Few knew it at the time, but Lorenzo was also closing in on another computer reservation system—a system controlled by an executive who needed Lorenzo every bit as much as Lorenzo needed him.
Frank Borman was beside himself with anguish and frustration. He had spent his adult life operating within a chain of command, much of it with himself at or near the top. But the command structure of Eastern Air Lines had suddenly been inverted. Now the workers were in control, like “monkeys running the zoo,” he thought.
The Colonel’s misfortunes were rooted in the 32 percent settlement he had awarded the machinists to keep Charlie Bryan from leading a strike. Eastern’s bankers, perceiving no irony in the situation, were so outraged at Borman’s capitulation that they moved to restrict his credit lines even further, even though it was their refusal to release cash under those same credit lines that caused Borman to cave in the first place. The combination of swelling costs and tightening credit threw Eastern into a genuine cash flow crisis.
Borman was in the midst of this drama on the day that Frank Lorenzo put Continental into Chapter 11. Within hours Borman was in a video studio at company headquarters in Miami, peering into a lens and grimly demanding immediate pay cuts of 15 percent. Without them, he warned, Eastern might very well file for bankruptcy, “à la Continental,” or liquidate altogether, “à la Braniff.” Eastern executives fanned out through the system, distributing Borman’s videotaped bankruptcy threat.
Once reported by the press, the bankruptcy threat did less to intimidate Eastern’s employees than to frighten its customers. The Continental Chapter 11 filing had burned thousands of passengers, travel agents, and tour operators, just as the Braniff bankruptcy had. Nobody was eager to be the third cigarette on the match. Practically overnight Eastern passengers redeemed some $2 million worth of individual tickets. Miami-based cruise lines that provided airline tickets to their customers abandoned Eastern. By threatening bankruptcy Borman had only worsened the cash flow crisis. At Eastern’s hub in Atlanta, the machinists hired a skywriter who filled the air with the message “Frank Borman, Resign Now”—not as arresting as “Surrender Dorothy,” perhaps, but a startling message just the same.
In this round of BOHICA—“Bend over, here it comes again”—the unions were in a better position than ever to demand something in exchange for their concessions. Randy Barber, who had once joined with a band of French unionists that had seized control of a watch factory, helped to structure an extraordinary range of ownership concessions by the company. Eastern employees received shares in Eastern Air Lines equivalent to 25 percent of the company’s equity. Their unions won complete access to the company’s internal financial reports any time they wished to examine them. Budgets, spending authorizations, fleet planning—the blizzard of confidential paperwork that drifted through any major corporation—all now passed through the hands of Charlie Bryan, his colleagues in the other unions, and all of their aides, minions, advisors, and hangers-on.
On top of all that the unions had been awarded three seats on the Eastern Air Lines board of directors, the fulfillment of a dream for Charlie Bryan. Joining him on the board was Robert V. Callaghan, president of the flight attendants’ union at Eastern, and an outside lawyer representing the pilots.
Borman consented to these extraordinary concessions with the enthusiasm of an inmate on his way to the electric chair; he relented not just under the pressure from the unions but on the advice of some of his own aides. Something had to be done, they counseled him, to break the cycle of mistrust and confrontation that had become the way of life at Eastern Air Lines. There had been too many close calls, too many bluffs, too many brushes with bankruptcy. Some board members also viewed the company’s concessions as an opportunity to teach some reason to Charlie Bryan, to impress him with the gravity of Eastern’s problems and the awesome responsibility of managing the company’s delicate affairs. Peter O. Crisp, who represented the Rockefeller interests on the board, made a point of cozying up to Bryan. John T. “Jack” Fallon, a Boston real estate maven, would take Bryan to football games or share stories about his good friends, the Kennedys, whom Bryan so admired. Bryan would later admit to delighting in the attention.
