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Hard Landing

Page 41

by Thomas Petzinger, Jr.


  This is where Southwest came in. While the major airlines were frantically working to become all things to everyone, Southwest recognized that a huge number of people in any city would rarely want to fly anywhere except to a few other cities. The cost and complexity of the hub system was worthwhile for the 22 people a day on average who, according to Transportation Department data, flew between Kansas City and Norfolk. But how many people in Kansas City might fly to Oklahoma City two cities linked by common industries, by family connections, by the Big Eight athletic conference, and by geographical proximity? Each day, it turned out, hundreds of people were eager to make that trip when they learned they could do so without changing planes, without making their plans far in advance, without scheduling a Saturday stay, and for a price of, say, $39 each way.

  That Southwest operated largely in a market all its own was most evident in its headquarters town of Dallas. Southwest shared its operating center with the fastest growing and most ruthlessly powerful airline in the world, American Airlines. Yet even as both airlines grew, even as the airline industry became more competitive year by year, American and Southwest served increasingly divergent markets from their respective airports and actually became less competitive as time passed. Bob Crandall, who in 1981 had tried to bring down the weight of the local community and the federal government on Southwest’s operation at Love Field, had by 1986 come to consider Kelleher a friend and perhaps even a bit of a role model. The two men collaborated on a video for a local roast, joked about their compulsive smoking habits, and looked for chances to needle and play practical jokes on one another. Kelleher in an astonishingly effective marketing move painted a Southwest 737 to look like Shamu the killer whale when Sea World opened a park in San Antonio. “Just one question,” Crandall asked him. “What are you going to do with all the whale shit?”

  “I’m going to turn it into chocolate mousse and spoon-feed it to Yankees from Rhode Island,” Kelleher answered. The following Monday Crandall received a vat of chocolate pudding with a little Sea World spoon stuck in the middle.

  Though Southwest was largely separate and distinct from the rest of the airline industry, there were unavoidably points at which they intersected, sometimes with a pyrotechnic result—never more so than when Bob Crandall unleashed the full power of his pricing computers with “ultimate super savers” in January 1985. Although American’s principal target was People Express, Southwest was sure to be struck with some of the shrapnel. Analysts began to cut their recommendations on the company’s stock. “Small carriers such as Southwest,” The New York Times glumly remarked in March 1986, “will be at a growing disadvantage in an age of airline giants.” As if beginning to fulfill the prophecy, Southwest’s profits plunged in late 1985, though it did remain profitable.

  One evening Kelleher was talking to a business executive at a cocktail reception in Dallas. “I see that American now has fares as low as yours,” the man said.

  “Yes,” Kelleher admitted. But American, he patiently explained, required passengers to buy a ticket 30 days in advance. By contrast, Kelleher said cheerfully, anyone could walk right up to the airport gate and fly at those prices on Southwest.

  “No, you can’t.”

  “Yes, you can,” Kelleher corrected him.

  “You’re full of shit,” the man said.

  The man refused to accept that he could avail himself of the lowest fare in the market without enduring a multitude of restrictions. American, Kelleher realized at that moment, had conditioned the flying public to believe that low fares were impossible without restrictions.

  Kelleher decided to try playing the game Bob Crandall’s way. Holding its corporate nose, Southwest made certain fares nonrefundable. Just as bad, it adopted advance purchase requirements. It would, alas, force itself to acquire computer technology to step up the sophistication of its pricing. (The annual report devoted barely a full sentence to the new computer system, under a black-and-white photo of a paltry-looking desktop video terminal.)

  But Southwest quickly realized that by exposing itself to even the rudiments of yield management, it could take its low fares so much lower that they practically disappeared—while the flights themselves remained profitable. Suddenly a passenger could fly anywhere on Southwest Airlines for $19. After American had beaten People Express at its game, Southwest was beating American at its.

