Hard Landing (15 page)

At United, Dick Ferris shared Crandall’s view that the travel agents should never be permitted to establish their own computer reservations
network. But
Ferris had figured out Bob Crandall’s game, and looked warily on the idea of creating a single system owned by the airlines. The airline business, Ferris knew, was a game of controlling the passenger. These computers were unspeakably powerful—that much was already clear, even in the mid-1970s. If United could begin installing its own computer terminals in travel agencies, it could garner untold additional passengers. United, of course, would have to display all airline flights, not just its own, on the agents’ terminals; otherwise, the system would be of little value to the agents and their clients. But the presence of an Apollo terminal on their desktops was bound to put any travel agent in the habit of choosing United over its competitors.

Ferris and his aides spent
months studying the issues. We’ve got a competitive advantage, Ferris thought. Why throw it away so everyone else can benefit? Why, he wondered, should United play the patsy by shouldering the greatest cost of a solution that would benefit all of its competitors—including American? Finally, at a daylong meeting, Ferris decided to quit dilly-dallying with the rest of the industry. On January 28, 1976, United announced that it would not join in any collective efforts. Instead it would in the months ahead begin making its Apollo system widely available to travel agents.

Without the participation of America’s largest airline, the industrywide effort led by Bob Crandall was doomed. Now, it was every man for himself, a contest to see which airline could hard-wire its reservation system into the most travel agencies. Ferris and United Airlines had just launched history’s first computer war. The computer reservations network, the greatest back-office tool ever created by the airlines, was now a weapon as well.

Bob Crandall was furious that Ferris had foiled his plans, but he had been bracing for the outbreak of battle. Crandall had
ordered his field managers to listen for “competitive intelligence,” demanding that they pass along anything they might hear about what United was telling travel agents. Max Hopper, one of Crandall’s top data processing executives, had learned that
United was warning agents away from an industrywide system, vaguely promising that it would soon have something better to offer them. So while they were publicly promoting the industrywide alliance, Crandall and Hopper
were privately developing plan B, a strategy for having Sabre terminals, rather than a jointly owned system, installed in any travel agencies willing to pay for the equipment. The development costs would be huge, but Crandall would come up with the money somehow. This was the future. American, he believed, had no choice.

Shortly after Ferris had fired the first shot, Crandall flew to Dallas-Fort Worth Airport to address a meeting of American Airlines managers. “
Where do we go from here?” he asked. “There is only one place we can go, ladies and gentlemen, and that’s to battle.… American is going to fight on the agency automation front, and fight hard!”

While Ferris’s forces at United were just beginning to plan their effort, American dispatched a wave of salespeople to the agencies that gave it the greatest business. The smooth talkers in the sales force were joined by technical people—“guys in
short white socks,” as they became known inside the company. They opened up big notebooks showing that a travel agent working on a Sabre terminal could book
$800,000 worth of flights a year instead of $350,000 by flipping through the
OAG
and spending all day on the telephone to the airlines. American also paid consulting fees to a few of the country’s largest travel agencies, ostensibly for their ideas about what the system should do; the promise of fees assured that these agents would choose Sabre, helping to create a groundswell that discouraged other agents from signing with United’s Apollo.

On the rare occasions that United got the better of American,
Crandall blew his stack and demanded immediate countermeasures. At one point United obtained an exclusive software license from a Florida company for a series of bookkeeping and other programs that could be made available to travel agents over the Apollo network. Crandall ordered his people to jump on the next flight to Florida, where they arranged to buy the very company that had sold the software license to United. American gained the benefit not only of owning the technology but of employing all the people who had developed it.

Sabre was not only a way of making fees, of course, but also a distribution system for American’s own flights. Although agents could book flights on nearly any airline through Sabre, Crandall began
enticing agents to skew their bookings toward American with an addictive
new financial arrangement. The greater the dollar value of an agency’s business with American, the greater the percentage the agency received on the entire sum. The standard 5 percent commission might be increased to 6 percent, say, on ticket sales over $1 million, or 7 percent on sales over $3 million. (American could easily pay the higher rate, since each additional passenger put so much money on the bottom line.) The more American flights an agency booked through Sabre, the greater its incentive to buy still more flights on American.

Most agents did not, of course, choose less convenient flights for their customers for the sake of the bonus rate. But “override” commissions, as they became known, certainly created the incentive for an agent to resolve close calls in American’s favor. The whole matter, in any case, was considered highly sensitive. At an American Airlines management meeting, one of Crandall’s top sales executives remarked that the incentive programs were “
highly confidential” and that among the biggest and best travel agency accounts, “It takes constant attention, better cooperative programs, and in some cases a
big bag of money
to solidify and retain these relationships.”

United had no idea what hit it. Convinced that he had started out with an advantage over the rest of the industry, Ferris immediately found himself a distant second in the race to hard-wire the travel agents. American had coordinated its Sabre sales effort from the top; United had allowed regional managers to handle the sales efforts in their individual territories, and some had pushed much less aggressively than others. United had established a policy of signing up only financially healthy travel agencies; American took anybody who could pay the equipment rental. And when United caught wind of the special commission structure that American had introduced to Sabre subscribers, it judged the scheme to be
a questionable business practice. United then quickly adopted the same policy for itself.

The two remaining members of the Big Four, Eastern and TWA, would also push their in-house computer systems into travel agencies, but they would never overcome the early lead of American and United. Between the two leaders American remained way out in front. Even if American didn’t have the most planes in the industry, it had the most distributors.

• • •

Crandall’s moves as American’s marketing chief, though radical, did not test the limits of federal regulation. The steps he took to muscle in on the preferred listing positions in the flight guide, or even to create his massive electronic network, required either perfunctory approval by the CAB or no approval at all. It was in the far more critical areas of routes and rates that the CAB served as the airlines’ Big Brother.

