k. rodman mannix

Book Review: Hard Landing

2018-09-05

This was so good. My current day job is working at Freebird, a startup within in the travel industry. There are a lot of peculiarities about working in the travel space that I’ll hopefully describe in future blog posts. It was really fun to read about an industry and understand the context in which decisions were made, decisions which still affect the way we run our business and how businesses within the travel space interact with each other! Also, this seemed to be a really in depth history for the ground covered, but there could likely be entire volumes written on the history of each airline or technical system used within the industry. There’s so much information covered in Hard Landing, and still much left out due to space constraints. That’s a shame, since I doubt there will be another tome on the history of the airline industry written by an author with the access Petzinger Jr. had to the major players. My favorite description by Petzinger Jr. is the airline as a game of musical chairs, in which executives and main characters switch seats every so often. Occasionally, a chair is pulled from the game, leaving one without a place to sit…

Some notes: WN is the carrier code for Southwest

• William Boeing got an airmail route which eventually became United Airlines
• First Rule of Airline Economics: once the flight is paid for, any additional payload is pure profit
• Big Four born from Walter Forger Brown, Postmaster General, in 1930s. Airmail routes were a mess. Reorganized, want east to west
  • United, northern corridor via Chicago
  • TWA, center corridor via St. Louis
  • AA, southern corridor via Dallas
  • Eastern Air, along eastern seaboard north to south
• Roosevelt tried to remove the privatized monopoly. Said no new routes for existing companies, so they changed their names to subvert regulations!
• Intercontinental Hotels started as Juan Trippe, legendary founder of Pan Am, wanted to set up bases for a US-China route
• Pan Am had a monopoly on international routes in 1930s
• Civil Aeronautics Board started in 1938 as regulation was put together, lobbied by airlines, to improve safety and prevent rate wares by setting fares based on costs
• 747s, DC-10s and L-1011s were all too big when they began to be used in the 1970s. Regulation allowed airlines to be generous with budgets and encourage bigger and bigger airlines
• 1970 was the airline industry’s worst financial year, 150m in losses. Airlines got too big for the demand and as fares were fixed, the prices couldn’t be discounted to entice passengers
• John Robson, an industry outsider and appointed by Nixon, was installed after the previous CAB chairman was berated by the press for going on a Bermuda golfing trip with many airline executives. He was curious why morale was low at the CAB and why executives even needed the CAB to exist. He looked to shake things up
• Frank Lorenzo started an airline consulting business, eventually raising funds to take over Texas International, as it was facing pressure from Southwest Airlines and losing the legal battle against it. Don Burr joined Lorenzo as his right hand man. Texas International had a tough time competing with Southwest and needed to cut costs. This caused a labor strike. That stopped traffic to Harlingen, on the Mexican border. Southwest picked ion up. Losing ground, Texas International started offering half-off discounts in 1976, approved by the CAB (now run by Robson). This caused usage to soar and other airlines to adopt discount pricing practices.
• Sabre (the reservation system still in use today, and first within the airline industry) started co-development between AA and IBM in 1962, headed by CR Smith of AA
• United bought Western Hotels in 1970. In 1937 it actually had the first flight kitchen in the industry
• United created a rival to Sabre called Apollo around this time
• American and United battled to put terminals into travel agents offices after a push to make an airline wide network fell apart and travel agents wanted to create a system themselves. American executed better and gained upper hand
• In April 1978 deregulation occurred under Carter. Ted Kennedy used the measure to raise political capital. CAB under Robson was in agreement. United thought it was inevitable. Single state airlines were in favor.
• Frank Lorenzo was brilliant. Attempted to buy out top-ten Airline National via LBO. Failed when Pan Am hostile takeover but still made a killing
• Burr, Lorenzo’s right hand man, split to start a new northeastern airline company (People Express) y with some deputies of Texas International. Lorenzo started an NY company as well. Recruited Phil Backes, who practically wrote the deregulation, since he could help with the new entrants against incumbents. Texas International pilots union campaigned against the non/union new company, since it was a subsidiary of Texas international. Didn’t matter, country fed up with unions. Page 127 Don Burr practically invented LCCs! People Express charged for everything beyond just basic transportation.
• Three ways to expand an airline
  1. Acquisition
  2. New markets
  3. Taking territory by force
• Bob Crandall was able to use Sabre in travel agent terminals to not show other airlines flights and snuff out upstarts
• Crandall introduced the b-scale pricing tier to hire new people at half the cost. Unions incentivize to agree by growth. Lower average personnel cost. Post regulation, early 1980s
• Braniff invented the hub model. Small feeder planes 727s connected to DFW hub, which had the only 747 to Hawaii. Smaller s planes reached remote destinations
