Hard Landing
Page 29
A career in cargo might not have been the first choice for most graduates in the mid-1960s, but Wolf was thrilled to take a trainee position at American Airlines’ cargo operation in San Francisco. Expected to reach a supervisory position in 12 months, he made it in 12 weeks. From there he moved to Cleveland and then to New York, where in a hangar at JFK he caught the attention of American’s newly appointed chairman, Al Casey, whose own background included working in railroad freight. At the time that Casey was propelling Bob Crandall along the fast track at American, he also took Wolf under his wing. Soon Wolf was working on the passenger side of the business, doing the same with people that he had been doing with boxes and crates.
A conspicuous individual to begin with because of his towering height, Wolf took great care in his personal appearance. He had a thick, immaculately trimmed mustache and wore bright red suspenders, which only exaggerated his height. When American produced a sensitivity training film for flight attendants in the late 1960s, Wolf was shown walking down a New York City street wearing a trenchcoat, head and shoulders over the crowd, in a scene intended to depict the hustle and bustle of modern life. Years later Wolf would take delight in recalling that the soundtrack music behind his appearance on the film was the romantic theme from the movie Midnight Cowboy.
Though intensely methodical and results-oriented, Wolf began to lose steam professionally at American, and his rapid ascent began to slow. Some of his peers had moved ahead of him. He urgently wanted a promotion and a raise but was turned down for both. Wolf left to go to work for Ed Acker at Pan Am, where he was stung by the bug that bit so many in aviation. He wanted to run something.
An offer from Frank Lorenzo to become president of Continental Airlines was his opportunity, and Wolf leapt at it. A short time later, sitting down with a reporter from Business Week, Wolf boasted of what a brilliant team he and Lorenzo made. Lorenzo, said Wolf, “has very profound financial strengths, and I’m a very good operating guy. I think we balance each other superbly.”
Once at Continental headquarters in Los Angeles, Wolf scheduled both the airline and himself to perfection. He conducted one-on-one meetings as he drove to the dry cleaner. People on the operating side of the airline, where details particularly mattered, were deeply impressed with Wolf’s mastery of intricacy. But to others Wolf seemed so compulsively attentive to detail that he could not begin to see the scope of Continental’s problems. With the financial crisis worsening, Lorenzo at one point rushed into Wolf’s office for an emergency consultation, only to find the president sprawled on the floor studying upholstery samples. On another occasion a marketing executive looked on as Wolf tried to explain to someone else the exact shade of paper stock he desired for Continental’s timetables. “I want it to be this color,” Wolf barked, stabbing his finger against a beige telephone receiver. “This color, understand?”
The people around him thought Wolf was not above an occasional round of office politics. One Sunday night Lorenzo, at home in Houston, called corporate headquarters in Los Angeles as Wolf and his aides were immersed in making budget cuts for the year. Lorenzo was unhappy to learn that Bakes, now a senior vice president, was absent from the meeting. Lorenzo tracked down Bakes at home. “Why aren’t you at the company?” he demanded. Bakes told Lorenzo that Wolf had not informed him of the meeting. It was a pure power play, Bakes thought. Wolf was cutting him out.
Wolf did not recognize that he slighted Bakes at some peril to himself. Though junior to Wolf on the organization chart, Bakes was a card-carrying member of Lorenzo’s inner circle, which Wolf was not. Lorenzo, in fact, was regularly conducting end runs around Wolf, talking privately to Bakes about what was happening in the company. Because Wolf seemed to make a point of introducing himself as Stephen, Lorenzo made a point of calling him Steve, with a whiff of sarcasm.
Wolf before long could not avoid sensing that things were not entirely right for him at Continental. The issue came into focus when Lorenzo announced that Continental was moving its headquarters, notwithstanding his promises. “Contrary to what has been speculated,” Lorenzo had said in a letter, “Texas International has no plans to move the headquarters of Continental out of the state of California.” But months later he told executives in Los Angeles to start packing for Texas International’s hometown of Houston. Wolf, preparing for the move, decided it would be wise to sign a month-to-month lease on an apartment in Houston. He even rented furniture. Wolf could sense trouble ahead.