In the new participatory atmosphere, a program was established for employees to identify cost-saving ideas. Individual workers were appointed to operating committees. Time cards were ripped up. Employees began going the extra mile—delivering errant luggage to passengers on their way home, for instance. And suddenly Eastern Air Lines, that crucible of labor-management hatred, was a cause célèbre. Consultants, journalists, and academics descended on the company. Washington Monthly magazine called it “the largest experiment in labor-management cooperation in American history.” One of Eastern’s consultants told The New York Times that “Eastern has the most extensive employee participation system of any American corporation today.” A study team from Harvard won a Department of Transportation contract to determine how Eastern could serve as a model for other companies. And Charlie Bryan was no longer just a labor leader. He was now a statesman, a shining example of union-management cooperation. He went on tour, giving speeches about codetermination.
Eastern tried to extract some small marketing advantage for its newly forged “partnership” with organized labor. Borman renewed his appearances in Eastern’s television advertising, surrounded by mechanics, flight attendants, and pilots. “Who can serve you better than the owners?” he asked. Eastern extolled itself as the first employee-owned airline in America (causing Herb Kelleher of Southwest Airlines to write Borman a chiding letter. “You’re off by 10 years,” Kelleher said.)
But while Borman was outwardly proclaiming that “the war is over,” he was dying inside. The warm-and-fuzzy act was a brave face, intended purely for public consumption. Privately he considered all the union involvement to be so much “crap.” Borman cringed with each new accolade in the press. Where the newly born team spirit existed, it was confined largely to a single location—Kansas City, a newly established hub through which Borman was again struggling to break into the transcontinental market. It was true that an impressive harmony had taken hold there, but it was far from typical. Kansas City was a brand-new operation with many freshly hired employees. It was not crowded with embittered middle managers and die-hard unionists.
Through it all management was blind to the monster it was creating: an employee group, and a union leader in particular, hailed as exemplars of employee participation when in fact there was really no employee participation at all. All the unions had really received was access to Eastern’s confidential internal documents and three out of sixteen votes on a board of directors, which might as well have been three in a million. Those concessions had established a detente in the cold war at Eastern, but no peace. And both sides remained sufficiently armed to fulfill the Cold War concept of mutually assured destruction.
If there was any doubt about the fragility of the peace, it was erased in April of 1985, when the machinists’ contract once again came up for renewal. The Colonel wanted yet another BOHICA deal, preserving some of the concessions already in place. And amazingly Charlie Bryan, now playing the role of union statesman, urged his members to assent. They did not. Over the advice of their beloved leader, the aircraft mechanics and baggage handlers and fuel loaders who made up the IAM voted down the proposed new contract in a ratification vote. After few minor changes Charlie Bryan got the deal approved, but the incident had shaken him and his aides. It was apparent that however wild-eyed and radical Charlie Bryan might seem, he was actually a moderate next to the majority of his membership.
Borman, perhaps worst of all for him, had lost much of his standing with his pilots, a group for whom he had once walked on water. He appealed for their understanding on professional grounds. “To the best of my knowledge,” he told their leadership during a meeting at the Miami Airport Ramada, “I am the only pilot running a major airline.” He pleaded urgently for the pilots to adopt b-scales in their next
contract. “I am not standing here like Ferris did and saying, Take this or nothing.’ Maybe I made the [mistake of thinking] that we could act like adults and look at the numbers together and reach a conclusion.” While waiting for b-scales Borman hit the brakes on hiring new pilots, but he soon found himself without enough pilots to fly his own schedule. In the last week of October 1985 alone he was forced to cancel more than 500 flights from crew shortages, only worsening Eastern’s financial problems.
It was a testament to the Colonel’s long-range vision that despite the intense, minute-to-minute financial pressures, he never wavered from his commitment to building up Eastern’s computer reservation system. It had grown into the third largest system in the industry, with 17 percent of the travel agency market, significantly exceeding the TWA and Delta systems and beginning to close in on United’s Apollo. Eastern’s network, called System One Direct Access, was noted among travel agents for a number of outstanding features, in some respects exceeding even Sabre and Apollo. The growth of System One and the accompanying halo effect on Eastern’s bookings was one of the things keeping Eastern alive.
