Frank Lorenzo
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- This article discusses the airline executive. Frank Lorenzo was also the name of a neighbor on the television sitcom All in the Family.
Francisco A. Lorenzo (b. 1940) is a former airline executive and corporate raider in the United States. Lorenzo created the current day Continental Airlines in the 1980s through the merger of Texas International Airlines, which he ran, and a then small west coast airline - the original Continental. Although Continental remained an industry basketcase for several years after he left, the fact that it was later restructured into a profitable and successful airline sometimes leads individuals to claim that he is responsible for Continental's later success. There are many others who would dispute that and claim that Mr. Lorenzo did much damage to the company. See the article in the National Review on September 17, 1990 by Willaim F. Buckley.
Lorenzo was born May 19, 1940 to Spanish immigrants in Queens, New York. After attending public schools, he graduated from Columbia University in 1961 and Harvard Business School in 1963, and went to work in the finance divisions of Trans World Airlines and Eastern Air Lines.
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[edit] Rise and fall of Texas Air
[edit] Pre-deregulation
In 1969 Lorenzo and Harvard classmate Robert J. Carney established 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. Donald C. Burr, who in later years would go on to found People Express, was made executive vice president.
Burr was active in recruiting a talented and energetic work team and in forging the human relations philosophies of the company. In fact, during the late 1970s, TI was an incubator for much of the talent that would subsequently form the core of post-deregulation new airline startups in the U.S. In addition to Burr himself (later the founder of PeopleExpress), TI management going on to run existing carriers or establish new ones included: Gerry Gitner (People Express,TWA), Neal F. Meehan and J. Scott Christian (New York Air; Midway Airlines; Chicago Air), Hap Paretti (Presidential), and others.
With Lorenzo as CEO, TI's management team pushed new marketing approaches on the U.S. airline industry, including the first CAB-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 one of the first U.S. airlines to offer fully computerized airport check-in in 1978.
The combination of strenuous cost cutting with marketing, pricing and service innovations eventually returned TI to profitability and in 1977, Lorenzo was awarded the Aviation Week and Space Technology Laureates Award during a banquet held at the Smithsonian Institution's National Air and Space Museum.
By vigorously reducing costs (especially at the expense of airline labor unions), restructuring TI and using junk bond financing, Lorenzo had the financial resources which would be harnessed with TI's management talent to create a large U.S. trunk airline from a combination of distressed legacy carriers and 1980s start-ups. Lorenzo and Burr continued to disagree philosophically, however, and Burr left shortly after the passage of the Airline Deregulation Act of 1978.
In 1978, Lorenzo bought up 25% of the stock of National Airlines, at the time a sleepy Miami-based airline that Lorenzo saw as having great potential value, and whose Los Angeles-Arizona/Texas-Florida and Florida-East coast route structure would have complemented TI's southwestern routes very well. However, Pan Am, keen to enter U.S. domestic markets, won a spirited takeover battle with rivals Texas International and Eastern Airlines. Nevertheless, Lorenzo proved to be the winner since stock profits to TI yielded a large $45 million war chest for Texas International. Pan Am's acquisition and ill advised merger with National proved disastrous for Pan Am (see related article), and the aftermath was instrumental in the demise of that perhaps grandest of all U.S. aviation legacies.
[edit] New York Air
In an environment portending freer new airline startups following deregulation, Burr left TI in 1980 to start PeopleExpress and take advantage of the new U.S. aviation liberalization policies, which also included the demise of the once powerful Civil Aeronautics Board, (CAB), the industry's regulator since the 1930s.
On June 11, 1980 Lorenzo created a holding company for TI called Texas Air Corporation that enabled him to be free of Texas International's unions. Texas Air would prove invaluable to Lorenzo in starting other carriers and in pursuing other non-airline activities. Airline labor unions, upset with this use of what they termed a "loophole" in labor contracts, made forbidding airlines from forming holding companies a major priority after Texas Air's founding.
Shortly after forming Texas Air, Lorenzo started a new airline venture 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 had grown up. New York Air would become Lorenzo's challenge to the lucrative Eastern Airlines Shuttle, and provided competitive hourly services between New York, Boston and Washington-National. The ALPA pilots' union saw New York Air as a threat and fought it vigorously - as Lorenzo used the threat of transferring operations away from TXI to New York Air to win concessions from TXI's pilots union, whose contract had expired.
An aggressive campaign conducted by the pilots against Lorenzo, including a boycott against New York Air, brought considerable negative publicity. The non-union airline also gained great attention for successfully suing the government's Federal Aviation Administration (FAA) and thus received a grant of precious landing slots at LaGuardia and Washington National airports that were needed to start the hourly shuttle service. Further aggressive moves yielded the departure gates and other facilities needed by fledgling NYA, and the DC-9 aircraft purchased from Swissair and Austrian Airlines.
New York Air grew rapidly, adding scheduled services from LaGuardia to Cleveland, Buffalo, Detroit, Louisville, and other cities, before eventually being folded into today's Continental Airlines.
[edit] Continental Airlines
In 1981 Texas Air acquired a controlling interest in Continental Airlines after a contentious battle with Continental's management (including American aviation legend and early industry pioneer Robert Six), who were determined to resist Lorenzo. Continental's labor unions also fiercely resisted, fearing what they termed as, "Lorenzo's deregulation tactics." In the end, Texas Air prevailed. Texas International was merged into Continental Airlines in June 1982. TI ceased to exist and the "new Continental" relocated its headquarters to Texas Air's base in Houston, Texas.
