Hard Landing (63 page)

Reneging was such a routine of business with Lorenzo that when a middle-level executive once complained that Continental was failing to fulfill his employment contract, Lorenzo was quick to suggest a recourse: “
If I were you,” Lorenzo said with a straight face, “I’d probably sue me.”

The pattern of reneging and re-trading was nowhere more obvious—or more excruciatingly documented—than in the New York bankruptcy proceedings of Eastern Air Lines. By the spring of 1990, a year into the proceedings, Texas Air had offered
five separate repayment schemes, only to retreat from each and substitute a cheaper plan. A creditors’ committee told the court it would “
no longer tolerate Eastern’s and Texas Air’s inability to adhere to an agreement.”

Amid the tussling over the terms of repayment, an independent Washington lawyer named David I. Shapiro had been investigating as a court-appointed examiner the financial affairs of Texas Air. Shapiro reconstructed the flow of funds in all directions through the Texas Air empire and determined that the parent company had
plundered Eastern of as much as $403 million—funds in which other parties had a lawful interest, even if Eastern was Lorenzo’s subsidiary.

The creditors demanded Lorenzo’s head. Transactions so “
smacking of fraud,” they told the court, plainly justified throwing Lorenzo out. A hearing on the creditors’ motion was held on April 18, 1990. Shapiro offered high marks to some of Lorenzo’s line managers. “They, and particularly Mr. Bakes, have done an
outstanding job in the face of impossible odds,” Shapiro told the court. But he also said,

The issue in reality—and I say this more in sadness than in anything else—is really Mr. Lorenzo. Can anyone blame the creditors for being outraged? I think this court knows from what it’s seen, and I know from what I have seen, that Mr. Lorenzo only starts negotiating at the very last minute … and once he makes a deal … he tries to renegotiate it.… He is just a tough guy to make a deal with.

After hearing the testimony and taking a 90-minute recess, Judge Burton Lifland climbed back to his bench at about 10
P.M.
“The time has come,” he declared, “to replace the pilot to captain Eastern’s crew.” Lorenzo was not fit to run Eastern. He was being thrown out “for cause,” the judge said, “including incompetence.” The judge noted that in the course of trying to reorganize Eastern, Lorenzo had
burned up $1.2 billion that otherwise could have gone to the company’s creditors, including its employees.

Lorenzo had stuck Bakes with the duty of remaining in the courtroom to hear the ruling. As the hearing broke up, Bakes and the Texas Air lawyers made their way uptown to the masculine, green-and-brass bastion of Smith & Wollensky steak house. Bakes called Lorenzo from a
pay phone there. He found Lorenzo in bed and shared the news that they had been jettisoned from Eastern.

“Well,” Lorenzo said to Bakes, “I guess it’s not a surprise.”

Bakes rejoined his party, and abandoning his compulsive attention not only to costs but to diet, ordered a New York strip steak, baked potato with sour cream, bleu cheese dressing for his salad, and a $100 bottle of Bordeaux, the last meal he ever charged on his Eastern Air Lines credit card.

Though it had outlasted Eastern, Continental was also in deep trouble, still suffering from the trauma of its amalgamation with People Express. In the late 1980s the growth in U.S. air travel had slowed while international travel surged, and Continental, still principally a domestic airline, bore much of the brunt of the slowdown as marginal passengers elected not to fly. Texas Air was faltering as well. Its debt burden now exceeded the entire output of goods and services of many Third World nations.

On the morning of August 9, 1990, the airline industry awoke to a stunning headline on the front page of
The Wall Street Journal:
“Bailing Out: Lorenzo Plans to Sell Continental Air Stake To Scandinavian Air.”

The buyer was Jan Carlzon, the visionary leader of Scandinavian Airlines System, who was intent on
establishing a foothold in the
U.S. market. Lorenzo agreed to sell the entire interest in Texas Air held by Jet Capital. The price paid by SAS to Lorenzo’s personal holding company was $14 a share—more than three times the current market price of $4.50 a share. All told, Lorenzo wound up walking away with $30.5 million—a fraction of the $250 million that some of his aides had
once reckoned his holdings to total, but a handy sum for a company verging on failure. On his way out Lorenzo had greenmailed his own company.

Four months after Lorenzo had safely gotten his money out,
Texas Air joined Continental and Eastern in the bankruptcy hall of fame. Lorenzo had a hat trick. Everything had failed.

Bob Crandall rapidly filled the void left by Eastern in Miami. Before long American would control 85 percent of the airline seats going in and out of the vital gateway. Having so many seats at a single airport, as he once explained to a meeting of his pilots, gave Crandall control not only over the local aviation market but over the community’s travel agents as well. “
We can say to them, ‘We need all your high-fare traffic. And if you don’t give us your high-fare traffic, you don’t get any seats at Christmastime. And you have to have seats from me at Christmastime, because
I
have 85 percent of the seats here in Miami!’

“That,” Crandall went on, “is the way this game is played. This is a nasty, rotten business, and we’ve got to play to win.”

CHAPTER 16

“TO FLY, TO SERVE”

T
he self-destruction of Continental Airlines vividly revealed a principle as old as passenger flight itself: people will tolerate many sacrifices to fly, but they will not tolerate surprise. They may sit with their knees to their chest for a low fare, but they will not stand for a lost bag. They may spend all night in the boarding area waiting to clear a standby list, but they will display no patience for a 30-minute rain delay. Predictability—the fulfillment of expectations—is the most important factor in whether an airplane flight is a pleasantly efficient experience or one of modern life’s worst travails.

