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Excerpts relating to Frontier Airlines from RAPID DESCENT: Deregulation and the Shakeout in the Airlines

by Barbara Sturken Peterson and James Glab, published 1994.

This is an excellent book and available at Amazon.Books.

 

A DEVELOPMENT OUTSIDE THE AIRLINE business became increasingly important to the airlines in the next two years. Investment bankers were eager to broker a deal, to tap the largesse of an Icahn or a Lorenzo. As Brian Freeman put it, “Drexel was really hustling Lorenzo for deals.” Drexel junk bond king Michael Milken actually got to know Lorenzo fairly well and occasionally proffered advice. Even though Milken and his junk bond obsession may have helped build Lorenzo’s empire, Milken later repeatedly urged the Texas Air chief to get out of the business.

But in early 1985, Wall Street was hailing Frank Lorenzo as a hero. He had proved that an airline could be taken into bankruptcy and survive, indeed prosper.

Continental, in the two years after its Chapter 11 filing, confounded critics who had warned that passengers would desert a bankrupt airline. The airline had in 1985 posted the highest third-quarter operating and net profit in its history, admittedly with help of Chapter 11, which exempted the company from some debt payments. Its planes were flying two-thirds full. Its workforce had more than doubled, from the skeletal staff of forty-five hundred right after the strike to nearly ten thousand.

The company was still technically in bankruptcy and the court kept slowing Lorenzo’s efforts to build Continental into a powerhouse. When Lorenzo tried to acquire eighteen new aircraft and launch new services to a score of cities, the judge overseeing the case questioned the company’s eagerness to expand at a time when it had yet to work out a final deal with its creditors. At this rate, it would never rival United or American.

Continental’s bankruptcy did not slow Lorenzo’s acquisitiveness. Lorenzo simply used Continental’s parent company, Texas Air Corporation, which was not in bankruptcy, as a fund-raising vehicle.

Lorenzo’s tough stand against organized labor was an asset in raising money to finance expansion. Many Wall Street analysts issued bullish assessments of Lorenzo’s ability to create a truly low-cost airline giant. Through several public offerings Lorenzo amassed a war chest of some $150 million.

Soon a target came his way, ailing Frontier Airlines, which was based in Denver, also a big stronghold of Continental’s. This middling regional airline would not do much for Lorenzo’s grand ambitions to create a huge international company, but it would take care of a nagging problem closer to home. Both Frontier and Continental were having a hard time competing with United at Denver, where the three carriers were engaged in a turf war reminiscent of the brawl among American, Braniff, and Delta at Dallas a few years before. Denver was not a big enough market to support all three companies and it was just a matter of time before one of the rivals was forced to fold. United had the might to simply wait out the bloodbath. Lorenzo’s response was to try to buy his competition.

Frontier management had been looking for a cash-rich suitor to acquire the company. Employees, however, had their own ideas about how to rescue the crumbling company. Union leaders had formed a coalition to explore an employee buyout, and workers had already committed themselves to wage cuts as part of the plan. If it succeeded, Frontier would become the first employee-owned airline. The employee group entered into negotiations with RKO Corporation, which held the biggest chunk (40 percent) of Frontier’s stock, and a deal looked feasible by the time Lorenzo declared his interest. Employees were sickened at the prospect of having to work for Lorenzo instead.

Organized labor would not forget how Lorenzo had gutted labor contracts at Continental back in 1983. Airline unions subsequently lobbied for a change in federal law that would prevent Chapter 11 from being used as a tool to break labor contracts. This amendment was passed by Congress in 1984. Labor leaders were convinced that the Continental experience had hardened Lorenzo irrevocably. William Scheri, an official of the International Association of Machinists who had dealt with Lorenzo at Texas International in the 1970s, recalled that “he was a changed man” after he took over Continental. even refusing to meet personally with union representatives.

