Is Lorenzo in the Wrong Line of Work?
Frank Lorenzo, that snarling, vicious capitalist--know what he eats for breakfast?
1) Raw meat torn from a carcass.
3) Small Children.
4) Fresh fruit and herbal tea.
The correct answer is 4. Lorenzo wears that lean and hungry look because he is unusually lean and in all probability hungry, from a strict personal regimen of diet and distance running--something I learned while spending time with him as long as two years ago. Watching him eat, I had to suppress an urge to say: Frank, have a milkshake. All manner of pop psychology theories spun into my head about compulsion to devour in business what one fails to consume at the table.
I mention this because I sort of like Lorenzo. Don’t get me wrong--I’m really glad I don’t work for him. But he is taking a worse rap than he deserves during the Eastern Airlines strike--in part because the press and the public paid more attention to his robber-baron image than his real accomplishments. Consider:
It is true that none of the major airlines Lorenzo has acquired, including Eastern, have done well financially. But they were failing when he bought them. The Texas Air empire embraces four of the six major airlines that have had severe problems since deregulation: Continental, Frontier, People Express and Eastern.
When Lorenzo bought Continental it was considered the sickest major U.S. airline; at least give Lorenzo credit for keeping it alive. Frontier’s operations were suspended; People Express was avoiding bankruptcy by desperate accounting tricks. When Lorenzo acquired Eastern in 1986, it had shown profits only once in the previous decade. During 1986, major air carriers were on an acquisition binge, but so bleak was Eastern’s condition, Lorenzo was the only one to bid.
Why did Lorenzo buy four failing airlines? Simple--he could afford them. He was determined to become a major player in the U.S. airline industry. Some more pop psychology: Lorenzo was born in a modest home in Queens, N.Y., a first-generation son of Spanish immigrants. The house lay under the approach path to LaGuardia Airport. From childhood, Lorenzo was fascinated by flying. By sheer effort, he became the chief executive officer and, in effect, owner of the Western world’s largest air transport corporation. He could never have accomplished this by trying to buy healthy airlines. Lorenzo said he was drawn to Eastern “because its condition was so terrible that it was capable of a tremendous turnaround.”
For all the “greed” rhetoric surrounding Lorenzo, he is not filthy rich--estimated net worth, $40 million. Not shabby, but far below the Carl C. Icahn class.
Lorenzo isn’t filthy rich because Texas Air has never been profitable. Lorenzo’s first effort, a regional airline called Texas International, made moderate profits in the 1970s. But since Lorenzo went national by buying Continental, his company has lost money nearly every year and produced at best anemic stock price performance--undermining the value of Lorenzo’s own holdings.
Eastern unions are pumping out bluster about Lorenzo “bleeding Eastern for fast profits.” Bleeding to where? Eastern’s parent company loses money too. Lorenzo has been successful as a takeover specialist; he has never been conspicuously successful at making money. Air Line Pilots Assn. President Henry A. Duffy called Lorenzo “the Gordon Gekko of the airlines,” referring to the billionaire villain of the movie “Wall Street.” Bad analogy. Gekko deals made money.
Texas Air lost money through the 1980s for two reasons. First, it is based on companies in deep financial trouble when Lorenzo acquired them. Second, Lorenzo held down Texas Air fares, almost single-handedly preventing deregulation from creating monopoly-priced air travel. Texas Air has been the industry’s low-price leader. Everybody knows that labor hates Lorenzo. Guess what--management hates him too, management of the other major airlines at least. Without Texas Air, the majors could have had a nice pie-dividing session after deregulation, charged higher prices and cleared higher profits. Any air traveler who pays for his own tickets ought to pray Texas Air does not fold.
Charles E. Bryan, head of the machinists’ union that struck Eastern, has in recent months repeatedly said Lorenzo is the problem and that no settlement is possible unless Lorenzo goes.
Bryan said exactly the same of Eastern’s previous chairman, Frank Borman. In 1986, elaborate negotiations to prevent Eastern from being sold to Lorenzo collapsed when Bryan demanded that the Eastern board fire Borman. Bryan’s rhetoric focused on how Borman was the problem; now, take any recent news story about Eastern, substitute Borman’s name for Lorenzo’s and you have a story indistinguishable from those of 1986.
Eastern management did several crummy things to make workers bitter. Borman unilaterally reneged on promised raises; Lorenzo refused to meet with Bryan. But perhaps more relevant: Eastern machinists belong to the International Assn. of Machinists, the most vocally left-wing of major U.S. unions.
Eastern’s IAM local is biased toward confrontation over cooperation; in the fog about money (demanding $50 million in raises from an airline that just lost $400 million) it has been so pumped up by Bryan about how horribly members are treated that many have lost sight of how attractive airline industry jobs are. Most Eastern ground workers may never again get jobs as desirable as the ones they now hold--especially slots that pay about $35,000 a year for ramp workers who are only slightly above unskilled labor.
