But where? Crandall seemed intent on attacking Eastern’s hub in Atlanta. Eastern had been slugging it out there with Delta for years, and Delta, strong but ponderous, did not intimidate Crandall.
Atlanta did not feel right to Olsen, however. He loaded every airline schedule in the United States into a forecasting model, including the Transportation Department’s route-by-route passenger load figures. Then Eastern’s schedules were removed entirely—eradicated from the data—allowing the forecasting models to run as if the airline industry suddenly existed without Eastern and its nearly 300 airplanes. The model projected a windfall of new business for Delta in Atlanta, business for which American could attempt to compete. But the analysis also showed a number of other routes—“hot spots,” Olsen called them—that had nothing to do with Atlanta, routes on which there was no carrier around to pick up Eastern’s business.
These routes all seemed to converge on Miami. Moreover there were international route authorities from Miami that were available immediately—to Guatemala City, Costa Rica, and elsewhere. “Bob, we should start positioning ourselves now,” Olsen said. That way American could justify outbidding anyone else for Eastern’s assets in Miami, including its vital South American routes. Moving into Miami quickly would have the additional virtue of hastening Eastern’s demise.
In August 1988, as Texas Air was announcing a quarterly loss of $256 million, American announced that it would establish a crew base in Miami. Publicly American insisted that the move was in no way related to the problems at Eastern, as mendacious a denial as a corporation could utter.
In Miami Phil Bakes had a strange, uneasy feeling—a sense of disconnect, as he later described it.
Soon, on March 3, 1989, the 8,500 remaining members of the machinists’ union at Eastern would walk off the job. Elaborate preparations had been made to replace them with nonunion workers making a fraction of union wages. Bakes would then launch the rebuilding of Eastern. But as the great day approached, “I felt like I had nothing to do with it,” Bakes would say. The battle had become fixed in almost everyone’s mind as a personal confrontation between Frank Lorenzo and Charlie Bryan, as if Eastern itself did not matter. Bakes’s old Washington friend Alfred Kahn had put it best when he was quoted in The Wall Street Journal calling Lorenzo and Bryan “two scorpions in a bottle.” Bakes could not disagree, but couldn’t people see that he and 32,000 other Eastern employees were in the bottom of that bottle as well? “It was as if the people who worked and managed were marionettes,” Bakes later said, “carrying out the wishes of the unions and Texas Air.”
Bakes could practically hear his credibility deflating. The dramatic rebuilding of Continental, the greatest airline turnaround in history, had endowed him with all the standing he had walking into Eastern. Now it was clear even to him that Continental was cratering. He could feel his miracle-worker image fading as he talked to employees and even his own managers about his goals and plans and programs for Eastern. Bakes had come in as a savior; now he felt like a bumbler.
The clearest barometer of the world’s failing confidence was the price of Texas Air stock. When Bakes had left Continental to join Eastern more than two years earlier, in late 1986, the parent company’s stock was rocketing on its way to $50. Bakes’s wife had begged him to sell; practically their entire net worth was tied up in Texas Air. But Bakes thought that selling would signal a weakness of commitment. So as the big bang erupted at Continental and as the war escalated at Eastern, Bakes watched the stock sink like a stone to the single digits. Only later did he learn that Lorenzo, while preserving his control of Texas Air through Jet Capital, had cashed out his personal, direct holdings in Texas Air very nearly at the top, for about $10 million.
