a land-office business hauling military personnel and matériel in and out of Vietnam. He also conducted covert operations for the CIA in Laos. Six had the experience and the connections to turn Continental into a small player in the Pacific when the U.S. government began chipping away at Pan Am’s dominion there in the 1960s.

  On this Saturday night, however, the 72-year-old Six had apparently confused the date of his dinner meeting with Lorenzo either that or he had forgotten it altogether. Like Dorothy at the gates of the Emerald City, Lorenzo was instructed to depart and come back another time.

  At about the same time he met with Six, the newly flush Frank Lorenzo sat down for breakfast at the Hotel Carlyle on the Upper East Side of New York with Edwin Smart, the head of TWA. Whereas most men in this situation might offer to buy breakfast, Lorenzo offered to buy TWA. Smart, stunned, walked out before the eggs arrived.

  Everywhere he turned, it seemed, Frank Lorenzo was being shown the door. Though he had been a leading spokesman in the failed battle against deregulation, Lorenzo remained an outsider in his own industry. Maybe it was those peanuts fares; they had certainly annoyed the big players. Or perhaps it was his Latin ancestry; the airline industry was as WASP as they came. Or maybe it had something to do with Lorenzo’s refusal to accept the hand he had been dealt. Deregulation had just changed the nature of the game and Lorenzo wanted the cards to be dealt again.

  So what if he had to take on the big boys to save his company? Lorenzo was smarter. He knew how to leverage a balance sheet. He had once defeated the mighty Howard Hughes. He had extracted $35 million in net trading profits from Pan Am. The prejudice of the industry’s titans—whether directed at him, his parentage, his company, or his response to deregulation—would represent no obstacle once the right opportunity presented itself.

  But Lorenzo had a crisis to deal with first, a crisis both personal and professional. The president of his company—the best man at his wedding, the father of his godson—was walking out.

  Saying “I quit” to Frank Lorenzo had become a kind of ritual for Don Burr. There was, for instance, the occasion when Texas International began service to Las Vegas, a destination known for its well-established sensitivity to bargain-priced travel. Burr convinced Lorenzo that the fare from Dallas should be $39, but Lorenzo, not entirely free of his ambivalence about low fares, soon changed his mind, insisting on $45.

  “Thirty-nine!” Burr cried.

  “Forty-five,” Lorenzo answered.

  “Thirty-nine!” Burr cried again.

  “Forty-five,” Lorenzo answered again.

  “I quit!” Burr said, and before walking out he took aside Jim O’Donnell of the Texas International marketing staff and said that even though he was quitting and heading for Martha’s Vineyard, he was counting on O’Donnell to see that the price remained at $39. “Don’t yield one dollar!” Burr commanded him.

  After a good pout, however, Burr had always come back, if only to endure more anguish. The memory of Lorenzo slamming down his people program a year earlier still stuck painfully in his craw.

  Thankfully, so far as Burr was concerned, Lorenzo had abandoned the idea of taking over National Airlines. Now, Burr noted, Pan Am, not Texas International, faced the daunting task of trying to absorb that airline. But it was clear to Burr that the outcome of the National bidding had only postponed—and enlarged—the inevitable. With more flash money than ever sitting in the bank, Lorenzo was bound to attack an even bigger rival. And Burr knew that once Lorenzo had bought another airline, it would be his job, Don Burr’s job, to put the pieces together. Burr began to fantasize anew about quitting.

  He recognized that it wasn’t a great time to walk out. In the year following adoption of the Deregulation Act the airline industry had been almost stagnant. A suffocating recession was under way, triggered by the second great oil shock, due to the revolution in Iran. The Federal Reserve had pushed interest rates i
nto the stratosphere as an antidote for rampant inflation.

  But if anybody could land on his feet, Don Burr thought, it was Don Burr. He had earned a reputation in the airline industry, thanks to the transformation of Texas International into a vibrant, profitable airline. “We had turned around an atrocious piece of shit,” Burr later insisted. “The world knew about us.” Above all, Burr knew that only by leaving Lorenzo could he ever hope to put his people plan, with its emphasis on trust and love and manipulating the psychology of the workforce, into action.

  From his office in the Blue Barn, Burr called his friend and mentor at the new executive offices in downtown Houston.

  “I resign,” Burr said.

  “Ha,” Lorenzo answered. “Fine.” He snickered, having heard this spiel a hundred times. “It’s about time.”

  Burr hung up. Then he called Melrose Dawsey, Lorenzo’s secretary and Burr’s personal friend, and invited her to join him in leaving to look for a new opportunity. She readily agreed. Then he called Gerry Gitner, who had become one of the most important cogs in the Lorenzo machine but who had tired of working at Lorenzo’s beck and call. On the eighth day of the decade of the 1980s, Burr, Gitner, and Dawsey walked out of Texas International, eager to see what the new world of aviation had to offer-equally eager, in Burr’s case, to prove something to Frank Lorenzo, unaware that in leaving Lorenzo, he had only entwined their fates more closely than ever.

  Leasing a small office in northwest Houston, they put out word that they were available for hire as a management team, ready to right any listing airline, but they also harbored the fantasy of starting their own airline. Burr knew from competing against Southwest that it was possible to start an airline from scratch and succeed against the established competitors, so long as the service was priced at the level necessary to tap the latent demand for air travel. Best of all, by starting from nothing Burr would have the best chance to create the kind of culture he had so eagerly wanted and failed to instill at Texas International.

 

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