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New York Air planned to win customers by charging lower fares and providing better service with roomier seats and snacks, than the dominant carrier between New York and Washington, Eastern Airlines, which responded by offering lower fares. Pan Am, which had announced competing service after New York Air's formation, also lowered its fares.<ref>{{cite news |title=Pan Am to Cut Fares Between Washington, Newark, N.J., to $29 |publisher=[[The Wall Street Journal]] |date=1981-01-08 |accessdate=2009-06-15 |page=27}}</ref>
New York Air planned to win customers by charging lower fares and providing better service with roomier seats and snacks, than the dominant carrier between New York and Washington, Eastern Airlines, which responded by offering lower fares. Pan Am, which had announced competing service after New York Air's formation, also lowered its fares.<ref>{{cite news |title=Pan Am to Cut Fares Between Washington, Newark, N.J., to $29 |publisher=[[The Wall Street Journal]] |date=1981-01-08 |accessdate=2009-06-15 |page=27}}</ref>


The formation of New York Air was opposed by the unionized employees of Texas International Airlines, who were upset that non-union employees were being hired and that pay rates were substantially less than union rates at TIA; in the case of pilots, the rate was about half of the union rate.<ref>{{cite news |title=Unions Label New York Air 'Runaway Shop' |author=Brown, Warren |publisher=[[The Washington Post]] |date=1980-12-12 |accessdate=2009-07-27 |page=C1}}</ref> The unions felt the company was set up specifically to "sidestep longstanding labor contracts with organized employees" and that the jobs should have been offered to TIA employees. The pilots' union planned a $1 million protest campaign and a boycott of companies that did business with Texas Air, the parent company, but the campaign was called off because of the [[Professional Air Traffic Controllers Organization (1968)#August_1981_strike|1981 air traffic controllers' strike]].<ref name=unfriendly>{{cite news |title=Unfriendly Skies |author=Thurow, Roger |publisher=[[The Wall Street Journal]] |date=1982-02-18 |accessdate=2009-06-15 |page=1}}</ref><ref>{{cite news |title=N.Y. Air Gets Off Ground . . . at Last |author=Shifrin, Carole |publisher=[[The Washington Post]] |date=1980-12-20 |accessdate=2009-07-27 |page=C1}}</ref><ref>{{cite news |title=Pilots Union Plans A $1 Million Attack Against New York Air |publisher=[[The Wall Street Journal]] |date=1981-04-29 |accessdate=2009-07-27 |page=39}}</ref> Lorenzo denied these claims citing that union representation, or lack thereof, was a right of any employee, New York Air employees included, should they so choose.<ref>{{cite news |title=New York Air Annual Report |publisher=[[New York Air]] |date=1980 |}}</ref> New York Air employees never elected to unionize.<ref>{{cite news |title=New York Air Annual Report |publisher=[[New York Air]] |date=1980 |}}</ref>
The formation of New York Air was opposed by the unionized employees of Texas International Airlines, who were upset that non-union employees were being hired and that pay rates were substantially less than union rates at TIA; in the case of pilots, the rate was about half of the union rate.<ref>{{cite news |title=Unions Label New York Air 'Runaway Shop' |author=Brown, Warren |publisher=[[The Washington Post]] |date=1980-12-12 |accessdate=2009-07-27 |page=C1}}</ref> The unions felt the company was set up specifically to "sidestep longstanding labor contracts with organized employees" and that the jobs should have been offered to TIA employees. The pilots' union planned a $1 million protest campaign and a boycott of companies that did business with Texas Air, the parent company, but the campaign was called off because of the [[Professional Air Traffic Controllers Organization (1968)#August_1981_strike|1981 air traffic controllers' strike]].<ref name=unfriendly>{{cite news |title=Unfriendly Skies |author=Thurow, Roger |publisher=[[The Wall Street Journal]] |date=1982-02-18 |accessdate=2009-06-15 |page=1}}</ref><ref>{{cite news |title=N.Y. Air Gets Off Ground . . . at Last |author=Shifrin, Carole |publisher=[[The Washington Post]] |date=1980-12-20 |accessdate=2009-07-27 |page=C1}}</ref><ref>{{cite news |title=Pilots Union Plans A $1 Million Attack Against New York Air |publisher=[[The Wall Street Journal]] |date=1981-04-29 |accessdate=2009-07-27 |page=39}}</ref> Lorenzo denied these claims citing that union representation, or lack thereof, was a right of any employee, New York Air employees included, should they so choose.<ref>{{cite news |title=United State National Labor Relations Act 29 U.S.C. §§ 151-169|publisher=[United States Government]] |date=1935 |}}</ref><ref>{{cite news |title=New York Air Annual Report |publisher=[[New York Air]] |date=1980 |}}</ref> New York Air employees never elected to unionize.<ref>{{cite news |title=New York Air Annual Report |publisher=[[New York Air]] |date=1980 |}}</ref>


