Skygods: The Fall of Pan Am

by Gandt, Robert

  Ed Acker hired Ray Grebey in 1984 to be Pan Am’s vice president for industrial relations, making him the airline’s chief negotiator with the unions. Grebey was fiftyish, with a ruddy complexion and the arrogant strut of a banty rooster. He brought with him a reputation for bare-knuckle, spit-in-your-eye brawling with unions. Grebey had spent twenty years in labor and personnel jobs at General Electric, where labor relations were consistently fractious. From 1978 to 1983 he represented the owners of major league baseball teams in their disputes with the players. It was Grebey who received most of the credit for triggering the bitter players’ strike of 1981.

  In Pan Am’s private little labor negotiating club, the arrival of Ray Grebey was like throwing a pit bull into an alligator pen. Grebey wasted no time polarizing the two sides. “You guys have had it too good for too long,” he informed the union officials on their first meeting. “Now it’s giveback time.”

  They hated him. “That little sonofabitch,” said a union negotiator. “Grebey can piss off more people than Idi Amin and the IRS together.”

  Grebey didn’t care what they said. It went with the job. As he explained to a newspaper reporter, “There’s a bad guy at every airline trying to wring wage concessions from labor.” Grebey was Pan Am’s bad guy.

  In August of 1984 the unions were informed that Pan Am had stopped its contributions to the employees’ pension funds. And then on January 1, 1985, Pan Am announced that it was unilaterally extending the pay freezes the unions had accepted back in the short-lived Acker Backer euphoria. The freeze was supposed to be temporary, with a “snapback” provision—an automatic reinstatement of the previous, higher wage scales. Now it was time for the snapback, and Acker was reneging—withholding scheduled pay increases of 26 percent for the pilots, 14 percent for the mechanics, 12 percent for the flight attendants, and 2 percent for the clerical employees.

  Labor relations at Pan Am plunged to an all time low.

  While the unions took the company to court over the pay freeze extension, they gained access to an evaluation of Pan Am’s management done for the board of directors by the consulting firm Lazard Freres. The report indicated Pan Am management had damaged its credibility by saying that concessions from labor could solve the airline’s financial problems. Most stinging, though, was the consulting firm’s conclusion that “by far the most significant failure has been Pan Am’s inability or unwillingness to confront its own problems.”

  To the embittered work force, this meant that Pan Am management was blaming labor for its own failings. The Lazard Freres report noted that Pan Am workers were being paid significantly less than their counterparts at other major domestic airlines and “the quality of labor relations had deteriorated into anger and accusation.”

  Anger and accusation. It was an understatement for the rage the employees were feeling. By court order, Pan Am was forced to abide by the snapback agreement. In the meantime, all the union contracts were up for renewal. Ray Grebey kept up the pressure on the unions for new wage freezes as well as a host of new productivity improvements. “Productivity” was a labor relations buzz word that had an ancient meaning: more work for the same pay. Pan Am also wanted to institute a new two-tiered airline wage scale—A and B scales—under which newly hired employees, the B-scalers, would be paid as much as 50 percent less than current workers.

  Negotiations dragged on through the early winter of 1985. Even the union leaders, at least in private, understood that Pan Am could not afford the snapback pay increases and a restoration of the pension contributions. The snapback alone would cost $170 million per year. Pan Am’s unfunded pension liabilities had reached a staggering $650 million.

  In February the pilots were the first union to give the company generous concessions in productivity and health care. It was necessary, Jim MacQuarrie told the Wall Street Journal, “to ensure the future health and profitability of the company.” The company’s hope was that with the pilots leading the way, the other unions would follow.

  They didn’t. The Transport Workers Union, representing the 5,700 mechanics, was led by a feisty Irishman named John Kerrigan, who was finding it especially difficult to bargain with a man like Ray Grebey. Throughout February the two sides haggled. The deadline for the contract was fixed at 12:01 A.M., February 28, 1985.

  Midnight came, and there was still no contract. Grebey told the mechanics they could take it or leave it.

