Hard Landing (37 page)

We, the pilots of Texas International, have come to this meeting at personal risk to tell you some hard truths about dealing with Frank Lorenzo. The truth is this: Mr. Lorenzo
is
a brilliant man, perhaps a market manipulator without peer. We are here, however, to tell you that he is also a man who has done nothing to show that he cares one whit for the 3,400 Texas International employees who work for him. An airline is a service business, only as good as the people who make the service work.… We are compelled to report that Mr. Lorenzo’s current employees are a dispirited group.

When, mercifully for Bakes, the meeting ended, he was
thronged by microphones and television cameras. Once the interviewing ordeal was over, he approached Continental founder Bob Six, who had been seated in the ballroom with his wife, Audrey Meadows. Bakes simply wanted to shake Six’s hand. Six, though gruff, was not ungentlemanly. His actress wife, however, cast a
chilling glare at Bakes through the entire encounter.

• • •

Lorenzo and Bakes were much more worried than they could publicly let on. If successful, the takeover by Continental employees would be a showstopper for Texas Air. If Texas Air acquired more shares on the open market, Continental could simply create additional shares in itself and sell them to employees, diluting Lorenzo to a level below majority control. Texas Air had about $100 million already invested in Continental stock. If the employee buyout went through, Texas Air would be a minority shareholder in a company that was majority-controlled by employees who were openly hostile to Frank Lorenzo.

Then, when Lorenzo and Bakes least expected it, victory came from Continental’s own home state of California. The state’s chief securities regulator ruled that Continental could not issue millions of new shares to employees without the approval of all
existing
shareholders. Texas Air controlled virtually half of all existing shares and could doubtless get the few additional shares necessary to checkmate the plan. Al Feldman and the employees were doomed unless they could get the California legislature to override the state securities commissioner.

Bakes flew to Sacramento and swung into action. He thought he had seen it all in politics—the lobbying, the logrolling, the trade-offs, the quid pro quos—but he had never seen anything like this. “It
made you feel dirty,” he later explained. Someone representing a state assemblyman came to Bakes’s hotel room and requested stock options in exchange for his vote. “
Get the fuck out of here,” Bakes said. In this sea of influence peddling Bakes tapped one of his old Kennedy connections, getting an assemblywoman named Maxine Waters (later to become a leading member of the U.S. House of Representatives) to give an impassioned floor speech against the employee takeover effort.

Bakes’s campaign succeeded. The measure to override the state securities commissioner died. Continental, it appeared, was nearly in the bag.

Then late one night in Washington about two weeks later an associate in one of Lorenzo’s law firms was hanging
around the Senate chambers as Congress debated President Reagan’s massive tax-cut legislation. Standing in a hallway, the young lawyer overheard someone
say that Sen. Dennis DeConcini of Arizona had discreetly slipped a rider into the Reagan tax bill that would allow the Continental ESOP to go forward. Senator DeConcini, it turned out, had a
brother-in-law who was a Continental pilot.

Bakes returned to action, only this time on the familiar turf of Capitol Hill. The employee takeover had become a cause célèbre, and Bakes faced an even greater battle than that in California two weeks earlier. Capitol Hill was teeming with uniformed Continental pilots promoting the virtues of employee ownership and the evils of Frank Lorenzo, adding to the lobbying confusion surrounding the major tax bill.

Both sides zeroed in on the House and Senate members serving on the conference committee pounding the final tax bill into shape, but the most important target was Dan Rostenkowski. The chairman of the House Ways and Means Committee, Rostenkowski was also heading the conference committee, as befitted him on a major piece of tax legislation. Lorenzo, having hired the Washington law firm of Robert Strauss, the former Democratic Party chairman, was one of the few people who got in to
see Rostenkowski. Lorenzo was also seen huddling in the Senate cafeteria
with Sen. Lloyd Bentsen (later to become treasury secretary under President Clinton), causing the pilots’ hearts to sink.

All day and night it went on. At 2:30
A.M.
on the final night, outside the conference committee room,
Bakes and Lorenzo collapsed next to each other at the bottom of a marble staircase. They would know shortly whether they had blown $100 million or were on the verge of finally bringing off the first hostile takeover of an airline in modern times. They were frightened. They locked gazes. Bakes had never felt closer to Lorenzo.