But then it hit. The Big One—the one killer fare war that was capable at last of putting Eastern over the edge.
Ed Acker started it just as the winter tourist season was kicking off in the fall of 1985. Pan Am wanted cash. Acker wanted full airplanes. Still infatuated with $99 fares, he slashed prices to that level from New York to Florida. Eastern, of course, would have to match.
Don Burr would not be undersold on principle, and he needed cash besides. Before long People Express announced a $69 fare to Florida. Eastern, of course, would have to match.
The following day Lorenzo weighed in. New York Air, gravely damaged in the Northeast by the controllers’ strike but alive and kicking and causing trouble elsewhere, would fly to Florida for $39. Eastern, of course, would have to match.
In the midst of the Florida pricing war, in rolled the massive machine of American Airlines, staking a huge new hub in San Juan, in the heart of Eastern’s most profitable operation. Crandall’s coterie could see that Eastern was wounded and reeling. American had adopted, as an explicit internal goal, the “domination of Caribbean marketing.”
Only one thing could save Eastern. Yes, it was back to the well for more concessions, but it really, really, counted this time. Anybody could see that. Thirty-nine-dollar fares to Florida! The sky was falling, really and truly.
Borman wrote a letter to employees saying that all those concessions in the past, all those “temporary programs,” were no longer sufficient. “We must look beyond Band-Aids.” This time Borman wanted a straight 20 percent off the top. And this time there was no “God bless you” at the end.
Once again cries of “BOHICA!” went up from the locker rooms and dispatch centers of the airline. Like his insensitive comparison of an earlier wage giveback to a few six-packs of beer, Borman’s characterization of years of concessions as mere “Band-Aids” outraged employees anew.
The three principal union groups—the machinists, pilots, and flight attendants—had never particularly gotten along, neither at the leadership nor at the membership level. That now changed. Combined rallies were staged at snowy locations in the north. Lawyers were jointly engaged—not some slouch Miami Beach outfit but Skadden, Arps, Slate, Meagher & Flom of Wall Street, the General Motors of the takeover bar. If Borman couldn’t run Eastern, the unions would look into running it themselves. They already owned 25 percent of the company, after all. Charlie Bryan pleaded with his members to buy stock, noting that if each of Eastern’s 40,000 employees bought just $3,000 in shares, the workers would control Eastern Air Lines.
Watching the spectacle from a distance, Eastern’s bankers added more uncertainty still: unless Borman had the wage cuts in place by February 28, 1986, they told him, they would cut the company off for good. It would be curtains for Eastern, a certain bankruptcy filing.
In his career as a pilot and astronaut Borman had never flown a mission without three courses of action firmly planned. The first was to complete the mission, the second was to resort to an acceptable alternate mission, and the third was to bail out. Borman now reduced his goal at Eastern to three options. He would try to win over the unions; failing that, he would find a buyer for Eastern; failing that, he would file for Chapter 11 protection. In his dealings with his fellow officers, his board members, and the unions, he expressed his new strategy over and over, as if it were his mantra: “Fix it, sell it, or tank it.”
Borman knew his credibility was shot. If he had any hope of completing the first mission, he needed a stalking-horse, a real warmonger.
No sooner had this realization hit Borman than a call came from Frank Lorenzo. He wanted a meeting. “I’d like to talk to you about System One,” Lorenzo said.
They got together at a small office that Eastern maintained in New York, and it was immediately obvious to Borman that Lorenzo wanted System One very badly. They discussed the variety of ways a transaction could be structured, including a merger of System One and the in-house Continental reservations system. No deal was reached, but they agreed to revisit the matter soon. Borman took immediately to Lorenzo, who was direct, just like Borman, and who hated small talk, also just like Borman. Borman decided to unveil his hidden agenda tentatively, almost as if he were making a joke.
“I might get back to you [to sell] not just the reservation system but the whole airline,” Borman said.