Right after the Chapter 11 filing in 1983, “Continental shrank down to a small core of people who formed a circle around Frank,” one former Continental officer remarked. “And they fought the battles with the pilots, and with the pipe bombs, and the violence and ugliness that came of the Continental bankruptcy. That forged a bond between Frank and this circle, and the circle stayed together all through the Continental regrowth. It became a siege mentality.”

Early in April 1985, Lorenzo made an offer for Frontier, but it was laughed off as a lowball bid, just a typical effort by a raider to stir up the pot. “Bids were made on everything,” said a close associate of Lorenzo’s. “You throw in a bid to find out what’s happening, maybe learn a little more about your competitor through due diligence” (gathering information on the target company). However, Lorenzo was soon distracted by a much more alluring target, the airline he most coveted—TWA.

IN AUGUST 1985 A COALITION of Frontier employees announced a proposal to buy 80 percent of the company’s stock for $210 million, or about seventeen dollars per share. News of the imminent employee buyout got Lorenzo’s attention, It was just days after he had signed off on his agreement with Icahn not to muddy the TWA deal. He had never quite called off his pursuit of Frontier, and he quickly sprang into action, proposing a tender offer for Frontier at twenty dollars per share and setting an October 18 deadline on the offer.

The ensuing imbroglio mirrored events at TWA. The unions were aghast at the idea of a Lorenzo acquisition and began a search for a White Knight. The employee coalition complained to the Transportation Department, accusing Lorenzo of “high-handed tactics” in his proposed takeover. The agency, consistent with its record, refused to stand in Lorenzo’s way and soon signaled that it would allow Texas Air to buy stock in Frontier and place it in a voting trust.

When attorneys for Frontier tried to scare up another suitor, Burr got wind of the activity; he contacted Frontier to say he too would be interested in making a bid.

“We knew that by that time we were in deep shit, and we knew we were being underpriced everywhere. We knew we had to do something,” Burr said. He actually had been attending to one crucial matter, development of a computer reservations system that would finally permit People to dabble in yield management, juggling its fares to meet demand. But the airline was years behind in this endeavor, in part because of an unfortunate deal it had signed with NCR. The computer company had spent virtually two years on the project and had come up empty-handed. People now turned to a \Vest Coast software company, which had promised to produce a real reservations system by 1987. However, Burr was starting to doubt that People could survive independently until then.

After Burr’s call to Frontier, Morgan Stanley entered the scene as People’s investment banker. Now they had to convince People’s board that the transaction made sense. Burr made a compelling pitch to his directors. “Here we’ve got this merger, and it gives us everything we’ve got to have a frequent-flyer program, access to Denver, San Francisco, Los Angeles, and all the major airports in the West, because we wanted to fly there but there aren’t any slots . . . and guess who has all that, plus a beautiful hub in Denver, a sales force, a computerized reservations system? We don’t have time to invent all that.”

Meanwhile, Frontier’s board had scheduled a meeting for early October to consider Lorenzo’s bid in New York City, where Burr was by then operating from a hotel, working furiously on the deal with his investment bankers. Late one night he went out and bought a copy of the next day’s New York Times. When he opened the paper to the business section, he knew he had to act fast. A story reported that Lorenzo had suddenly sweetened his offer for Frontier to twentytwo dollars a share. The next day, Burr got in touch with the coalition of Frontier unions and offered them an appealing proposition: Give me concessions, and I’ll rescue you from Lorenzo. Burr and the employees quickly put together a concessions-ownership swap to present to the Frontier board.

When the directors met as planned, Burr came in with an offer of twenty-four dollars a share plus the firm support of the unions for the deal. The board was speechless. Burr had been expected only to match Lorenzo’s price. Now he was offering about $300 million for the airline, with about $100 million from People, the rest from the money already raised by the labor coalition. “That’s a remarkable offer,” said Gerald O’Neil, a Frontier director and the company’s largest shareholder. ‘It’s the deal of a lifetime,” Burr gushed.

