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Hard Landing

Page 34

by Thomas Petzinger, Jr.


  Although there was no shame or embarrassment in conducting defensive acquisitions in the 1980s, Ferris would forever refuse to acknowledge the Hertz purchase as an antitakeover measure, not even to the members of his inner circle. For everyone but Frank Olson, Ferris had a different explanation, one that Ferris pushed so hard it took on a life of its own, inside United and outside. Ultimately the cover story became the reality.

  The acquisition placed United squarely into a third major sector of the travel and tourism business, on top of Westin Hotels and United Airlines itself. If properly stitched together, these three businesses, Ferris told his associates, could become something extraordinary—an integrated travel empire on a scale never before seen. The pièce de résistance, the glue that would bind it all together, would be Apollo, United’s sprawling computer reservation network. Apollo could take the three separate businesses and assemble them into a single product, that product being a trip, a seamless travel experience, arranged in a single phone call and carried out with unheard-of efficiency and convenience. You could complete your rental car contract and check into your hotel at the United counter at the beginning of your journey. Your luggage could be delivered directly to your Hertz car. Apollo would know that you wanted an aisle seat in the smoking section (they still existed then) and a midsized sedan and a room on the concierge floor. And you could pay for everything on a single credit card imprint. Ferris’s people threw themselves into the job of endowing Apollo with such intelligence.

  But to legitimize his global travel empire Ferris needed two additional things. The first was a much bigger hotel operation, including hotels overseas—particularly in Asia, now that he controlled the vast Pan Am routes there. Ferris went shopping and quickly bought the Hilton chain in late 1986, for nearly $1 billion.

  The other thing he needed was to reach into Europe, by tying in key United flights with those of a European airline while simultaneously extending the reach of the Apollo reservations network. That way passengers in Europe could be directed toward an airline friendly with United, which, in turn, would turn them over to United for their connecting flights in the United States, where they would drive in Hertz cars and lodge at Westin or Hilton hotels.

  One night, in their search for strategic partners in Europe, Ferris boarded a British Airways flight to London with United marketing chief John Zeeman. When they landed in London they raced to a breakfast meeting with Colin Marshall, chief executive of British Air. Following breakfast they jumped into a chartered plane to Cologne, Germany, where they were whisked past German customs and into a luncheon meeting with Heinz Ruhnau, head of Lufthansa. Soon they took off again in the chartered plane, this time for Paris, where they held a dinner meeting with the people from Air France. And when their whirlwind tour was concluded, Zeeman and Ferris realized that by having breakfast with the British, lunch with the Germans, and dinner with the French, they at least had planned their meals well.

  As Ferris moved to fulfill his vision there was grumbling inside United, and not just from the pilots. Ferris’s own managers urgently wanted more planes to meet the attack from American in Chicago, more planes to fight Continental in Denver, more planes to throw against People Express, growing like a weed everywhere.

  But Ferris, the pilot, was thinking less and less about airplanes. He still had the number one airline, and on top of that the number one car rental outfit and the number one hotel chain in the world. As he later put it, “We were ready to own the world.”

  The visionary Juan Trippe (left) launched Pan Am’s airmail service to South America in 1929, with Charles Lindbergh in the cockpit. “We have shrunken the Earth.” (Smithsonian Institution)

  Marketing genius C. R. Smith of American Airlines introduced jet travel to America in 1959. “We’re going to make a pile of extra dough just from being first.” (American Airlines)

  Herb Kelleher battled to launch Southwest Airlines in 1971. If the sheriff shows up with another injunction, he said, “leave tire marks in his back.” (Southwest Airlines)

  Dallas’s Love Field gave Southwest an operating base as well as a marketing identity. “How do we love you? Let us count the ways …” (Southwest Airlines)

  Taking control of Texas International in 1971, Frank Lorenzo soon became the industry’s youngest president at age thirty-two. Calling it “our little airline,” he would make it the nation’s largest. (AP/Wide World Photos)

