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Authors: Thomas Petzinger Jr.

Tags: #Business & Money, #Biography & History, #Company Profiles, #Economics, #Macroeconomics, #Engineering & Transportation, #Transportation, #Aviation, #Company Histories, #Professional & Technical

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BOOK: Hard Landing
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This polite reticence began to crack in Texas, not with the birth of Southwest but several years earlier. In 1965 Braniff Airways introduced a ritual called the “air strip,” in which stewardesses peeled away layers of their designer uniforms during the course of a flight, down to their blouses and skirts. (“Does your wife know you’re flying with us?” Braniff’s ads asked.) For the first time body language was an explicit part of airline marketing. By the early 1970s the sexual revolution was in full swing (with the feminist movement trailing slightly behind). Continental adopted the degrading motto, “We
really move our tails for you!” Perhaps most infamously, National Airlines launched its “Fly Me” campaign, as in “I’m Debbie! Fly me!”

Where sexiness in the seventies was concerned, however, nobody pushed it to the extreme of Southwest Airlines. The positioning of Southwest as the love airline was one of the most smashingly successful campaigns in airline history, even if almost no one outside Texas ever saw it. Sexiness got Southwest Airlines off the ground. But it would not keep it aloft forever.

After a year in business Southwest had still not established a ridership sufficient to sustain itself. When people phoned in reservations, there was no need to bother making a record of them. “Fine, sir,
we’ve got you down!” a passenger would be told, leaving him blissfully unaware that Southwest didn’t even have a reservations system. By mid-1972 Southwest was in financial jeopardy. There was no choice but to sell a plane. In a fleet of four jets, that meant a 25 percent reduction in capacity. That, in turn, meant layoffs. Or did it?

The employees of Southwest—many of them having been let go
by other airlines, all of them thoroughly steeped in the company’s early fight against the odds—were willing to do just about anything to avoid layoffs. Some of them went to management with an
extraordinary proposal: to maintain the existing four-airplane schedule with only three airplanes.

The company was incredulous. The only way to accomplish that would be to get the planes in the air after they’d been on the ground only 10 minutes—an unheard-of feat. Fine, some of the employees said. We’ll turn them around in 10 minutes.

Pilots and management supervisors were soon helping with baggage. Tickets were collected on board rather than at the gate. Each airplane was restocked with beer, booze, and soft drinks through the rear door while passengers were still deplaning through the front. Flight attendants worked their way to the front of the cabin as passengers exited the planes, picking up newspapers and crossing seat belts row by row, rather than waiting for ground handlers to come aboard. Once the last passenger had deplaned, the remaining flight attendants began performing the same tasks from front to back. “When they meet, they have time to
brush their hair,” a trade publication,
Aviation Week & Space Technology
, would incredulously report. And as the next cargo of passengers came aboard, they did so with no seat assignments, which meant that people simply stepped into one seat and then the next and then the next, in a nice, orderly, rapid sequence.

Everyone’s job had been saved. Braniff and Texas International watched in horror as Southwest gave birth to the airline industry’s first 10-minute turnaround.

Herb Kelleher was the master strategist of Southwest Airlines and continued to rank among its largest stockholders. He was also the courtroom tactician and the chief schmoozer with the political establishment. His legal assistant, Colleen Barrett, was immersed in critical personnel and administrative matters. Kelleher was a member of the board of directors. But Kelleher had no executive position with Southwest—no title, office, or salary. Even if Southwest was his principal client, Kelleher remained a lawyer in private practice.

The man hired actually to manage Southwest Airlines—someone who, it was hoped, actually knew something about running an airline—was
an irascible coot named
Lamar Muse. Muse had been given up by others as a has-been, but one with an extraordinary record to recommend him. He had spent the early postwar years at Trans-Texas, making it the most profitable local-service operator by means of an uncommon business strategy: negotiating fixed price rather than variable cost contracts from the Post Office Department, which meant that by flying the mail cheaper, he could swell his bottom line. This success won him a high-ranking executive job at American, but he had quit out of protest when the company added linen-and-china food service in its short hops along the East Coast (an amenity that was eventually scuttled because it exhausted the flight attendants). Muse ultimately wound up in Detroit at a cargo airline called Universal, where he introduced to the airline industry the practice of bringing everything into a single airport—a “hub”—and sending it back out to its ultimate destinations along “spokes.” Muse quit that airline too, because it insisted on ordering a Boeing 747, which he considered a costly frill.

