Hard Landing
Page 27
“Intuition is a powerful force,” he responded.
Among the surprises greeting Acker when he arrived at Pan Am was the dearth of experienced executives. Years of purges had driven away dozens of top officials. Many of these executives had received absurdly generous severance packages in which they retained not only their salaries but their membership in the Sky Club, high atop the Pan Am building. Luncheons and happy hours at the Sky Club looked like reunions of the departed.
As part of his effort to rebuild management, Acker hired Stephen Wolf, who had spent 15 years at American. Wolf, age 40, had been through the star chamber of Bob Crandall’s budget reviews and had seen American brought back from the edge of financial collapse on the strength of relentless cost cutting. Literally within hours of joining Pan Am as a senior vice president, Wolf began boring into budgets and personnel records, looking for ways to stem the red ink.
A few days after Wolf’s arrival, Acker was leading him around the Sky Club, making introductions.
“Ed, does he work for us?” Wolf asked after one such introduction.
“No,” Acker replied matter-of-factly. “He’s gone.”
He’s gone?
“Ed,” Wolf whispered. “I think he’s still on the payroll.”
But that was Pan Am, a company practically frozen by the inertia of grandeur and tradition, as was evident to another of Acker’s recruits, 37-year-old Gerry Gitner, who became a top officer of Pan Am after resigning as the president of People Express. Gitner walked into the Pan Am boardroom to meet the vice presidents reporting to him and was so startled to see them rise from their chairs that he turned around to see who was walking in behind him. After eliminating every cargo airplane in Pan Am’s fleet in order to get more passenger planes, Gitner was puzzled to see a few pieces of cargo-handling equipment still remaining at Pan Am’s operation in Frankfurt, Germany. “What’s that doing here?” Gitner asked. The local manager explained that the equipment was being maintained so it would be ready whenever Pan Am brought back the cargo planes.
Wisely Acker did not rely on outsiders alone to bolster the ranks of senior management. He also promoted Martin R. Shugrue, Jr., a 41-year-old Pan Am lifer, into his inner circle. Shugrue, a former navy fighter pilot, had coincidentally flown the search plane that located the bobbing Gemini 8 capsule with Frank Borman aboard in 1965. A short time later Shugrue became a 707 flight engineer for Pan Am, a position from which he climbed into top management.
Under Acker the three of them—Wolf, Gitner, and Shugrue—worked mightily to restore even a modicum of profitability to Pan Am’s operations. When the paperwork crossed Wolf’s desk for his own company-sponsored membership in the Sky Club, Wolf refused it; Pan Am veterans were offended by Wolf’s display of sanctimony. Gitner, having spent much of his career at Texas International, knew well the value of free advertising; he ordered a new paint job for the fleet, replacing the delicate Bodoni lettering that said “Pan American” with a giant “PAN AM” that stretched the entire height of the fuselage. Shugrue, who had once worked as a hat salesman, became famous for taking key customers out for raucous nights on the town.
But none of Acker’s turnaround moves drew more attention than his prices.
Acker began walking into offices literally issuing orders to cut prices, the same way he added new cities to the route map. At one point he walked into a meeting of executives agonizing over whether to match a price cut that Eastern had just instituted and was stunned that they would belabor the issue. “You have no choice!” Acker snapped. Failing to meet a price cut meant losing business, even if only a few passengers. Acker wanted to fly full airplanes even if the flights lost money; he wanted momentum. He wanted people talking about Pan Am’s comeback. He wanted to steal back every single bit of business that the previous management had given up, in the United States and overseas.
Even better than matching a price cut was initiating one, offering the customer, as he once told a management group, “the most terrific travel bargain that he has ever probably seen in his life.”
Acker also declared a new policy toward Freddie Laker, a cut-rate British charter operator expanding into the scheduled airline business over the North Atlantic. Laker, declaring it his mission to provide low-fare international service for “the forgotten man,” spent five years trying to get approval to conduct low-fare flights to the United States, and finally in 1977 had won the U.S. government’s approval, thanks to the burst of consumerism sweeping Washington. Before Acker arrived in 1981, Pan Am had arrogantly turned up its nose at Laker, uninterested in trying to capture the backpacking bargain customer. Acker, however, harbored no such contempt. Didn’t it make sense, he asked, for Pan Am to go for some of that business? One of Pan Am’s top analysts threw himself into the issue and quickly concluded that Pan Am could indeed benefit. The analyst handed over a 16-page report to Acker, who flipped the pages for a few seconds and promptly ordered prices to London slashed by nearly 60 percent.