The deal that had been designed to save People would, however, destroy it. Burr had committed some cardinal sins in his rush to grab Frontier from Lorenzo. He’d garnered the support of Frontier’s unions, in part, by guaranteeing jobs for up to four years at current Frontier wages. These pledges were not extended to Burr’s own workers at People, who were predictably upset at their inferior treatment. And taking on a competitor like United at Denver was pure hubris. “God, even Lorenzo didn’t realize it, but United owned every travel agent in that town,” Burr remarked later.

When Burr actually got down to trying to merge the two companies, he committed another blunder in trying to spread People’s no-frills service to Frontier. The results were disastrous. “It was more of a culture shock for the passengers than for anyone else,” a former People employee recalled. “On Frontier. they were used to assigned seats, meals, a ticket counter . . . here at People, you’d get a piece of paper that looks like a grocery receipt. Passengers would charge onto the plane and take any seat they wanted. It was not for everyone, that’s for sure.”

Several weeks after the transaction, one of Burr’s top financial officers, going over the figures on Frontier’s operations, became increasingly distressed at what he kept seeing. Burr walked by, saw the odd look on the man’s face, and demanded to know what was wrong.

“This Frontier thing is going to kill us,” the executive reported. “It could very well eat up $100 million in cash in losses over the next few months, and we can’t generate enough excess cash from our own operations to meet those needs.”

Burr’s response, according to the executive, was to say: "I don’t want to hear about this! Don’t come out of your office until you’re ready to put a smile on your face. People will think you’ve got something to be worried about.”

Burr had made the classic merger mistake of jumping into an essentially unknown situation. People had been breaking even, even managing to make a little money; Frontier was bleeding. Every week, according to People insiders, millions of dollars went from People’s coffers just to pay Frontier’s payroll and fuel bills.

BURR SOON HAD CAUSE TO regret he hadn’t let Lorenzo grab Frontier from him. He too had been tempted by an airline’s apparent asset value, only to find it to be an illusion.

“Yeah, so we got a computer,” he said later. “It was an old computer that didn’t do much, but we got one. And we got a frequentflyer program, but it wasn’t United’s, and it was pretty useless. And we got relationships with travel agents who said, ‘Sure, we’ll talk to you, but just remember that all those Apollo machines of United’s get our first attention.’ And of course, United and Continental, who’d been quite prepared to allow us to exist in Newark and had given us a lot of room there, were not prepared to have us in their hub at Denver.” At one point Continental slashed fares to Colorado Springs to nine dollars one-way.

Doubts about Burr slowly started to bubble up among his loyal troops. Some of the pilots started calling their boss “Guyana Jones,” after the People’s Temple founder Jim Jones, who had led his followers into mass suicide in a South American jungle. Vendors and others who did business with the company weren’t getting paid. “I’d start getting angry calls saying, ‘Where’s my money?’ “ recounts Sheryl Martin, who had been opening new stations for People and dealing with outside suppliers. Inside the company, she recalled, “Employees were in a state of denial. They kept on saying, ‘Don will fix it.’ “

Burr clearly saw himself as a guru, a self-anointed prophet of industry who would miraculously convert the misguided union employees of Frontier to his touchy-feely philosophy. But his top officers increasingly viewed him as remote and autocratic. Burr’s increasing openness about his close relationship with his long-time assistant, Melrose Dawsey, was also casting doubts on his judgment, according to former associates. She held an officer title and a substantial share of company stock.

Burr’s apparent refusal to face reality alarmed top officers. One instance involved the hall-dozen 747s Burr had ordered in an expansive moment, cramming 450 seats onto each of the planes. “People like to fly on 747s,” he said, but the traffic numbers showed that was true on only one route, Newark-London——elsewhere, the airline was losing as much as a quarter of a million dollars per flight with the 747s. A group of People officers went to Boeing and convinced the manufacturer to take back five of the six planes and replace them with 250-seat 757s, but Burr rejected the move, reasoning that since passengers liked the 747, it must make sense.

