A few hours after the board meeting the phone rang in Luce’s hotel room. It was Dick Ferris. “Can I have dinner with you?” he asked.
Ferris sheepishly explained that he had spoken further to his contact at Goldman, Sachs, who informed Ferris that the firm would have trouble financing the deal if the United board wasn’t squarely behind it. Ferris’s fantasy had crumbled. He had succeeded in nothing more than agitating a board that considered him a little impulsive to begin with.
“Dick,” Luce said, “you don’t make many mistakes, but when you make one, it’s a big one.” Like a schoolteacher making someone write on the blackboard for misbehaving, Luce told Ferris to telephone each and every director to say the deal was off. The episode was never made public. But as Luce would later say, “This incident really shook the board.”
The rejection of his LBO proposal was a small matter, in the eventual scheme of things, compared with another snubbing that Dick Ferris was receiving. The pilots’ union was making Ferris the enemy.
In a sense he had brought it on himself. Ferris had failed to keep the pilots’ union at arm’s length. He was too chummy with its leaders; he had extracted too many concessions in the blue skies contract, and now he had a backlash on his hands. By a single vote of the local council the old slate of union officers was swept out. In came a new group whose leaders were still seething over the loss of the three-man cockpit. The new leaders vowed to restore distance between the union and management and to put the interests of pilots ahead of, rather than alongside, those of United Airlines.
The timing of the union shake-up could not have been worse. Negotiations were scheduled to begin on a new contract to replace the expiring blue skies deal. Suddenly the air was electrified with acrimony.
The timing was terrible in another respect: United operated the world’s most valuable fleet of airplanes principally from two hubs, Denver and Chicago, and both were suddenly under intense attack. In the case of Denver the enemy was the resurgent Continental Airlines, a fact for which Ferris had himself partly to blame. When Lorenzo and Bakes had announced that Continental would fly its way out of bankruptcy with $49 fares to anywhere, they knew that United was the one airline that could checkmate their move. No airline had greater route overlap with Continental than United, principally in and out of Denver. By giving the order to match Continental’s $49 fare, Ferris could have killed the company before it ever got back off the ground. But Ferris had decided that Lorenzo was already dead anyway, so after a furious internal debate he matched only selectively. He had miscalculated; Continental was now surging in Denver, in large part at United’s expense.
Ferris’s other enemy as he entered into negotiations with the pilots was far more worrisome. This was an old adversary—Bob Crandall.
Crandall had ordered billions of dollars’ worth of airplanes after putting his b-scales in place, all as part of his vaunted Growth Plan for American Airlines. Having nearly saturated Dallas with planes, Crandall turned to O’Hare in what he called the Chicago Action Plan, grabbing every slot and gate on which he could lay his hands—every slot and gate, in any event, that Dick Ferris did not snatch first. Ultimately American alone would spend well over $100 million just on additional landing slots. Though there was little doubt that United would always be number one at O’Hare, it mattered immensely to both companies whether American was a close number two or a distant one. The unhappy position of being a weak number two was becoming painfully evident to other airlines at other hubs: Eastern, struggling against Delta at Atlanta; Delta in turn struggling against American at DFW; Frontier, God help it, slugging it out in Denver with United and Continental. Airline economics demanded that American come as close as possible to attaining parity with United at O’Hare. The same economics dictated that United try to prevent American from doing so.
Both companies launched costly local advertising campaigns. American threw a giant soiree to woo the affections of 1,000 Chicago-area travel agencies. Each of the two companies intensified its effort to convert travel agencies to its own computer reservation system. American snagged corporate business by offering free first-class upgrades to United accounts. Ferris ordered his top executives to begin a concerted effort to ingratiate themselves with the local establishment through civic activities.
Most of all United needed a lot of new airplanes, fast, to stay well ahead of American. United, however, could not simply add airplanes to its fleet. Ferris had to match the Crandall strategy of lowering his costs with each new airplane, and Ferris could do that only by convincing his pilots to accept b-scales. There was obviously no way Ferris could expand with pilots hired at twice the wages Bob Crandall was paying.