Now, as the president of the marginal, newly founded Southwest, Lamar Muse was vitally concerned with cost and profitability. It
bothered him that in its three-cornered route system one of the company’s planes was flying empty each night back to the maintenance base in Dallas. Muse decided to offer seats aboard the late-night maintenance flight to the public. Having no idea what to charge for the flight, he settled on $10, a nice round number, about equal to the bus fare between the cities—an off-peak fare, one might say, well below the regular fare of $26.

Southwest purchased exactly one radio ad to promote the $10 flight. To everyone’s amazement, the departure gate was swamped with would-be passengers.

It was obvious that they weren’t the businesspeople to whom Southwest had been pitching itself. They were college kids, old folks, middle-class families—people who weren’t flying somewhere to spud an oil well or to sell a railcar full of industrial coatings. So Southwest decided to charge one fare during the day (a peak price) and a much reduced fare on every flight after business hours and on weekends.

Off-peak flights were soon jammed with new, first-time passengers; a state official in Texas would later comment that whenever he observed Southwest boarding a flight, he expected to see a “
chicken
coop on top of the airplane.” The combination of surging revenue and declining costs on the quick-turn, three-plane operation enabled Southwest to cut its regular daytime fares still further below the prices of the established carriers. Soon these flights too were performing well.

Braniff and Texas International were jolted into action. Having failed to kill Southwest in the courts, Braniff moved to snuff it out once and for all in the marketplace by offering a $13 fare on flights in the state—a 50 percent discount from Southwest’s daytime fare. So thinly capitalized a company as Southwest, Braniff reasoned, could never last long matching that fare.

Indeed it could not, but Kelleher and Muse resolved to see just how long they could last. Southwest’s ad agency rushed out a new series of ads that proclaimed, “No one’s going to shoot us out of the sky for a lousy thirteen bucks!”
In addition to matching the $13 price, Southwest offered an alternative: anyone choosing to travel at the full $26 fare would receive either an ice bucket or a free fifth of liquor. Since most business passengers were flying on expense accounts, they naturally chose the $26 flight and the free gift, and it was not usually the ice bucket they requested. For a time in 1973 Southwest was the largest
Chivas Regal distributor in Texas. Southwest had discovered another lesson in airline marketing: giving the expense-account customer something for free that he could take home instead of to the office—in short, a kickback—won his undying loyalty.

The combination of in-flight titillation, 10-minute turnarounds, off-peak pricing, and free bottles of booze had at last firmly established Southwest among the incumbent airlines. After the books had closed on 1973, Southwest actually had a profit; it totaled only a few hundred thousand dollars, but it was a profit. And soon the company was skimming those profits and plowing money back into Southwest Airlines stock for the benefit of employees. The industry’s
first employee-owned airline was born.

It was still only a Texas operation, for the CAB remained inalterably opposed to any new airlines in the interstate market. Just the same, Southwest’s influence would very quickly extend well past the boundaries of the Lone Star State, thanks, ironically, to Texas International—and thanks, above all, to a kid from New York named Frank Lorenzo.

• • •

Born May 19, 1940, the son of Spanish immigrants, Francisco Anthony Lorenzo grew up around his father’s
beauty parlor on Third Avenue just south of midtown Manhattan, one of the toughest places in the world to own a retail business. The family made its home in the Rego Park section of Queens, on the periphery of LaGuardia Airport, where American Airlines and Eastern Air Lines were landing their Douglas DC-3S and Lockheed Electras practically by the minute, even in the 1950s. Lorenzo loved airplanes and would hang pictures of them on the
walls of his bedroom. Yet even at a tender age Lorenzo had a peculiar ambition in aviation: he aspired to
own
airplanes every bit as much as to fly them. Taking a lesson from his father, who dabbled in the stock market, Lorenzo began
buying airline shares at age 15 after taking a flight to Europe with his parents. His first purchase was TWA, then controlled by a Lorenzo role model, Howard Hughes, one of the world’s richest men.