Although Lorenzo had rarely been accused of putting emotion ahead of money, the register tapes at Eastern suggested that he had let the campaign against the machinists get away from him. Apart from the plunge in Texas Air’s stock, there was the debilitating cost (to Continental as well as Eastern) of the massive government investigation that the unions had brought down. There was the usurious price of the money Lorenzo was borrowing to fund his war chest against the machinists—an interest rate of 17 1/2 percent, more than two times the prime rate. The initial strike preparation had cost $70 million—recruiting and training scab mechanics, rounding up nonunion pilots in case they were needed, acquiring decoy cars for management, preparing more than 1.7 million Mailgrams to apologize in advance to frequent fliers, and so on. In the midst of Eastern’s 30-day “cooling off” period, the combined airline operations of Texas Air reported a loss for 1988 totaling nearly three quarters of a billion dollars, the biggest loss in airline history, almost as much money as the entire industry had previously lost in its worst year ever. Moreover, Texas Air’s staggering loss occurred as the rest of the industry was having its best year ever. How much of Texas Air’s deficit represented financial fallout from Eastern no one could tell, but it surely exceeded by several times the $150 million a year that Lorenzo had been seeking to extract from Charlie Bryan’s membership.
Bakes, for his part, could do nothing but lower his head and prepare for the collision. There was so much invested already. If it paid off, the returns could still be tremendous.
The most difficult preparations involved not the machinists but the pilots. The last time Bakes had been through this exercise, the pilots had walked through the machinists’ picket lines at Continental like Schwartzkopf’s forces crossing the Euphrates. Lorenzo was convinced that the pilots would never honor Charlie Bryan’s picket lines. Under Borman the pilots had sacrificed much more than the machinists had. In any case, why would any pilot walk away from a six-figure salary simply out of solidarity with the bag smashers?
A few dissenting voices were heard. James W. Arpey, who had spent 15 years with Lorenzo and who had personally driven scab workers through machinists’ riotous picket lines at Continental, thought things were different this time. The Eastern pilots had already made so many concessions. “There’s no way the pilots will let you do here what you did at Continental,” Arpey warned.
“When push comes to shove,” Lorenzo answered, “they will cross the picket line.”
Sixteen days before D-Day the machinists took their official strike vote. The walkout was approved by 97 percent of the membership.
Nine days before the strike thousands of Eastern employees came to work wearing red tee shirts saying “Stop Lorenzo.” Anti-Lorenzo signs were breaking out all over Miami.
Seven days before D-Day the federal mediators on the case asked President Bush to appoint a Presidential Emergency Board, as provided for under the airline labor law. The principal effect of such an appointment would be to delay the process for another 60 days. President Bush declined, saying, “The best answer is a head-on-head, man-to-man negotiation between the union and the airline,” as if the idea had not yet occurred to anyone.
Five days before the strike Lorenzo appeared on the cover of Fortune for the special issue on “America’s Toughest Bosses.” (Among the six other bosses on the 1989 list, a second came from the airlines. It was Bob Crandall.) A new high school business textbook, published as the strike loomed, contained a page-long description of Lorenzo’s fight with the machinists. Eastern was now immortalized as a textbook case of bad labor relations.
Two days before D-Day, on a Wednesday, the Eastern pilots individually received a mass-produced videotape showing Frank Lorenzo at his home, a pen in his hand, poised over a sheaf of papers. He was, he explained, signing a new contract for the Eastern pilots, one that would greatly increase their job security by maintaining the Eastern fleet at 222 airplanes. The offer was meaningless, however, unless the pilots crossed the machinists’ picket lines.
The pilots were sorely tempted. Putting a fence around the fleet assured that there would always be aircraft to fly. The pilots could preserve their seniority status at Eastern, rather than risk starting out as second officers at other airlines. But the pilots’ lawye
rs soon determined that the promise would be meaningless if Eastern ever went into Chapter 11, a prospect that seemed far from impossible. Lorenzo was offering protection that would disappear the minute it was most needed. The pilots’ union told Lorenzo to get lost. ALPA would leave to individual pilots the decision whether to fly through the machinists’ strike.
On Friday, March 3, 1989, with the strike scheduled to begin at midnight, Eastern’s managers sent the machinists home at 10 A.M., 14 hours early, with pay. The workers scheduled for the next shift were contacted by telephone and telegram and given a paid day off. Eastern, terror-stricken about vandalism, did not want the machinists anywhere inside the fence at midnight. Manhole covers were welded in place to protect communication lines below.