==Continental Airlines==
==Continental Airlines==

Revision as of 00:00, 23 September 2009

Frank Lorenzo, 1978

Francisco Anthony "Frank" Lorenzo[1][2] (born (1940-05-19)May 19, 1940) is an American investment manager, entrepreneur, philanthropist, and former airline CEO in the United States. He is noted for a career spanning two decades in the airline industry, starting before airline deregulation. In particular, his pursuit of a sustainable and profitable airline model is often categorized as anti-union, stemming from his leadership during the 1983 bankruptcy of Continental Airlines that enabled the company to void its union contracts, and during the strike and bankruptcy of Eastern Airlines that eventually led to its permanent shutdown in 1991.[3]

Lorenzo’s history is contentious, both “despised by unions and admired by airline strategists.”[4] In 1990, after Lorenzo liquidated his holdings after 18 years in the airline industry, Alfred E. Kahn, the “main architect of airline deregulation,” offered this perspective on Lorenzo’s leadership: “I don’t think there is any question that he saved Continental, but his tactics obviously didn’t work when he took over Eastern.”[4]

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.[1]

Early life

Born to Spanish immigrants Olegario (d. 1980)[5] and Ana (née Mateos),[6][7] Lorenzo grew up in Queens, New York.[2] His father was a private investor and long-time salon proprietor in Manhattan.[5][6][8]

Lorenzo attended Forest Hills High School[8] and then worked his way through Columbia College, working several jobs, including at Macy's.[2][7] He graduated in 1961 with a B. A. degree in economics, followed by an MBA from Harvard Business School in 1963.[2][7] He spent a short time in the army that year, and then returned to New York.[8]

Early airline career

Lorenzo's first professional jobs were at Eastern Airlines and Trans World Airlines, working in financial analysis, from 1963—1966.[7] He then formed Lorenzo & Carney, Inc., a financial advisory firm specializing in airlines and related businesses, in 1966 with Robert Carney, who had also attended Harvard Business School.[7]

Jet Capital

Lorenzo and Carney later formed Jet Capital Corporation, an airline advisory company, in 1969.[7][9]Cite error: The <ref> tag has too many names (see the help page). The firm's first two advisory clients were Mohawk Airlines and Texas International Airlines in 1971.Cite error: The <ref> tag has too many names (see the help page). [10] Jet Capital raised over $1 million in a public stock offering to "establish a meaningful platform for successful participation in the exciting but beleaguered field of air transportation."Cite error: The <ref> tag has too many names (see the help page). Jet Capital was later asked by Chase Manhattan Bank to take over Texas International Airlines (TIA) as an alternative to bankruptcy,[7] since the airline had suffered its third year of annual losses in the $7 million range in spite of $70 million in revenue.Cite error: The <ref> tag has too many names (see the help page). .

