Hard Landing
Page 45
Plaskett may have been embarrassed by such brutish marketing tactics, but that embarrassment was nothing compared with the humiliation that followed his involvement in the biggest one-day merger in airline history.
On Lorenzo’s orders Plaskett, on February 1, 1987, mashed together Continental, New York Air, People Express, Frontier, and all of their many subsidiaries into one giant airline operating under a single schedule. Only Eastern, with its poisonous labor problems, would remain a separate airline. Plaskett and others urged a go-slow approach, but as Plaskett would later comment, “Frank was adamant; it had to be done.” Inside Lorenzo’s shop some people called the merger the “big bang.”
Suddenly Continental had 32 different galley configurations in its fleet. Continental meal trays wouldn’t fit into Frontier warming carts. People with tickets on Continental found themselves boarding bright red New York Air planes. Passengers at Newark were herded from gate to gate as cancellations mounted. People Express employees were assigned to Continental flights with no idea how to operate Jetways. Golf bags, skis, and luggage of every shape and variety began to accumulate in a warehouse of lost bags in Houston. The entire system ran late all day long.
Lorenzo had not foreseen the worst problem of all: scheduling the newly swollen and far-flung workforce. As with so much else in airlines, crew scheduling creates a reverse economy of scale: the bigger the operation, the more difficult, costly, and inefficient it becomes. Pilots and flight attendants, calling in for new assignments as flight cancellations worsened, encountered busy signals, meaning they could not be reassigned, causing still more flights to be canceled. There’s no such thing as a half-broken airline.
Morale plunged. People Express pilots accustomed to flying in the captain’s seat—men who had flown for the original Braniff before it failed, for instance—found themselves junior to Continental pilots who were barely shaving. Continental could ill afford to make its pilots so unhappy; every airline in the country was now trying to recruit pilots, to keep up with the surging demand caused by low fares and to staff all those airplanes rolling off the assembly line in Seattle. As if eating seed corn, Continental began assigning training pilots to line flying, which meant that fewer new pilots could be trained, which meant that the trainers had to fly that much more often. Continental’s pilot schedules began pushing federal safety standards. As noted in one internal memo, “We never intentionally overcommit on flying hours. Yes, we do push it to the maximum.” The memo chalked this practice up to “the axioms of operating in a deregulated environment.”
In April 1987, three months after the big bang, consumer complaints against the entire airline industry more than doubled, with units of Texas Air accounting for more than half of all complaints against all airlines. It was just a temporary public relations setback, Lorenzo thought, and he could lick it, he was sure—just as Johnson & Johnson through brilliant public posturing had overcome the marketing crisis following the Tylenol poisonings. In a letter Lorenzo appealed for understanding from the Continental pilots, expressing the closest thing to contrition that he was capable of: “We have lived through a lot together. We survived the bankruptcy, completed the airline consolidations, saved thousands of jobs, and emerged as one of the biggest airlines in America.… However, I know it has not been easy for any of us, and we are still fine-tuning and continually improving our operations, a fact which will continue to benefit you.”
But in all the parsing of blame for the big bang debacle of 1987 there was only one president of Continental Airlines, and that was Tom Plaskett. Vainly Plaskett tried to overcome the cataclysmic operating problems, but he had no capital: no money to tear out galleys, for instance, or to purchase the software by which to knit together the various in-house computer systems of People Express, Frontier, and Continental itself. So it was only a matter of time—nine months was all it took—before Lorenzo unceremoniously dumped Tom Plaskett. Plaskett’s résumé would later put the best face possible on his months at Continental, noting that he had introduced a measure of organization to “a complex cultural and operating environment.”
And throughout those months of carnage, nobody followed the disaster at Continental with more interest than Plaskett’s former boss, Bob Crandall.
Doing all he could to compete with Frank Lorenzo on schedules and flights, Bob Crandall resolved to conduct a new tactic: he would make Lorenzo look bad.
