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Revision as of 16:36, 1 October 2006 by AEMoreira042281 (talk | contribs) (→New York Air)(diff) ← Previous revision | Latest revision (diff) | Newer revision → (diff)- 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. His controversial tactics as the first airline executive to face up to high legacy carrier labor costs after deregulation, earned him great enmity from airline labor unions, not yet able to deal with the newly deregulated airline environment.
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.
The creation of Texas Air
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 Federally approved low fares and other consumer benefits like being the first carrier to forbid pipe and cigar smoking on airplanes in 1976. Burr was active in recruiting an energetic work group and in molding the human relations philosophies of the company.
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.
In an environment of new airline startups after deregulation, Burr left in 1980 to start People Express and take advantage of the new aviation liberalization.
Lorenzo saw opportunities in the newly deregulated national market. He had competed with other carriers successfully in the unregulated intrastate market, whereas the major airlines were exposed to competition for the first time in an environment of high fuel prices and high interest rates.
By reducing costs (especially labor costs which were a carry over from the regulated days) and restructuring his companies, he had the tools to create a large airline from distressed carriers. 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.
Pan Am, keen to enter the U.S. domestic market, won a takeover battle with Texas International and Eastern Airlines, producing a very large $45 million profit for Lorenzo's company; the acquisition and ill advised merger proved disastrous for Pan Am (see related article.
New York Air
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, he started a new airline venture called New York Air, the first post-deregulation airline, based in New York City and near where Lorenzo had grown up. 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.
Based at LaGuardia Airport, the non-union New York Air competed against the Eastern Shuttle, and gained great attention for successfully suing the Federal Government and receiving a grant of precious landing slots at Laguardia and National Airports, to start the shuttle.
Continental Airlines
Texas Air acquired a controlling stake in Continental Airlines in 1981. After a very contentious battle with Continental's management, anxious to resist the new owners, and its labor unions, fearful of Lorenzo's deregulation "tactics". Texas International was merged into Los Angeles, California-based Continental Airlines in June 1982. TXI ceased to exist and the new Continental moved its base 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 computer reservation system, an extensive new network, and one of the signature names in American aviation, and at the end of 1986 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 system, System One, and Continental's new 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.
In 1990, Lorenzo retired after 18 years at the helm of Continental Airlines and predecessor, TXI, selling the major position of his Jet Capital Corporation to Scandinavian Airlines System. Shortly after Lorenzo left and after the Kuwaiti invasion which occured at the same time with its grave effect on fuel prices, the airline filed for its second bankruptcy inside of a decade.
In 1993, a group on investors including Lorenzo tried to found a new airline. However, with enormous political opposition from labor unions with the newly installed Clinton administration, the United States Department of Transportation, rejected the application because of Lorenzo's involvement.
After his Continental days, Lorenzo founded Savoy Capital, Inc., in the same Texas Air Houston offices, as a private investment firm to invest his family's funds along with outside investors.
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., 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 , July 2002
- Parker, Mike. Remarks on Eastern Air Lines to the United States House of Representatives, March 15, 1990
- The Handbook of Texas Texas Air