Texas International Airlines

After consulting to Texas International Airlines (TIA) for several months, Lorenzo acquired control of it in 1972 through Jet Capital, which acquired 26% of TIA's equity interest and 59% of the voting power for $1.15 million.[10][11] Lorenzo became its president in August 1972.[2][10] The deal was approved by the Civil Aeronautics Board (CAB), which regulated the airline industry in the United States at the time.[10]

When Lorenzo took control of TIA in 1972, it was on the verge of financial collapse, having lost money since 1966 including roughly $7 million annually for the previous three years[12]. Lorenzo and his management team "acutely [understood] the risks in...redirecting a highly regulated company with serious operating problems.[13]" Two years later, Lorenzo's management was able to steer the company to break even due to significant streamlining of operations[14]

Some years later an analyst from Oppenheimer & Company, citing Lorenzo and business-partner Carney’s strategies of substituting obsolete planes with jets, eliminating unprofitable routes in exchange for destinations with higher demand, and instituting half-price “peanut-fares” for the first time in the aviation industry, noted TIA’s ability to compete and win against much larger and financially stronger companies. [15]

In the succeeding five years, Lorenzo's management changed the character of the airline, having revamped the fleet, increased utilization, cut costs and dropped a lot of losing routes and added flights on strong segments[16]. The average trip distance per passenger boarded jumped 25% from 1972 to 1976[17]. In 1977, the company earned $8 million,[18] and in 1978, TIA's reported net income was up to $13.2 million[19] and it was described as an "aggressive, innovative carrier".[20]

From 1972 to 1978, Lorenzo and his management team turned a $6.3 million loss on $63 million in revenue into a $13.2 million profit on $158 million in revenue. [21][22]

National Airlines

File:NAL.DC-10.jpg
National Airlines DC-10, Houston (IAH), 1978

For several weeks starting in June 1978, Texas International Air acquired shares of National Airlines, filing documents with the U.S. Securities and Exchange Commission when its stake reached 9.2%, just short of the 10% that would require prior approval of the Civil Aeronautics Board (CAB).[23] TIA was reported at the time to be studying the "possibility of seeking control"[23] of National. Several weeks later, TIA announced intentions to buy up to 25% of National's stock, and requested approval from the CAB to acquire the stock and direct control of National.[24][25]

TIA's attempted takeover of the much larger National "surprised a lot of people".[26]

A competing offer for control of National was submitted to the CAB by Pan Am, driving the price of the stock up in the process.[27] National agreed to be acquired by Pan Am after the initial TIA bid, and TIA filed legal complaints. At the time, TIA controlled over 20% of National's stock, purchased at an average of about $28 per share, and Pan Am controlled about 5%;[27][28] by October, TIA's share was 22% and Pan Am's was 19%.[26]

The CAB gave TIA and Pan Am each permission to acquire up to 25% of National's shares,[29] and the two companies acquired 45% of the shares in total.[30] The management and directors of National, as a group, owned less than 5% of the outstanding shares.[30] In December, Eastern Airlines also joined the bidding for National.[30] TIA and Pan Am considered the bid a "ploy to block their own chances" of completing the deal, but Eastern chairman Frank Borman called the offer serious.[30]

In April 1979, the United States Department of Justice and the United States Department of Transportation both announced opposition to a merger of Eastern and National on the grounds that the merger would be anti-competitive.[31] In July, the CAB said it "would not stand in the way of airline mergers that appear to benefit the public".[32] National had accepted the Pan Am offer and had not submitted TIA's offer to its shareholders,[33] which rendered the TIA offer "effectively dead".[32]

Lorenzo became chairman of TIA in June 1979, and the position of president went to chief operating officer Donald C. Burr.[34]

In August 1979, TIA agreed to sell its shares in National to Pan Am, earning TIA a net profit on the merger attempt of almost $45 million.[9]

TWA

With a large amount of cash on hand, observers said that TIA was likely to begin another acquisition attempt quickly, to preclude becoming a takeover target itself.[9] TIA did exactly that, accumulating shares of Trans World Airlines (TWA), an even bigger target than National. TWA had airline revenues about 14 times those of TIA, and the total revenue of TWA's parent corporation, Trans World Corp., was 20 times TIA's.[35]

Analysts wondered why Lorenzo and TIA would try to take over such a large company; some speculated that he and his team would "love to cure TWA",[35] believed it could "work miracles" at TWA,[36] or were interested in other profitable businesses owned by Trans World Corp, including Hilton International, Canteen Vending, and Spartan Food Systems.[35][36] Others suggested Lorenzo was trying to create another profit on the sale of stock, which he denied.[37]