And indeed enemies old and new alike, sensing Lorenzo’s weaknesses, had begun to circle.
Sitting in his office overlooking Newark’s North Terminal, Don Burr read aloud from Business Week to his companion and fellow People Express founder, Melrose Dawsey. Stephen Wolf was quoted as saying how well he and Lorenzo worked together. “That guy is gonna last a month,” Burr cackled. “Frank will kill this guy.”
The separate launchings of People Express and New York Air had only intensified Burr’s rivalry with Lorenzo. When a fleet of 20 secondhand 727s came on the market through the liquidation of Braniff, Burr expressed interest in acquiring them, but Lorenzo, it turned out, was eagerly seeking the same planes, Burr was convinced that Lorenzo was making a play for the airplanes simply to be a spoiler, to drive up the price that People Express had to pay—“one more of Frank’s deals to frustrate what we were doing,” he would later claim. But Burr moved quickly and nailed down the 727s, some of which, he decided, would be scheduled to fly from Newark to Houston, piercing the heart of Lorenzo’s new Continental hub.
Burr could not have chosen a more sensitive spot on which to inflict pain. Houston-New York was among the most vital routes in the Continental system and one that Lorenzo essentially had all to himself. Other airlines served the same pair of cities only with connecting service—Delta through Atlanta, for instance. The established airlines were lazily raking in as much as $320 for a one-way ticket.
In addition to the economic imperative for Burr to jump into Houston, there was also the emotional one. As Burr would say a decade later, “Maybe I thought it would be a wonderful way to jab Frank.” He determined to swamp Lorenzo with low prices—$69 one way—and massive service: 727s jammed with seats, initially three flights a day, then up to eight flights a day … 1,600 seats every day, swarming into Lorenzo country, each in a plane bearing the double facial profile of People Express.
The confrontation was all the more pleasurable for being played out in the old headquarters town of Texas International, where Burr and Lorenzo had once been so fast. Many of the renegade Texas International employees now working at People Express still had connections to Houston. Melrose Dawsey, who had been Frank’s secretary back in the old Texas International days, had a child who spent time in Houston with her ex-husband.
Delightedly Burr awarded Dawsey the privilege of traveling to Houston to conduct the press conference announcing the invasion. Lorenzo would learn from his former secretary, now with Burr in Newark, that People Express was attacking Continental.
In Dallas Bob Crandall’s people were taking “screen science” to a new level of sophistication. And with Frank Lorenzo—Mr. Peanuts Fares himself—taking control of Continental, they had a new target in their sights.
This much was apparent to Dick Murray of the Sabre staff one day when he took a phone call from Continental. Lorenzo’s new airline had just posted discount fares in a number of cities. But the discounts on 49 particular routes were not showing up on Sabre terminals in travel agencies across America.
That didn’t seem possible to Murray. “There’s been a screwup somewhere,” he told Continental. But when he investigated, Murray learned that the discounts had been deliberately withheld from the Sabre network on routes where American competed. Murray later saw an internal memo that cited “suppression of all Continental fares” at the discount level between the 49 city pairs.
Later a Sabre staffer sheepishly approached Murray and laid a file on his desk. She said she had been directed to work on a pro
gram that would automatically suppress any discount fares loaded into the Sabre mainframes. The program would withhold the data from travel agents long enough to give American time to study whether it wished to match the fare cuts, thus blocking the competition from stealing a march on American. “She had been sworn to secrecy,” Murray would later recall.
When he was denied a promotion and assigned to report to one of his rivals, Murray decided it was time to leave American. He scheduled a meeting with Bob Crandall and informed him that he had an offer from Lorenzo to join Continental. “Jesus Christ! Don’t go to Continental,” Crandall said. “We’re going to put them out of business!”