  The mechanics left it. The other four unions, equally fed up with Grebey and Acker and Pan Am management in general, walked with them. The Great Strike was on.

  Later, if you asked employees why they had gone on strike, most could not put a specific reason to it. That was because the Great Strike of 1985 had less to do with wages and pensions and productivity than it did with dignity. It was bad enough that the old airline of the Skygods should be so hideously mismanaged that it couldn’t afford to pay its workers a decent salary. But this—to be insulted by hired guns like C. Raymond Grebey—just wasn’t. . . dignified.

  Not all the pilots were on strike. “Management” airmen—those assigned as check pilots and instructors, and administrative airmen who had jobs as chief pilots and operations managers—had been alerted to fly that morning. They were supposed to maintain a skeleton flight schedule.

  The management pilots found themselves in a no-man’s-land. They were regarded by Pan Am management to be exempted from union obligations. They were expected to carry the company flag. ALPA—the pilots’ union—didn’t see it that way.

  “Pilots are pilots,” said a union official in a letter to the management pilots. “When we go on strike, we all go. No exceptions.”

  But there they were, the exceptions.

  “There go the fucking scabs,” yelled a man wearing a sign that declared he was a striking employee. He stood with a group of strikers on a picket line outside the Pan Am check-in counters.

  Martinside had been recently assigned as a check pilot. It was supposed to be a distinction, being selected as a check pilot. No one had told him that the job would place him at ground zero in a labor war.

  Martinside had no particular feelings about the strike one way or another. There were no gut-burning, Bastille-storming, banner-waving issues at stake. The pilots were on strike because they were union members and that’s what the union had declared. The check pilots were flying because they worked for management and that’s what management had declared. Both sides were doing their jobs in the collective bargaining process.

  But it was more complicated than that.

  A note appeared in Rob Martinside’s mailbox: I presume that by now you have seen the light and resigned your check pilot position. If not, consider our friendship ended. It was signed by a friend from his new-hire class.

  Another friend called up to say he thought Martinside was a gutless traitor. A man on the picket line spat at him as he walked past.

  The strike was getting expensive. Losing old friends was a price he had not expected to pay.

  Jim Wood wasn’t bothered by such things. He told Martinside to grow up. “Friends?” said Wood. “Quit kidding yourself. What makes you think people who spit at you are friends? Friendship doesn’t have anything to do with strikes.”

  The war went on for nearly a week. Nothing in the pilots’ airline experience had ever aroused so much passion. Paranoia was running wild on both sides. The striking pilots gathered every night to pump up morale and exchange their deepest fears.

  “They’re bringing in scab pilots to take our jobs.”

  “Pan Am is going out of business and reorganizing—without us.”

  “If we go back to work, we go on the bottom of the seniority list.”

  “We’ve all been fired.”

  And that one was true, at least on paper. Every pilot who didn’t show up for his scheduled trip received a notice of termination. Most said they thought it was very funny and they intended to keep it as a remembrance. But deep down, they were scared. This goddamn strike. . . it wasn�
�t funny at all.

  One of the odd things about the strike was that both sides claimed to be trying to save Pan Am. Which raised a question: who was Pan Am? The employees? Management? The guy who signed the paychecks? The grunts who had given most of their adult lives to the company? Who were they saving it for?

  A few asked an awkward question: how are we saving Pan Am by shutting it down?

  Support for the strike, at least by the unions that had walked out in sympathy with the TWU, quickly waned. Within days picket signs came down and people began returning to their jobs. In New York Jim MacQuarrie signed an agreement with management to put the pilots back to work. The others, the flight attendants, the clerks, the flight engineers, followed suit. The TWU held out longer, then reached its own compromise.

  When it was over, both sides were claiming victory. The employees felt that they had tossed a bomb directly into Ed Acker’s throne room. The company did some chest-thumping of its own. Pan Am’s management had made its point, at considerable expense, that it would not be held hostage to demands from its unions. The Imperial Airline would do business exactly as it saw fit. Even if it went broke in the process.

  Who won? It was hard to find a winner. The Financially Troubled Pan American looked as if it had been gut-shot at a time when it was already limping.