When Ferris had turned 21 years old in 1957, he had received a letter from his father conveying a piece of wisdom that had long been passed from one generation of Ferris men to another: “Get along peaceably if you can, forcibly if you must.” No one could have given Ferris more perfect advice for his face-off with the new slate of pilot leaders. Ferris might have relied on his well-honed golf-course manners, on his charismatic powers of persuasion, but instead he went straight for force. He had been deeply hurt at the election of the ardently antimanagement union slate, and to the extent that the pilots’ leaders presumed him to be the enemy, so did he judge them.
He involved himself deeply in the negotiations, as he had four years earlier, but this time with incendiary consequences. He displayed his strongest tough-guy bearing, even pounding on tables. And right from the beginning of the talks he laid down the conditions for a peaceful settlement: “You match the American contract,” he said, “and we’ll accept that.”
For the new pilot leaders at United, however, matching American was out of the question. American’s b-scales, in their view, were anathema to the pilots’ profession—and irrelevant as a precedent besides. The pilots at American who had consented to Crandall’s demands were not part of the Air Line Pilots Association. The American pilots in their infatuation with C. R. Smith had broken away from the more militant ALPA organization more than 20 years earlier, in 1963, establishing an in-house union.
No, ALPA declared, there would be no b-scales at United. To which Ferris declared there would be no new airplanes.
As the contract talks continued into 1985, Ferris’s refusal to buy airplanes not only aroused resentment among his pilots but began to take its toll on United in the marketplace. Airline traffic was swelling on the continuing tide of low fares. Other airlines-People Express, Delta, even Continental, to say nothing of American—were buying all the planes in sight. Before long United was actually canceling flights because of a plane shortage.
Ferris’s friends and associates, while they supported his strategy, began to worry about the passion with which he was pursuing it. Chuck Luce, the senior board member, was concerned that Ferris had “lost his balance,” as he later put it. Ferris’s mentor, the newly retired Eddie Carlson, concluded from a distance that Dick’s toughness was making it easy for the leadership of ALPA to turn the membership against management. To John Zeeman, Ferris’s marketing chief, Ferris’s relations with the pilots’ union “was like a love affair gone bad.” If Ferris had only removed himself from the bargaining process, Zeeman would later say, “that emotion would have stayed out.”
There was an element in the escalating confrontation that was no fault of Dick Ferris, however. It was purely bad luck that Dick Ferris happened to be the next in line after Frank Lorenzo and Phil Bakes had heaped such failure and humiliation on the Air Line Pilots Association. ALPA was itching to take on Dick Ferris.
The union had conducted an extensive postmortem of its failure at Continental and learned that it communicated poorly with members. In part because pilots often lived hundreds of miles from the operating bases at which they reported to work, barely one fifth ever showed up for union meetings. To overcome the estrangement ALPA brought in experts to establish a video department in Washington. Experts in telephone communication instructed the un
ion in using “cell block” meetings and “telephone trees” to keep members informed—and to keep pressure on the rank and file when the time came to act with unity. In its studies of the failed Continental strike ALPA had also discovered the critical role that wives played in the decisions of their husbands in crossing picket lines. Thus United pilot wives were soon being recruited to union “family awareness” meetings.
The pilot leaders at United appointed a longtime 737 pilot named Frederick “Rick” Dubinsky as the strike chairman. Dubinsky had followed the standard path to flying, starting out building model airplanes and dropping out of college because he could not wait to get his hands on the real thing. Dubinsky and his assistants recruited fully 1,000 pilots as volunteers on the strike committee. Soon they were putting in 10,000 hours a week preparing to strike against b-scales. They were making more than 7,500 phone calls a day to spread the anti-Ferris gospel. Reams of information were distributed, including household finance how-to tips for strikers and lists of foods to avoid in times of stress. And everyone received indoctrination in the need for unity: we must fight b-scales; b-scales will degrade the pilots’ profession; we must not give Dick Ferris what Bob Crandall got from the American pilots; United must find other ways to compete with Continental and People Express.