In short order Laker’s operation was dead. “I didn’t do it to put him out of business,” Ed Acker would later say, “although I didn’t mind if it had that effect.”
And then, most outrageous of all, was the “ninety-niner,” as Acker called it—a $99 fare to anywhere in the United States, offered in the winter of 1982–83. No Saturday stay, no advance purchase restriction—just walk up to the ticket counter and go. Even a coast-to-coast flight plunged to $99, for the first time on any airline in years. Every other airline, unwilling to lose a single passenger to Pan Am, matched the ninety-niner, and although prices climbed back a few weeks later, profits had been devastated across the industry. In the first quarter of 1983 the U.S. airline industry racked up the deepest quarterly deficit in its history, $640 million.
To an extent Acker’s sell-at-any-price philosophy was accomplishing its intended effect, pumping blood into Pan Am’s sclerotic arteries and infecting the organization with the spirit of rebuilding. Lapel buttons popped out saying, I’M AN ACKER BACKER. Acker began holding massive meetings of managers and eventually companywide meetings, using high-technology satellite linkups that were still rare for the time. Although no one would ever confuse Acker, a man of no small elegance and savoir faire, with the abrasive Bob Crandall, Acker took to giving the same kind of locker-room pep talks. After Frank Borman of Eastern had snatched Braniff’s Latin American routes-a prize Acker made no secret of coveting for himself—Acker wrote a letter to Pan Am employees declaring, “We should all dedicate ourselves to making sure that Eastern regrets that they ever obtained those routes.” Speaking to a management group in Miami he vowed, “We are going to be leaders in the future. We are not going to take a back seat to anybody because of their pricing! We are not going to let Eastern Air Lines run us out of any more markets. We are going to start running them out of markets!… We will survive and Pan American will become the finest, most respected airline in the world today, just as it was 15 or 20 years ago when it introduced 747s.”
Despite its palliative effect on morale, there were some grave problems with Acker’s strategy. As Bob Crandall had taught the industry a few years earlier, in the late 1970s, slashing prices was a worthwhile strategy so long as some seats were still sold at full price. The First Rule of Airline Economics demanded selling otherwise empty seats at any price—but not every seat on the airplane. Marginal pricing was a worthy strategy for the last seat sold but not for the first. Selling everything so cheap not only reduced the total revenue attainable for any flight but also debased the value of the product in the mind of the consuming public. Pan Am was flying more seats and taking in less per seat. It could not survive by cutting back limousines and Sky Club memberships. Something major had to give—and that meant asking employees to give back some of what they had won in the regulated era.
Acker did not have the time or the capital to cut average costs with b-scales, as American was doing. Nor was there time for an imaginative “variable earnings plan,” such as Borman had used suc
cessfully for so many years at Eastern. Pan Am, Acker resolved, had to whack hard immediately: 10 percent had to be cut from everyone’s wages, he determined, to avert Pan Am’s failure.
For the delicate job of negotiating with the unions, Acker chose Marty Shugrue. Shugrue already had plenty of experience dealing with organized labor at Pan Am, which was no mean task. Pan Am’s workers had never been the highest paid, thanks to Juan Trippe’s view that working for such an institution was reward in itself. As a consequence Pan Am became the most heavily unionized airline in America. Even the secretaries were members of the Teamsters. Featherbedding was legion. Because only Teamsters could operate forklifts and only members of the Transport Workers Union could operate belt loaders, the act of horizontally removing an aircraft part from an overhead shelf and then vertically lowering it to the ground required two people and two machines. The merger with National Airlines only heaped on a new layer of work-rule complexity.
If anybody could go to the unions for concessions and come out alive, however, it was Shugrue. He was the son of a union beat cop in Providence, Rhode Island, and had been a Pan Am union member himself in his flying days. He was still on drinking terms with some of the most powerful labor leaders in the industry; one, the head of the Transport Workers Union, was a close family friend.