About a half hour later it was over. The DeConcini rider was defeated: Texas Air had won again. Although it was theoretically still possible for the employees’ buyout to succeed so long as the financing remained in place, Lorenzo and Bakes had the upper hand now.

Al Feldman was part of a small group of high-level executives and professionals who enjoyed
adventurous two-week vacations with their families out west each summer, often at a remote and exclusive fishing camp in Idaho. The vacationers were Feldman’s dearest
friends. One was Dick Ferris, the president of United, who had grown close to Feldman as they battled jointly in favor of airline deregulation. Another was Travis Reed, an aircraft broker and deal maker who had served as undersecretary of commerce in the Ford administration. Both Feldman, newly widowed, and Reed, then unmarried, were living in Los Angeles; they began spending many of their evenings together.

Over dinner, night after night, Feldman told Travis Reed how much he disliked Lorenzo and his tactics and how desperately he wanted to save Continental. “He was emotionally
100 percent immersed in it,” Reed would recall years later. “It was a battle to the death.” As the battle dragged on, Reed watched Feldman go from his usual two drinks or so to five—“
big drinks,” as Reed would later describe them. Feldman became obsessed with fending off Lorenzo. But strangely, in the period when the employee takeover received its devastating setbacks in Sacramento and Washington, Reed observed a conspicuous change in Feldman’s attitude. His intensity had diminished. His anxiety had melted away.

Then President Reagan fired the air traffic controllers. Four days later, a Sunday, while everyone else in the airline industry scrambled over their flight cutbacks, more bad news arrived at Continental headquarters. The
nine banks that had agreed to finance the employee takeover were withdrawing their commitment. The airline industry, the banks said, was in too much turmoil.

A group of employee leaders met with Feldman in his office. They were planning a trip to Sacramento—one last-ditch effort to lobby for reversal of the fatal ruling by the securities commission a few weeks earlier. Feldman told the takeover leaders not to bother; all hope was lost. The employees decided to go anyway.

Feldman reviewed a press release announcing the collapse of the financing. He then left his office, only to return later that evening carrying a package. Shortly
before 6
P.M.
a security guard stepped into Feldman’s office, asking how long he planned to work. “A few hours,” Feldman answered.

Phil Bakes decided that if the Continental employees were going to drag him back to Sacramento for one more round, then Frank Lorenzo could show up this time. Although
Lorenzo had joined in
the lobbying in Washington, he had resisted participating in the nastier and much lengthier legislative battle in California. Bakes felt strongly that Lorenzo needed to appear at a press conference in the California capital. Continental was headquartered in Los Angeles, after all. Lorenzo’s name had achieved too much prominence for him to miss out on this, the last political skirmish in the long battle to vanquish the employee takeover. Lorenzo flew into Sacramento late on the same Sunday that the employees’ financing had fallen through.

The next morning Bakes arrived
first for breakfast and sat down to await Lorenzo. A group of the Continental pilots, making the trip from Los Angeles over the discouragement of Al Feldman, were having a breakfast meeting in the same hotel. One of the pilot leaders approached Bakes with a look of devastation on his face.

“
I’ve just gotten word,” he told Bakes earnestly. “Al Feldman has killed himself.”

Bakes stood in disbelief.

The other members of the Continental group were filing in from their conference room. Another one of the pilot leaders saw Bakes. He thrust his finger in the air.

“
You killed him!” the pilot cried. “You killed him!”

Bakes was still in a state of shock when Lorenzo arrived for breakfast a moment later.

“Frank,” Bakes said. “Al Feldman’s dead. He killed himself.”

Bakes watched the
color vanish from Lorenzo’s face. Lorenzo, it suddenly appeared, was losing his breath. He had to sit down. Then “Frank was on the
next plane out of Sacramento,” Bakes would later say.