Just as Continental was falling to pieces, Crandall’s people went to the Department of Transportation and demanded a monthly public announcement of every airline’s on-time performance—a policy they knew would hurt Continental disproportionately. As Crandall explained to his assembled managers: “I think it’s entirely possible that we are confronted by a unique—and short-lived—window of opportunity. For eight long years, ever since deregulation, we have had to compete with our low-cost rivals on the basis of price and price alone. Today, thanks to growing public unhappiness, we have an opportunity to put quality back where it belongs: front and center.… It’s going to be harder and harder for carriers to hide shoddy performance. The public is going to have an opportunity to know who’s good and who’s not.”
Crandall also personalized the attack. When Texas Monthly published a scathing cover story on Lorenzo, Crandall ordered 15,000 reprints to assure even wider distribution. Crandall called on the government to deny international routes to Continental as punishment for “abusing employees.” “They treat their people dreadfully,” Crandall told Business Week.
Lorenzo’s campaign to slash wages at Eastern moved Crandall to even greater histrionics. “The employees have no chance,” Crandall said in Airline Executive magazine. “How do you think an employee will feel if you’re 51 years old, you’re a baggage handler, you’ve worked yourself up to $30,000 a year, and they come in and say, ‘I’m going to cut your salary to $18,000. If you don’t like it, you’re fired.’ They’ve deprived you of the ability to make a living.”
“The cruel irony,” Crandall said in a speech, “is that it wasn’t success, it wasn’t good management or a superior product that created the Texas Air empire. It was failure.” One of Lorenzo’s people offered a rejoinder that deliciously recalled Crandall’s encounter with the tape recorder: “Since Crandall can’t fix prices,” a Continental spokesman told Travel Weekly, “he’ll try to fix costs.”
Lorenzo even provoked Crandall to abandon his declared policy against takeovers. The major airlines by late 1986 had largely re-carved the route map of the United States, though the process was far from complete in California. Lorenzo had started a shuttlelike operation called Continental West and was scoring impressive early gains against United, the longtime market leader in California. American, by contrast, was a small player within the boundaries of California. Crandall had a problem. As more Californians accumulated frequent-flier miles flying on other airlines inside California, they were more likely to use those same airlines to travel across the United States.
Crandall might have painstakingly built up a major presence in California, as United and Continental had done. But Crandall learned that Lorenzo was preparing a possible bid for AirCal, the last surviving California independent. If Lorenzo succeeded, Crandall feared, the door would slam shut on California, with Lorenzo, of all people, doing the slamming. Crandall moved with dispatch, agreeing to pay a quarter-billion dollars for AirCal and adding yet another hub, in San Jose, to the American route map. Lorenzo, though bested, would sniff that Crandall had overpaid for AirCal.
California indeed became a battleground between Crandall and Lorenzo, not only over passengers but over travel agents. Lorenzo dispatched salespeople to persuade travel agents to abandon Sabre (and United’s Apollo as well) and sign on with System One instead. Outraged, Crandall called the System One salespeople “Lorenzo’s raiders” and chased Lorenzo from courthouse to courthouse trying to block Sabre agents from defecting to System One. Lorenzo in turn showered Sabre subscribers with cash, offering inducements and agreeing to pa
y any legal fees and damages they faced in switching networks. In time Lorenzo’s raiders would spend the breathtaking sum of $250 million to entice travel agencies from rival reservation networks, an outlay that ultimately went down as more debt.
After buying AirCal and bringing in still more airplanes under the Growth Plan, American in November 1988 officially became the largest single airline in America, a position it had not held since 1961. Lorenzo still had more airplanes and more total market share than Bob Crandall, but his assets were divided between the two lobes of Texas Air. Crandall, by contrast, now controlled under a single brand nearly 17 percent of the airplane capacity in the United States. United was a close second. Delta, having recently acquired Western Airlines, was third. At the same time, American was reporting the highest profits in the history of commercial aviation.
Crandall proudly referred to American’s industry-leading distinctions as “the trophy” during the annual conference of American’s sales executives. “All winners hate to lose,” he told them, “and one of the marks of a consistent winner is a sharp ear for the footsteps of those who envy the trophy.”
