Hard Landing (56 page)

“Remember, Bob,” Kelleher said in a squeaky, accented voice, “size isn’t everything.”

CHAPTER 14

OPERATION STEALTHCO

F
or Dick Ferris even a
day of fishing provided an opportunity to compete.

When he and his friend Travis Reed climbed into a boat together during one of their summer sojourns in the West, Ferris kept score. If he found himself with fewer fish at the end of the day, Ferris pleaded to stay out, even if they had already pulled in dozens of fish, even when Reed complained that his arm was killing him. “
Being second is not something Ferris likes to do,” Reed would later comment.

In 1987 it was obvious that Bob Crandall would soon have more fish in his boat than Dick Ferris. Airplanes were coming into the American Airlines fleet at the rate of nearly two per week. More meaningful to both men was the fact that Crandall was being hailed as the indisputable leader of the airline industry. Even if American was still not the biggest airline, by many outward appearances it was the best managed. With his spanking new planes and enthusiastic young recruits, Crandall was fielding a crisp and fresh-looking airline, while Ferris had older planes and pilots who were bitterly divided against him.

To some of his associates Ferris seemed to be anguished less by the inevitability of Crandall’s ascent to number one than by Crandall’s success in conceiving and implementing ingenious new ideas.
Ferris once had been the industry’s leading young standout—a prodigy, president of the country’s biggest airline at 38—but that was 13 years ago. Now it was Crandall who was the industry’s most conspicuous leader of any age.

By 1987, however, Ferris was well on his way to completing a bold and imaginative strategy: his plan to build a three-sided travel empire around United Airlines. The idea of packaging plane trips, rental car contracts, and hotel stays into a single travel product terrified even
some of Crandall’s people in Dallas. With sufficiently aggressive management, they thought, the new United could overpower any of the marketing weapons American had yet conceived. Frequent-flier programs, the use of hubs to dominate geographic regions, sophisticated pricing—all could be crushed if Ferris began offering hotel discounts to lure airline customers, or first-class upgrades to entice rental car customers, or any such permutation.

The travel empire—it had become Dick Ferris’s dream and vision, his path to greatness. “I will go
to my grave,” he would comment years later, “convinced that it was right.”

But Travis Reed, for one, began to worry about Ferris’s relations with the United board. The bitterness of the strike and the restiveness of Wall Street exposed Ferris to intense pressure at a time when he was also committing billions of dollars in shareholders’ capital to his strategy. Over a
glass of gin one day Reed decided to have a heart-to-heart talk with his friend. “Dick, you’re doing some major things, and you’ve still got Eddie Carlson’s board. You better get a few loyalists on there who will punch somebody in the nose when it comes time.” Reed tried to be as explicit as he could. “You’ve got to get some buddies on the board, some guys who would go down with you.”

Ferris, however, had
no reason to doubt the loyalty of his board. His purchases of Hertz and Hilton were controversial, yes, but the board had unanimously—indeed, enthusiastically-backed each move. The confrontation with the pilots was hurtful and emotional, yes, but the board had been included in the process and, notwithstanding the lone dissent of director Wally Haas, had backed Ferris all the way. Ferris assured Reed he could handle his board.

Although Ferris was unaware of it, the fact was that some of the directors harbored great concerns.

Some felt that the presumptuousness Ferris had displayed three years earlier in his short-lived effort to buy the company through an LBO was only worsening. During one meeting Ferris informed the directors, “Now we’re going to
pass the dividend,” as if he were ordering them to pass the butter. Declaring a quarterly dividend, though often a formality, is a happy event for the shareholders of a company and a ritual that directors take very seriously. William M. Jenkins, a retired banker who held one of the long-standing Seattle seats on the United board, complained to Chuck Luce, the senior director, “Since
when does
management
pass the dividend?”

Then came the name game.

Shortly after the first of the year in 1987 Ferris informed his board that a new name would be established for the parent company. UAL, Inc., would no longer be UAL, Inc. A new corporate identity would help the company proclaim to the world that United wasn’t just United Airlines anymore, that it was a seamless travel experience consisting of great names in hotels, cars, and yes, an airline as well. But while they listened to the merits of adopting a new corporate identity, the directors were dismayed to realize that Ferris was
withholding the name itself, from his own board of directors. He said he could not reveal it so far in advance of the scheduled announcement date for security reasons! The board would eventually get briefed in advance, but only on the verge of the public announcement.

When the great day came, Ferris stepped behind a podium wearing a green tie—his
favorite color, the color of a putting green, the color, as it turned out, that had been chosen for the new corporate logo.
Linked by satellite from Australia to Hong Kong to Mexico City and points in between, the ladies and gentlemen of the press poised their pens and pencils on the surface of their notepads as Ferris said, “
It’s a name that you have not heard before, but most certainly will in the future …

“Allegis Corporation.”

Ferris’s design consultants explained that they had cobbled together
Allegis
from the root word for “allegiance” and from the Greek
aegis
, meaning protection. Never was a corporate name change so ridiculed, and among those who were already skeptical of Ferris’s strategy the stupidity of the name only reinforced their views. Donald Trump, cruising on a wave of borrowed money and
having just purchased a big chunk of UAL stock, said that Allegis sounded like “a world-class disease.” Just as the airline was planting the flag in the Far East on the old Pan Am routes, Asian people had a particularly difficult time with the word
(Arregis?)
. Employees of the airline itself began saying they were “allergic to Allegis.” The day the new name was announced, UAL shares sank like a stone; the following day as Ferris tried to explain his travel service strategy to analysts, the share price only sank further. In a 24-hour period UAL shares dropped $3 to $56.50, erasing $150 million from the company’s market value.