  Robert Crandall roiled the industry after becoming Americans marketing chief in 1973. “Be ruthless. Be driven. Don’t let anything get in your way.” (American Airlines)

  Crandall’s deft internal politicking helped him win the presidency of American from chairman Al Casey (left) in 1980. When did Crandall first covet the job? “When I was born.” (American Airlines)

  Within days of Continental’s Chapter 11 in 1983, Phil Bakes excitedly details his rebuilding plans as a depressed Lorenzo looks on. “it’s your baby.” Lorenzo told him. (AP/Wide World Photos)

  Lorenzo’s 1980 creation of New York Air triggered a union hate campaign, including this billboard in Houston. “Runaway shop!” (Courtesy of Dennis Higgins)

  Ed Acker (left) announces that Pan Am will sell its historic Pacific routes to United in 1985, as Dick Ferris stifles his glee. “You can’t fucking believe it!” Ferris told an associate. “They want to do the Pacific deal!” (AP/Wide World Photos)

  Former astronaut Frank Borman announces the 1986 sale of Eastern to Lorenzo. “No one can run a company under these circumstances.” (AP/Wide World Photos)

  In 1986 Don Burr sold People Express to the rival of his life. Frank Lorenzo, catapulting Texas Air to number one. “Frank is capable of any kind of behavior to win.” (AP/Wide World Photos)

  Charlie Bryan of the machinists’ union at an Eastern shareholders’ meeting in 1986. He told his rank and file, “Weapons formed against you will not prosper!” (AP/Wide World Photos)

  Phil Bakes presided over Eastern’s demise in 1989. “It was as if the people who worked and managed were marionettes.” (Christopher Morris/Black Star)

  Crandall leads a counterdemonstration as striking flight attendants cripple American in 1993. Management, one official claimed, was victimized by the “gay and lesbian component [in the union membership].” (AP/Wide World Photos)

  Sir Colin Marshall celebrates his 1993 investment in USAir. Asked years earlier to name his dream job, he readily answered. “To be the chairman of British Airways.” (AP/Wide World Photos)

  Two decades after its traumatic birth. Southwest hit the East Coast and Herb Kelleher was thrust into the spotlight. “Being a millionaire ain’t what it was in the 1890s,” (FORTUNE is a registered trademark of Time inc. Used by permission. All rights reserved.)

  CHAPTER 11

  GLOOM OVER MIAMI

  Processing and transmitting information along an electronic network is an almost wholly derivative activity. Whether a cable television system, a complex of automatic teller machines, or an airline computer reservation system, a network exists not as an end in itself but as a convenience to those who create and consume an underlying product: a Hollywood movie, a banking service, a seat on an airplane. The sociologist Marshall McLuhan’s 1964 assertion that “the medium is the message” is by more recent standards a quaintly over-enthusiastic characterization of the Information Age. Even if the medium is the message, it is not the product. Though it may enhance value, it creates nothing. By themselves computers, networks, and systems can no more fly people between cities than they can print money or direct actors.

  Yet in the mid-1980s it almost seemed otherwise to Frank Lorenzo. New York Air and the resurgent Continental Airlines, were, taken together, the largest airline operation in the country without a direct electronic tie-in to the travel agent community. Some 30,000 travel agencies, accounting for two thirds of all airline reservations, had been hard-wired, but the mainframes of only five airlines resided at the other end. American’s Sabre system remained the leader by far, with 34 percent of t
he agencies devoted to its system. United’s Apollo system was still number two, with one quarter of the travel agencies. The remainder of the market was divided among systems operated by Eastern, TWA, and Delta.

  When the government moved to crack down beginning in 1983—partly in response to the failure of Braniff and partly in response to the vocal complaints of Frank Lorenzo—Bob Crandall took the lead in defending the systems. “The preferential display of our flights, and the corresponding increase in our market share, is the competitive raison d’être for having created the system in the first place,” Crandall told Congress. Crandall’s protests were unheeded, however. His system was seen as too successful; he had pushed too far. In late 1984 the government outlawed screen bias.