  Nineteen dollars was so cheap that yet another new layer of travelers was drawn into the market—major league baseball fans attending away games for the day, the poor, and college kids on dates. Southwest promoted the new fares with television ads in which animated suitcases and overweight people in bathing suits jubilantly sang and danced to a Beach Boys melody: “And we’ll have fun fun fun flying Southwest on a fun-fare today.” The fun-fare concept quickly reached into the fabric of the company, as employees in planes and behind ticket counters were outfitted in surfer shorts, golf shirts, and tennis shoes. Kelleher wore his “fun uniform” to the office on Fridays.

  Kelleher did harbor a flaw, however, one that was so obvious no one could appreciate it. He had made Southwest Airlines a one-man show.

  In big business in America the life of the chief executive is considered a corporate asset. Companies carry insurance policies against the loss of a chief executive. At age 55 Kelleher was still a relatively young CEO, and as he had displayed in his remarkably athletic youth, he was a person of some strength and vigor. “I’m immortal,” he would joke.

  But he also had a family history of heart attacks. The man smoked four packs a day; he ate heartily and swilled Wild Turkey. His complexion was pallid. “I lost my color because of bourbon,” he told people.

  Kelleher certainly had a management team, including some of the sharpest people in the business. Any number of them could run the planes and the schedules and the finances as well or better than Herb—but not the people. For that Herb did not need merely a successor, he needed an understudy, an apprentice, someone who without adopting his shtick or even his style had an instinct for knowing how to make each of nearly 6,000 employees feel like one of the Three Musketeers. No such person existed.

  There was one other respect in which Kelleher betrayed a selfish side, and not a trace of humor. Southwest, he declared, would never be anybody’s takeover.

  The opposition of top executives to hostile raiders was in the late 1980s so routine as to be an article of management faith. Kelleher, however, was not only management but ownership: he had been the first investor to put money into Southwest Airlines, and a takeover would put inestimable millions directly into Kelleher’s pockets. But while Kelleher was different from most airline chieftains in owning a significant share of the enterprise he managed, he did not differ from them in his fervor for its independence. Southwest Airlines was Herb Kelleher. It was his platform, his podium—his stage. It was part of his psyche, and that was worth much more than mere millions.

  While fighting the fun-fare wars against the majors, Kelleher also undertook a few discreet steps to assure that no one took his airline away from him. For the faster the airlines merged, the more conspicuous Herb’s became. Southwest Airlines in 1986 was a sitting duck.

  Twenty major airline mergers occurred in the first eight years of deregulation; of these, 11 occurred in 1986 alone. The sudden swell reflected the almost complete lack of antitrust enforcement by the Reagan administration, the surging tide of merger activity throughout American industry, and the economic maelstrom in which the airlines in particular found themselves: the compulsive drive for “critical mass” and the financial pressures brought on by fare wars and intolerable debt burdens. Counting Lorenzo’s empire as one, the entire universe of airline holding companies operating nationally had been reduced to 10: Texas Air, United, American, Delta, Northwest, TWA, Pan Am, USAir, Piedmont, and, at number 10, Southwest Airlines. As a group these airlines controlled about 95 percent of the airline market of the United States. The consolidation had been so furious that one of the industry’s leadi
ng technical and analytic services, Airline Economics, Inc., of Washington, D.C., issued a study in 1987 asserting there was nothing major left to merge with, nothing major left to fail. As the opening sentence of the study put it, “The airlines’ intense battle to position themselves for long-run survival is essentially over.”

  Kelleher knew better. He installed a “poison pill” and the other standard takeover defenses of the time, but he also used the jungle drums of Wall Street. When people asked what he would do if a particular takeover artist made a move against Southwest, Kelleher, the funny man, would turn stone-cold serious and reply, “I will kill him.”

  An investment banker from Wall Street happened to visit—a whippersnapper, in Kelleher’s view, the kind of person who brought out the curmudgeon in Kelleher. When the investment banker noted what a tempting takeover target Southwest remained, Kelleher cast his piercing blue eyes through the fellow’s heart, rose from his seat, and began backing him against the wall.

