It might have dismayed Wolf to know that he was the third person contacted for the United job and, above all, that he had been approached behind his old boss, Bob Crandall. But Wolf had the enthusiastic backing of Neil Armstrong, the search committee chairman. Wolf would have to walk away from a fabulous fortune in Tiger options to accept the position with United, but Armstrong resolved the matter by awarding Wolf options on 250,000 United shares. That meant that every $4 price increase would put another $1 million in Stephen Wolf’s pockets, and, with the stock having traded at more than $100 a share, such a price change was not uncommon.
For a boy who grew up poor, Wolf acclimated himself easily to the badges of fortune. He purchased a sprawling apartment on the 63rd floor of a skyscraper towering over Chicago’s North Michigan Avenue, just as Wolf himself towered over all who stood near him. He outfitted the residence with antiques juxtaposed with ultramodern decorator touches: stark white walls, a cantilevered staircase, and window blinds that could be raised and lowered at the touch of a button. But the dominant feature was the view, through windows some 20 feet high: Lake Michigan to the east, the Sears Tower to the south. Wolf could watch air shows along the shore of Lake Michigan by glancing downward at the aerial acrobatics.
The move to Chicago also occasioned a change in Wolf’s marital status. He and his girlfriend, Delores Wallace, had maintained their relationship after Wolf had left American Airlines seven years earlier, in 1981. Wallace had remained at American, where she had risen from flight attendant instructor to membership in Crandall’s inner circle as the vice president of personnel resources. Crandall, for all his ruthlessness as a taskmaster, was perhaps the best boss in the airline industry for female executives; a number had attained top positions in Crandall’s organization. If Crandall harbored any of the sexist bias so prevalent in the airline industry, it was snuffed out by his obsession with performance. Crandall had tolerated Wallace’s romance when Wolf was at Republic and Tiger, but United was a different story. “If Stephen ends up at United,” Crandall warned her, “we’ve got a problem here.”
So once Wolf had accepted the United offer, Delores Wallace quit American, quit Bob Crandall, and walked away from one of the highest positions ever attained by a woman in commercial aviation. She married Wolf and threw herself into studying French. She and Wolf loved France and everything about it. They visited regularly. Wolf loved French cooking and wines, especially Burgundies.
United, unfortunately, did not fly to Paris, nor anywhere near Europe. United’s new code-sharing deal with British Airways would feed transatlantic passengers into United’s domestic flights, but that was a poor substitute for United’s flying to Europe itself.
Wolf saw four compelling business reasons for United to alter its strategy. The U.S. market, as most carriers realized, was reaching maturity. Second, Europe was a place where labor costs made U.S. carriers competitive: United was paying coolie wages compared with Lufthansa and Air France and other state-subsidized European carriers. Third, adding another continent to United’s portfolio diversified its geographic risk. (Latin America, another continent outside the United route map, looked attractive to Wolf for the same reason. In fact Wolf had recently paid a courtesy call on President Carlos Salinas de Gortari in Mexico City.)
Finally, Wolf could see that the long-standing U.S. carriers to Europe—Pan Am and TWA—were on the ropes. Either could fail. As unthinkable as it might seem, both could fail, and if so, Bob Crandall would undoubtedly push American Airlines into the vacuum.
Thus, from the moment he was introduced to Sir Colin Marshall, Wolf took pains to point out that United’s code-sharing deal with British Airways was a legacy of the previous management. “I want to keep our arrangement in place,” Wolf said, “but you specifically need to know that if I can ever find a way for United to fly to London, I will.” Marshall had no problem with that. He was sure that any such service by United would be small. If British Airways ever had to compete directly with United over the Atlantic, he thought, it would be on only one or two routes.
As Wolf was uprooting himself to Chicago, he flew frequently on a United flight regularly staffed by Bobbie Pilkington, an official of the Association of Flight Attendants. Wolf, she would comment, was as delightful as passengers came, until the briefcase was unsnapped. “It was the most bizarre thing. Everything about his countenance changes when he gets involved with his work. He gets cold, hard. His color changes. Everything about that man changes. He goes to gunmetal gray steel.” Wolf, thrown as an adolescent into full-time work to support a family, had never learned how not to work.