Still other analysts had a different perspective, pointing to the structural and financial synergies that a TIA and TWA merger would present. One offered that TIA “would get a route system, equipment and facilities in place.” [38] To other analysts and even airline executives, it was obvious why Lorenzo was interested in TWA: said one executive, “Frank’s a financial man—that’s his game,” and TWA offered Lorenzo a tricky financial situation with an unattractive amount of long term debt ($643 million, a relatively large amount in the industry) offset by a portion of that debt carrying an extremely attractive and low interest rate of 4%.[19][38]

TWA was opposed to the sale; its board "unanimously affirmed" publicly that TWA was not for sale.[37][39] After accumulating more than 4% of Trans World's stock, TIA eventually backed out of the proposed deal, selling all of its holdings by January 1980.[37]

Texas Air Corp.

Lorenzo restructured TIA in 1980, forming a holding company called Texas Air Corp, which was controlled by Jet Capital, as TIA had been.[40] Texas Air owned TIA and had cash holdings of about $60 million, which Lorenzo said would be used primarily for investments in the airline industry.[40]

In June 1985, TWA sought Texas Air as a white knight in a defensive move against Carl Icahn's offer to purchase TWA; Icahn ultimately acquired TWA.[41] When TWA and Texas Air discussed the merger, Texas Air’s principal airline subsidiary and the logical match to combine its route structure with TWA was Continental Airlines. Although still under Chapter 11 Bankruptcy since filing in September 1983, Continental’s finances had improved dramatically and its routes and aircraft were projected to complement those of TWA in a sensible way. [42]

New York Air

Later in 1980, Texas Air formed a new airline, New York Air, with $25 million in capital.[43] Lorenzo was the chairman of the new company, which was to fly shuttle flights between New York and Washington.[44] Later plans included expansion to several cities in the Northeast.[45]

New York Air planned to win customers by charging lower fares and providing better service with roomier seats and snacks, than the dominant carrier between New York and Washington, Eastern Airlines, which responded by offering lower fares. Pan Am, which had announced competing service after New York Air's formation, also lowered its fares.[46]

The formation of New York Air was opposed by the unionized employees of Texas International Airlines, who were upset that non-union employees were being hired and that pay rates were substantially less than union rates at TIA; in the case of pilots, the rate was about half of the union rate.[47] The unions felt the company was set up specifically to "sidestep longstanding labor contracts with organized employees" and that the jobs should have been offered to TIA employees. The pilots' union planned a $1 million protest campaign and a boycott of companies that did business with Texas Air, the parent company, but the campaign was called off because of the 1981 air traffic controllers' strike.[48][49][50] Lorenzo denied these claims citing that union representation, or lack thereof, was a right of any employee, New York Air employees included, should they so choose.[51][52] New York Air employees never elected to unionize.[53]

Continental Airlines

Purchase

In January 1981, Texas International Airlines, which together with its parent, Texas Air Corporation, had accumulated over $140 million of cash from the sale of National Airlines stock and several financings, [54] announced an offer to buy Continental Airlines.[55] It had already purchased almost 10% of Continental's shares, and offered to buy enough to bring its stake to 35% to 48%.[55] Continental already had an agreement to merge with Western Airlines, and Texas Air announced that it would seek to vote its shares against the merger.[55][56] As with previous attempts, TIA's takeover target was a much larger company than itself.[55]

There was opposition to TIA's planned takeover. In particular, employees feared that Lorenzo would lay off workers and that he was anti-union, demonstrated by formation of New York Air as a non-unionized company, charges which Lorenzo denied by making clear the employees had the right to select union representation should they have so desired.[57] While TIA acquired 49% of Continental's shares, an employee group attempted to stop the plan through legal maneuvers designed to give them control of the company rather than sell to TIA.[58] Continental's chairman, Alvin L. Feldman, objected to the purchase, telling Lorenzo that he thought the combined company would be "very weak"; as the takeover battle continued, Feldman was described as being "bitterly opposed" to the plan.[58][59]

The financing for the employee group's planned purchase fell through, and as Continental was preparing a public announcement, Feldman committed suicide in his Los Angeles office.[60] TIA received approval for its purchase from the CAB, and President Ronald Reagan did not block the deal.[61] The legal battles between the two companies ended in November, with Lorenzo and two associates elected to the board of directors of Continental.