He went on: “When do people feel good about their company and themselves? When they’re winning. I’ll tell you where low morale comes from. It comes from losing. How would you like to be working right now for Continental, or Pan Am, or TWA, or—God forbid—Eastern? Now there’s low morale. Why? Because they are losing.”
In fact the unions at Eastern cared much less about their position against American than about their position against their own sister company. Planes, people, routes, and a vital computer network had all been plucked from Eastern for Continental’s benefit, reducing jobs, promotion opportunities, and the asset base on which Eastern might hope to earn a profit. It was these asset transfers that finally provoked the unions into launching counteroffensives against Texas Air.
The pilots established a program called “Max Safety,” in which they flooded the flight line with brochures and stickers urging pilots to push to the limits of their discretion in holding back flights. “Better safe than sorry,” “Fly by the book,” “Take the time to be sure.” The economic toll was tremendous. Delays due to requests for replacement altimeters increased 247 percent. Eastern’s red ink flowed faster.
Before long, with a $2 million subsidy from ALPA headquarters in Washington, the pilots expanded their attack into the political arena. They carried preprinted cards addressed to the FAA and Department of Transportation on which they could detail individual safety problems observed on any aircraft. Washington was inundated with postcards listing complaints ranging from the horrific (a fire detection system left in “marginally acceptable condition” for more than three weeks) to the hilarious (“aircraft full of roaches”).
Charlie Bryan’s machinists, for their part, cast their lot with the flight attendants in a campaign to vilify Lorenzo in the public eye. As profound and emotional as the workers considered their fight, they recognized that the public might not easily be won over on issues of asset switching and wage cuts for $40,000-a-year baggage handlers. Thus, as detailed in a planning memo, the unions resolved to “make Frank Lorenzo the issue—personalize the conflict to one between him (i.e., the man who’s the pillager of the American dream; the man who’d cut any corner to make a buck; the man who’s a brutal, unscrupulous corporate autocrat)—and us (ordinary working people, fathers and mothers …).”
The memo outlined a campaign to investigate Lorenzo (including the use of a “pro-labor ‘private eye’ ”), to pressure Merrill Lynch and other Lorenzo financial backers, and to whip up opposition in the Congress and through the media, all with the goal of ultimately forcing Lorenzo to sell Eastern either to its employees or to “an acceptable third party.”
Lorenzo’s likeness was printed on a poster behind the concentric circle of a gunnery target. “Stop Lorenzo” buttons and stickers spread like a virus. A Lorenzo “wanted” poster was printed. Jesse Jackson got into the act, leading a crowd of cheering anti-Lorenzo demonstrators at Lorenzo’s 25-year reunion at Harvard Business School. The AFL-CIO organized a noisy demonstration against Merrill Lynch.
Before long the separate campaigns of the Eastern unions blended into a single orgy of hate against Lorenzo, and Congress began to take notice. Norman Mineta, the California Democrat who had provided a crucial swing vote in favor of airline deregulation partly at the behest of Phil Bakes, introduced a bill urging the Transportation Department “to conduct a full investigation into the management of Texas Air Corporation.” The congressional opposition took on a bipartisan ring when the ranking Republican on the subcommittee, Newt Gingrich, also cast his lot with the union-backed legislative effort; his Georgia district encompassed Hartsfield Airport in Atlanta, around which lived a heavy concentration of Eastern union members.
For Lorenzo the far greater problem at Eastern remained the inertia of the federal agency that was still blocking wage cuts for the machinists. Eastern was devouring cash with losses. To keep Eastern alive long enough to conduct the final confrontation with Bryan, Lorenzo had to find some more furniture to throw into the fireplace. Eastern, he announced, would sell the venerable Eastern shuttle. The buyer, on extremely favorable terms, was Texas Air.
When the proposal to cleave the shuttle from Eastern landed at the Department of Transportation, it sent the agency’s legal department into a stupor. The paperwork for the deal included a labyrinthine flowchart showing that Jet Capital, the personal holding company of Frank Lorenzo, was destined to receive 5 percent ownership of the shuttle, as a “fee” for having put the deal together. As they scratched their heads, the DOT people picked up The Wall Street Journal and read a page-one article about the financial “house of mirrors” at Texas Air, including an analysis of the cash that the parent company was “upstreaming” from its struggling airline subsidiaries. The following evening the DOT people tuned into ABC’s 20/20 for a broadcast on alleged safety infractions at Texas Air.