At midnight Phil Bakes stepped onto a rooftop from the ninth floor of Building 16 and watched a group of strikers assemble on the perimeter of the company’s property below. Minute by minute the crowd swelled, soon bulging against the chain-link fence. The strikers laced their fingers through the fence holes, shoving it in and pulling it out with the racket of determined rebels, as if they were storming the Bastille. Bakes felt sick inside.
The following morning he knew there was no point in rushing to work. When he arrived at 10 o’clock, there were plenty of scab mechanics but no pilots. That night at home, watching images of giddy strikers and stranded passengers on Cable News Network, Bakes wept for the first time since his mother had died five years earlier. The bold piece of economic engineering he had bulldozed through the Congress of the United States had just claimed another victim, and it was he.
Lorenzo had often dismissed the possibility of bankruptcy at Eastern. He couldn’t “imagine a set of circumstances that would produce Chapter 11 for Eastern,” as he once put it.
On March 9, 1989, within a week of the walkout, Eastern Air Lines, with a mountain of debt and hardly a trickle of revenue, was in bankruptcy.
But Lorenzo was not done yet. Though stripped to barely half its earlier size, Eastern still had the routes that Frank Borman had so proudly purchased for $30 million from the failing Braniff seven years earlier, in 1982. How much would they fetch now? How much, in particular, would Bob Crandall pay for those routes, after positioning American in Miami?
Perhaps by selling Latin America, Lorenzo could pull off a turnaround of Eastern after all—facilitated by Chapter 11. By selling South America at the right price, Lorenzo could pay off Eastern’s creditors, recruit a cadre of strikebreaking pilots, and focus Eastern’s resources on Atlanta, fighting a one-front war against Delta. Lorenzo was so confident of the plan that he dispatched Bakes to bankruptcy court with a complete reorganization proposal predicated on the sale of Latin America. In the meantime he began discussing the sale with Crandall.
For weeks in 1989, while the talks dragged on, Eastern ever so tentatively got itself back into the air, rebuilding operations with scab workers as the machinists, pilots, and flight attendants remained on strike. “If we have to build the company back with picket lines,” Lorenzo said, “then that’s how we will build it back.” Bakes shook off his depression and threw himself into yet another campaign. By July, barely four months into the strike, Eastern was back in business, flying 30 percent of its flights, serving 77 cities (compared with 102 before the strike) with stripped-down service and low fares. It was a struggle, but it actually seemed to be working. The load factors quickly hit 67 percent. Lorenzo and Bakes, it appeared, were doing it again. Lorenzo had become the Richard Nixon of the airways!
Then suddenly Lorenzo had cold feet about selling a huge chunk of Eastern to Bob Crandall. Eastern was starting to look like Continental Airlines in the months following its bankruptcy, coaxing back the pilots little by little, a few more flights here and there, passengers clamoring for low fares … Lorenzo called a number of aides to a meeting in New York. Why, he asked, shouldn’t Eastern keep Latin America instead of selling it to American? Why, he asked, shouldn’t Eastern build up Miami instead of getting rid of it?
People in the room tried to remind Lorenzo that an entire bankruptcy reorganization plan had been predicated on the sale to American. The creditors had even been led to expect 100 cents on the dollar. But Lorenzo was undeterred. He was never a seller at heart anyway—least of all to Bob Crandall. So he backed out of negotiations to sell the South American routes, infuriating Crandall. With the Latin sale pulled from the table, Eastern’s bankruptcy reorganization was off too.
Lorenzo’s dream of a resurgent Eastern was in the end a death wish. Money that Lorenzo might otherwise have committed to creditors went down a rat hole. Before long Lorenzo would send Bakes back into bankruptcy court, only this time with a plan to repay creditors 10 cents on the dollar. By then Lorenzo had no choice; he had to sell Latin America. And the only company positioned to pay top dollar was, once again, American Airlines.