It was not the name change alone of course that accounted for the negativism on Wall Street. The continuing fare wars, particularly with Continental in Denver, were killing United’s earnings. In addition Ferris’s many and diverse travel companies were not yet producing huge dividends; there were not yet any synergies to speak of. Ferris warned Wall Street to be patient. It would be two years or so before all the pieces were in the right place, before the electronic “glue” of the Apollo system had cemented them. But two years was a long time to wait in the Roaring ’80s—a period of fabulous stock profits, the greatest bull market in history—and United, UAL, Allegis, whatever the hell it was, was a laggard in the estimation of Wall Street. Among investment professionals Allegis Corporation was soon known as
Egregious Corporation.

Wall Street did take note, however, that while Allegis did not exceed the sum of its parts, the parts themselves were performing beautifully. Dick Ferris had chosen his various businesses exceedingly well. He had bought Hertz and Hilton and had built up Westin at extremely favorable prices, and these assets had appreciated swiftly in the swelling economy. Far from solacing the traders on Wall Street, however, this fact only heightened their outrage. The individual pieces of Allegis, they realized, could be sold off piecemeal at tremendous profits. Allegis, it appeared, was worth more dead than alive.

As the computers on Wall Street calculated the soaring value of the pieces, savvy traders began snapping up shares at the parent company’s depressed price. As the buying spread, the price of Allegis shares began creeping higher, causing individual investors to bail out with their profits and the professional speculators and money funds to jump in.

The buy-and-hold crowd was giving way to the get-rich-quick crowd. And the United pilots were getting nervous.

Rick Dubinsky, the strike committee chairman in the 1985 pilots’ walkout, first discussed taking control of United Airlines over several
glasses of wine on the night he had been elected chairman of the pilots’ organization. The outgoing local chairman, Roger Hall, could see even through the alcohol haze that Dubinsky was instantly enthralled with the prospect. “He acted like a kid with a
new toy,” Hall would later remark.

Dubinsky immediately went into action. If the bitter strike had proved anything, in Dubinsky’s view, it was that airline pilots were nothing more than
hired help. “Airline pilots are simply a form of high-paid production workers,” he would later declare in a speech at Harvard. “We produce revenue-passenger miles instead of widgets, TV sets, or shoes.” Pilots, though long accustomed to thinking of themselves as “professionals,” were not in fact professionals at all by the standard definition, Dubinsky realized: a professional could go into business for himself, could hang out his own shingle. Airline pilots could do none of that.

As Dubinsky saw it, buying United was the only way for the pilots to take control of their destiny—the only way to get the company out of the hotel business and the rental car business and to start rebuilding the
airline
again. United was once a premier carrier, he thought; under Ferris it was fast becoming
an also-ran. The only strategy that made sense for the pilots was to bid for control of the entire airline; the
Eastern unions, among others, had provided a painfully instructive example when they traded away hard-fought wages for a minority interest and a few board seats, which proved meaningless. At other places the unions gave up concessions strictly to keep their jobs. “We will not
buy our jobs,” Dubinsky declared. Buying jobs was indentured servitude. Instead, he said, “we will buy the company.”

On a Saturday in April 1987, barely a month after Dick Ferris had rechristened the company as Allegis, some 40 United pilot leaders in civilian clothes arrived for a secret meeting at the Stouffer Hamilton Hotel in Itasca, Illinois, not far from O’Hare, where they voted to go forward with a project named
Operation Stealthco—a takeover offer for their airline.

Ferris was on a Learjet
flying to Des Moines the following day to give a speech as the newly appointed chairman of United Way when a call came from his office on the radio of the small jet. In his absence a
three-page letter had arrived from the Air Line Pilots Association. They were proposing to take over United Airlines, they said, because they were fearful that someone else would do it first—and because they were resentful that Ferris was turning their airline into a car and hotel company as well.

They were offering $4.5 billion. They had $300 million in pension fund money under their control—flash money. They would stretch their equity by exploiting the tax advantages available to employee-owned corporations. They would cut back their own wages, making the company more attractive to lenders. They had spent time on Wall Street. They had conferred with Boone Pickens. They had consultants on the payroll. They were sure they knew what they were doing.

Ferris ordered the Learjet turned around. Immediately he was on his way back to Chicago, where United’s head of flight operations prepared a telegram to the company’s pilots. “Events have started a
chain reaction,” the telegram warned, “that may be very difficult to control.”

On April 17, 1987, Dick Ferris began the day on a headline in
The Wall Street Journal
that defined the living nightmare of a corporate CEO: “Rising UAL Turmoil Threatens Ferris’s Job as the Chief Executive.”

“Even if the 50-year-old Mr. Ferris succeeds in fighting off the pilots,” the article said, “his job may be
in jeopardy, some people close to the UAL board suggest.” The directors, the article explained, were upset that United—the airline, not the holding company—was performing poorly. Even more surprising, the article said that the board was putting Ferris’s “whole business strategy under hasty review.”

Senior Director Charles
Luce was horrified. Although the article captured the sentiments that he and other United directors privately harbored, it was not the kind of publicity any of them wanted. The shareholders of United were now in a state of complete rebellion, Luce recognized, engulfing United in a three-way struggle for control among the management, the pilots, and Wall Street. Worse still, as the days wore on and as positions hardened among the combatants, a
community of interests had begun to emerge between Wall
Street and the pilots. Both groups more than ever wanted to see Allegis busted up, and increasingly Wall Street and the pilots were unified in their judgment that Dick Ferris was the principal obstacle to the fulfillment of their wishes.