1981 was a financially difficult year for Texas International, New York Air, and Continental.[48] Lorenzo claimed, and some analysts agreed, that Continental's problems were worse than they had appeared before his purchase of the airline.[48] Continental's losses for 1981 were over $100 million, and an economic recession further hurt Continental's finances. It attempted to renegotiate contracts with several unions.[62]

A series of steps to combine TIA and Continental followed. Lorenzo consolidated the historic TIA Dallas hub to Houston as part of a plan to combine the routes of TIA and Continental in a hub and spoke system.[48] Continental moved its annual meeting from May to March 1982;[63] at that meeting, Lorenzo was named chairman of Continental.[64] In July, Continental and Texas Air approved a "financial merger" of the companies, although operations were still to remain separate.[32] In September, the employees of both Texas International and Continental were informed that there would be "operational and management integration of the two companies effective Oct. 31 [1982]".[65] Although Texas Air remained the parent company, the combined operations operated under the Continental name and colors.[66]

Strike and bankruptcy

After 19 months of negotiations, Continental and its mechanics' union failed to reach a labor agreement, and the mechanics went on strike in August 1983.[67] Continental continued to operate, partially by hiring replacement mechanics,[68] but filed for Chapter 11 bankruptcy protection from creditors several weeks later, laying off 65% of its employees.[69] Following the bankruptcy filing, the pilots' union went on strike to protest lower wages being offered by the company.[70] The bankruptcy filing allowed Continental to void union contracts. It returned to operating profitability in 1984, but remained under bankruptcy protection until 1986, after working out plans with creditors to repay most of its debt over a period of 10 years.[71]

During the bankruptcy, Continental claimed that its labor costs were too high and would force the company out of business completely if left unchanged. The unions claimed the bankruptcy was simply a legal maneuver intended to void contracts.[72] The company trimmed operations and expenses during the reorganization, firing one-third of its employees, voiding contracts, and cutting two-thirds of its routes.[73] The average salary of Continental's pilots after the bankruptcy filing was 30% to 50% lower than before the filing.[74]

“The major reason, however, that the airline [had] been able to function more smoothly and rebuild its route system is that many of its unionized employees [had] decided to ignore their union leaders and fellow employees and cross the picket lines.”[75] This resulted in allowing the Lorenzo management team to operate and grow toward profitability.[76] Indeed, beginning in the first quarter of 1984, Continental announced a profit for the first time since 1979. Enthusiasm amongst the slimmed-down employee base “skyrocketed.”[77]

Expansion and Emergence from Bankruptcy

The “New Continental” began emerging while in bankruptcy. With its cost structure in line with any post deregulation upstart carrier, the airline began competing effectively with legacy carriers. By May of 1984, Continental was operating 83 of its 105 aircraft, which had been mostly grounded upon filing for bankruptcy.[78] Though operating near capacity, it was doing so with nearly half the 12,000 employees, on half the wages, than prior to bankruptcy. By the summer of 1984, the Lorenzo team had filled many of the positions downsized during the strike, and employment had reached 9,000 with a route system served 67 destinations.[79] Planes were averaging a 67% load factor, amongst the highest in the industry. New Continental’s low-cost carrier strategy was beginning to bear fruit. [80]

In June of 1984, Continental received a favorable ruling from Bankruptcy Judge R.F. Wheless Jr. who ruled that “Continental was justified in rejecting its [pilots’ union] contract it described as burdensome” and that it “had no choice but to file for reorganization.” [81] Continental's Lorenzo and his team had successfully argued that labor “costs would force the airline to liquidate.” [82]

In the second quarter of 1984, led by Lorenzo's team, Continental’s restructuring showed more promise. The company reported a net profit of $10.4 million, which was a $36.9 million improvement from the $26.5 million loss during the same time period in 1983. [83]