Sporting a perfect pompadour, Lorenzo wore a stern look for his photo in the 1958 yearbook at Forest Hills High School. He intended to become an engineer but abandoned the notion at Columbia University. Lorenzo had a glib, charming affect—
Frankie Smooth Talk, classmates called him. As a freshman he threw himself into campus politics, assuming a leadership position in a student government faction aligned with a group of
gentile fraternities. According to an account later published in the
Columbia Daily Spectator
, Lorenzo’s political organization was concerned it would get cheated out of votes in the sophomore class elections. To fight back, “They
discussed the possibility of voting twice.”

The group came up with a list of students who had dropped out but whose names had not yet been removed from the university enrollment lists. Lorenzo and his fellow conspirators could vote more than once using these names. As the campus paper reported it,

Frank Lorenzo was the first and only-one actually apprehended in the act of double-balloting.… At first he denied everything and … claimed that he had tried it as a “stunt” in order to test the Elections Commission and see if anyone could actually get away with voting twice.
His political cohorts at that time decided Lorenzo was on his own and that they would deny knowing anything about it.
Lorenzo soon cracked under the pressure of the Board’s questioning and admitted to voting twice.

Academically, however, Lorenzo performed well enough to go on to Harvard Business School, where he became vice president of the Finance Club and immersed himself in studies of the great wealth builders. He read
biographies of Andrew Carnegie, Averell Harriman, and other giants of fortune. And then it was back to New York for a real job, for a career in the industry with which he had developed a fascination by age 15. He accepted a position in the treasurer’s office at TWA.

But TWA was not to be Lorenzo’s final home. Before long he moved a few blocks to the New York headquarters of Eastern Air Lines, where he worked as a financial analyst. Eastern’s hold, too, was tenuous; Lorenzo wanted to find his own fortune instead of helping his bosses make theirs.

Bob Carney, a Harvard friend and classmate who was working in New York as an assistant to Siegmund Warburg, the great financier, agreed to strike out with Lorenzo. In August 1966 they each put $1,000 into
Lorenzo, Carney & Company. They resolved to act as consultants, as experts in aviation finance, with a specialty in assisting companies in troubled situations.

The partnership combined Carney’s golden contacts in the banking community and his gift for financial analysis with Lorenzo’s salesmanship and savoir faire. They began modestly, using the New York Public Library as their office, scouting amid the stacks for prospects who might need their combination of financial and airline expertise. Before long they landed a consulting contract at Zantop Air Transport, a cargo operation that ferried parts among the auto-making regions of the Great Lakes. They studied the finances of a publication called
Aviation Daily
, whose publisher gave Lorenzo a tremendous break by taking him as a guest to a meeting of the exclusive Conquistadores del Cielo, a club of industry leaders who got together periodically for fast-gun competitions, knife throwing, high-stakes gambling, and other such manly pursuits. Showing up at a Conquistadores meeting conferred legitimacy in the clubby world of commercial aviation. Lorenzo, it appeared, was on his way.

In the summer of 1969 Lorenzo
flew to New Orleans for a convention
of the nation’s local-service airlines hours after Hurricane Camille had devastated South Louisiana. Lorenzo had services to sell, and the delegates flying in for the meeting were among the ripest of his prospects.

A great bull market was under way on Wall Street, with airline stocks among the highest-flying performers. Like Lorenzo, the investment community had taken notice of the little regional airlines. By the late 1960s the local airlines needed vast sums of money to replace their aging war-surplus planes with jets. Wall Street was eager to assist with financial offerings and underwritings. Another young man from New York had therefore also braved the aftermath of the hurricane—Donald C. Burr, the chief stock picker at a mutual fund called National Aviation. Burr had lately pulled off some of the smartest guesses on Wall Street, making him a bona fide star of aviation finance.

The local-service operators enjoyed sumptuous feasts at their conventions, with the major vendors of airplanes, engines, and spare parts outdoing themselves to sponsor lavish bars and buffets. Burr was standing by a vast hors d’oeuvre table holding a drink when he was
approached by Bob Carney.

BOOK: Hard Landing
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