This principle is doubly important on international flights. They are longer, more costly, and generally involve less tolerant categories of humanity: business executives and tourists with money. Moreover, most transcontinental flights occur over water, great distances from the safe harbor of an airport, heightening at least slightly the anxiety of every passenger.

But over the Atlantic, on the world’s busiest international routes, the airlines of the United States and Europe allowed their standards of excellence and uniformity to slip badly in the 1970s and early 1980s. Preoccupied with mergers, fare wars, and financial pressures, the three leading carriers—Pan Am, TWA, and British Airways—allowed their punctuality, their counter service, and their in-flight
product to lapse. Though some of the small European airlines were noted for outstanding service (Swissair, for instance), transatlantic travel had been reduced nearly to the commodity status of a discount flight to Florida.

The problem was most evident at British Airways, an airline established under the name Imperial Airways on a route to Paris in 1924. Imperial, a state-owned enterprise with a charter to replicate by air the empire that Britain had once conquered by sea, reached India in 1929 and South Africa two years later. Even after evolving into British Overseas Air Corporation in 1939, the culture of the company
remained decidedly imperial. At BOAC airplanes were said to take “voyages,” not “flights.” The pilots wore greatcoats, silk scarves, monocles, and kid gloves. Anyone so familiar as to address a crew member by his first name was rebuked: “This is an aircraft, not a barge!”

Passenger service, however, was always closer to barge standards. BOAC was operated like a railroad, for the sake of a schedule. Departure times were chosen for anything but the convenience of the passenger. The company was managed by engineers, not marketers. Its poor service became legendary even in popular culture when the Beatles detailed a horrific BOAC flight to Miami Beach in “Back in the U.S.S.R.”

Anyone who thought the service couldn’t get worse quickly learned otherwise. The British government had long divided the international routes leaving Britain between two companies: BOAC, which handled all the long-haul, intercontinental routes, and British European Airways, or BEA, a pugnacious airline with an eager young staff, which mainly hopped to destinations on the continent of Europe. In 1972 BOAC and BEA were mashed together in the name of efficiency, in part to atone for the sin of each developing a
separate computer reservation system. The resulting company was called British Airways, and in the annals of aviation mergers there was to that point none worse. (Pan Am’s acquisition of National a decade later would become a disaster on roughly the same scale.)

The culture gap was unbridgeable. The long-haul people at BOAC considered theirs a
gentleman’s airline and BEA a tradesman’s airline. BEA people considered themselves true competitors and their brethren employees to be snobs. The respective staffs couldn’t agree
on logos or other rudiments of marketing. Service grew worse as every deficiency was deemed someone else’s fault and someone else’s responsibility to repair. Hot meals were served cold because the people from one side of the company wouldn’t fix the food warmers belonging to the other side. Complaining passengers got a brusque brush-off if they happened to ask the wrong employee for a remedy. The top management of the airline, instead of knocking heads together, was absorbed in the trendy “
management by consent” objectives of the 1970s. People regularly joked that the “BA” designator code, used in the airline’s flight listings, stood not for British Airways but for “Bloody Awful.”

British Airways survived in the marketplace thanks to artificial help. Her Majesty’s Government merrily pumped in whatever capital the company required to fund its losses and keep its employment swollen to the levels worthy of statist patronage. British Air employed more people than any other airline in the world—55,000 at its peak in the early 1980s—while ranking seventh in terms of passengers carried, roughly the same as the old Braniff, which had one quarter as many employees.

In addition British Airways survived on a surge in postwar transatlantic travel that simply would not stop. The advent of the four-engine airplane in the mid-1940s and the jet in the late 1950s made a relic of the ocean liner. The ascent of the multinational corporation, beginning in the 1960s, caused a tremendous new wave of travel between the United States and Europe. The spread of electronic communications and the dismantling of fixed currency exchange rates in the 1970s began melding the financial systems of the world into a state of interdependency, while the slow dissolution of protectionist barriers further swelled global travel. The postindustrial maturation of the U.S. economy accelerated the process, as U.S. manufacturers increasingly turned overseas to find markets for their goods.

British Airways was assured its share of this market thanks to a third vital factor: politics.

Free trade has always been, and remains, an impossible dream in aviation. Though aviation has long fostered hopes for international peace, in diplomatic terms it has created nothing but jealousy and conflagration. Like bees, airlines pollinate the world’s financial system
with capital. They create, mobilize, and transport wealth in proportions vastly exceeding the fares paid by the passengers. Without the surge in transatlantic air travel the rebuilding postwar economies of Europe would never have accumulated the dollars necessary to begin purchasing American manufactured goods. In Britain BOAC was lovingly said to stand for “Bring Over American Cash.” Deciding which airlines should carry the cash, cargo, and passengers between which points has been one of the most contentious ongoing debates in international diplomacy, a contest to determine which countries shall pay the toll for international travel and which shall collect it, and in what proportions.

On just one occasion—in Chicago, with peace approaching in 1944—the world’s nations attempted to reach an omnibus agreement on how to apportion the spoils. The effort failed. Ever since, airline service between any two countries has required a treaty to assiduously balance the opportunities and costs between them. Because airlines often wish to fly from their home country to a second country and then on to a third, a complex series of interlocking arrangements has arisen, each of which narrows the options of the parties in coming to terms on the next.

Notably it was a conflict between the delegations from the United States and Britain that caused the Chicago convention to fail. That these two countries—the closest allies in the world, then and now—should become such bitter adversaries is a reflection of both the huge stakes at issue and an inescapable fact of geography: the United States is vast and Britain small, about the size of Oregon. There is no way that Britain could give the United States as much flying opportunity as the United States could give Britain.