Yet for all his experience with labor--Lorenzo felt he understood the inner dynamics of unions because he helped put himself through college as a Teamster--the Texas Air boss seemed not to understand just how determined Bryan was to keep his members in labor’s old “us versus them” mode. In mid-1987, Lorenzo told me, “I expect that two years from now there will be labor peace at Eastern. The marketplace is at Eastern’s door. Union leadership pretends that isn’t happening but the union members understand and are more realistic. They don’t want to sacrifice their jobs for ideology. They will pressure their leadership for peace.”
While it is true that airline unions enjoyed many sweetheart deals under the old regulated system--deals that had to be reined in because they guaranteed higher fares--Lorenzo seems to have become obsessed with labor as an enemy.
“When Congress deregulated the industry,” he said, “all they really did was deregulate the revenue (ticket price) side. Congress said, ‘Look fellas, the expense side, that’s labor, that’s politics, that’s brutal. You all go out and worry about that.’ We (managers) were left with the dirty work. Certain airlines didn’t have the stomach for this. Management wanted to keep their cozy little relationships. I mean it’s the easiest thing in the world to avoid a strike, right? Just give in. Well somebody had to bring the disciple of the marketplace to the unions.” Lorenzo refers to the kind of company he likes not as “non-union” but “union-free.”
For his part, IAM President, William W. Winpisinger has long claimed that airline deregulation was a conspiracy to undermine unions. Destroying Lorenzo probably means more to him than the thousands of jobs lost if Eastern vanishes. But then Winpisinger, and the rest of the union hierarchy, will not be out on the street: The IAM represents other workers besides Eastern mechanics, so leadership jobs are safe.
Eastern pilots, who are honoring the picket lines, take a far lesser risk than machinists: There is an industrywide shortage of experienced commercial flight crews. Traditionally pilots’ unions have not shown sympathy for strikes by ground workers and flight attendants, whom many pilots consider overpaid. These groups in turn resent pilots, who they feel have been propelled into the upper class by $115,000-plus incomes and have forgotten the problems of average working people.
Texas Air management miscalculated, however, in thinking that most Eastern pilots would cross the picket line. “There’s a real difference between ALPA national and the Eastern chapter,” Lorenzo told me. “ALPA is obsessed with safeguarding the $150,000-a-year, 12- day-per month life style of its most senior members, and will tell any fairy tale it can to protect this group. The Eastern pilots want to see a growing company and know that companies must be competitive in order to expand.” Pilots get raises both via seniority and by promotion to captaincy. An expanding airline has an increasing number of captains’ seats, giving pilots a direct monetary stake in growth. Any hope Lorenzo might have had of keeping the pilots in his corner, however, probably was lost last year when Texas Air began scaling back Eastern operations.
Why hasn’t Lorenzo been able to rebuild the sickly airlines he acquired? There are a number of reasons; principle among them is that air travel is a service industry. Reputation is based as much on eye contact and personal experiences with flight attendants, baggage handlers and ticket agents as on government performance statistics. And reputation, once lost, is hard to recover.
Consider that in its dying days People Express could not pay to get people on its planes, though its operational problems had smoothed out. Today Continental has a good travel product but veteran travelers, the core of profits, remember Continental’s wacky operations when Lorenzo rode out another strike in 1983. They remember how shabbily Continental treated customers during its chaotic integration with the ghosts of People, Frontier and New York Air. Today they will go out of their way to avoid the airline. Reputation is the main reason Continental continues to lose money, while airlines with higher wage structures, like American and United, are making money.
It is fair to say that Lorenzo is not the kind of person who ought to be running a business like an airline where personal interactions--both with customers and workers--are so important. Whatever his other merits, Lorenzo does not ooze warmth. Pop psychology alert: I think his marathon running is a clue. People who participate in distance running learn to live inside their own heads; some come to look forward to the chance to be alone with their thoughts, shutting out others entirely. Not such a good personality profile for the head of a service industry.
Yet it is also fair to say that Eastern’s unions are cutting off their noses to spite their faces--millions of Americans would trade their jobs for the ones Eastern machinists speak of with such contempt. Workers are also virtually saying “go to hell” to a traveling public that has shown a long memory.
Thus Lorenzo and Eastern unions are writing a suicide pact. No matter how the strike is resolved--whether the unions break, or they win and Lorenzo sells them Eastern, or another buyer steps in--what remains will be an airline with a bad reputation made worse. The only practical solution may be to dissolve Eastern and sell off the pieces--ending the life of an airline but breaking the cycle of mutual destruction that both labor and management now seem bent on sustaining.