"He would just go chasing out after something; you couldn’t rein him in even if you could show him numbers that proved his new ideas wouldn’t work. . . . He couldn’t admit he had made a mistake. He was running the company into the ground because he wouldn’t listen to us,” said one officer.

In January 1986 Time magazine hailed Burr’s success on its cover. By July, Newsweek was calling him a “fallen hero.” Later, Burr would confess to feeling "amazed” at how quickly a company could run out of cash. In nine months, People Express went from a profitable enterprise to flat broke. Burr’s own board of directors was now regarding him much more critically. Several times, Bill Hambrecht, the banker most responsible for People’s startup, was deputized by the directors to go to Burr and ask for his resignation. “Come on, Don, I think it might be best for you to step down,” Hambrecht would say. But Burr was determined to stay on and fix the company. He finally started listening to his board’s advice to make People more like a traditional company; it had clearly grown way too large for the sorts of jobsharing and vague job descriptions that had been its hallmark. Burr had considered bringing in more professional managers to run things, but his unconventional style had worked against him. Top officers at People Express made less than one hundred thousand dollars a year and did without secretaries and expense accounts.

Meanwhile, as these deliberations were going on, Burr was heading toward bankruptcy court. In June 1986, under pressure from his board, he put out a press release saying, in effect, that he was ready to sell any part or all of his airline.

United Airlines appeared as an unlikely savior, offering to take Frontier off Burr’s hands for $146 million—less than half what Burr had paid for it a year earlier. News of the deal provoked an instinctive response from Lorenzo, who was understandably distressed to learn that United might soon be in a position to destroy Continental at Denver.

It was from a position of strength that Lorenzo went to his old friend and tried to help him out. He had finally achieved his critical mass by buying Eastern, but the transaction was not due to be finished for another six months while the government ruled on the merger. And while Lorenzo’s lunge at Eastern had been as hasty as Burr’s purchase of Frontier, the folly of the former would not be evident until much later.

Burr was touched, he said, by Lorenzo’s interest.

“The other airlines just wanted us to collapse, so they could buy the planes. They didn’t think our people systems were worth anything,” said Burr. “But there is a piece of Frank that kind of respected what we do. And he was very enamored of Newark Airport.

“Look, don’t do that United deal,” Burr recalls Lorenzo saying. “We’ll buy People Express and it will be a great deal. You can be president of Texas Air and I’ll be chairman, and you can do all your ‘people’ things. The company will be about an $8 billion outfit and it should be big enough for both of us.”

The two started spending time together, meeting at Burr’s summer home on Martha’s Vineyard or at Lorenzo’s Nantucket house. Lorenzo agreed to make a bid for People.

Burr took Lorenzo’s proposal to his board. However, there was some dispute over exactly how much Lorenzo’s offer was worth. It was a cash and stock offering that a Morgan Stanley adviser valued at S7 or $7.50 a share. A Drexel analyst came up with a $9-a-share figure. And Lorenzo said it was more in the $10 to $1 1 range. But to sweeten the package, Lorenzo also threw in “an especially good deal” for the officers, Burr recalls.

“I thought this Texas Air deal was the best thing for us at the time,” said Burr. “But goddammit, this Morgan guy comes in at 5:00 A.M. when we’d been up all night meeting on the offer. And he says he can’t provide a fairness opinion on this one, because you can’t trust Frank Lorenzo.”

Burr was, as he admitted, “highly compromised” with the board at the time. The gap between him and his directors had widened to the point that the board had hired its own external legal counsel to protect themselves in their dealings with him. Then Burr got the rug pulled out from under him by another player. When Burr was asked what People’s cash situation was, he gave the board one figure, but executive vice-president for finance McAdoo contradicted him and said it was about half that. So the board said it would back the United offer for Frontier and reject Lorenzo. To make matters worse, the message was delivered to Lorenzo in the vein of “go to hell.” Burr felt. McAdoo left the airline soon after.