Ten percent, Shugrue begged—a 10 percent cut to save Pan Am. The unions answered that they would rather strike.
Shugrue knew a strike would be curtains. Although Pan Am would save on fuel and salaries in a strike, there would be no relief on the interest expense. If a strike shut down the company, Shugrue knew, Pan Am would be dead in a matter of days.
The unions finally said they would come to terms—on one big condition. Pan Am had to promise to restore the 10 percent cut by the first day of 1985, now less than three years away, with no bargaining required. An automatic “snapback” would have to occur.
Acker and his aides were in a serious bind. Would the fare wars abate within three years? Who could tell? But it was clear that the next three years promised no relief from upstart airlines, particularly on Pan Am’s price-sensitive leisure routes. Acker and Shugrue knew there was no way the company could reasonably hope to restore those pay cuts three years out. Yet Pan Am needed the 10 percent concessions now in order to survive.
Shugrue felt as if he had a gun to his head, so he did what any desperate person does. He lied.
Snapback? Sure, he told the unions. Absolutely. It’s in the bag.
With the concessions in place Acker went back to the things he loved: cutting fares, adding new destinations, and acquiring airplanes. The snapbacks were a couple of long years away. He would worry about them then, he decided—unaware that a violent conflict elsewhere in the industry would by then reach Pan Am’s doorstep as well.
CHAPTER 9
CONTINENTAL DIVIDE
Frank Lorenzo was a restless man. He imagined himself a builder, a creator, perhaps to airlines what Carnegie was to steel or Rockefeller to oil. By the early 1980s he had, in fact, come much further than anyone would have expected of someone growing up the child of Spanish immigrants in Queens. He had taken control of Texas International and had more than tripled its size. He had created New York Air; though struggling for landing slots and pushed to the bottom of the screen on American’s Sabre network, New York Air was still flying and still stealing passengers. Lorenzo had established a new holding company, Texas Air, which was flush with the winnings from his takeover attempt against National Airlines.
Yet all he had built was still no empire by airline standards. Texas International, for all its growth, had risen from the 19th largest airline in the industry only to the 15th. New York Air was a savvy niche operator but no powerhouse. Altogether Lorenzo had a measly 37 jets. He was still the ham in somebody else’s sandwich. It was time again to go shopping for an airline. The target this time was Continental Airlines.
Lorenzo had approached Continental previously only to get the cold shoulder from the aging founder, Bob Six. This time Lorenzo would not give him such an opportunity. This time Lorenzo would go into the open market and simply buy a chunk of Continental’s stock, then get a tender offer rolling. Although he’d be able to buy virtually every share in the company, Lorenzo resolved to limit his ownership to just under 51 percent, enough to give him control of the entire company. On February 6, 1981, he stepped into the open market and purchased nearly a million of Continental’s shares. Then he called Bob Six.
Once again the legendary Six, semiretired now, sent Lorenzo packing. Lorenzo, he said, should be talking to the newly appointed president of Continental Airlines, a man whose name made him appear destined for success in aviation: Alvin Lindbergh Feldman.
Though born in the year of Lindbergh’s Paris flight, Al Feldman did not make airlines or flying his first choice in careers. Feldman was an engineer from Akron, a whiz kid who worked for Aerojet General Corporation, a subsidiary of General Tire & Rubber Company, whose controlling shareholders in turn had long held a major interest in Denver-based Frontier Airlines. One of the many local-service operators that had sprung up after World War II, Frontier served dozens of small communities smack in the middle of the Middle West from Denver Stapleton Airport; it had been slowly slipping for years. Aerojet General had finally dispatched Feldman to Denver in 1971 with orders to liquidate the airline. Feldman, however, quickly grew smitten with the airline business and asked for the chance to resuscitate Frontier instead. His bosses back in Akron agreed.