  That, perhaps, was why they had gone on strike.

  The pilots’ strike-ending agreement with the company included a “no hostages” clause, which meant that everyone—strikers and scabs—was supposed to be forgiven. No reprisals. Bygones were supposed to be bygones. At least, that’s what the agreement said.

  But it would never be the same. The pilots had lost something intangible. The carcasses of old friendships lay like corpses on a battlefield. No longer were they, the Skygods and Skygods-to-be, a cohesive team fighting the bureaucracy, the competition, the rest of the world. They had been reduced to fighting with each other.

  Chapter Twenty-Six

  The Pacific

  This is one hell of a good deal for United Airlines.

  —RICHARD FERRIS, chairman, United Airlines

  We’re cutting off our right arm.

  —A PAN AM PILOTS’ UNION REPRESENTATIVE

  It was a classic Ed Acker hip shot. He had carried the secret with him, telling no one, for three months. And then one day over lunch at the Sky Club in the Pan Am Building, he spilled it to Marty Shugrue. “I’ve sold the Pacific,” Acker said.

  Shugrue slowly lowered his fork. Outside he could see the long rays of the April sun flooding Manhattan. It was 1985, and spring had mercifully come. The airline was still reeling from the strike in March. Shugrue stared at the chairman. Surely he had misunderstood. Sell the Pacific? What did that mean? How can you sell an ocean?

  It was true. Acker explained how he had made a deal with United Airlines to sell Pan Am’s Pacific Division. The Pacific happened to be one of Pan Am’s few moneymakers. It also happened to be the fastest growing market in the world. The Pacific route system had been virtually invented by Pan American.

  And Acker was selling it. He was lopping off an entire ocean of airline routes and destinations, all pioneered by Pan American going back to the China Clipper days.

  He had done it in typical Acker vest-pocket fashion. No one else had known, just he and Richard Ferris, chairman of United Airlines. Part of the deal, Acker revealed, had even been done on a golf course.

  Why did United want Pan Am’s Pacific routes? By the 1980s, United had managed to extend its reach into the Pacific, dominating the mainland-to-Hawaii market and obtaining rights to Tokyo and Hong Kong. And United already had a powerful domestic system poised to feed a new Pacific route expansion. But two Far East destinations were not enough to make an impact. United needed an extensive Pacific route system to make it work. To build up such a system through the burdensome application process, adding one route, one destination at a time, would take decades.

  The quick solution was to buy Pan Am’s routes. Since 1982, Ferris had been probing. When he first suggested a Pacific deal, Acker was still new in his own job as chairman of Pan Am. Anyway, Pan Am wasn’t hurting that bad, since the airline was still living off the proceeds of the sale of the Pan Am Building and the Intercontinental Hotel chain. Pan Am didn’t have to sell. Acker said no.

  Ferris kept trying. Again in 1983 he approached Acker on the subject. The answer was still no.

  By 1985, Pan Am’s situation had changed. Ed Acker was wrestling with demons that exceeded even his Texas-sized imagination. Pan Am wasn’t just losing money, it was going through cash faster than a Middle East emirate. While the Atlantic and Pacific divisions were showing small profits and the South American operation was just breaking even, the domestic routes were racking up a projected 1985 loss of $250 million. Since the beginning of the eighties, Pan Am had transformed one and a half billion dollars, including all the proceeds from the assets sales, into a fine, invisible vapor.

  Richard Ferris, aware of all this, telephoned Acker in early February 1985. Would he now like to talk about a possible sale of Pan Am’s Pacific routes?

  Acker was in a corner. His growing conflict with Pan Am’s unions, if it came to a strike, would cause another disastrous loss for the year. It was apparent that Pan Am would soon be forced, no matter what, to make another asset sale. The airline’s only marketable assets left were its routes.

  Ed Acker thought it over. He called Ferris back in late February.

  In absolute secrecy the two executives haggled through the winter of l985, and into the spring. The Great Strike came and went. While the strikers stood on the picket lines raging about Ed Acker, they were unaware of the three-quarter-billion-dollar secret Acker was carrying around like a derringer in his boot.