Further signs that the Lorenzo management team's new low-fare, high-frequency business model was working began to show. With all fares initially set at $49, the airline was able to compete with legacy carriers. It also put in place a stock ownership plan with a grant of 1 million shares, profit sharing and other new forms of compensation, including options to buy new stock to reward employees’ loyalty during and after the union strikes. [84] Pioneering innovations in the industry, such as the self service ticketing Flying Machines and Continental’s partnership with Federal Express to provide overnight ticket delivery nationwide to customers, proved effective. [85]

By September 1984, Lorenzo's team had led the airline to surpass the number of seat miles flown prior to bankruptcy with 25% fewer employees.[86] Though the airline was price competitive with new entry carriers, it still offered full services such as hot meals, checked baggage, a frequent flier program and co-sharing with partner airlines.[87] Record profits of $30.3 million were reported for the third quarter in 1984.[88] Continental had successfully transitioned from “a high-cost airline losing its proverbial shirt to being a low-cost carrier making good profits.” [89] In September of 1986, the “New Continental” successfully emerged from bankruptcy as a lean, sustainable and profitable airline. Notably, Lorenzo's management team had reached agreements with all of its creditors to repay them at 100 cents-on-the-dollar with no equity compensation, a rarity in previous bankruptcies. [90]

Acquisition of Terminal C and Creation of New Hub

As a result of the Lorenzo team's acquisition of an option on Terminal C at Newark International Airport though the People Express transaction, Continental Airlines began a major expansion at Newark airport on May 22, 1985. The $255 million facility boasted 875,000 square feet, 12 curbside check-in stations, 95 ticket counters and 41 aircraft gates and laid the groundwork for a dominant East Coast presence that remains today. [91]At the time, the new terminal serviced 130 cities domestically and internationally, allowing Continental to absorb 55% of Newark’s passenger traffic. [92]

Exit From Continental

By 1989, Continental served 133 airports around the world, carried approximately 9% of US commercial air traffic and offered more than 1,250 daily departures. [93] Lorenzo agreed to sell his controlling stake in Continental Airlines’ holding company to Scandinavian Airlines Systems (SAS) on August 10, 1990. [94] Lorenzo agreed to remain on the company’s Board of Directors for two years.

Eastern Air Lines

Background

In 1975, Frank Borman became president and CEO of Eastern Air Lines. It was ailing financially, and Borman negotiated concessions from its employees, but he also ordered expensive new airplanes. He also clashed frequently with the head of the machinists' union, Charles Bryan.[95] The atmosphere at Eastern was such that "[l]abor brawls struck Eastern with the regularity of tropical storms in Florida".[96] (The company was later described as having been "anemic for most of the past 20 years" and as having "lurched from one financial crisis to another".)[97]

Takeover

In January 1986, Eastern faced another financial crisis and sought more concessions from its unions. Eastern was described as needing to "either get long term economic relief from its labor unions or enter bankruptcy and impose that relief, just as now-thriving Continental did under Frank Lorenzo in September 1983".[98] Eastern's machinists' union refused to renegotiate its contract; after Texas Air made an offer to buy Eastern, despite the unions' generally negative opinion of Lorenzo's tactics, union leader Bryan said, "it might be surprising the relationship that could develop between Lorenzo and our organization".[99] Eastern established a deadline with its three major unions to grant concessions or have the company sold to Texas Air; when the deadline passed without the concessions, the Eastern deal was pursued.[99][100] Although there were more legal maneuvers that attempted to stop the deal, it was approved by shareholders in November 1986.[95]

In December 1986, Texas Air also finalized a deal to acquire Peoplexpress Airlines, a low-cost airline that had been formed by eight executives who had left Texas Air in 1980.[101][102] The deal included the assets of the bankrupt Frontier Airlines, which Peoplexpress had purchased in 1985. In February 1987, PeoplExpress and New York Air were merged into Continental.[103] The combination of the airline companies controlled by Lorenzo through Texas Air accounted for 20% of the airline industry in the United States, and some estimates described it as the largest airline in the Western world, and second only to Aeroflot worldwide.[97][103]

Asset divestiture

In February 1987, Texas Air moved six airplanes from Eastern to Continental, a move that was seen as an anti-union move because Continental no longer had union workers.[95] In March, Texas Air purchased Eastern's reservation system in a new subsidiary, SystemOne, for $100 million, substantially below its estimated value of $200 million to $400 million. Eastern then paid fees to lease back the system.[95] The system was combined with other computer system assets and had 5,100 travel agent customers.[104] Texas Air later sold half of its interest in the system to Electronic Data Systems for $250 million.[105]