Plainly, though, Wolf’s challenges—and opportunities—provided plenty of motivation. Overtaken in 1988 as the nation’s largest airline, United needed airplanes badly, but it remained a deeply troubled company with disaffected employees and pilot salaries that were out of line with the rest of the industry. “It was,” as he later put it, “unusual, if not strange.” Reversing those problems could make Wolf not only a fabulously wealthy man but a celebrity besides. He could become, as The Wall Street Journal said, the “Iacocca of the Airways.”
Wolf had walked into United expecting at least the recognition by United’s pilots that he was a bona fide “airline guy,” not a “car guy” as Olson was or a “hotel guy” such as Ferris. But even if he was the kind of chairman they had been clamoring for—indeed, because he was that kind of chairman—the leaders of the pilots’ union were fretful over Wolf’s arrival. The pilots’ leadership, still infatuated with the idea of taking over United, were not eager to see their members co-opted by a new CEO with a sterling image. The ALPA leaders in Chicago told the top union brass in Washington that they intended to cast Wolf as the bad guy. Although some of the headquarters people were troubled by this, they were powerless under the ALPA constitution to interfere.
The tar and feathers were waiting when Wolf, shortly after assuming the United job, traveled to Hawaii to make a presentation to the United pilot leaders. This time the pilots were not waiting in red suspenders. Wolf stepped to the front of the room and took the microphone. As he began to speak, he found that the microphone cord seemed to be stuck on something. He looked down. The cord disappeared under a curtain. Wolf tried to jerk it loose, but it remained stuck. The cord, it appeared, had been fastened to the floor! Wolf, all six foot six of him, went through his presentation fussing with the cord and stooping at the waist, humiliated, deprived of the stature that he had always used so effectively in trying to win the support of his adversaries.
Wolf told the United pilots that he wanted to make the airline grow, that he wanted to swell the fleet—but that he first wanted to cut still further United’s costs. This gave the pilot leadership all the ammunition it needed in the character assassination campaign that followed. Anti-Wolf stickers were passed into cockpits. Because it was not specifically accounted for in their contract, pilots refused to fly two newly delivered Boeing 747s in the 400 series, the newest and best jumbo jet model ever built; the cost to United of leaving the two planes on the ground totaled $200,000 a day. Taking a page from the Max Safety playbook at Eastern Air Lines, the United pilots adopted a strategy they called “Sweet Sixteen”—delaying one minute past the 15-minute grace period that the government gave the airlines before counting any flight as late. In one month only 62 percent of United’s flights were scored as on time, a shockingly poor showing at a time when passengers were closely comparing the percentages. The pilots also insisted on topping off their fuel tanks, weighing down their vessels so that they consumed more fuel.
Then, a curious thing happened. While publicly pillorying Wolf, the pilots actually invited him to join them in their effort to mount an employee takeover. His involvement would clearly lend respectability to the marginal prospects for such a monumental takeover. Wolf considered himself something of a pioneer in the whole area of employee ownership in the airline industry (although he, like others, often failed to appreciate that Southwest had initiated the trend),
but he wanted no part of a buyout. He did not want to load up the balance sheet with debt; he wanted to buy airplanes and make United grow. He wanted to launch United into Europe and Latin America. He wanted to match and beat back the thrusts and parries of Bob Crandall.
Wolf wanted nothing to do with the employee takeover scheme.
In the spring of 1989 the airline industry was transfixed by a new drama seizing Northwest Airlines, a drama that would ultimately reach the stage at United.
After buying Republic from Wolf, Northwest’s internal strife and service had plunged to the same cataclysmic lows that followed the National-Pan Am merger and the union of BOAC and British European Airlines. In one month only 25 percent of Northwest’s flights were on time. Marvin Davis, a 300-pound Beverly Hills billionaire and an airline deal waiting to happen, was suddenly on the scene. “When I was a boy, I liked to play with toys,” he would later tell an ALPA official. “I still like toys. They’ve just gotten more expensive.” Davis offered to buy Northwest for $2.7 billion.