Feldman stepped up passenger amenities (including smoked almonds, which caused people to order more drinks) and rebuilt Frontier around a hub system. He also inspired Frontier’s employees to greater heights of performance with a mixture of aggression, bluntness, and sincerity. Feldman hung an ugly picture of a purple vulture in the company’s boardroom bearing the inscription, “Don’t just sit there—go kill something!” He structured the company so that every employee was involved in either sales or operations, explaining, “If you’re not doing one, you must be doing the other.” Under Feldman, Frontier was one of the nation’s most consistently profitable airlines.
When he jumped to Continental in 1980 to assume the management chores from Bob Six, Feldman threw himself into his work, all the more so after his wife died of cancer. Fifty-two years old, six foot three, handsomely graying at the temples, he remained at his desk during lunch, eating a coach-class meal prepared on the Continental flightline. Feldman, thoroughly absorbed, was in love with Continental Airlines.
But Lorenzo’s maneuvers, it would appear, were about to take the company away from Al Feldman. The tender offer was like a magnet around iron filings: within days Lorenzo owned 48.5 percent of Continental’s stock, with money he borrowed in part by pledging Continental’s airplanes as collateral. Al Feldman observed dejectedly, “It’s the first time in my life I’ve ever lost.”
Noted for the Frontier turnaround and for a noteworthy if brief tenure at Continental, Feldman suddenly became the hottest free agent around. Marvin Davis, having recently acquired Twentieth Century-Fox, discussed bringing him aboard as chief executive. The directors of Pan Am were looking for a new chief executive officer (to fill the job ultimately given to Ed Acker) and asked Feldman if he would be interested.
Feldman, however, soon had reason to say no to his suitors: the employees of Continental had come forward with a plan to mount a rival takeover attempt, with Feldman as their leader.
Continental’s employees were wearing lapel buttons that said, FRANK WHO?, but in fact they knew only too well. Lorenzo had been vilified in the union campaign against the creation of New York Air. It was also common knowledge to union people that Lorenzo in his early days at Texas International had taken one of the longest strikes in airline history. Ominously, Lorenzo had filed a legal statement in connection with the proposed takeover saying that if he established control of Continental, “it will be necessary to renegotiate existing collective bargaining agreements.” By this time “reneg
otiate” was an often-used word in the Lorenzo lexicon—a word whose first five letters made it a cousin of the less dignified “renege.” The employees of Continental were beside themselves at the idea. They had contracts, after all.
A group of Continental pilots came up with the ingenious idea of using an employee stock ownership plan, or ESOP, to block Lorenzo. Continental would issue enough new shares to the employees’ group to dilute Lorenzo’s position safely below the level of control. The employees began to search for financing, while Feldman penned a letter to Lorenzo. “I must tell you,” Feldman wrote, “that each day more of our employees come forward to manifest their resolve to reject your bid for control of Continental. They are determined to oppose you with every means at their disposal. In the face of their determination, it may not be possible to merge our two airlines.”
Together, Feldman thought, he and the employees of Continental just might have a chance of beating Lorenzo.
Lorenzo was bothered by the FRANK WHO? buttons. “When you own 48.5 percent of a company, it means certain things,” he said. “It means you get certain rights.” He was offended to see Continental employees turn “goggle-eyed,” as he put it, when he stepped on a Continental flight. “Listen, I’ve checked my horns with my luggage,” he told them.
Lorenzo needed a point man to carry out his takeover moves, and the assignment went to Phil Bakes. Once more Bakes assumed his crusade mind-set, just as when he had campaigned for deregulation or had lobbied for the slots with which to launch New York Air. To Bakes victory was all the more important because Lorenzo had given him so much responsibility and authority in the wake of Don Burr’s resignation. Bakes resolved to prove himself worthy of Lorenzo’s trust.
Bakes’s opportunity came when Continental’s annual shareholders meeting occurred in the midst of the takeover battle. As Bakes entered the ballroom in Denver’s fabulous Brown Palace Hotel, a throng of angry Continental employees was noisily demonstrating with picket signs: “Don’t bank on Frank.… You can’t buy pride for peanuts.” The throng marched into the ballroom, many in their flight uniforms, looking like the military, and Bakes was suddenly filled with dread. He was the personal embodiment of the enemy that had brought these hundreds of people together. It was a mob scene. What if they lose control? he wondered.