  Lorenzo remained unsatisfied, complaining that American and United still found ways to play games against him. In January 1985 both systems delayed loading a new round of Continental fare cuts into their systems, making the discounts invisible to travel agencies. (American blamed a power outage; United claimed that Continental had failed to pay the requisite $100 loading fee). Wherever the blame lay, computer reservation systems clearly remained devilishly effective marketing tools. Travel agents could get advance boarding passes on American flights, for instance, only if they were Sabre subscribers. Likewise, only Sabre subscribers could be assured of having the most reliable, last-minute seat availability information.

  Even after these and other imbalances were ameliorated by regulation, travel agents sitting in front of terminals leased from American and serviced by American—and that American had trained them to operate—remained significantly more inclined to choose American over other airlines, even when the screen listings were scrupulously neutral. (The same was true of United and its Apollo system.) In study after study the statistics made it clear: a concentration of terminals in a given geographical area continued to produce a disproportionate amount of business for American (or United, or the other three airlines offering terminals) relative to the number of flights that the airline had in that market. The airlines referred to this phenomenon as the “halo” effect. “Whether bias exists or not,” Mike Gunn, one of Crandall’s top marketing people, told a sales meeting in 1984, “we know we can get more business from a Sabre-automated account.”

  In the minds of Lorenzo and many others the networks were the stuff of economic mythology: guarantees against failure for those who possessed them, assurances of slow death for the have-nots. Frank Lorenzo wanted a halo for himself.

  In June of 1985, while the airline industry was transfixed by the bitter strike raging at United, Lorenzo made a deal to acquire Trans World Airlines—his second attempt to take over the first airline he had ever flown, the company whose stock was the first he had ever owned. There was widespread speculation that Lorenzo wanted TWA, with its routes across the Atlantic, to foster a low-fare revolution around the globe. But others knew better. Lorenzo, they could see, had an additional and probably greater motive: to lay his hands on TWA’s computer reservation system, the same system that Bob Crandall had helped to create in the early 1970s, before joining American Airlines.

  In the end, Lorenzo’s reputation would cost him TWA. The company’s unions were so mortified at the idea of having him on the property that they maneuvered the takeover artist Carl Icahn into a position to take control, failing to appreciate that he was no picnic either. There was something vague and off-center about Icahn; whereas Lorenzo was accused of forever backing out of his deals, Icahn would never quite come to closure on one. Lorenzo and Icahn tussled over TWA for weeks, the battle growing increasingly personal. In the end Icahn won TWA. The once-great airline of Howard Hughes became Icahn’s newest cash cow. TWA was as good as dead.

  Lorenzo walked away from the TWA contest with $51 million in trading profits and other payments, a consolation prize of the type he had become so practiced at obtaining. But he was still without a computer reservations network.

  For Phil Bakes, watching Lorenzo tangle with Icahn was like watching two gypsies play cards.

  Bakes followed the action, barely, from the distance of the Mediterranean. In the midst of the United strike Bakes had walked away from Continental Airlines for a few weeks for a road trip through his family’s ancestral homelands in Italy. Bakes would later call the trip one of the high points of his life.

  He could revel with his family knowing that back home he had made something of the godforsaken airline that Frank Lorenzo had turned over to him. With the summer schedules of 1985, Continental had not only reached but surpassed the level of operations it had suspended the day it went into Chapter 11 two years earlier. Along the way the company had scored one decisive legal victory after another. The federal judge overseeing the bankruptcy case embraced the company’s move to wipe out its labor agreements, concluding, “There was no intent or motive to abuse the purpose of the Bankruptcy Code.” (The judge would soon accept a $250,000-a-year position with one of Continental’s law firms.) Congress, nevertheless, took it upon itself to reform the bankruptcy laws in order to prevent anyone from automatically wiping out wage contracts through bankruptcy, a kind of “Lorenzo Amendment” to the bankruptcy laws.

