Hard Landing (36 page)

Despite its palliative effect on morale, there were some grave problems with Acker’s strategy. As Bob Crandall had taught the industry a few years earlier, in the late 1970s, slashing prices was a worthwhile strategy so long as some seats were still sold at full price. The First Rule of Airline Economics demanded selling otherwise empty seats at any price—but not every seat on the airplane. Marginal pricing was a worthy strategy for the last seat sold but not for the first. Selling everything so cheap not only reduced the total revenue attainable for any flight but also debased the value of the product in the mind of the consuming public. Pan Am was flying more seats and taking in less per seat. It could not survive by cutting back limousines and Sky Club memberships. Something major had to give—and that meant asking employees to give back some of what they had won in the regulated era.

Acker did not have the time or the capital to cut average costs with b-scales, as American was doing. Nor was there time for an imaginative “variable earnings plan,” such as Borman had used successfully for so many years at Eastern. Pan Am, Acker resolved, had to whack hard immediately: 10 percent had to be cut from everyone’s wages, he determined, to avert Pan Am’s failure.

For the delicate job of negotiating with the unions, Acker chose Marty Shugrue. Shugrue already had plenty of experience dealing with organized labor at Pan Am, which was no mean task. Pan Am’s workers had never been the highest paid, thanks to Juan Trippe’s view that working for such an institution was reward in itself. As a consequence Pan Am became the most
heavily unionized airline in America. Even the secretaries were members of the Teamsters. Featherbedding was legion. Because only Teamsters could
operate
forklifts and only members of the Transport Workers Union could operate belt loaders, the act of horizontally removing an aircraft part from an overhead shelf and then vertically lowering it to the ground required two people and two machines. The merger with National Airlines only heaped on a new layer of work-rule complexity.

If anybody could go to the unions for concessions and come out alive, however, it was Shugrue. He was the son of a union beat cop in Providence, Rhode Island, and had been a Pan Am union member himself in his flying days. He was still on drinking terms with some of the most powerful labor leaders in the industry; one, the head of the Transport Workers Union, was a
close family friend.

Ten percent, Shugrue begged—a 10 percent cut to save Pan Am. The unions answered that they would rather strike.

Shugrue knew a strike would be curtains. Although Pan Am would save on fuel and salaries in a strike, there would be no relief on the interest expense. If a strike shut down the company, Shugrue knew, Pan Am would be dead in a matter of days.

The unions finally said they would come to terms—on one big condition. Pan Am had to promise to restore the 10 percent cut by the first day of 1985, now less than three years away, with no bargaining required. An automatic “snapback” would have to occur.

Acker and his aides were in a
serious bind. Would the fare wars abate within three years? Who could tell? But it was clear that the next three years promised no relief from upstart airlines, particularly on Pan Am’s price-sensitive leisure routes. Acker and Shugrue knew there was no way the company could reasonably hope to restore those pay cuts three years out. Yet Pan Am needed the 10 percent concessions now in order to survive.

Shugrue felt as if he had a gun to his head, so he did what any desperate person does. He lied.

Snapback? Sure, he told the unions. Absolutely. It’s in the bag.

With the concessions in place Acker went back to the things he loved: cutting fares, adding new destinations, and acquiring airplanes. The snapbacks were a couple of long years away. He would worry about them then, he decided—unaware that a violent conflict elsewhere in the industry would by then reach Pan Am’s doorstep as well.

CHAPTER 9

CONTINENTAL DIVIDE

F
rank Lorenzo was a restless man. He
imagined himself a builder, a creator, perhaps to airlines what Carnegie was to steel or Rockefeller to oil. By the early 1980s he had, in fact, come much further than anyone would have expected of someone growing up the child of Spanish immigrants in Queens. He had taken control of Texas International and had more than tripled its size. He had created New York Air; though struggling for landing slots and pushed to the bottom of the screen on American’s Sabre network, New York Air was still flying and still stealing passengers. Lorenzo had established a new holding company, Texas Air, which was flush with the winnings from his takeover attempt against National Airlines.

Yet all he had built was still no empire by airline standards. Texas International, for all its growth, had risen from the 19th largest airline in the industry only to the 15th. New York Air was a savvy niche operator but no powerhouse. Altogether Lorenzo had a measly 37 jets. He was still the ham in somebody else’s sandwich. It was time again to go shopping for an airline. The target this time was Continental Airlines.

Lorenzo had approached Continental previously only to get the cold shoulder from the aging founder, Bob Six. This time Lorenzo would not give him such an opportunity. This time Lorenzo would
go into the open market and simply buy a chunk of Continental’s stock, then get a tender offer rolling. Although he’d be able to buy virtually every share in the company, Lorenzo resolved to limit his ownership to just under
51 percent, enough to give him control of the entire company. On February 6, 1981, he stepped into the open market and purchased nearly a million of Continental’s shares. Then he
called Bob Six.

Once again the legendary Six, semiretired now, sent Lorenzo packing. Lorenzo, he said, should be talking to the newly appointed president of Continental Airlines, a man whose name made him appear destined for success in aviation: Alvin Lindbergh Feldman.

Though born in the year of Lindbergh’s Paris flight, Al Feldman did not make airlines or flying his first choice in careers.
Feldman was an engineer from Akron, a whiz kid who worked for Aerojet General Corporation, a subsidiary of General Tire & Rubber Company, whose controlling shareholders in turn had long held a major interest in Denver-based Frontier Airlines. One of the many local-service operators that had sprung up after World War II, Frontier served dozens of small communities smack in the middle of the Middle West from Denver Stapleton Airport; it had been slowly slipping for years. Aerojet General had finally dispatched Feldman to Denver in 1971 with orders to liquidate the airline. Feldman, however, quickly grew smitten with the airline business and asked for the chance to resuscitate Frontier instead. His bosses back in Akron agreed.