“I wouldn’t be interested in doing anything unless it’s a friendly arrangement,” Lorenzo answered. “But if you want to talk further, just give me a call.”
Borman flew back to Miami so excited he could hardly contain himself. “I regarded Texas Air as an ace in the hole,” he later explained.
Borman quickly contacted Richard Magurno, a soft-spoken former Peace Corps volunteer who had risen through the ranks of the Eastern legal department to become the general counsel of the company. Magurno had grown close over the years to a number of Eastern’s distinguished outside directors. Borman excitedly described his conversation with Lorenzo. He wanted to go to the board immediately, then to the unions, brandishing Lorenzo as his new bogeyman. Borman wanted the world to know that if the unions didn’t deal, if Charlie Bryan didn’t cave this time, they’d have Frank Lorenzo to deal with.
Although he did not consider it his place to say so directly, Magurno thought the Colonel needed a cold shower. Acting impulsively would throw Eastern Air Lines into play, particularly in the frenzied takeover environment of December 1985. So Magurno placed a discreet call to his best contact on the board: Roswell Gilpatric, a retired 79-year-old partner in the New York law firm of Cravath, Swaine & Moore, who had served as deputy defense secretary in the Kennedy White House. Gilpatric in turn called Borman and urged him to move with caution.
Within a few weeks, with the crisis at Eastern mounting, Borman was having his second meeting with Lorenzo, during an industry function at the sprawling Marriott resort center in Fort Lauderdale. This time Lorenzo seemed wary. “I want to know if you’re serious about selling Eastern, or are you just using me as a bargaining chip?” he demanded. Borman explained his strategy—to fix it, sell it, or tank it—and promised that if he failed in the first goal, he would deal with Texas Air in good faith.
Borman talked to other potential buyers. Northwest Airlines, financially strong, wasn’t interested. He met in Washington with Don Burr of People Express to discuss a possible merger but dismissed Burr as a real-life Elmer Gantry. “He was loony tunes,” Borman would later recall. Borman even sounded out some oil companies, which at the time were the biggest takeover players in the game. There too he drilled a dry hole. That left only Frank Lorenzo.
To that point Borman’s dealings with Lorenzo had been strictly sub-rosa and totally informal. In the takeover culture that had developed in the mid-1980s, merger deals, regardless of the contact between willing principals, were not set into motion until the investment bankers from Wall Street had b
ecome involved, like ministers at a baptism. Borman contacted Eastern’s investment bankers at Merrill Lynch. He was ready to play his ace in the hole.
“What do you think?”
It was the afternoon of Friday, February 21, 1986. The Presidents’ Day weekend was about to begin, and Phil Bakes had plane tickets from Houston to Washington. Frank Lorenzo had just invited himself into Bakes’s office, announcing that Frank Borman’s investment bankers had telephoned. Eastern Air Lines, they had told Lorenzo, was officially available.
“What should we tell them?” Lorenzo asked Bakes.
Bakes could hear nothing but alarm bells. After dodging the airline unions with New York Air and destroying trade unionism at Continental, Texas Air was not exactly the ideal candidate for defusing the most volatile labor situation anywhere in the United States. As Bakes would later put it, “We were the wrong savior for this flock.”
Bakes tried to be direct with Lorenzo: “I think it’s a swamp from which we will never return.”
But Lorenzo began to rhapsodize. Eastern, a company he had once worked for … Eastern, one of the original Big Four … One could never build anything like that today, he thought. “That franchise,” Lorenzo said in Bakes’s office. “That name …”
Of course, Lorenzo recognized, it was a damaged name; the labor wars were so unfortunate. And its routes—they were uniquely vulnerable to competitive attack, stuck in the world’s single most competitive airline market, the East Coast. Eastern did not have a cozy position in some hub, Lorenzo thought, where it could hide a lot of high costs. But he had seen worse, had even been involved with worse—Continental, for instance. When he bought it, Continental had a lousier market position than Eastern at this point, Lorenzo thought.
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