The United deal soon collapsed, too. Dick Ferris had second thoughts as he got a better picture of just how badly Frontier was bleeding. Ferris could pick up some of the assets he wanted, like Frontier’s 737s, without assuming the burden of the entire company.

By late August, the pilots union had made up Ferris’s mind for him. For the deal to be palatable to United, Frontier’s unions would have to agree to substantial wage cuts for several years, but the proposed pilot contract, and the subsequent merging of seniority lists, was subject to approval by United’s pilots. Still stewing over their own strike against United the previous year, the pilots rejected the deal.

Burr was right back where he had started, with Frontier still attached to People and still bleeding like an open wound, draining millions from his cash flow.

On August 24, Frontier Airlines ceased operations. On August 28, People Express announced that its Frontier Airlines subsidiary had filed in a Denver court for protection from creditors under Chapter 11 of the bankruptcy code. Burr angrily attacked what he called the “rigid and unrealistic” United pilots for torpedoing the deal that might have saved the airline.

Sometime that August, Burr got a long-distance call from Lorenzo, who was vacationing in the south of France with his family. “I guess you are having a little trouble with Frontier,” Lorenzo said. “Why don’t you come over to France and we’ll talk about it.”

Burr was grateful for the opening and he immediately said he’d be right over. As he was getting ready to leave, he got another call from Lorenzo, who said he was decamping from his rented house in Provence, where huge fires had been raging. But he was even more promising this time, almost nostalgically talking about the early days of his and Burr’s partnership. “You and I are a great team,” he said. “We’ll get together as soon as I get back.”

Weeks later, the two had hammered out a pact. It was, of course, much less generous than even the lowest estimate of what Lorenzo had offered in June. Now, Lorenzo was offering somewhere between four and five dollars a share. But it was an extremely good offer compared with what anyone else would have forked over. People then was barely solvent; analysts were regularly quoted in the press as saying that it should just be allowed to die, and that the big airlines would simply pick up the pieces.

Lorenzo was extremely covetous of Newark, so it was not an act of charity to buy People at a bargain basement price, although the purchase would conveniently spare Burr an ignominious end. Phil Bakes recalled the discussions down in Houston about a People acquisition. “We really needed that East Coast hub and we did not want anyone else to get their hands on it.”

On the afternoon of September 15, 1986, hundreds of People employees filed into the huge amphitheater at People’s reservations center near Newark Airport. On the stage were an uncharacteristically morose Don Burr and a smiling Frank Lorenzo. They gave the assembled People staffers the news: Soon they would be working for Texas Air. Despite the fact that Lorenzo was rescuing an operation no one else would touch, Burr, for perhaps the first time, was not delivering his standard upbeat message to his troops. Some hollow assurances were uttered about preserving the People Express culture, but the audience was skeptical. “Don would not even look at Frank,” said Sheryl Martin. “I’ll never forget it. It was awful. He looked shell-shocked.”

Coincidentally, on that very day the fancy computer system that Burr had been after for five years, the one that would let Burr compete with Bob Crandall and all the other yield management wizards out there, the one that would let him launch a true frequent-flyer program and a travel agent program, was finally declared ready by the technocrats who’d been toiling for nearly three years. Too late.

TEXAS AIR SHAREHOLDERS APPROVED THE merger of Continental and People Express on December 31, 1986. Lorenzo told his surprised staff he wanted the merger completed almost immediately. His haste was aimed at stemming People’s losses, which were continuing at the rate of some $1 million a day. Continental managers said it was impossible to complete such a complex operation that fast. Lorenzo insisted, but he finally acceded to a brief postponement. The cornbination was set back to February 1.

Workers started repainting the brown-and-tan planes of People Express in Continental’s red and gold; the two-letter PE code was expunged from computer reservations systems and replaced with the CO identifier of its new owner.