Lorenzo had hired Murray to try to make something of Continental’s modest in-house computer reservation system. Lorenzo understood as well as anyone the power of massive computer reservations systems in the airline industry. With Dick Murray joining his team, Lorenzo could at least begin to investigate the potential of expanding the Continental system into a more meaningful force—a counterweight, perhaps, to the passenger-gathering power of Sabre and Apollo (and to a much lesser extent the networks that TWA and Eastern were also installing in travel agencies). Above all Lorenzo wanted to join in the practice of collecting fees from other airlines for electronically processing reservations made in their behalf; he bitterly resented having to pay the tax that Bob Crandall and Dick Ferris collected for every reservation that their networks handled for his airlines.
After Murray had joined Continental, a subpoena arrived in connection with a federal investigation of computer reservations systems. Murray came forward, regaling Lorenzo with tales of tweaking and bias and fare suppression and stolen data at Bob Crandall’s American—some of the tricks having been directed against Lorenzo’s airlines. Lorenzo suddenly thought he had a smoking gun with Bob Crandall’s fingerprints all over it.
The next thing he knew, Murray was in a room full of Justice Department lawyers, with a stenographer taking down every word.
While Dick Murray toiled over computer problems and Steve Wolf moved to consolidate the hub operations in Houston and Denver, Frank Lorenzo was busy trying to keep Continental’s finances from collapsing. Continental by 1983 was losing money faster than ever. Though the recession had lifted and fuel prices were beginning to abate, a new fare war had erupted, much bigger than anything yet to hit the airline industry, triggered by Ed Acker’s “ninety-niner” at Pan Am. Matching the Pan Am fares creamed Continental. Thankfully for Continental, Lorenzo had not lost his touch on Wall Street; he funded the losses with underwritings. In addition a major insurance company in Houston, American General Corporation, invested $40 million in options on Continental stock, declaring that it believed the company, and the industry, to be strong turnaround bets. “Frank laid on all the charm he knew how to lay on,” Phil Bakes would recall.
But even Lorenzo could not continue funding Continental’s losses forever. The only way to reverse the tide of red ink was to attack the single largest controllable area of costs: labor. That was now Phil Bakes’s department.
Though still resentful that Wolf had been given the presidency, Bakes was delighted that Lorenzo gave him the responsibility for attacking Continental’s labor costs. That, Bakes was sure, was where the company’s future would be decided. Indeed, in a series of meetings after the July 4th weekend in 1983, Continental’s bankers agreed to relax further the terms of the company’s debt, but only if the company cut back severely on its labor rates. Flying in for those meetings on a clear night over New York City, Bakes had a breathtaking view of all the Independence Day pyrotechnics below—a fitting metaphor, he thought, for the fireworks doubtless to come.
The average Continental pilot was earning about $90,000 a year, including benefits—not a king’s ransom in 1982 and 1983, perhaps, except that he received that pay for an average of about 11 days’ duty per month. The pilots had already agreed to significant cutbacks, but in Bakes’s view their concessions had bought the company only a little more time. The pilots would have to be pressured to give up much more, along with the other union groups.
Continental’s flight attendants earned salaries and benefits averaging $37,300 and enjoyed work rules that Bakes considered reprehensible—large hotel rooms with double beds on overnight trips, for instance.
But the most immediate labor-cost issue involved Continental’s mechanics, who pulled down nearly $40,000 a year. Bakes had had some acquaintance with their union, the IAM, during his Kennedy years. The IAM was so enamored of Teddy Kennedy and his pro-labor stance that it donated the use of a private airplane for the ill-fated Kennedy presidential campaign. Such loyalties didn’t mean a thing now, of course.
The Continental machinists were working under an expired contract, which made them the first targets for deep cuts. The talks on a new contract were proceeding perfectly rationally, with the prospect of some give-and-take. But the atmosphere at Continental changed overnight when Charlie Bryan and the machinists’ union at Eastern crushed Frank Borman, walking away with a 32 percent increase. After Bryan’s triumph in Miami the Continental machinists didn’t want to hear a word about the financial problems of Continental. They wanted the same contract from Lorenzo that Bryan had won from Borman.
Without bothering to consult Steve Wolf, who was still his boss, Bakes called together his own subordinates and declared that Continental would take on the machinists. “We’ve got to prepare for a strike!” Bakes announced.
