Frank Lorenzo
- 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 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.
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.
Lorenzo changes the face of U.S. airline industry
Pre-deregulation
In 1969 he and Robert J. Carney established an aircraft leasing company called Jet Capital Corporation. In 1972 Jet Capital acquired Texas International Airlines (TI), a struggling intrastate carrier based at William P. Hobby Airport in Houston, Texas previously known as Trans-Texas Airways. Donald C. Burr, the later founder of People Express, was made vice-president.
Lorenzo as CEO pushed new marketing approaches on Texas International 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 computerized check-in in 1978.
Burr was active in recruiting a talented and energetic management 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 form the core of post-deregulation new airline startups. In addition to Burr himself (later the founder of PeopleExpress), TI management going on to run existing carriers or establish new ones included: Gerry Gitne (TWA), Neal F. Meehan and J. Scott Christian (New York Air; Midway Airlines; Chicago Air), Hap Paretti (Presidential), and others.
The combination of approaches 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 labor costs which were a carryover from the regulated days) and restructuring TI, Lorenzo had the financial resources and management tools he needed to later create a large airline from a combination of distressed legacy carriers and future start-ups. 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.
Pan Am, keen to enter the U.S. domestic market, won a spirited takeover battle with rivals Texas International and Eastern Airlines. The stock profits to TI, however, yielded a large $45 million war chest for Lorenzo's company. 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.
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 from the 1930s.
On June 11, 1980 Lorenzo created a holding company for TI called Texas Air Corporation, which enabled him to be free of Texas International's unions, in starting other carriers or in having other non-airline activities. 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 the holding company, Lorenzo started a new airline venture called New York Air, the first post-deregulation airline, based at New York's LaGuardia Airport, very near where Lorenzo had grown up. New York Air would be Lorenzo's answer to the lucrative Eastern Airlines Shuttle, with hourly services between New York and Boston/Washington-National. Although Lorenzo committed to keep the airlines separate and not transfer any of Texas International's aircraft, the ALPA pilots' union saw New York Air as a threat and fought it vigorously.
As TI's Meehan and Christian, joined by a determined group of industry veterans including Kenneth Carlson, Steven Kolski, Harris Herman, and William Bottoms, descended on La Guardia airport to establish New York Air (NYA), industry watchers held their breath and tried to forecast what this development would mean for the industry. The feisty, non-union New York Air 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 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 obtained from Swissair and Austrian Airlines.
New York Air grew rapidly, adding scheduled services from La Guardia to Cleveland, Buffalo, Detroit, Louisville, and other cities, before eventually being folded into today's Continental Airlines.
Continental Airlines
Texas Air acquired a controlling stake in Continental Airlines in 1981. After a very contentious battle with Continental's management (including American aviation legend and early industry pioneer Robert Six), who were anxious to resist the new owners, and with Continental's labor unions who feared Lorenzo's deregulation tactics. Texas International was merged into Los Angeles, California-based Continental Airlines in June 1982. TI ceased to exist and the new Continental moved its headquarters to Houston Intercontinental Airport.
Lorenzo took Continental into Chapter 11 bankruptcy in September 1983, after extensive negotiations with its Unions proved unsuccessful. The New Continental imposed a new agreement on employees, sharply reducing the labor costs of the company, making it more competitive with the new airline startups then surfacing and growing in the Southwest. At the same time, a smaller airline was brought back a few days after the bankruptcy filing, which gave Continental the distinction of being the first airline to fly through bankruptcy.
The airline unions fought Continental at every step. In the court room, they unsuccessfully sued to stop the company's reorganization. They were successful in aiding the passage of 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 drastic cuts and changes that helped rescue it from liquidation.
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 him, and the Board 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.
Frontier and People Express
In October of the same year Lorenzo made an offer for a Denver carrier, Frontier Airlines, opening up a bidding war with People Express, headed by his former associate Don Burr.
As with TWA, the unions pushed hard to avoid Lorenzo, and as with Pan Am, People Express won only a Pyrrhic victory.
It paid a substantial premium for Frontier's high cost operation, funded by debt, which didn't seem to many observers to make any system sense, but rather was an attempt by Burr to beat out his former boss, Lorenzo.
On August 24, 1986 Frontier filed for bankruptcy and ceased operations. With People Express hemorraging cash, Texas Air acquired the airline on September 15, 1986, also gaining Frontier Airlines, which was added to Continental's 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
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 transferred a number 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 powerhouse, System One, and Continental's formidable hub at Newark Airport. Lorenzo also sold off some of Eastern's assets to fund the cash losses at the airline, 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 struck in March 1989, and were joined by both the flight attendants and pilots, Eastern was forced into bankruptcy. However, the Eastern bankruptcy accomplished far less than Continental's due to the disruptions that Eastern's unions were able to effect and their ability to keep workers from returning to work and cross the picket line, unlike at Continental.
Ultimately, Judge Burton Lifland, overseeing the bankruptcy case, at the Union's urging removed Texas Air from control of Eastern and named Martin Shugrue, a former Pan Am and Continental executive, as its trustee. However, Shugrue proved unable to reverse the finances of the airline and it was liquidated in early 1991.
Lorenzo's Legacy
In 1990, Lorenzo retired after 18 years at the helm of Texas International and later Texas Air and Continental Airlines, selling the major position 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 1993, a group of investors including Lorenzo tried to establish a new airline. However, with enormous political opposition from labor unions and their influence with the newly installed Clinton administration, 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, both through the force of his indomitable personality and the farsighted trends which he initiated and others later imitated. He will be remembered, in light of his strengths and flaws, as one of the titanic figures in post-deregulation American aviation.
Lorenzo who had successfully competed with other carriers, notably Southwest Airlines, in the unregulated Texas intrastate market, had a head start in the scrappiness and prompt action which would be needed in the post-regulation U.S. airline industry. By 1979, Lorenzo was accustomed to the fight, whereas the major trunk airlines were exposed to competition for the first time in an environment of high fuel prices and high interest rates, and were encumbered with entrenched managements that were much slower to act. In this environment, Lorenzo's tenacity, marketing savvy, and blitzkrieg management methods carried the day and allowed him to act boldly in assembling the largest airline empire in world.
On the other hand, Lorenzo's management style with reference to labor relations produced friction and sometimes violent reactions not only in the companies he managed, but throughout the U.S. airline industry. The labor wars and low morale which resulted among unionized labor hung like a cloud over Continental for several years after his successor, Gordon Bethune, took the helm of what was by then one of the world's largest trunk airlines. Versions of Lorenzo's labor philosophies and tactics have survived his direct involvement in the industry, and somewhat less draconian imitations have been employed in restructuring other of the industry's legacy carriers, most notably United Airlines, Delta Air Lines, and Northwest Airlines. The flexibile, lean, and aggressive style of Lorenzo's management team has since been widely imitated throughout the airline industry.
See also
References
- Bernstein, Aaron, labor editor of Business Week 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
External links
- Chasing the Sun [4]
- U.S. Centennial of Flight Commission [5]