In October 1988, Donald Trump bought Eastern's shuttle service for $365 million, rebranding it as Trump Shuttle.[95][97] In December 1989, American Airlines agreed to purchase routes to Latin America for $471 million.[95]

Decline in service

In March 1987, Senators Frank Lautenberg and Lowell Weicker sent a letter to Lorenzo questioning the decreased level of service, including delays, overbooking, cancellations, and bad communication. After outlining several problems their Senate committee had found, they asserted that Texas Air was not meeting its "obligation to provide a reasonable level of service to its passengers" and requested that Texas Air work toward that goal and provide a "prompt response".[95]

Labor strife

The labor problems that had started before Lorenzo's takeover of Eastern continued. In 1987, a pilot was told to fly a route that would put him over the FAA weekly flying limit, and when he protested, Eastern called the FAA to complain that it was interfering. The FAA did not insist the pilot not fly, and the union told him to fly to avoid being fired. Later, the FAA learned that Eastern had said it would pay any fines from the FAA for the practice of flying in excess of regulations.[106] The machinists, pilots, and flight attendants were all subjected to increasingly stringent absenteeism rules which would allow Eastern to fire them after fewer infractions than before.[106] Eastern also fired increasing numbers of employees under allegations of drug abuse and phony medical claims and insubordination.[106] A study by Virginia Tech University in 1987 showed that only 2% of Eastern pilots described their jobs as "very rewarding", while 85% at the others surveyed felt that way.[107] By September 1987, Eastern's employment rolls had been reduced by 4,000 to 39,000 people.[107] Both Eastern and the machinists' union prepared for a strike to occur.[108]

Safety issues

Lorenzo instituted cost-cutting measures at Eastern by outsourcing some maintenance work, requiring pilots to fly longer hours, and delaying repairs. In one instance, a pilot refused to fly with only one functioning air-conditioning unit on a cross-country flight.[109] The FAA investigated in the summer of 1987 and found that Eastern had the worst repair record of 11 airlines, and had an average of 55 items unrepaired per day, compared to an average of 29 in the industry.[109] In October 1987, at a Congressional hearing, pilots told of being forced to fly unsafe planes.[95]

In April 1988, the United States Department of Transportation began an inquiry into the financial fitness and safety of Texas Air and Eastern; the inquiry was announced at the same time as a fine of $823,000 levied by the FAA for safety violations.[110][111] The inquiry deemed Texas Air to have passed its tests and added that labor disputes "could endanger safety at Eastern".[112]

Amid the negative publicity that followed, Barbara Walters dubbed Lorenzo "probably the most hated man in America" in a 1989 interview, which he denied, blaming the unions for the bad press.[113][114][115]

Strike

After negotiations with the three unions failed to produce any labor agreements, a mandated 30-day cooling off period began on 1 February 1989.[116] If an agreement could not be reached, strikes would begin on 4 March 1989. During this period, Lorenzo met with potential buyers of Eastern, including Carl Icahn, and although an agreement was reached, the details were not able to be worked out and the sale did not happen.[117] Other potential buyers included Jay Pritzker and Peter Ueberroth, but those deals did not work out either.

On 3 March 1989, President George H. W. Bush 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,[118] and the machinists, flight attendants, and pilot unions went on strike at midnight.[119] Thousands of flights were canceled, and thousands of nonunion employees were laid off.[120]

Bankruptcy and shutdown

Eastern filed for bankruptcy protection on 9 March 1989.[120] After the bankruptcy filing, additional potential buyers were contacted, including Kirk Kerkorian and Marvin Davis. Both Pritzker and Ueberroth made offers to Texas Air, but when Ueberroth was asked to pay more to come closer to Pritzker's deal, he withdrew his offer, and Pritzker then withdrew his because he didn't like the negotiating tactics that Lorenzo had used.[121] Ueberroth was convinced to re-enter negotiations, and a tentative deal was reached, but a final deal could not be worked out.[122]

