Frank Lorenzo

Francisco A. "Frank" Lorenzo (born (1940-05-19) May 19, 1940) is an investment manager, entrepreneur, philanthropist, and a former airline CEO in the United States. Since 1990, Lorenzo has been chairman of Savoy Capital, Inc., professionally devoted to asset management, private investments and venture capital, as well as a number of philanthropic activities. Born to Spanish immigrants in Queens, New York, Lorenzo graduated from Columbia University in 1961. He had worked his way through university, selling neckties, waiting on tables, and driving Coca-Cola trucks. Harvard Business School admitted him straight from university. Lorenzo graduated with a Master of Business Administration (MBA) in 1963 and worked in the finance divisions of Trans World Airlines and Eastern Air Lines. In 1989 Lorenzo received the John Jay award for Distinguished Professional Achievement from Columbia University.

Lorenzo has been both praised and villified for his transformational role during the period when he led Texas International Airlines, Texas Air Corporation, and particularly Continental Airlines and Eastern Airlines. The changes forged by Lorenzo and his management team have been seen as catalytic in transforming a once moribund and tradition-bound industry into a more profit-driven, bottom-line oriented one. However, Lorenzo's other legacy--of contentious, combative, and even acrimonious labor relations--has been long lasting. It has been conventional wisdom since the 1980s that the gains in airline industry profitability and capitalization have come at the expense of labor; however, recent scholarship has, at least to some extent, raised questions concerning the factuality of this point of view. On the other hand, it is indisputable that during the tenure of Lorenzo's successor at Continental, Gordon Bethune, wages increased an average of 25%, and during the same period, airline performance and employee productivty increased to such a degree that Continental went from "worst to first" in the industry, as chronicled in Bethune's 1999 book of the same name. In light of all the data, it is perhaps most accurately asserted that Lorenzo's methods enabled Continental to survive the initial period of airlne deregulation and consolidation; and that Bethune's methods allowed Continental to become the preeminent trunk airline in the U.S. airline industry.

Pre-deregulation and Texas International

Frank Lorenzo, 1978

In 1966 Lorenzo and Harvard classmate Robert J. Carney established an advisory business to assist air carriers and investors interested in aviation. In 1969 Lorenzo co-founded, with Carney, an aircraft leasing company called Jet Capital Corporation. In 1972 Jet Capital acquired Texas International Airlines (TI), a struggling regional carrier, based at William P. Hobby Airport in Houston, Texas previously known as Trans-Texas Airways. The Lorenzo team pushed new marketing approaches on the U.S. airline industry, including the first regulator approved low fares (first known as "Peanuts Fares" because some were so startlingly low) and other consumer benefits, like being the first carrier to forbid pipe and cigar smoking on airplanes in 1976 and, in later years, being the first US airline to bring first class seats to business class, and eliminate first class service.

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McDonnell Douglas DC-9-15, Mexico City, 1976.

Lorenzo was active in recruiting a talented and energetic management team. In fact, during the late 1970s, TI was an incubator for much of the talent that would subsequently form the core of other U.S. startup airlines. Former Lorenzo managers were at some point CEOs, founders, or top executives of existing or new airlines, which included: People Express, TWA, New York Air, Midway Airlines, Chicago Air, and Presidential, and in later years included United Airlines, US Air, Northwest and Delta Airlines.

The combination of cost rationalization with marketing, pricing, and service innovations returned TI to profitability by 1976 and in 1977, Lorenzo was awarded the Aviation Week and Space Technology Laureates Award during an event held at the Smithsonian Institution's National Air and Space Museum.

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National Airlines DC-10, Houston (IAH), 1978

In the autumn of 1978, TI management attempted a tender offer acquisition of trunkline National Airlines. National, with headquarters in Miami and hubs there and in New Orleans, Houston, and Los Angeles, would have allowed tiny Texas International to expand substantially beyond its south-central U.S. area of service, merge with National and, in addition, create a major Houston hub, already a goal of the company. National, however, fought the acquistion stubbornly, and finally consummated a merger with Pan Am, who had emerged as a 'white knight' during the takeover battle. Texas International, which amassed about 25% of the stock of National in the attempted merger, made a $45 million profit from the sale to Pan Am.

