The Great Airline War
Will IT’s “whiz kids” fizzle?! Will sexy Southwest conquer all?! Will Braniff lose its routes?!
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A very different question arises about relations between Southwest and Texas International. In Braniff the provocative element is the pointlessness of it all; Southwest was not going to put Braniff out of business. For Texas International, the dangers are not illusory. Braniff has treated Southwest with exceeding politeness, ever since word of an antitrust indictment was bruited about in legal circles. Although most of TI’s involvement in the antitrust mess took place before Lorenzo’s ascent, the new regime has gone after Southwest with renewed vigor in the last year, fighting prolonged and bitter legal battles. Through August, September, and much of October, lawyers for Southwest and TI slugged it out in an Austin courtroom, fighting over Southwest’s right to fly into the Rio Grande Valley, a fight emblematic of TI’s entire dilemma.
Southwest had first gone into Harlingen during the TI strike last winter. It might seem graceless of TI to protest this incursion while its own planes were grounded, but even before its strike was settled it took two quick steps. One was to file a suit asking that Southwest be removed from the Valley—or more formally, that the TAC’s decision granting it the route be reversed. The other was a filing with the CAB, asking that if Southwest stayed in Harlingen TI be allowed to move out. The hard fact is that TI can’t compete with Southwest; Southwest can offer lower fares out of the Valley, or anywhere else it flies.
There are several reasons for Southwest’s advantage. One is labor costs: Southwest, which is not only non-union but aggressively anti-union, still gives its employees the feelings of working in a family business, and thereby manages to shell out less hard cash. Its pilots, unlike TI’s, have not fallen into the clutches of the Air Line Pilots Association. Francisco Lorenzo says that the average pilot at TI makes close to $30,000; at Southwest, the figure is closer to $25,000. (Lamar Muse does claim, however, that his pilots will make as much as TI’s when they have accumulated the same amount of seniority. Twenty of Southwest’s 39 pilots have been hired since the beginning of 1974.) Another reason goes to the heart of the controversy between “regulated” and “non-regulated” carriers. Because Southwest doesn’t have to arrange elaborate reservations through other carriers, sell interline tickets, check baggage from one line to another, or do anything but get passengers from one city to another, it shrugs off much of the overhead which burdens down TI and the other CAB carriers. (“Say that these expenses came to five per cent of our costs, which is just a guess,” Lorenzo says. “When you consider that in the best years we’re just making a two or three per cent profit, the cost is significant.”) Finally, and what has the TI management most steamed up, is that Southwest is free to pay travel agents extra commissions without having the CAB breath down its neck. For all these reasons, TI must either push Southwest out of the market, or find a new reason to justify its own survival.
Francisco Lorenzo inherited this burden when he came to TI. The airline had already mastered one of the secrets of losing money—it served a network of tiny towns that never generated enough income to pay off, even with the government subsidies. Until 1966, when the line was bought by a group of investors from Minnesota, the situation had not been so bleak, and the Trans-Texas (as it was known until 1969) had earned steady, if modest, profits. But with the arrival of the Minnesotans, and the musical-chairs sequences of presidents who came in their wake, the airline did not see another profitable month. The figures were those usually associated with impending bankruptcy: TI lost more than $6 million in 1969, and even more that that the following year. By the end of 1971, it was $20 million in debt. The TI stock, which had sold for as much as 29¼ early in 1969, was selling for as little as 3½ by the end of 1971.
This may not be everyone’s idea of a dream business, but to Lorenzo it had its charms. While still in their mid-twenties, he and Robert Carney had put together Lorenzo-Carney Enterprises; a few years later they converted it to Jet Capital Inc., a financing company whose purpose was to serve, as they put it, as “a meaningful platform for successful participation in the exciting but beleaguered field of air transportation.” In other words, to buy their way onto a sinking ship, and hope to keep it afloat. They had made the try before, at Mohawk before it disappeared (by merger) into the maw of Allegheny, but with TI they had a much clearer shot. In April 1971, they became consultants to TI’s panicked management, earning $15,000 per month to help pull the airline out of its nose dive. One year later they were sitting at the controls, on the strength of a refinancing deal that temporarily pacified the creditors.