This operation was infinitely more complex than even Northwest and Republic; it would crush many disparate companies into one— not only People Express and its subsidiary Frontier, but also New York Air, which Lorenzo had decided to absorb into the mass, since it seemed unlikely to survive on its own. There were several smaller commuter lines that were also part of the overall merger—Rocky Mountain Airways in Colorado, which had been bought by Continental; Provincetown Boston Airways and Britt Airways, two commuter lines snapped up in a feverish expansion binge by Don Burr; and Bar Harbor Airways. In all, it was a mish-mash. Alfred Kahn himself could not have dreamed up such an incompatible collection of airlines uniting as a result of the deregulation battles.

Nothing was alike at any of these airlines. Each had different types of aircraft with different cabin configurations. People Express, because of its unique no-frills service, didn’t even have galleys in its plarnes. “We had something like thirty-two different types of equipment coming together under one umbrella,” said a Continental worker.

One camp argued for putting People into Chapter 11 bankruptcy. Phil Bakes, for one, liked to describe Burr’s company as a “black hole,” an airline with almost no infrastructure and an anarchic operation that would eat up and destroy anything else that came within its orbit. Texas Air didn’t want another bankruptcy but Bakes and others felt that this was a different case; People had already been written off and was being treated in the media as if it had already gone bankrupt. Its subsidiary Frontier, in fact, was already in Chapter 11.

Some people also suspected that Lorenzo decided not to throw People into bankruptcy in order to save Don Burr’s personal fortune. In bankruptcy, his shares in the company would have been worth little or nothing, but thanks to the merger agreement he’d worked out with Lorenzo, Burr reportedly would get about $5 million to $10 million—as well as a top job at Texas Air to help smooth the transition.

Burr claimed later that Lorenzo had promised him the president’s post at Texas Air but reneged, just as he had years before when he had first joined Texas International. This time, Lorenzo threw him a bone in the form of a vague title, naming him executive vicepresident of the Texas Air holding company. In any event, it didn’t matter much what his title was, since his job responsibilities were unclear.

When he arrived at Texas Air early in 1987 as People’s ambassador without discernible portfolio, Burr merely irritated the longtime Lorenzo associates who reported to him. A Continental executive recalled that Burr was “always out screwing something up. His nose was always under the tent. He was always at Newark. He was acting like he was the boss and he wasn’t.” Burr still clung to the hope that he would be able to preserve some of People’s unusual culture.

To promote the merger in the New York area, Continental officials cooked up a wild scheme to pass out to the public hundreds of thousands of free rickets, but the promotion had to be abandoned. Not only did Madison Square Garden and the huge Meadowlands sports complex across the river in New Jersey turn down Continental’s request for a place to hold the giveaway, but New York City police frowned on the whole idea, fearing that up to a quarter of a million people would turn out for the freebies, creating a near riot.

Even if Continental couldn’t hand out free tickets, it went ahead with the merger plan. But no one was clearly in charge, and somehow the event took on an ominous inevitability that no one could stop. Continental was far from prepared.

Lorenzo also decided that this was the time to launch some new fares he’d been working on, MaxSavers, which were billed as the deepest discounts ever—slashing 40 percent off coach fares. The thinking was that the fare cuts would be just the thing to introduce the “new” Continental to the public. “It was a typical Texas International stunt,” said one employee. And it would succeed, but not in the way Lorenzo had intended. The last thing that Continental needed was to overwhelm its already overworked reservation agents. By compounding the merger problems, the MaxSavers simply brought forth lots of negative publicity.

Elliott Seiden had only recently left the Justice Department to join Texas Air as assistant general counsel. As he sat down at Continental’s Houston headquarters he viewed D-Day with increasing alarm. Three years after it had shut down and shrunk to one-third its former size, Continental was just emerging from bankruptcy proceedings. It was simply unprepared for a huge increase in size—from 100 to 315 planes, and double the number of employees.