  Bakes also took pride in the company’s marketing triumphs; it was holding its own against United in Denver even without a reservation network. Continental fought back with price, a strategy financed in part by the free use of roughly $1 billion of creditors’ money and labor costs that were only half what they had once been. But nobody could attribute Continental’s success solely to the benefits of bankruptcy. Continental was an on-time airline with good service and a crop of eager and compliant young workers, strikebreakers all.

  The traumas had been numerous. The pilots’ union was maintaining its pathetic strike against Continental, as if a strike would reverse the rulings of the bankruptcy court. There had also been public relations setbacks, such as a full-page ad in USA Today, signed by Patty Duke, Tony Randall, Daniel J. Travanti, and some 30 other union actors, claiming that Continental cared “more about money than safety.” And there were those pantywaist bankers, forever imploring Bakes to end the insane fare wars. Bakes would give them a courteous or patronizing brush-off, while thinking to himself, “What are you going to do? Sue us? We’re in Chapter 11!”

  Despite all the growth—the furious fleet expansion, the development of the hubs at Denver and Houston—Bakes had kept the lid on costs, in some cases no thanks to Frank Lorenzo. Lorenzo, it appeared to his associates, had an inferiority complex about abandoning the legacy of superior passenger service for which Continental, under Bob Six and later Al Feldman, had been so justly famous. Lorenzo was still sensitive about the Mr. Peanut image that stuck to him from the Texas International days. So the same Frank Lorenzo who was getting credit in the business schools as the cost cutter extraordinaire had jumped all over Bakes when hand-cut radishes and other frills were cut from Continental’s menus.

  Bakes was proud of himself. He had not blinked. And now he was on the verge of fostering a whole new round of changes at Continental, on many levels. He envisioned a radical series of marketing innovations making air travel even more affordable to more people. He assembled a full-time team of staffers into a study group he assigned to designing “the airport of the future”: a paperless airline operation without tickets—an unheard-of concept in 1985. He imagined passengers boarding airplanes and paying for their seats by swiping credit cards through an electronic reader. They would use their credit cards even to get baggage tags and self-check their luggage. Lorenzo, however, did not appreciate Bakes’s studies. “What are we wasting money on this shit for?” he asked at one point, almost as if he were slamming down Don Burr’s “people plan” of six years earlier. Bakes kept the airport-of-the-future project alive anyway.

  Bakes had not, however, become the media hero of Continental’s recovery, or at least not the main hero. Just as the press had misleadingly identified Lorenzo alone as the bogeyman in the bankruptcy filing, so did it focus on him,
not Bakes, as the ace of the comeback. With a self-satisfied smile on his face—he could look so handsome when he smiled—Lorenzo was pictured in Business Week under the headline “Continental Is Soaring Out of Chapter 11.” Lorenzo took pains to foster the rehabilitation of his public image, even turning out for Continental Airlines Night at a Houston Astros game. “You get a real high with the employees,” he told a reporter present for the game. “They are so happy.”

  Bakes, though he did not broadcast the fact, knew that if there was any such change in the attitude of Continental’s employees, it was principally the result of his efforts, his plans, his programs. He was spending fully 30 percent of his time on the line, meeting with employees. He had installed a profit sharing program, and not only were there profits, but they were shared. He had launched a “gain sharing” program that rewarded employees—pilots who burned up less fuel, for instance—with cash payments. He began planning training programs for middle management intended to infuse the company with a new “participatory culture,” as he liked to call it, and this stuff was selling.

  On September 5, 1985, two years to the month after the proceedings had begun, Bakes and Lorenzo announced that Continental Airlines was emerging from Chapter 11. They proudly declared that creditors would get 100 cents on the dollar, which was literally true, except that in some cases the creditors would have to wait years to receive full payment. In other cases involving benefits for certain employees who went on strike, the payoff was zero cents on the dollar. In the same budget hotel from which they had shocked the world with their original announcement, Lorenzo and Bakes now proudly basked in the media floodlights. Bakes hailed “one of the most successful reorganizations of a billion-dollar company in the history of American industry.” Lorenzo boasted that “Continental has come back from the brink in fighting form.”

 

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