Texas Air Corporation creates New York Air

In 1980 Lorenzo created a holding company for TI called Texas Air Corporation. Shortly after forming Texas Air, Lorenzo started a new airline called New York Air (NYA), the first post-deregulation airline. New York Air was based at New York's LaGuardia Airport, very near the Queens neighborhood where Lorenzo grew up. New York Air would become Lorenzo's challenge to the expensive Eastern Airlines Shuttle, and provided cheaper and more frequent (hourly) flights between New York, Boston and Washington-National. The ALPA pilots' union fought it vigorously, running picket lines at LaGuardia and Washington National and taking out critical ads in the New York newspapers. Suspected acts of vandalism, interference, and prohibited aircrew operations were also reported by New York Air managers. New York Air's representatives to the Airline Scheduling Committees (CAB-authorized committees of airline representatives that allocated takeoff and landing slots at capacity-controlled airports in New York, Washington, and Chicago) were stonewalled for months as they sought to get the necessary 'slots' for New York Air to operate its shuttle services between New York, Washington, and Boston. Eventually, however, the airline succeeded in overcoming all obstacles. New York Air service commenced on 19 December 1980 with shuttle operations between New York LaGuardia, Washington National, and Boston Logan airports.

New York Air grew rapidly, adding scheduled services from LaGuardia to Cleveland, Buffalo, Detroit, Louisville, and other cities, before eventually being combined into today's Continental Airlines after Texas Air Corporation succeeded in acquiring Continental in 1981.

Continental Airlines

In 1981 Texas Air Corp. initiated a hostile takeover of Continental Airlines. Texas Air acquired Continental only after a contentious battle with Continental's management who were determined to resist Lorenzo. Continental's labor unions also fiercely resisted, fearing what they termed as, "Lorenzo's deregulation tactics." During this struggle, Continental Airlines President, A. L. Feldman, committed suicide, on August 9, 1981, in his Los Angeles office. In the end, Texas Air Corp. prevailed. Frank Lorenzo became Continental's Chairman and CEO in the autumn of 1981.

Texas International was merged into Continental Airlines in June 1982. TI ceased to exist and the "new Continental" relocated its headquarters to Houston. The merger resulted in a large expansion of Continental's hub at Houston Intercontinental Airport and its extensive routes to Mexico. Lorenzo was determined to build Continental into a low-cost full-service airline, focusing on profitable routes, in order to reach sustainability in the new free-for-all deregulated marketplace.

Airline unions fought Continental at every step. In the Federal courts, they unsuccessfully sued to stop the company's reorganization. They were successful in working to persuade Congress to pass a new bankruptcy law preventing bankrupt companies from terminating contracts as Continental had successfully done. The law was too late to affect Continental and the cost cutting and changes that had rescued it from liquidation.

Lorenzo took Continental into Chapter 11 bankruptcy in September 1983 after extensive negotiations with labor unions concerning wage rates and work rules proved unsuccessful. Bankruptcy, up to 1984, allowed immediate cessation of union contracts and imposition of new labor conditions, subject to later Court approval and revision. Union fury against this provision of bankruptcy law resulted in Congressional action prohibiting the voiding of labor contracts by airlines in bankruptcy; but, the new rules were approved after Continental's bankruptcy judge had approved Lorenzo's plan.

A more streamlined Continental emerged out of bankruptcy. Much of the airline was liquidated and the airline was rebranded as a low-cost carrier. Continental was also forced to abandon its hub in Los Angeles although it maintained its Denver, Chicago, Houston, and South Pacific routes. A more streamlined, leaner Continental emerged only a few days after the bankruptcy filing, a fact which gave Continental the distinction of being the first U.S. airline to fly through bankruptcy.

Shortly after the original filing, the Bankruptcy Court approved management's measures; however, terse and sometimes contentious labor relations persisted at Continental for some time, and airline historians have noted that the period from 1984-1994 represented an historical anomaly for Continental: a period of low morale and material deterioration of customer service. These problems would only be remedied after the assumption of the helm at Continental by a new CEO, former Boeing executive Gordon Bethune, in 1994.