When ALPA put the matter to a vote, 96 percent of the United pilots authorized a strike. Word came from the ALPA offices in Washington that the United pilots should not worry about financing the strike: the national union would provide all the strike funds necessary, to the point of mortgaging the eight-story ALPA headquarters building on Massachusetts Avenue.
While the showdown drew closer, some good would come to Dick Ferris as a result of the Continental bankruptcy. The anti-Lorenzo fallout was also raining on Pan American World Airways, in a way that would enable Ferris, and United, to bring off perhaps the most brilliant transaction in airline history.
At the beginning of 1985 the jig was up for Ed Acker. The unions had discovered the big lie. Pan Am did not have—and had known all along that it never would have—the financial strength to deliver the promised snapback on the wage concessions of three years earlier. Pan Am’s finances were so precarious that it had even been using its pension programs as a piggy bank. The pension plans by 1984 were so dreadfully underfunded that Pan Am had been forced to freeze retirement benefits, intensifying the resentment of the rank and file. “Employees will not trust management until its word can be relied upon,” Lazard Frères, the investment banking concern, wrote in a report to the Pan Am board on January 31, 1985.
Acker was in a dreadful fix. Fulfilling the company’s snapback promise would bankrupt Pan Am. Yet the unions were already threatening to call a strike, which could bankrupt the company equally.
This painful conundrum was weighing on Acker when he took time out to attend a party aboard the yacht of publisher Malcolm Forbes. Dick Ferris happened to be attending the same event. “Ed,” Ferris said, “I want to talk to you.” The two men departed the yacht and began walking along the dock, deep in conversation. Would Pan Am be interested, Ferris wanted to know, in selling its routes to the Orient?
It was a preposterous and practically unthinkable idea. The Pacific routes were the jewels of Juan Trippe’s crown, the most famous—and lucrative—international air routes in the world. But for Ferris the routes represented a bold solution to a vexing strategic challenge. Ferris recognized that one day the United States would be saturated with airplanes and there would be no place left to grow—except overseas. Ferris had commissioned a study evaluating which of three continents made the most sense for United to establish as a major destination. On a scale of one to ten, South America scored a two. Europe was between six and seven. The Pacific was a ten.
United in fact had launched its first and only international route three years earlier, in 1982, from Seattle to Tokyo, but securing the necessary landing authorization had consumed 12 years; victory had come only through the personal intervention of President Reagan. Entering the Asian market to any meaningful degree would require landing rights in Singapore, China, Taiwan, Hong Kong, the Philippines, Thailand, and Korea, to say nothing of bargaining for expanded authority in Japan. It would take a lifetime to assemble that kind of operation from scratch. But by paying Pan Am, Ferris could perhaps accomplish the same result.
There was no telling for sure whether such a deal could go through. The legal questions were mind-boggling. The flying authorities and the landing rights—were they corporate assets, like factories or mines, that Pan Am was free to trade away? Or were they licenses that the respective governments conferred? Pan Am had never actually paid to acquire those operating rights; did it now have the right to sell them? If so, how could anyone begin to determine the price? Ferris was eager to find out.
The Forbes party, in fact, was not the first time that Ferris had broached the matter; three years earlier he had secretly met Acker at an off-brand motel near JFK to propose buying the Pacific routes. Acker had politely brushed him off. This time things were different. Pan Am, like United, was headed for a cataclysmic union showdown, but unlike United, Pan Am had no financial wherewithal.
“I’ll think about it,” Acker finally answered.
Neither man realized that at that moment an executive in the Forbes organization was leaning over the ship’s deck above with a camera. He snapped a shot of the two men deep in conversation; he later sent a copy to each. Referring to an oily spot on the pier beneath them, the photographer added the caption: “That’s Crandall down there, wondering what you’re talking about.”