Even though TI was in trouble, others in the airline business had hoped to take it over and make it pay. There was, consequently, widespread incredulity about how Lorenzo and Carney finally won control. By lining up the refinancing for the $20-million debt—admittedly no small feat—Lorenzo and Carney took over TI on extremely attractive terms. For their part, the two men, through Jet Capital, put up $1,150,000 cash. Actually, since they had been paid some $180,000 in consulting fees over the previous months, and got a $60,000 “finders fee” for arranging the refinancing as well, the cash was easier to raise than it might otherwise have been. In return for their money, they got 59 per cent of the voting stock of the company. (The flier which went out to stockholders explaining the deal, 64 pages of small type and obscure accountants’ terms, dryly told the present stockholders that what used to be 100 per cent of the voting stock would not count for only 35 per cent.) They also received 2,040,000 shares of “series C” stock, convertible after a few years to 1,020,000 shares of TI common stock. Even at the greatly depressed market prices of TI right now, the stock alone is worth as much as Lorenzo and Carney paid for the airline. Lorenzo was also made of president of the company and Carney executive vice-president. One of the rival suitors for TI’s hand, Hughes Air West (run by Howard Hughes) in California, filed a statement with the CAB, saying that the deal was unfair. Lorenzo and Carney were getting too much, the Hughes men said, they were paying too little, and they had twisted the stockholders’ arms in a moment of duress. The protest was to no avail.
In Lorenzo and Carney’s defense it must be said that TI’s stockholders are better off as diluted owners of a going business than as full owners of a business in the bankruptcy courts, and that, once installed, the new managers did everything sensible and possible to get the airline back in business. They angled for the rich routes, most notably one between Houston and Mexico City, which has turned into a steady money maker; they have also improved service routes to Albuquerque, Denver, and other cities not in the Brownwood/Big Spring category. At the same time, they begged the CAB to let them out of service to some “marginal” cities, like Pine Bluff and Lufkin. (The normal process for terminating service owes a great deal to the railroad industry. To win a route-suspension case before the CAB, an airline usually has to demonstrate that there is no real demand for its services from the torpid small tow. There is no better way to dampen such demand than to schedule the required two-daily round trips for, say, five in the morning and ten at night, so that they become just as inconvenient for the passengers as the railroads became when they were trying to discourage all but the hardiest riders.) In 1973, Lorenzo and Carney saw TI make a modest profit of $319,000. The next year, the profit was $401,000. These sorts of figures would be laughed out of the boardroom if they were announced at Braniff, but they were a welcome relief for an airline that had, in its bleakest periods, been losing a million dollars a month.
But all of these well-intentioned efforts went to hell over Thanksgiving weekend of 1974, when the long siege of the TI strike began. The airline lost $3.2 million in the first half of 1975, and traffic depressed through most of the year. The strike also revealed the basic oil-and-water nature of TI’s management. Lorenzo and the earnest young people he has brought with him seem uniformly decent and capable, but there was something about their background that sat ill with the rest of the company. “You often get the feeling,” says a lawyer who has been close to the events, “that Frank and his people came down from Harvard, saw the TI employees driving pickup trucks with gun racks in the back, and thought to themselves, ‘We can handle these guys.’ There was never any kind of natural relationship between the handful of people at the top and everyone beneath them. You saw the results of the bitterness when it took four months to settle the strike.”
For their part, Lorenzo and his associates deny that there is anything like a class division at TI; they also deny that the strike had done any permanent damage to company morale. Lorenzo claims that the management had to weather the strike to keep the company afloat. “It’s the easiest thing in the world to avoid a strike,” he says. “All you have to do is give in. It’s harder to make the necessary judgment of what the company can sustain in the long run.” In this case, the “necessary judgment” was that the company needed to squeeze two concessions out of the union—the right to hire part-time employees (without laying off any of the permanent staff), and the right to let employees voluntarily work split shifts, at a premium in pay. “This is a business of peaks and valleys,” says James O’Donnell, the company’s young PR man who is now becoming one of its six regional managers. “At Lufkin, for example, you’ll have one flurry of business at eight in the morning, and another at five in the afternoon. If you can’t hire anybody to work part-time or on a split shift, you have to hire two full shifts and you’re going to go broke.” (On both these points, the union finally gave in.)
Time, the great arbiter, will give the final answer about TI’s wisdom in taking on the strike, and about class divisions within the airline as well. But one other problem spawned by the strike already has TI screaming. The strike let Southwest into the Valley.
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