Almost three months after the strike had started, Lorenzo was interviewed and responded to the suggestion that he was "one of the nation's toughest bosses" by saying: "I'm not paid to be a candy ass. I'm paid to go and get a job done."[123]

The law had been changed since Continental's bankruptcy six years earlier, and it was more difficult to void union contracts in a bankruptcy.[124] Eastern continued to operate a reduced schedule, hiring non-union pilots and using pilots who crossed picket lines. By November, it claimed it was back on the road toward profitability and asked for more time to submit a reorganization plan to the bankruptcy court.[125]

After Bush declined to appoint an emergency board to mediate the labor dispute, Congress passed a compromise bill designed to establish a bi-partisan commission specifically to "investigate the labor dispute" at Eastern,[126] but it was vetoed by Bush on 21 November 1989.[127][128] The following day, the pilots' union voted to end its strike, after about 800 of its members had crossed picket lines, and many others had taken early retirement or gone to work for other airlines.[129] The flight attendants ended their strike the following day, but the machinists continued to strike.[130]

Bush's veto was sustained by the House of Representatives on 7 March 1990.[131] Although Eastern was still operating, it was still losing money and proposed plans to its unsecured creditors that called for payment of 50% of the debt, and as conditions worsened, only 25% of the debt. The creditors at first called for liquidation of the company, but changed their request to only ask for Lorenzo to be removed and a trustee to be appointed to "enhance the value of the estate".[132] The bankruptcy court agreed to the request and named a trustee to run Eastern in April 1990, with the goal of continuing to operate the company and find a buyer. The move was described by experts as "rare" in a bankruptcy case.[133]

Eastern ceased operations on 18 January 1991 and its assets were liquidated.[134]

Airline legacy

"Frank Lorenzo has etched an indelible mark on the U.S. airline business. Whether he is a union buster, an opportunist, or a keen businessman depends on one's perspective, but his mark has been deep and may be lasting," wrote James Ott on Lorenzo's departure from Continental.[135]

Lorenzo is frequently described as "anti-union", particularly after the bankruptcy at Continental, which voided the union contracts in the successful effort to save the airline from liquidation and permanent job losses.[136][99] At Texas International Air, he demanded wage concessions in 1974 to return the company to profitability, and one union went on strike; when he began hiring replacement workers, other unions at the company joined the strike. After four months, the unions returned to work and TIA went on to reach profitability in 1976.[137][138] Before his takeover of Eastern was completed, his efforts to build a sustainable, profitable airline model were criticized, with opponents saying his companies' profits were earned at the expense of labor unions' goals.

Investment career

Savoy Capital

In 1990, after having been CEO for Continental and Texas International for 18 years, Lorenzo sold his controlling interest in Continental Airlines to Scandinavian Airlines System (SAS), and stepped down from his CEO role to pursue other entrepreneurial and investment ventures. Lorenzo’s departure from Continental was a requirement of the deal by both Lorenzo and SAS, although he was required to remain a director of Continental for two years afterwards.[139] 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, but the airline was heading back to bankruptcy court. 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.[1]

ATX, Inc.

In 1994, a company in which Lorenzo was a significant shareholder, ATX Inc., attempted to start a low-cost airline serving the east coast of the United States. A regulatory application by ATX was rejected by the U.S. Department of Transportation; the agency said that under Lorenzo's supervision, Eastern Airlines and Texas Air had "experienced operational, maintenance and labor-related problems that were among the most serious in the history of U.S. aviation."[140] Lorenzo had reduced his stake in the company to 24 percent and said that he would only serve on its board.[140]

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 a director, donor, or advisor to several other arts and charitable organizations, including the International Advisory Board of Catalonia, Spain.[141]

In 1986, Lorenzo established the Olegario Lorenzo Memorial Scholarship Fund at Columbia College.[8][142]

Personal

Lorenzo married Sharon Neill (née Murray) in 1972,[6][143] and has four children.[2]

References

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  139. ^ Share purchase agreement between Jet Capital Corporation and Scandinavian Airline System (SAS) dated August 2, 1990.
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Further reading

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