In 1990, Frank Lorenzo retired after 18 years at the helm of Texas International and later Texas Air and Continental Airlines, selling the majority of his Jet Capital Corporation to Scandinavian Airlines System (SAS). According to William F. Buckley, in his September 17, 1990 article on National Review, the sale to SAS was conditioned on Lorenzo leaving the company. Shortly after Lorenzo retired, Continental filed for its second bankruptcy in a decade. There were a number of circumstances underlying the second bankruptcy, most importantly: Lorenzo had dedicated himself almost full time to the Eastern Air Lines acquisition and labor relations issues; the 1990 Iraqi invasion of Kuwait and the resultant Gulf War had resulted in a dramatic increase in the price of jet fuel; and acquired carrier People Express had been highly leveraged at the time of its merger with Continental, PE having purchased Frontier Airlines just two years before for an inflated price. During his eighteen year tenure with TI/Texas Air/Continental, Lorenzo's stake grew from 15 jet aircraft and revenues of $73 million, to 350 jet aircraft and revenues of over $5 billion; and, whether viewed as for better or worse, the airline industry has never been the same.

Trans World Airlines (TWA)

In 1985, Texas Air attempted a takeover of Trans World Airlines. Although TWA's management favored Lorenzo over rival Carl Icahn, TWA's unions feared Lorenzo and negotiated special concessions with Icahn in order to avoid a takeover by Texas Air. TWA's Board eventually accepted Icahn's offer.

Frontier and People Express

In 1985, Lorenzo's Texas Air Corp. made an offer for a Denver-based regional carrier, Frontier Airlines, opening a bidding war with People Express, which was headed by Lorenzo's former TI associate Don Burr.

PeopleExpress placed the highest bid and paid a substantial premium for Frontier's high-cost operation. On August 24, 1986 Frontier filed for bankruptcy and ceased operations. Texas Air acquired PeopleExpress on September 15, 1986, at the same time gaining Frontier, which reinforced Continental's already formidable Denver hub.

On February 1, 1987, People Express, New York Air, and several commuter carriers were merged into Continental Airlines to create the sixth largest airline in the world.

Eastern Air Lines

Lorenzo pursued negotiations with another troubled carrier that suffered the deregulation marketplace, Eastern Air Lines. Texas Air acquired Eastern on February 24, 1986 and started taking assets from Eastern. Some of Eastern's assets were used to create a world-wide reservation system, System One, and Continental's hub at Newark Airport. Lorenzo divested certain assets, including the Eastern Shuttle (which was sold to Donald Trump) and the South American route system (sold to American Airlines).

The machinists', flight attendants', and pilot unions were lock out in 1989. On 3 March 1989, President George H. W. Bush, a personal friend of Lorenzo, issued a statement outlining his decision not to act on a National Mediation Board recommendation to appoint a presidential emergency board to attempt to reach a labor agreement. In addition, a Congressional bill designed to establish a commission specifically to "investigate the labor dispute" was vetoed by Bush on 21 November 1989; the veto was sustained by the House of Representatives on 7 March 1990. The Bankruptcy Court named a trustee to run Eastern in April, 1990. Eastern ceased operations on 18 January 1991 and its assets were liquidated.

Divestiture from Continental

In 1990, after have been CEO fo Continental and Texas International for 18 years, Mr. Lorenzo sold his controlling interest in Continental Airlines to Scandianvian Airlines System, and stepped down from his CEO role to pursue other entrepreneurial and investment ventures. During his eighteen year tenure, the airline grew from 15 jet aircraft and revenues of $73 million, to 350 jet aircraft and revenues of over $5 billion.

Investment Manager

After the sale of his interest in Continental, Lorenzo founded Savoy Capital, Inc. in 1990 in Houston, TX. Savoy is a private investment firm largely investing for its own account, but which also invests on behalf of accredited outside investors.

Philanthropy

Lorenzo is a trustee of The Hispanic Society of America, an institution with a free-entrance museum of Art. The museum is located in New York City, and houses the largest collection of Spanish art outside Spain, with major paintings by Velázquez, Goya, Zurbarán, El Greco, and Sorolla. He is additionally a trustee of the Woodrow Wilson National Fellowship Foundation located in Princeton, New Jersey. Lorenzo is involved as an director, donor, or advisor to several other arts and charitable organizations, including the International Advisory Board of Catalonia, Spain. .

References

• Roy Rowan From Mao to Now, a reporter's fifty-year pursuit of Powerful People (ISBN 0-7867-0312-1), Carroll & Graf Publishers, Inc.
• Buckley, William F. Jr., Frank Lorenzo & the free market in National Review, September 17, 1990
• The Handbook of Texas. Texas Air.