One of the agency’s most persistent missions was to whack down the pesky breed of flying operation known as the charter airline. Charterers flew planes for hire, but they could not fly on a regularly scheduled basis; only the incumbent airlines with their congressional sinecure had that privilege. Once every decade or so, when the established airlines rushed out to buy the newest and biggest airplanes, another generation of charterers would spring up on the used airplanes that the majors were dumping. Offering deep discounts to the most popular tourist destinations (Las Vegas was always a leader), the charterers gave rank-and-file Americans the opportunity to taste what the established airlines priced for the well-heeled. The charterers could afford to offer such low rates not only because they flew inexpensive old aircraft, but because they scheduled only as many flights as they had sold all the seats for; a customer often had to purchase a seat weeks or months in advance. So long as the charterers functioned solely as a poor man’s airline industry, carrying passengers who would otherwise never fly, the CAB largely left them alone. But in each cycle of rebirth, it seemed, the charterers would get bigger and bigger, serving more destinations with more frequent service, ultimately stealing passengers from the half-empty planes of the major airlines. At that point the established airlines would cry, the CAB would lower the boom, and the charterers would go away.

To the dismay of Bob Crandall, yet another
generation of charter operators was cropping up in the mid-1970s as the major airlines cast off their first round of jets to make room for the jumbos and other second-generation jet planes. By all practice and tradition, the CAB had a duty to impose onerous new operating restrictions on these charterers as well. But there was a new chairman at the CAB, John Robson, a man with no background in the airline industry. He was a loose cannon; the CAB had even approved a 50-percent-off sale—“peanuts fares”—on a couple of Texas International’s routes. Instead
of slamming the charterers, Robson, unbelievably, had taken steps to
loosen
their operating restrictions.

As American’s marketing chief, Crandall was beside himself. American had planes sitting on the ground for lack of passengers, and the charterers were flying full. They were bleeding the leisure business from the airlines’ regular operations. The kind of simple, straight-off-the-top fare cut that Frank Lorenzo’s people had come up with was no solution for Crandall; American’s most important customers were business travelers, who did not care about price. There was no point in offering to fly business travelers for half off. Instead American and the other majors had gone to the hypocritical step of using some of their remaining excess airplanes to start their own advance-booking charter operations, engaging in the very practice of which they complained. But for Crandall, having an in-house charter operation was
no panacea either; American was soon losing charter business not only to the upstart operators but also to United Airlines, where Dick Ferris’s people had built up the biggest charter operation in the industry. United, in fact, was landing jet charters in Las Vegas every few hours.

Crandall finally decided that if Robson and the CAB would not crush the charterers—all of them—he would do the job himself.

Crandall had a kind of informal brain trust that gathered most mornings by 6
A.M.
, often long before sunrise in Manhattan, to talk through the major marketing issues facing the airline. On one such occasion, when the executives were discussing American’s own in-house charter operation, someone had doodled an airplane on a chalkboard. Crandall stared at the drawing. Why, he asked out loud, should American fly a separate charter airline when its regular flights were half empty? He went on: “Why don’t we
pretend the empty part of our plane is a charter?”

Someone walked up to the blackboard (it might have been Crandall, but no one would recall for sure) and drew a line through the airplane. Part of the airplane could be reserved for regular airline service, with traditional, last-minute reservations and the usual high fares. The rest of the airplane could be treated as a charter plane. American could estimate how many seats would be flying empty on any regularly scheduled flight and sell those seats at cheap charter rates—better still, sell them below charter rates, squeezing the other charterers out of business.

The idea of charging two prices on the same flight wasn’t by itself original. As early as the 1940s, with CAB approval, airlines began offering a few seats (at the front of the cabin, initially) at discounted “coach” prices; the remainder of the passengers flew first-class. Over the years the price spread widened, with the result that coach seats overwhelmed the cabin, squeezing first class into a small section at the front of the fuselage. By the time that most people were flying coach, there was no pretense that they were doing so at a discount; coach had become the standard fare, and a prohibitively expensive one at that. First class, at one time the standard product, had become a premium brand instead.

Crandall was not proposing to segment the plane into additional classes of service, but to discount—severely discount—a share of seats throughout the airplane. The great challenge, of course, was finding a way to sell the cheap seats only to discretionary, price-sensitive travelers—people who wouldn’t otherwise be flying—while holding as many full-price seats as possible in reserve for people who traveled no matter what. How, in other words, could the company enable the middle-class John Q. Public to fly on a low fare, while assuring that business travelers still paid the full freight?

Crandall’s group studied the problem and began coming up with answers. Vacationers, as the charterers had proved, usually made their plans weeks in advance; businesspeople didn’t. Moreover, vacationers (in those days) usually remained a week or longer at a destination; business travelers almost never did. American could require people traveling on discount tickets to buy their tickets weeks in advance and to remain a week or longer at their destinations, just as the charterers did.

Crandall turned his attention to an even more vexing question: How should the company decide how many discount seats to sell in advance? If it sold too many, it would risk shutting out full-fare business passengers making plans at the last minute. Yet if the airline cut off discount sales too early, planes would still be departing with empty seats—spoiled grapefruits. There were some obvious guidelines. On weekdays, in the early morning and late in the afternoon, it made sense to hold back a greater number of full-fare seats for the business traveler. But even this was pure guesswork; the mix of passengers was unique for every flight. The patterns were shaped by trade shows and industry conventions, by Super Bowls and weather
aberrations. Perfecting the estimations could add millions to American’s bottom line, but it would require data processing power on an almost unimaginable scale. While Crandall worked on the refinements, rudimentary guesses would have to suffice.