• • •
Marty Shugrue of Pan Am, like Dick Ferris of United, was a pilot, but unlike Ferris he still had strong rapport with the pilots’ union. With minutes to spare before a strike, Shugrue reached a settlement with the Pan Am pilots that provided for a phased restoration of their lost wages, a kind of partial snapback.
After the pilots came the Transport Workers Union, representing mechanics. A settlement appeared hopeless, but that was okay, Pan Am’s management reasoned, because Pan Am could fly through a mechanics’ strike. Pan Am could stay in business so long as it had pilots, and the pilots had signed.
The mechanics walked off the job at midnight on February 28, 1985. But to the astonishment of everyone else connected with the situation, the Pan Am pilots honored their picket line. Acker and Shugrue had completely miscalculated. Pan Am was all but shut down. Once again the sins of Frank Lorenzo were being visited on another airline. “The Continental situation, more than anything else, taught the pilots’ union some religion,” a union official was quoted as saying. “The pilots’ union decided it was better to start honoring other unions’ picket lines, at least for a while, or the unions weren’t going to get anywhere.”
Acker recognized that Pan Am was a victim of Lorenzo fallout, but it was cold comfort. Like any executive who had put in more than a few years in the airline business, he had a thing about maintaining a cushion of cash. In his mind Pan Am required a cushion of at least $300 million. Pan Am was practically down to that already, with no place to turn for more. The banks had cut Pan Am off. The entire fleet was already mortgaged to the wing slats. The landmark headquarters building in midtown Manhattan had long since been sold. Ditto the Intercontinental Hotel chain. Only the routes, the circulatory system of Trippe’s great beast, were left to sell.
Among the company’s routes those over the Pacific, despite their high fares and storybook history, were the only logical ones to sell. Among the achievements for which they received insufficient credit, Acker and his aides had reoriented the U.S. route system to feed Europe-bound passengers into New York and Latin-bound passengers into Miami, but there was far less feed to the West Coast for Asia. It would take $3 billion worth of new planes and new routes to make that happen. The 747s Pan Am used from the West Coast to the Orient were also in need of replacement; in the easterly headwinds of the winter the planes often required fuel stops or had to fly with reduced load
s, unlike the later-model 747s that other airlines were buying.
The rest of the airline industry, meanwhile, was eating Pan Am’s lunch in the Pacific. Northwest, unlike Pan Am, had extensive routes running from the interior of the United States to the West Coast and thence to Asia, enabling it to collect transpacific passengers that Pan Am relied on other carriers to bring to it. Pan Am was also inundated with new competition from Asia itself. In addition to Japan Air Lines there were a number of national carriers from the booming Pacific Rim—Korean Air, Singapore Airlines, Cathay Pacific, and Thai Airways—that offered sumptuous onboard service with flight attendants paid a small fraction of what Pan Am paid.
With the kind of money they could get by selling the Pacific, Acker and Gitner could not only pare down Pan Am’s oppressive debt burden but also build additional routes to the surviving Pan Am gateways of New York and Miami. Finally there was, in the case of the Pacific, a ready buyer in the person of Richard Ferris.
Acker tracked him down at the 1985 Hawaiian Open, the annual golf tournament that United used to beam images of putting greens and girls in grass skirts across America every winter. Ferris and his marketing chief, John Zeeman, were in a practice round on the 13th hole when Ferris was called to the phone. He caught up with the group on the 16th hole and casually asked Zeeman to join him privately after the round. The two walked to the hotel and closed the door of Ferris’s room behind them.
“You can’t fucking believe it!” Ferris exclaimed. “They want to do the Pacific deal!”
The following Saturday, on April 20, 1985, Eddie Acker and Gerry Gitner sat down with Dick Ferris and one of his aides in a suite at the Plaza Hotel (then owned by United) and named their price: three quarters of a billion dollars. Ferris, to their surprise, readily agreed. In one of the biggest commercial transactions in history there was no haggling over money.
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