  The Texas deal-maker was doing what he did best, and this was the biggest deal of his life. At three o’clock on a Monday morning, April 22, after a weekend of haggling, they came to terms. The announcement knocked the wind out of the airline business.

  PAN AM AGREES TO SELL UNITED ITS PACIFIC UNIT. PRICE OF $750 MILLION INCLUDES 18 PLANES, ROUTES TO ASIA AND AUSTRALIA FROM U.S.

  The business press made more of the gargantuan sum paid by United than of the shrinkage in size—about 21 percent—it represented for Pan Am. The Wall Street Journal obtained a secret thirty-six-page analysis of the transaction prepared by the aviation consulting firm of Simat, Helliesen & Eichner. It focused on the fact that the average purchase price of airline acquisitions over the years amounted to nine-and-a-half times one year’s earnings. In the case of the Pan Am-United sale, United was paying twenty-two times the annual earnings of the division. At that rate it would take United over twenty years to recover its investment.

  Ferris shrugged it off. “Our studies indicate the return on invested capital will be very good. Our feed of domestic traffic to the West Coast can do marvelous things to the load factor.” Load factor meant the percentage of seats filled in the airplanes. Because of United’s extensive domestic system, it could feed more passengers to its Pacific flights than Pan Am had ever dreamed of.

  The deal scared the hell out of the other airlines. United was already the biggest carrier in the country. “This deal will only make the nine-hundred-pound gorilla a twelve-hundred-pound gorilla,” warned C. E. Meyer, president of TWA. Northwest Airlines, which had recently overtaken Pan Am as the biggest Pacific carrier, declared that it would oppose the sale on antitrust grounds.

  Part of Acker’s rationale for selling the Pacific routes was that Pan Am would have had to invest one billion dollars in new equipment just for the Pacific in order to remain competitive. Pan Am didn’t have a billion dollars.

  Wait a minute, critics of the deal began saying in the business press. A billion dollars? Hadn’t Acker, just the year before, in 1984, placed an order with Airbus Industries, the European aircraft consortium, for sixteen A-320 short-haul jets and twelve A-310 twin-engine wide-hodies, which were transatlantic jetliners? The deal had a purchase price of
$ l .1 billion. Wasn’t that approximately the amount Acker was saying it would cost to reequip the airline’s Pacific operation? In other words, the profit-making and expanding Pacific market was being sacrificed for the already-saturated and questionably profitable Atlantic.

  Well, as a matter of fact, yes. But as Acker’s people explained, there really wasn’t any choice.

  “We can’t afford to be a two-ocean airline any longer,” said a vice president close to the deal. “Something had to go. Ed decided it was the Pacific.”

  Meanwhile Acker was telling his board of directors what a good deal it was for Pan Am. Pan Am would not only reap a huge cash infusion, he told them, it would save itself the huge investment it would have to make to upgrade the airplanes that served the Pacific. Pan Am had a fleet of dogs. Now it was selling them to United.

  “We’re not overjoyed about the airplanes United is getting,” Ferris admitted. United was taking eighteen airplanes off Pan Am’s hands, including the 747 SPs. The “SP” meant “special performance.” They were shortened models of the 747 that, because of their reduced weight, had lower fuel consumption and thus longer range. Because of the shorter fuselages, they also had fewer seats, only 233, compared to the nearly-400-seat versions of the normal 747. Now the SPs were anachronisms from the seventies. Boeing was delivering full-size 747s with new, more powerful engines that had the same range as the undersized SPs. They also had upper decks that allowed a total load of as many as 500 passengers.

  A Pan Am executive said, “To equal the seats in one of those new planes, you have to fly two SPs in formation.”

  United was also taking the fleet of six Lockheed Tri-Stars, which Pan Am had been trying for several years to unload. Though pilots loved the technically advanced Lockheed, the trimotor jet with its clunky Rolls-Royce engines had an uncompetitive cost per seat-mile. One other unwanted airplane, a single model of the trimotor DC-10, was also included in United’s package.