Crandall’s people were soon rushing to buy their own copies of Rand McNally to locate Bway-nos-I-rays and the 19 other South American cities Eastern had served. With all the bilateral treaties and individual landing rights involved, the transaction required a courthouse of lawyers to complete. Over from Miami came some 70 boxes of documents that had been heaved into files over the years, each pertaining in some material way to the operation of those routes.
Once Crandall’s people got their mitts into the operation itself, they were horrified at what they found. Eastern had not begun to keep up with the growth in the market. In city after city there were so few phone lines that each rang continually. When American installed more phone lines, they too rang incessantly. Further lines and phones were hooked up and they rang. “It was a complete shambles,” Crandall would recall.
But it was a shambles with nothing but upside potential. Though Latin American travel still accounted for only a small fraction of total international travel by Americans, business relationships were blossoming between the continents. Talk was beginning to swirl about a new trading relationship that would ultimately take fruit as NAFTA—the North American Free Trade Agreement. Latin America was quickly coming to terms with its debt problems, once considered a time bomb that threatened to blow up the world financial system.
The arrival of American’s Sabre system and the introduction of frequent-flier plans would sweep up even more traffic, leaving the Third World airlines of the continent gasping for passengers. TACA, the national airline of El Salvador, say, or AeroPeru could not offer much diversity in their frequent-flier awards—no trips to Hawaii, for instance—nor could they be reasonably expected to crank up a computer system more powerful than anything existing in the Southern Hemisphere.
American’s new South American system flourished all the more thanks to a shrewd trade by Crandall. He talked Lorenzo into tossing a small piece of Continental Airlines into the Eastern route deal: Continental’s route between Miami and London. It was just a single route but a vital one, which Crandall could now use as a nexus to feed Europeans into his new South American flights.
Before long Latin America was the most profitable piece of American Airlines, just as it had been for Eastern, and before it for Braniff, and before it for Pan Am.
In the brief time he had served as the president of Continental Airlines, Tom Plaskett learned that aircraft suppliers made a point of keeping a little something in reserve in any negotiation with Lorenzo, even past the point of the handshakes, because Lorenzo would try to re-trade the deal. They called it the “Frank factor.”
Phil Bakes would call this phenomenon the “last nickel” impulse. Bakes took a more charitable view than most, allowing for Lorenzo’s upbringing in a nonaristocratic household. Lorenzo, in addition, simply changed his mind frequently, Bakes observed, without sufficient appreciation for how that affected his standing in the next deal.
Among the men who had served as Lorenzo’s number two, Don Burr took the harshest view of all. “Frank is very simpleminded: you do whatever you have to do to make money,” Burr would later claim. “Any means to any victory is o
kay. Frank is capable of any kind of behavior to win.”
Regardless of the reasons, Lorenzo from the dawn of the 1970s to the dawn of the 1990s had established a pattern. When Jet Capital took over Texas International, it told the press that no major personnel changes were planned; several weeks later, the incumbent president was out. Three years after that he told his bargainers to make a deal with the union leadership at Texas International; he then refused to sign the deal. He had, at least in Burr’s view, reneged not once but twice in promising titles to him. He had vowed, in writing, that he would not relocate the headquarters of Continental Airlines if he won control of the company, then proceeded to waste no time in moving the staff to Houston. When rising airfares caused an unexpected number of people to clamor for free Continental tickets in a big supermarket giveaway program, Continental simply canceled the promotion.
Reneging was such a routine of business with Lorenzo that when a middle-level executive once complained that Continental was failing to fulfill his employment contract, Lorenzo was quick to suggest a recourse: “If I were you,” Lorenzo said with a straight face, “I’d probably sue me.”
The pattern of reneging and re-trading was nowhere more obvious—or more excruciatingly documented—than in the New York bankruptcy proceedings of Eastern Air Lines. By the spring of 1990, a year into the proceedings, Texas Air had offered five separate repayment schemes, only to retreat from each and substitute a cheaper plan. A creditors’ committee told the court it would “no longer tolerate Eastern’s and Texas Air’s inability to adhere to an agreement.”
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