Carrier Still Flying Through Unfriendly Skies : Airline: Trying to recover from the Lockerbie disaster that left 270 people dead and a company in disarray, Pan Am now must deal with a potentially damaging security report, shaky finances and a changing marketplace.

On May 15, the special Presidential Commission on Aviation Security and Terrorism, a group formed in the wake of the Pan Am 103 tragedy in Lockerbie, Scotland, issued its report.

Since the commission was formed last September, its seven members evaluated procedures for aviation security and reviewed options for handling terrorist threats, including prior notification to the public--a key issue since it was reported that the U.S. Embassy in Helsinki had received an anonymous telephone threat that a bomb would be carried aboard a Pan Am flight from Frankfurt to New York less than two weeks before the Lockerbie incident actually occurred.

Over seven months, the members interviewed dozens of witnesses, held five public hearings and visited security and police experts in the United States and foreign cities, including Frankfurt, Bonn, Paris, London and Lockerbie.

The final and unanimous report blasted both Pan Am and the U.S. Federal Aviation Administration for security lapses before, during and for nearly nine months after the December, 1988, terrorist explosion that killed 270 people.

For example, the commission released an FAA report of May 25, 1989, more than five months after the Lockerbie disaster, that stated Pan Am did not comply with strict security procedures at the Frankfurt airport, where Flight 103 originated.

An unanounced inspection of Pan Am at Frankfurt late last August showed that “many of the same security problems remained uncorrected.”

Top Pan Am officials were summoned to Washington.

“After one week,” the report states, “personnel changes were made by Pan Am at Frankfurt, and all of the security deficiencies were remedied. Pan Am’s security operation at Frankfurt was judged a model station.”

According to the report, Pan Am also fixed its security operations at London’s Heathrow Airport.

And what about notification to the public of bomb threats?

The commission report seemed to equivocate: “ . . . public notification of aviation threat information is appropriate under certain circumstances . . . The U.S. government should . . . establish a process and a mechanism by which clearly identifiable officials will consider when and how to provide notification to the traveling public.”

It should be noted that in the United States from 1980-89, the FAA reports that a total of 6,322 bomb threats were made concerning U.S. aircraft. Not one proved to be accurate.

The commission report comes at a time when many Americans are making their summer vacation plans, and when a record number of Americans are expected to be traveling across the Atlantic Ocean. And no one airline is more worried about the coming months than Pan Am.

Indeed, Pan Am’s fate could rest on how many American travelers in the next four months elect to fly on Pan Am.

Certain key questions remain about the airline, about its security, its service, its financial future and about its ability to compete in the global marketplace.

The tragedy at Lockerbie was a serious and staggering blow to Pan Am, but wasn’t the only big hit to shake the airline. The tragic crash of the 747 was nearly the coup de grace of a dismal decade for an airline that once flew high and proud, a once-profitable company that carried America’s flag around the world.

Since the late ‘70s, Pan Am had been in a tailspin of debt and bad service. And since the mid-’80s, rumors continued to circulate in aviation circles that Pan Am was flirting with bankruptcy. Each year, it seemed, Pan Am’s obituary was readied by airline observers.

Thomas Plaskett heard the Pan Am death rumors when he was a top executive at American Airlines, and later when he was at Continental.

And he heard them again when he was recruited by Pan Am in January, 1988, to try to save the ailing airline. When Plaskett arrived, the new chairman found himself confronted with huge management and labor problems.

By late 1988, Plaskett had succeeded in getting labor unions to make the financial concessions necessary to keep Pan Am in the air.

The airline then began to refurbish its fleet, analyze its fare structure, and offer new programs for business travelers, the core of its business.

“Too much of our business was being sold through consolidators, wholesalers, the gray market,” Plaskett said. “We were just selling our product too cheaply, principally because we didn’t have a product that was fully competitive.

“If we could get the product fixed, we could then start charging a fare that was consistent with the product.”

Pan Am reduced its dependence on consolidators, and started to market directly to the public “Eurosaver” fares to Europe that were lower than its regular fares but higher than consolidators’ fares.

“We began to make excellent progress,” Plaskett said. “We were seeing improvements in our revenues over the previous year.”