There was indeed virtue in taking a strike. Under the peculiarities of airline labor law, if the machinists went on strike, the company could replace them immediately with scab workers—and do so on whatever terms the company chose. A strike would cure Continental’s cost problem, at least insofar as it involved the machinists.
On August 12, 1983, Frank Lorenzo took the machinists strike that Frank Borman had refused to accept. It was, for Lorenzo and Bakes, far from a disaster. The pilots traipsed through the machinists’ picket lines. The middle management groups at Continental and Texas International, not yet fully comfortable with one another, galvanized into a unified group in the interests of keeping the airplanes aloft. Within days Continental was back flying at full strength, having cut its labor costs in the process—a big step on the long path toward reversing the company’s fortunes.
While Lorenzo and Bakes were rejoicing, they knew they had yet to take on the flight attendants and pilots in order to lock in the easier debt terms the bankers were willing to provide, and there was a huge payment coming due in a few weeks. And although the machinists’ strike had been utterly broken, it had driven away some business and burned up a lot of cash in the pell-mell effort to recruit and train scab workers.
Five days after the machinists had walked out, Hurricane Alicia swept through the center of Houston, shuttering businesses for days and driving anyone who could afford it into air-conditioned hotel rooms. Bakes and his family checked into a Guest Quarters Suite Hotel, where Bakes began crafting a mighty speech, one that Lorenzo would deliver in the days ahead to convince employees to consent to wage cutbacks or accept the consequences.
But what exactly were the consequences?
• • •
A few months earlier Bakes had been interested to read about an appellate court decision in Philadelphia. A New Jersey building supply company called Bildisco had filed for bankruptcy protection, and in doing so had repudiated its labor contracts along with its financial obligations, as if its work rules and wage rates were accounts payable. The court ruled that if collective bargaining agreements threatened the claims of other creditors, they could, in fact, be unilaterally abrogated—wiped out, kaput, while the company continued about its business. Bakes passed out copies of the case to some of his fellow executives.
Bankruptcy. The notion was so … intriguing: a perfectly solvent company, with a valuable franchise and assets of tremendous value, nevertheless using bankruptcy as a way of escaping from wage agreements it no longer wished to honor. It would be a provocative m
easure, certainly far less preferable than a negotiated settlement with the unions, but among some of Lorenzo’s senior executives a negotiated solution appeared less likely all the time. Continental’s senior vice president of flight operations, Richard Adams, jotted down some notes at one point in which he observed, “I don’t believe we can get these concessions on a voluntary, persuasive basis.… We must get an awfully big stick.… Most effective stick may be Chapter 11.” In August 1983 Harvey Miller of Weil, Gotshal & Manges, the dean of the bankruptcy bar, traveled to Houston from New York for his first consultation with Lorenzo and his aides.
Bankruptcy remained a fallback position. No airline had ever gone into bankruptcy and emerged to fly again. Braniff provided a harrowing precedent. No one knew whether the public would ever trust a bankrupt airline. Lorenzo, Wolf, and Bakes launched one last campaign to talk the unions into a deal.
They met with Continental’s pilots in the air-conditioned chill of a hotel ballroom near Houston Intercontinental Airport as a fog of humidity blanketed the city and the cleanup from Hurricane Alicia continued. Lorenzo had flown in from New York just in time to give the speech. Wolf and Bakes flanked him at the front of the room. It was obvious to Bakes that Lorenzo was nervous—nervous in a situation that demanded Lorenzo be at his calmest and most deliberate. The pilots stared angrily at Lorenzo and his confederates, wondering why, after agreeing to grant concessions a year earlier—why, after agreeing to cross the machinists’ picket lines—they were being singled out again to give more.
What Lorenzo wanted, in brief, was to cut their wages nearly in half, immediately, even though the existing pilots’ contract had 13 months left to run.
“The company,” Lorenzo told them, “is losing money at an alarming rate.” Just as bad, American and United were bearing down with “biased travel agent computer reservation systems that distort traffic patterns and competitive market shares.” People Express, he noted, was also closing in, attacking Continental’s home base of Houston. Bob Crandall was hiring b-scale pilots to expand the American fleet at a terrifying rate just 250 miles away in Dallas.