Alvin Lindbergh Feldman had shot himself with a Smith & Wesson .38 special purchased two weeks earlier, on the same night that his friend Travis Reed had noticed an easing of his countenance. Feldman had not been able to pick up the gun until California’s 14-day waiting period had lapsed. According to the coroner’s report, Feldman had been “
despondent since the death of his wife” and “concerned over attempts by Texas International to take over Continental.”

Al Feldman was buried near San Diego, with the members of his summer fishing group serving among his pallbearers. As they carried
the remains of their friend, Travis Reed heard an anguished cry behind him. He turned to see Dick Ferris of United Airlines striking the top of the casket with a fist, tears streaming down his cheeks. “Damn you, Al!” Ferris cried. “
Why did you have to do this?”

In all the attention that Feldman’s death received, few were aware that the former head of Mohawk Airlines had likewise taken his own life nearly a decade earlier, also in the midst of a takeover encounter with Francisco Lorenzo.

Lorenzo had purchased just enough stock, 50.9 percent, to assume majority control of Continental. He named himself and two others to the company’s board of directors. One was Phil Bakes. The other was John Robson, who, as CAB chairman, had played such a prominent role in bringing Lorenzo’s peanuts fares to fruition. With Alfred Kahn also sitting on the board of New York Air, Lorenzo now counted two former CAB chairmen among his trophies.

The Texas Air representatives attended
their first meeting of the Continental board in December 1981, giving Lorenzo his first opportunity to look closely under the hood of the company he had acquired. The senior managers of Continental, still shell-shocked from the takeover fight, conducted a presentation. Continental, they projected, would lose $60 million in 1982—twice the loss Lorenzo had expected. It got worse: Continental, it turned out, was in imminent jeopardy of defaulting on its borrowing agreements. Amid the distraction and expense of the takeover battle, it appeared, all financial discipline had been lost.

At one point during the meeting John Robson observed that there was no cash flow forecast, a projection commonly shared with directors. Robson, however, could piece together the data from the other reports the directors had before them. “
Judging from these projections,” Robson finally said, “the company is running out of cash.”

“Yes,” one of the Continental executives answered matter-of-factly. “The company will probably be out of cash in February.” That was two months away.

It was time, as Bakes would later recall, to go into “action mode.”
Fifteen percent of Continental’s workforce was fired. A banking group was told that they would have to relax their repayment terms. Unions were called to emergency meetings and were informed that
they would have to make concessions quickly; though the machinists and flight attendants balked, the most costly employees—the pilots—agreed to fly more hours and
give up $90 million in wages they had already been promised over the following two years.

In addition to retreating on Continental’s labor contracts, Lorenzo began to back away from some of the explicit promises made in the heat of the takeover battle. He had, for instance, assured Continental employees that their operations would not be dissolved into Texas International’s. He put the same promise in writing in a letter to a member of the California Assembly: “
The fact is,” Lorenzo had written, “we do not even intend to merge the two companies, but rather plan to operate Continental as a separate airline.” Now that he controlled the company, Lorenzo ordered it enmeshed with Texas International after all, causing still more layoffs.

Lorenzo knew he had a good reason to risk the dangers inherent in the merger of any two airlines, a reason he often described with the phrase “critical mass.” An airline didn’t necessarily have to be big in overall terms (although that had its virtues), but it had to be big in its principal operating locations. It was on the same principle that Bob Crandall had pulled airplanes out of the Northeast to concentrate them in Dallas, where the Sabre computer system was directing more and more passengers into American’s planes.
Lorenzo was eager to pull Texas International’s planes
out
of Dallas, where they stood in Crandall’s path, and concentrate them elsewhere—namely Houston and Denver.

The entire fleet was painted in Continental’s trademark white, eradicating the identity of Texas International Airlines forever. Lorenzo now commanded the nation’s seventh largest domestic airline, behind only the Big Four, Delta, and Northwest. As ingeniously as he had financed and assembled it, actually operating it exceeded Lorenzo’s ken. He needed to find a new president; Crandall had already turned him down.

It was the moment Phil Bakes had been waiting for. In his two years with Lorenzo, Bakes had procured the landing slots with which to establish New York Air and had succeeded in bringing the seizure of Continental to closure. Now 36 years old, Bakes thought he at last had an opportunity to run something.