  “You’re too young to know what scorched earth is,” Kelleher said evenly, trying to control his temper. Stepping closer, he told the young man how the Russians had destroyed their own property rather than leave it in the path of the Nazi onslaught. The investment banker soon had his back against the wall. “Anybody who buys this company is going to have ashes, soot, and cinders!” Kelleher yelled. “Those who build something know best how to destroy it!” Kelleher had his hands clasped to the young man’s shoulders.

  The investment banker slipped from Kelleher’s grasp. His glasses askew, he raced out of the office past Colleen Barrett, Kelleher’s executive assistant.

  “What happened?” she asked.

  “I just sent a message to Wall Street,” Kelleher answered.

  In January 1987 Kelleher proudly reviewed the text for the company’s soon-to-be-published 1986 annual report to shareholders. It told investors that the company was closing in on $1 billion a year in sales. It reported a record operating profit of $89 million. It enumerated a litany of operating accomplishments: “We breathed new life into Chicago’s Midway Airport.… Nashville became our first foray into the promising Southeastern market.… For the sixth year in a, row, we received the fewest complaints per customer carried of any airline serving the continental U.S.”

  As Kelleher studied the draft, he looked with satisfaction at the cover. It was, he thought, the perfect way to say “up yours” to the people on Wall Street and elsewhere who thought that Southwest had no future as an independent company. In bold yellow type against a black background the cover of the annual report read simply

  In 1986

  we didn’t

  merge.

  Even if a kind of gentleman’s agreement existed between them, it did somewhat unnerve Kelleher to see his friend Bob Crandall bringing so many airplanes and employees to Dallas. Crandall, of course, was temperamentally incapable of putting anyone at ease where his competitive intentions were concerned. But Kelleher knew to a degree that no one else seemed to appreciate that all those planes by themselves didn’t mean a thing. Kelleher once had a visitor in his office while he was planning a skit to present at an industry conference. “Let’s do a Dr. Ruth spoof!” Kelleher exclaimed. Then he pretended to be the sex therapist on the phone to Crandall.

  “Remember, Bob,” Kelleher said in a squeaky, accented voice, “size isn’t everything.”

  CHAPTER 14

  OPERATION STEALTHCO

  For Dick Ferris even a day of fishing provided an opportunity to compete.

  When he and his friend Travis Reed climbed into a boat together during one of their summer sojourns in the West, Ferris kept score. If he found himself with fewer fish at the end of the day, Ferris pleaded to stay out, even if they had already pulled in dozens of fish, even when Reed complained that his arm was killing him. “Being second is not something Ferris likes to do,” Reed would later comment.

  In 1987 it was obvious that Bob Crandall would soon have more fish in his boat than Dick Ferris. Airplanes were coming into the American Airlines fleet at the rate of nearly two per week. More meaningful to both men was the fact that Crandall was being hailed as the indisputable leader of the airline industry. Even if American was still not the biggest airline, by many outward appearances it was the best managed. With his spanking new planes and enthusiastic young recruits, Crandall was fielding a crisp and fresh-looking airline, while Ferris had older planes and pilots who were bitterly divided against him.

  To some of his associates Ferris seemed to be anguished less by the inevitability of Crandall’s ascent to number one than by Crandall’s success in conceiving and implementing ingenious new ideas. Ferris once had been the industry’s leading young standout—a prodigy, president of the country’s biggest airline at 38—but that was 13 years ago. Now it was Crandall who was the industry’s most conspicuous leader of any age.

  By 1987, however, Ferris was well on his way to completing a bold and imaginative strategy: his plan to build a three-sided travel empire around United Airlines. The idea of packaging plane trips, rental car contracts, and hotel stays into a single travel product terrified even some of Crandall’s people in Dallas. With sufficiently aggressive management, they thought, the new United could overpower any of the marketing weapons American had yet conceived. Frequent-flier programs, the use of hubs to dominate geographic regions, sophisticated pricing—all could be crushed if Ferris began offering hotel discounts to lure airline customers, or first-class upgrades to entice rental car customers, or any such permutation.