Then, barely 11 months into his job, Plaskett was confronted with an airline chairman’s worst nightmare: Pan Am Flight 103, flying at 31,000 feet from London to New York City, had been blown out of the sky.

A powerful plastic explosive bomb, apparently packed inside a radio cassette recorder and concealed inside a piece of checked baggage, had torn through the lower fuselage just in front of the left wing. The 747 ripped apart; all 259 people aboard the plane and 11 people on the ground died, the worst security-related disaster in U.S. civil aviation.

“Lockerbie changed the world for us,” Plaskett said, “and frankly it changed the world for every airline operating in the North Atlantic.”

Financially, the tragedy was a devastating blow.

“I’ve never seen revenue shortfalls hit an airline with such vengeance and so quickly,” Plaskett said. “It was a horrific tragedy. There’s no way you can calculate the human cost. But when you look at the facts, the reaction of the public was unjustified.”

Plaskett argues that despite reports of lax Pan Am security in screening passengers and baggage, the commission report did not conclusively determine that a piece of unaccompanied baggage was responsible for bringing the Pan Am plane down.

Even so, Plaskett knew that major changes had to be made.

“Lockerbie forced us to go back to ground zero,” Plaskett said. “We began to ask what was needed to improve our security system.”

Plaskett says that Pan Am’s security system “was an excellent security system before Lockerbie and it’s gotten even better after. Of course, there are individual lapses that take place. We’re dealing with human beings implementing very complex procedures.

“But overall security,” he claims, “has gotten better to the tune of probably $40 million. I’m not complaining about the cost. It’s necessary, and the fact is that you can’t provide security free.” (This year Pan Am will spend $63 million on additional security personnel and procedures. In 1988, that figure was only $25 million.)

But no matter how much money Pan Am spends, it still needs to fill its seats to stay in the air. In the wake of Lockerbie, many Pan Am planes were flying virtually empty across the Atlantic last year.

“We were tempted to pull back when that happened,” Plaskett admits. “But we made the decision that we had to stay the course that we had set, that if we stopped making the investments in the product, we would be even further behind once we climbed out of the negative cycle.

“What we didn’t anticipate was the long-term effects of Lockerbie, that our recovery from Lockerbie would take as long as it did.”

Indeed, the financial impact was nearly lethal.

While Pan Am carried 9.5 million passengers on its international routes last year (more than any other U.S. airline), the company recorded a 1989 loss of $452.1 million.

Plaskett announced that Pan Am needed a partner if it was to survive into the 1990s. But there were no takers due to the airline’s huge debt (more than $870 million) and aging fleet.

At one point, Pan Am tried unsuccessfully to buy Northwest Airlines. After the Northwest deal fell apart, Plaskett was left with few choices.

He pushed ahead and reinvested much of the airline’s remaining cash into refurbishing his aircraft, airport terminals and service in flight. He hired 2,000 more flight attendants and put more of them on each plane. He upgraded first- and business-class service.

Plaskett focused on on-time performance and baggage problems. He beefed up his Miami hub and increased service to Eastern Europe.

Slowly the airline began to show signs of recovery. On-time performance improved dramatically. And Pan Am now claims that it has the best record in the handling of baggage. (In 1989, Pan Am checked 25,013,010 pieces of passenger baggage; 24,850,576 arrived on schedule, or 99.4% of all bags handled.)

Pan Am has sold off once-profitable assets and continues to bleed money. It is down to about $90 million in cash, very little for an airline its size. Only two of Pan Am’s 157 jets are owned (the rest are leased or heavily mortgaged).

In an effort to raise cash, Plaskett is trying to sell part or all of Pan Am’s profitable intra-German flight operations. And last week the airline announced that it is putting its other moneymaking division, the Pan Am Shuttle, up for sale. (At this writing, American Airlines appears to be interested in buying.)

“We still have much more work to do,” says Plaskett, who argues that it is still too soon to publish the airline’s obituary.

So far, Pan Am’s bookings for this summer are running 25% ahead of 1988. If Pan Am can fill its seats, chances are that it will still be flying a year from now.

If it doesn’t, the next few months could very well be the final summer of Pan Am’s discontent.