The Transportation Department had finally seen enough. In April 1988 James Burnley, the secretary of transportation, announced that the FAA would swoop down on every airplane in the Texas Air fleet for a “white glove” inspection. Financial investigators, meanwhile, would pore over Lorenzo’s records and take depositions from all his top aides, with the objective of deciding whether Texas Air was “fit” to operate an airline, let alone several of them. There had never been an investigation remotely approaching such a scale.
To Lorenzo it was all just “noise.” With his entire empire under the microscope Lorenzo stood before the International Aviation Club in Washington and expressed thanks for the chance to discuss “the noise level that seems to surround Texas Air today.”
Ten years ago, this platform [at the Aviation Club] and many others around town were filled with industry officials and others debating deregulation. Some argued that with deregulation the consumer would be better served … others argued just the opposite.…
It will surprise many of you, no doubt, that initially we opposed deregulation. I argued in Congressional hearings and in speeches that deregulation would be very unfair to small airlines like Texas International … that it would pit us between the larger national carriers with substantial resources and the largely nonunion companies like Southwest. [Lorenzo did not mention that Southwest was now almost entirely unionized.] Little did we realize just how right we were.… So we set about the task of transforming our little airline.
Our little airline. Lorenzo went on to say that after taking control of Texas International in 1972 he built the number of jobs in his domain from 2,500 to nearly 70,000 and the annual revenue of his enterprises from $60 million to nearly $8 billion, all of it through “sound business strategy,” he noted, “not ‘corporate mirrors.’ ”
While we don’t harbor any beliefs that the noise surrounding us will disappear any time soon, nevertheless it is our hope that we will be better understood as we go forward. Texas Air has been on the cutting edge of positive
change in this industry. We’ve saved 68,000 jobs and breathed life into several near-paralyzed airlines. Along the way we’ve angered some who have not appreciated our responsiveness to the consumer and the marketplace. I cannot offer them much solace, since we intend to continue to be responsive to consumer-driven market forces.
It took the government six weeks to conclude that Continental and Eastern were indeed safe and Texas Air indeed “fit” to run airlines. But while signing off on Texas Air’s safety practices, investigators reacted with alarm to the strife gripping Eastern. In a memorandum to the transportation secretary, FAA administrator T. Allan McArtor noted that “the discord and complexity of the labor-management issues are deeper and more complex than at any other carrier.… Both sides have stated that they are ‘at war.’ ”
Lorenzo and Bakes did soften their approach, though their efforts seemed intended less for peace than to get the Mediation Board off dead center and declare an impasse in the negotiations with Charlie Bryan. Bryan and Lorenzo eventually met face-to-face for the first time, over a three-hour dinner in Houston, during which Charlie Bryan proposed that they star together in a series of television ads for Eastern. “Nobody’d believe it!” Bryan said. Nothing substantive came of the dinner.
Finally the Mediation Board could put it off no longer. On February 1, 1989, more than a year after the machinists’ contract had expired, the agency finally declared that an impasse indeed was at hand.
Tick … tick … tick. That glorious ticking of the 30-day clock.
It was now one month until the moment that Bakes’s people had been referring to as “D-Day.”
In Dallas Bob Crandall’s people were also making plans.
For some time Crandall had been pressuring his scheduling genius, Mel Olsen. “What are you going to do when Eastern goes under?” Crandall ceaselessly asked. This was in fact a matter of some urgency, not because Eastern was in danger of imminent demise, but because American was continuing to choke on airplanes. Even after adding hubs in Raleigh-Durham, Nashville, San Jose, and San Juan—on top of Dallas and Chicago—American’s internal studies showed that the airline needed more destinations for all of its incoming aircraft. Crandall needed new territory, and there was none more inviting than Eastern’s.