Another bidder for Northwest soon emerged, however—a partnership of three wealthy investors who had once worked together at Marriott Corporation. The Marriott men had backing from KLM Royal Dutch Airlines, which was eager to become the second foreign airline to buy into a U.S. carrier (following SAS’s move into Continental). Supplementing KLM’s money with funds borrowed in Japan, the Marriott men were able to outbid Marvin Davis handily.
The last had not been heard of Marvin Davis, however. The Northwest siege was barely concluded when he offered $5.4 billion for United Airlines. United shares climbed $46 in a single day—and with them the net worth of Stephen Wolf. A takeover of United that gave all shareholders that chance to cash out would put $42 million into Wolf’s pockets!
The United board gathered in Elk Grove Village, the portraits of United’s five previous chairmen looking down from the dark rosewood walls. “The board has concluded Davis will be successful,” director John McGillicuddy said at one point. “If this is going to happen, Steve, would you consider joining forces with the employees in a bid for the company?”
Wolf turned the question over in his head. He knew that if a raider took over the company, he could hand over the keys and walk away wealthier than he had ever dreamed possible. On the other hand, if Wolf became part of an insider group taking over the company, he would keep his job and he would get his $42 million in stock proceeds—a happy combination of events, to be sure. But in that case Wolf would be seen handing $42 million of the company’s money to himself. It wouldn’t look good. People, he thought, would consider him a “greedy son of a bitch.” He told himself, “There is not an inch of upside here.”
“This is a very serious decision for me because I have a very large stock option,” he told the directors.
And yet what of the airline? What of the employees? If Marvin Davis took it over, he would doubtless extract wage concessions to help pay for the deal. If the employees took it over, they would have to make concessions in that case as well—there was no doubt about that—but at least they would receive an ownership interest in exchange. Wolf agreed to join forces with the pilots, and to begin recruiting other employee groups to the plan.
The orders hurriedly went out to ALPA members across the United system: remove all the anti-Wolf buttons and stickers from the cockpits and locker rooms. “We must now demonstrate that employee ownership means cooperation and employee-management peace,” a union official explained. The flight attendants were invited into the ownership group, the price of admission being a 10 percent cut in their pay. They told Wolf and the pilots to get lost. The machinists, unalterably opposed to the deal because it would so severely leverage the company, played the spoiler at every chance—through lawsuits, lobbying, and repeated threats of a strike. Brian Freeman, a witty and acerbic consultant to the machinists, said that no one should be fooled into thinking that this was the pilots taking over United Airlines. It’s “just a Wolf in pilots’ clothing,” he said. Wolf and the pilots had to better Marvin Davis’s terms, of course, if they hoped to win the company; the price they offered was $300 a share—which, by happenstance, raised Steve Wolf’s take as a shareholder to $54 million.
To buy a company for something like $7 billion, the employees would need a partner with deep pockets. Wolf knew just whom to call: Colin Marshall of British Airways. The two men had grown closer, despite Wolf’s warnings that United would someday seek to invade British Air’s territory in Europe. Marshall had arranged for the British Airways board to host the United board in London, wining and dining Wolf and his fellow directors. Wolf was planning to reciprocate the gesture by having the British Airways directors to dinner in his chic 63rd-floor apartment.
Marshall wanted a piece of the U.S. airline industry more urgently than ever—and something stronger than joint marketing arrangements and code sharing. He told Wolf to count British Airways in, for $750 million.
Since 1926 U.S. law had restricted the voting control of foreign interests in a U.S. carrier to 25 percent. Therefore, Wolf’s group said, British Airways would receive only 15 percent voting control, safely within the statutory limits. This figure, however, significantly understated the financial influence that British Airways would wield in the newly constituted company. It was the twilight of the eighties, and the deal was practically all debt. The would-be buyers of United—Wolf, his fellow top executives, the legions of pilots, plus British Airways—were putting up a mere $1 billion in cash in a deal worth almost $7 billion. Anyone could see that British Air’s $750 million represented 75 percent of the equity. With voting control or not, British Airways was all but proposing to make a wholly owned subsidiary of United Airlines.