Lorenzo took Continental into Chapter 11 bankruptcy in September 1983 after extensive negotiations with labor unions proved unsuccessful. Continental imposed a series of new labor agreement on its union workers, sharply reducing the airline's labor costs. Not only were striking workers forced to return, but the law stipulated immediate cessation of union contracts. A new agreement was then imposed which furloughed a significant proportion of employees, cut the wages of retained employees nearly in half, and added stricter work rules and longer hours. Management argued this mov was necessary to make the airline more competitive with the new airline startups then emerging and thriving in the southwestern U.S. 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 airline to fly through bankruptcy.
Airline unions fought Continental at every step. In the Federal courts, they unsuccessfully sued to stop the company's reorganization. A Supreme Court ruling in an unrelated case, National Labor Relations Board v. Bildisco & Bildisco 465 U.S. 513 (1984) upheld the Lorenzo tactic. Prompted by high profile cases such as Bildisco & Bildisco and Continental, the United States Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984. The law was too late to affect Continental and the drastic cuts helped rescue it from liquidation, but labor relations afterwards were caustic, and employee morale and customer service suffered.
In 1985, Texas Air attempted a takeover of Trans World Airlines. Although TWA's management favored Lorenzo over his rival Carl Icahn, TWA's unions feared Lorenzo so much that they negotiated special concessions with Icahn. TWA's Board eventually accepted Icahn's lower offer. In later years, the TWA unions went on to fight Icahn and his financial architecture of the airline, which ultimately couldn't prevent the liquidation of the airline after two bankruptcies. TWA's assets were acquired by American Airlines in April 2001.
[edit] Frontier and People Express
In October 1983, 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.
As with TWA, Frontier's unions pushed hard to avoid the Texas Air acquisition; and as with Pan Am-National, PeopleExpress won only a pyrrhic victory. PeopleExpress paid a substantial premium for Frontier's high-cost operation. The acquisition, funded by debt, didn't seem to industry observers be rational from either the route integration or the operating philosophy points of view, but was rather an attempt by Burr to best his former boss, Frank Lorenzo.
On August 24, 1986 Frontier filed for bankruptcy and ceased operations. With PeopleExpress hemorrhaging cash, 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. New York Air's operations would eventually be entirely dismantled.
[edit] Eastern Air Lines
Meanwhile Lorenzo had also been pushing negotiations with another troubled carrier, Eastern Air Lines. In an attempt to gain leverage over the unions, Eastern's chairman, Frank Borman, threatened to sell the airline to Texas Air.
The ploy doubly backfired, however; the machinists' union wouldn't back down, and Lorenzo was able to acquire Eastern for $615 million, an attractive value considering its more than $2.5 billion net asset value, on February 24, 1986.
Lorenzo gained a state-of-the-art computer reservation system, an extensive new route network, and one of the signature names in American aviation. By the end of 1986, Frank Lorenzo controlled the largest airline company in the world outside the Soviet Union.
Lorenzo repeated many of his signature tactics. He transferred many of Eastern's assets to Texas Air, including its reservation system and a number of slots at Newark airport. These were used to create a new world-wide reservation system, System One, and Continental's formidable hub at Newark Airport. Lorenzo also sold off some of Eastern's assets to fund the leveraged buyout, including the Eastern Shuttle, which was sold for $365 million to Donald Trump, and the South American route system, sold to American Airlines for $500 million.
When the International Association of Machinists (IAM) struck in March 1989 and were joined by both the flight attendant and pilot unions, Eastern was forced into bankruptcy. However, he accomplished far less than he had been able to at Continental. Eastern's unions, especially the IAM and its head Charles Bryan, were far more militant, and Lorenzo's fading public image allowed them to keep workers from crossing the picket line and returning to work. This had not been the case at Continental.
President George H. W. Bush did not act on a National Mediation Board recommendation to appoint a presidential emergency board to attempt to settle the strike.
Ultimately, Judge Burton Lifland, overseeing Eastern's bankruptcy case, ruled Lorenzo "unfit" to run the airline and named Martin Shugrue, a former Pan Am and Continental executive, as the Eastern trustee. Shugrue, however, proved unable to reverse Eastern's financial fortunes. Eastern Airlines ceased operations and was liquidated in early 1991.
[edit] Lorenzo's Legacy
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. Shortly after Lorenzo left Continental, and after the 1990 Iraqi invasion of Kuwait with its dramatic effect on the price of jet fuel, the airline filed for its second bankruptcy inside of a decade. In 1991, ABC News anchor Barbara Walters called Lorenzo "the most hated man in America."
In 1993, a group of investors, including Lorenzo, tried to establish a new airline. However, the United States Department of Transportation, rejected the application because of Lorenzo's involvement.
Lorenzo subsequently founded Savoy Capital, Inc., in the same Houston offices once housing Texas Air. Savoy is a private investment vehicle which invests the Lorenzo family's funds as well as those of selected outside investors.
Frank Lorenzo's influence permanently changed the face of the U.S. airline industry. He will be remembered, in light of his strengths and flaws, as one of the titanic figures in post-deregulation American aviation.
[edit] See also
[edit] References
- Bernstein, Aaron, Grounded: Frank Lorenzo and the Destruction of Eastern Airlines (ISBN 0-671-69538-X), Simon & Schuster, 1990
- Buckley, William F. Jr., [1] Frank Lorenzo & the free market in National Review, September 17, 1990
- Delaney, Kevin J. Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage (ISBN 0-520-07359-2), University of California Press, 1999.
- Mengus, Alain. PEOPLEExpress at [2], July 2002
- Parker, Mike. Remarks on Eastern Air Lines to the United States House of Representatives, March 15, 1990
- The Handbook of Texas [3] Texas Air
[edit] External links
- Chasing the Sun [4]
- U.S. Centennial of Flight Commission [5]