• Another rule of airline economics. Those with the most departing flights from an airport receive a disproportionate amount of service
• CR Smith invented many market schemes. One was the Admirals frequent flyer club
• AA expanded in DFW as a hub on June 11 1981
• AA and Braniff battled over DFW. Howard Putnam was at United under Dick Ferris. Then went to WN. Then went to Braniff. Braniff was close to bankruptcy - Putnam modeled them after WN. AA played dirty tricks with Sabre and phantom passengers to snuff out Braniff
• Braniff was killed by deregulation and American competition. Before Putnam it had poor operations and cost control
• Eastern had tough labor costs per mike due to short haul. Stingy with costs to the annoyance of passengers. Late to order jets. Too many VPs lead to internal politics and two warring factions. Had to relent to labor demanding raises due to short cash reserves. Salary cuts resulted in a revolutionary amount of concessions. Union was given board seats and employee ownership. This changed the culture of Eastern.
• Air Florida, a WN like startup, was grabbed by Acker, formally running Braniff, in late 70s. He left to run Pam Am. Air Florida then crashed in 1982, essentially digging a grave for the company
• Alvin Feldman managed Frontier during a turnaround in mid 70s. Went to continental, which was taken over by Lorenzo in hostile takeover. Lorenzo then attempted to lower costs via labor struggles, but couldn’t do it. Ran out of cash and filed bankruptcy to get out of contracts and start anew. Pg 240
• Continental then battled united in Denver. United battled American in Chicago. United had tough labor negotiations with pilots, and Ferris got too involved. A strike ensued in 1985 that cost united a ton of money, as there were no scabs. They relented. The stock price tumbled, and to prevent a takeover they bought Hertz and Hilton hotels. That inspired Apollo to include all those items in a PNR.
• Pan Am had financial troubles. Their Pacific monopoly was removed piece by piece by the government, their merger with National failed and ran up costs. Because they did not fly domestically, they relied on other airlines delivering passengers. Ed Acker made labor promises that he could not keep. Labor strikes, inspired by Lorenzo with Continental, occurred. Pan Am, dealing with a strike and running out of money, sold their pacific routes to united for 750m.
• TWA razed by Carl Icahn
• Eastern Airline was creating a reservation system called System One Direct Access. It was the third largest. Agents loved its features.
• Great quote: Frank Borman. Three courses of action: “Fix it, Sell it, or tank it.” Page 282
• Unions hate Frank Lorenzo
• People Express, handled by Burr, picked on weak competition and became as large as Braniff pre-bankruptcy. However, it had no reservation system, people could pay for flights on board.
• American wanted to get rid of People Express. It had Sabre, and so was able to calculate how many seats to sell at what discount. People Express had no electronic system so it wasn’t able to. American also created non-refundable tickets, allowing them to price even lower since they wouldn’t lose revenue.
• In retaliation, People Express bought frontier so it would have a Newark and Denver hub for transcontinental flights. Frontier was a classy airline, and the cost cutting drastically hurt its reputation. Denver was a fighting ground
• WN eschewed the hub system for point to point. Once it used the AA yield management system and nonrefundable fares, they could drop prices even lower to $19 in the 1980s
• United changed their name to Allegis, in a move lampooned by everyone. It was bogged down by the acquisitions. It got into labor fights. And eventually Ferris was canned in the mid 80s as he misplayed some strategies
• Eastern Airlines was bought by Lorenzo and used to obtain the System One reservation system, and sell cheap airlines and landing spots back to Continental
• AA’s Tom Plaskett, Bob Crandalls right hand man, was recruited to Continental since Phil Backes was heading Eastern. At Lorenzo’s command, in a single day New York Air, People Express, Frontier, Continental and all subsidiaries merged into one. Chaos ensued
• Once again Eastern was bit by a labor strike, and bankrupted. Lorenzo sold his stake in Texas air to Scandinavian air, which was then bankrupt 4 months after
• AA entered the international market with more economical airplanes like the 767, allowing point to point travel not only from the east coast, other airlines used 747 which resulted in lots of connecting flights to fill the giant aircraft
• British airways invented business class as a middle tier between first and coach. It started code sharing with united as united did not fly to Europe and foreign airlines could not fly routes within domestic us. This doubled the chance those flights would be taken
• Pan Am’s comeback under Tom Plasket, after his merger failure at Continental, was cut short when a terrorist attack happened on a flight and killed 200 odd people
• Battle over access to UK since TWA and Pan Am grandfathered in, limited to only 2 US carriers. Mid 90s
• Delta eventually sunk money into Pan Am as a way to expand internationally. Delta bought the Atlantic routes. After a month it back out of the deal to finance Pan Am due to horrible performance
• United could not compete with southwest on low fares. Employees bought out when management said they would go small
• The meat of the story is the 25 years after deregulation. Regulation is the appetizer.