When the documents for the takeover were released publicly, there in black and white was the shocking truth of the monumental fortune that Wolf had riding on completion of the deal. Wolf knew in advance that the publicity would be ugly, but as he later put it, “I underestimated by 4,000 percent how unpleasant it would be.” The facts were no different than if Marvin Davis were taking over the company, he thought; the value of his stock options was the same either way. Wolf kept telling himself that he was simply acting as the front man in a deal that enabled the pilots to walk away with a voice in United’s affairs—a greater voice, for sure, than Davis would offer them. But the media, Wolf was mortified to conclude, were more interested in the “greedy son of a bitch.”
On September 14, 1989, a Thursday, the United board gave its final approval to the takeover by Stephen Wolf and the pilots of United, with British Airways acting as Daddy Warbucks. On Friday Marvin Davis withdrew his offer. All that remained was to nail down the financing.
The following week in Washington, Transportation Secretary Sam Skinner sat down for breakfast with Al Checchi, one of the former Marriott people now putting the finishing touches on the takeover of Northwest. Skinner was suddenly saying that he had a problem with one important aspect of the deal. The voting interest of KLM Royal Dutch Airlines in Northwest was to total only 5 percent, well within the statutory guideline, but there was a second test of control, Skinner noted, not a statutory limitation, but a policy of long standing that allowed foreign airlines to hold no more than 49 percent of the equity of a U.S. carrier. By this test the debt-ridden Northwest takeover failed, because KLM was providing $400 million of the $700 million in equity. Their entire deal at stake, the former Marriott executives readily agreed to restructure the terms of the investment by KLM. But all eyes quickly turned to Elk Grove Village, Illinois, where British Airways was preparing to provide three quarters of the equity necessary to bring off Stephen Wolf’s takeover of United. Fears quickly spread that the United States government would scuttle the deal.
About then a top official of the machinists’ union was talking to an official of Mitsubishi Bank when he happened to mention that the machinists would begin contract talks with United the following month. Regardless of who owned the company, the union man said, the machinists wanted a big
pay increase and they were going to get one.…
At about the same time an official in Japan’s ministry of finance was publicly expressing the first doubts raised in Tokyo about all that Japanese money feeding America’s LBO craze.…
And the bankers who were expected to finance the takeover began studying the breathtaking personal profits that Wolf stood to gain—money, they realized, that they would be indirectly providing.…
And USAir announced that it was expecting lower earnings, causing people to wonder how United could justify its rosy financial projections.…
And soon, one by one, the banks were saying no thanks. The employee takeover of United was dead.
It was as if the door had slammed shut on the 1980s. On Friday the 13th of October, 1989, as word spread that for the first time in the LBO era a big deal was falling apart for lack of financing, the Dow Jones Industrial Average plummeted 190 points in less than two hours.
Sir Colin Marshall had not been warned about the imminent collapse of the deal. Stunned, he quickly washed his hands of the entire mess. Within so cautious and distinguished a company as British Airways, it mattered urgently to some people just who was to blame for the company’s embarrassment. In particular the PR people who worked for Lord King, still the titular head of British Airways, were intent on protecting their boss from the tarnish. Word went out to the British press on a hush-hush basis: This was Colin’s deal.
But no one’s reputation suffered as much Stephen Wolf’s. His credibility with employees lay in ruins. He had allowed himself to be diverted from his real job. Wolf resolved to recover—to restore his reputation and put the nightmare behind him. Although the pilots were already investigating how to resuscitate their deal yet again, Wolf tried to snap everyone’s attention back to the airline itself—the need to improve quality, the need to grow. There were planes to order, destinations beckoning around the globe. He was planning a new color scheme for United’s fleet.
Hard Landing Page 51