Feldman stepped up passenger amenities (including smoked almonds, which caused people to order more drinks) and rebuilt Frontier around a hub system. He also inspired Frontier’s employees to greater heights of performance with a mixture of aggression, bluntness, and sincerity. Feldman hung an ugly picture of a
purple vulture in the company’s boardroom bearing the inscription, “Don’t just sit there—go kill something!” He structured the company so that every employee was involved in either sales or operations, explaining, “If you’re not doing one, you must be doing the other.” Under Feldman, Frontier was one of the nation’s most consistently profitable airlines.

When he jumped to Continental in 1980 to assume the management chores from Bob Six, Feldman
threw himself into his work, all the more so after his wife died of cancer. Fifty-two years old, six foot
three, handsomely graying at the temples, he remained at his desk during lunch, eating a coach-class meal prepared on the Continental flightline. Feldman, thoroughly absorbed, was in love with Continental Airlines.

But Lorenzo’s maneuvers, it would appear, were about to take the company away from Al Feldman. The tender offer was like a magnet around iron filings: within days Lorenzo owned 48.5 percent of Continental’s stock, with money he borrowed in part by pledging Continental’s airplanes as collateral. Al Feldman observed dejectedly, “It’s the
first time in my life I’ve ever lost.”

Noted for the Frontier turnaround and for a noteworthy if brief tenure at Continental, Feldman suddenly became the
hottest free agent around. Marvin Davis, having recently acquired Twentieth Century-Fox, discussed bringing him aboard as chief executive. The directors of Pan Am were looking for a new chief executive officer (to fill the job ultimately given to Ed Acker) and asked Feldman if he would be interested.

Feldman, however, soon had reason to say no to his suitors: the employees of Continental had come forward with a plan to mount a rival takeover attempt, with Feldman as their leader.

Continental’s employees were wearing lapel buttons that said,
FRANK WHO
?, but in fact they knew only too well. Lorenzo had been vilified in the union campaign against the creation of New York Air. It was also common knowledge to union people that Lorenzo in his early days at Texas International had taken one of the longest strikes in airline history. Ominously, Lorenzo had filed a legal statement in connection with the proposed takeover saying that if he established control of Continental, “it will be
necessary to renegotiate existing collective bargaining agreements.” By this time “renegotiate” was an often-used word in the Lorenzo lexicon—a word whose first five letters made it a cousin of the less dignified “renege.” The employees of Continental were beside themselves at the idea. They had
contracts
, after all.

A group of Continental pilots came up with the ingenious idea of using an employee stock ownership plan, or ESOP, to block Lorenzo. Continental would issue enough new shares to the employees’ group to dilute Lorenzo’s position safely below the level of control. The employees began to search for financing, while Feldman
penned a letter to Lorenzo. “I
must tell you,” Feldman wrote, “that each day more of our employees come forward to manifest their resolve to reject your bid for control of Continental. They are determined to oppose you with every means at their disposal. In the face of their determination, it may not be possible to merge our two airlines.”

Together, Feldman thought, he and the employees of Continental just might have a chance of beating Lorenzo.

Lorenzo was bothered by the
FRANK WHO
? buttons. “When you own 48.5 percent of a company, it means certain things,” he said. “It means you get certain rights.” He was offended to see Continental employees turn “goggle-eyed,” as he put it, when he stepped on a Continental flight. “Listen, I’ve checked my horns with my luggage,” he told them.

Lorenzo needed a point man to carry out his takeover moves, and the assignment went to Phil Bakes. Once more Bakes assumed his crusade mind-set, just as when he had campaigned for deregulation or had lobbied for the slots with which to launch New York Air. To Bakes victory was all the more important because Lorenzo had given him so much responsibility and authority in the wake of Don Burr’s resignation. Bakes resolved to
prove himself worthy of Lorenzo’s trust.

Bakes’s opportunity came when Continental’s annual shareholders meeting occurred in the midst of the takeover battle. As Bakes entered the ballroom in Denver’s fabulous Brown Palace Hotel, a throng of
angry Continental employees was noisily demonstrating with picket signs: “Don’t bank on Frank.… You can’t buy pride for peanuts.” The throng marched into the ballroom, many in their flight uniforms, looking like the military, and Bakes was suddenly
filled with dread. He was the personal embodiment of the enemy that had brought these hundreds of people together. It was a mob scene. What if they lose control? he wondered.

Feldman, who was chairing the meeting, knew that he had to give Bakes the opportunity to speak. Bakes, after all, was carrying proxies for as many shares as everyone else in the room put together. Bakes stifled his fear, rose, and asked to be recognized.

“I am the
authorized representative of Texas International Airlines,”
he declared. Bakes then placed a motion on the floor to block the employee takeover.

Silently the crowd around him looked on with contempt. “Thank you, Mr. Bakes,” Feldman said evenly. “The chair rules your motion out of order.” A thunderous, jeering ovation went up from the crowd.

Bakes stood stoically. “Mr. Chairman, I move to appeal the ruling …”

“The chair’s rulings are not appealable.”

Bakes vainly invoked
Roberts Rules of Order
. “Point of order …”

“The chair’s rulings are not appealable.”

After further fruitless protests Bakes finally sat down.

Up to the microphone went a short, beefy man with a mustache. It was Dennis Higgins, who had been a pilot for Texas International since the time it was flying DC-3S as Trans-Texas. Higgins had no standing to speak at the meeting—this was a Continental shareholders’ meeting, and he made no claim to owning any Continental shares—but the fix was in, and Higgins was warmly received by the partisan, anti-Lorenzo crowd. After introducing himself, Higgins put on his glasses and read his speech, written out on a single sheet of paper.