  The travel empire—it had become Dick Ferris’s dream and vision, his path to greatness. “I will go to my grave,” he would comment years later, “convinced that it was right.”

  But Travis Reed, for one, began to worry about Ferris’s relations with the United board. The bitterness of the strike and the restiveness of Wall Street exposed Ferris to intense pressure at a time when he was also committing billions of dollars in shareholders’ capital to his strategy. Over a glass of gin one day Reed decided to have a heart-to-heart talk with his friend. “Dick, you’re doing some major things, and you’ve still got Eddie Carlson’s board. You better get a few loyalists on there who will punch somebody in the nose when it comes time.” Reed tried to be as explicit as he could. “You’ve got to get some buddies on the board, some guys who would go down with you.”

  Ferris, however, had no reason to doubt the loyalty of his board. His purchases of Hertz and Hilton were controversial, yes, but the board had unanimously—indeed, enthusiastically-backed each move. The confrontation with the pilots was hurtful and emotional, yes, but the board had been included in the process and, notwithstanding the lone dissent of director Wally Haas, had backed Ferris all the way. Ferris assured Reed he could handle his board.

  Although Ferris was unaware of it, the fact was that some of the directors harbored great concerns.

  Some felt that the presumptuousness Ferris had displayed three years earlier in his short-lived effort to buy the company through an LBO was only worsening. During one meeting Ferris informed the directors, “Now we’re going to pass the dividend,” as if he were ordering them to pass the butter. Declaring a quarterly dividend, though often a formality, is a happy event for the shareholders of a company and a ritual that directors take very seriously. William M. Jenkins, a retired banker who held one of the long-standing Seattle seats on the United board, complained to Chuck Luce, the senior director, “Since when does management pass the dividend?”

  Then came the name game.

  Shortly after the first of the year in 1987 Ferris informed his board that a new name would be established for the parent company. UAL, Inc., would no longer be UAL, Inc. A new corporate identity would help the company proclaim to the world that United wasn’t just United Airlines anymore, that it was a seamless travel experience consisting of great names in hotels, cars, and yes, an airline as well. But while they listened to the merits of adopting a new corporate identity, the directors were dismayed to realize tha
t Ferris was withholding the name itself, from his own board of directors. He said he could not reveal it so far in advance of the scheduled announcement date for security reasons! The board would eventually get briefed in advance, but only on the verge of the public announcement.

  When the great day came, Ferris stepped behind a podium wearing a green tie—his favorite color, the color of a putting green, the color, as it turned out, that had been chosen for the new corporate logo. Linked by satellite from Australia to Hong Kong to Mexico City and points in between, the ladies and gentlemen of the press poised their pens and pencils on the surface of their notepads as Ferris said, “It’s a name that you have not heard before, but most certainly will in the future …

  “Allegis Corporation.”

  Ferris’s design consultants explained that they had cobbled together Allegis from the root word for “allegiance” and from the Greek aegis, meaning protection. Never was a corporate name change so ridiculed, and among those who were already skeptical of Ferris’s strategy the stupidity of the name only reinforced their views. Donald Trump, cruising on a wave of borrowed money and having just purchased a big chunk of UAL stock, said that Allegis sounded like “a world-class disease.” Just as the airline was planting the flag in the Far East on the old Pan Am routes, Asian people had a particularly difficult time with the word (Arregis?). Employees of the airline itself began saying they were “allergic to Allegis.” The day the new name was announced, UAL shares sank like a stone; the following day as Ferris tried to explain his travel service strategy to analysts, the share price only sank further. In a 24-hour period UAL shares dropped $3 to $56.50, erasing $150 million from the company’s market value.

 

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