The Airline Bankruptcies of the 1980s

The decade of the 1980s was a turbulent period for the commercial aviation sector in the United States. The deregulation of the American commercial aviation sector in 1978 had completely changed the face of civil aviation in the country. Whereas before deregulation, the federal government had significant control over fares and routes, after deregulation, unfettered free competition ushered in a new era in passenger air travel. Airlines abandoned smaller cities, adopted “hub” cities, competed with new smaller airlines that had entered the market, and perhaps most important, reduced passenger fares dramatically. The secondary effects of deregulation, however, proved to be more dramatic for the airlines.

The fate of three airlines, Continental, Eastern, and Pan Am, best exemplified the troubles that the major air services faced in the 1980s. By the early 1980s, Continental Airlines had, under the leadership of the colorful Robert F. Six, become a major presence in the American market. But while its dominating services across the Pacific remained profitable, its main operations in the western and southwestern United States were in danger after deregulation. When Six, one of the older generation of airline builders, retired in 1982, Continental was already in trouble. The threat came from one of the most controversial figures in American commercial aviation history—Frank Lorenzo.

In contrast to famous airline figures such as Six, Juan Trippe, and Howard Hughes, Lorenzo was less an aviation enthusiast than a financial investor with an eye for the good deal. Lorenzo had gotten his start with a small airline known as Texas International Airlines (TIA). The company prospered greatly in the late 1970s, partly as a result of deregulation but also because of Lorenzo's blunt tactics. These included slashing wages for employees and aggressive marketing of the company's services.

In the wake of deregulation, Lorenzo was keen to expand his small company into a nationwide airline. In 1981, as Continental Airlines faced an array of financial problems—made worse by a nationwide strike of air traffic controllers—Lorenzo orchestrated a takeover of the airline under his new holding company, Texas Air Corporation. Through the next two years, Lorenzo merged Texas International with Continental into a single airline, and tried to cut costs aggressively. First, he shut down Continental and then immediately filed to reorganize the company under Chapter 11 of the bankruptcy code—an arrangement in which a company continues to operate while it reorganizes in an attempt to improve its financial position. Such a move allowed him to toss out any previous agreements with labor unions and thus unilaterally set forth new terms of employment less favorable to employees. Most important, it allowed him to continue flying his planes while putting off his creditors. Under this approach, he fired all his employees, and then offered jobs to only one-third. He also reduced the number of destinations by two-thirds.

Perhaps Lorenzo's most controversial action involved significant pay cuts (up to 50 percent in some cases) and reduced benefits, especially for pilots and chief executives at the company. For obvious reasons, Lorenzo's tactics did not endear him to unionized employees, who were at odds with him through the decade. He had so many lawsuits filed against him that he even set up his own law firm to handle the cases. Despite major discontent, Continental's fortunes soared in the mid-1980s, primarily because of low labor costs.

In 1986, Lorenzo engineered a takeover of Eastern Airlines, the third largest of the country's scheduled airlines and a company that was $2.5 billion in debt, partly due to mismanagement and labor unrest. The takeover made Texas Air, Lorenzo's holding company, the largest of its type in the country.

Lorenzo's ambitions eventually cost him. Two of the most important problems were the increasing amounts of money he owed (mostly due to over expansion) and mounting labor unrest. Although Lorenzo tried to reduce the number of planes and sell off Eastern's entire East Coast operations, continuing dissatisfaction with Lorenzo's draconian rules crippled any hope for a way out of the financial nightmare. In 1990, after losing several lawsuits, Lorenzo quit and sold his shares in Continental (as Texas Air Corporation was then known). Although he personally walked off with $30 million, he had left Eastern Airlines in complete shambles. In January 1991, Eastern ran out of cash and had to suspend all operations. The company was formally liquidated later the same year; and while it had assets totaling $620 million it owed $3.2 billion at the time. The New York Times noted that it was “by far the largest casualty of the pressures brought about by deregulation of the airline industry 13 years ago.”

Another famous case of airline bankruptcy was that of Pan American, perhaps the most well recognized American airline in the world and known for its adventurous spirit. The airline grew at a pace of roughly 15 percent in the 1960s, but a series of factors, such as over-ambitious plans with the Boeing 747 jumbo jet and the economic recession of the early 1970s, put the company in debt. Although it recovered briefly by the late 1970s, Pan Am remained in trouble because it focused exclusively on international routes. A change in international regulations in 1978 was a turning point for the airline. From then on, Pan Am faced stiff competition on its routes and in its fare-setting from new competitors who were given a freer reign in international markets.

Pan Am tried to break into domestic routes by acquiring National Airlines, but this only increased its debt problems, made worse by high fuel costs, labor problems, and the economic recession of the late 1970s. Beginning in 1980, Pan Am tried to sell some of its assets such as the Pan Am building in New York. Nothing, however, stemmed its losses, and through the 1980s, it slowly sold off its routes in desperate cost-cutting measures. By the end of the decade, its net operating losses totaled $3 billion. In 1990, the airline sold its London hub and the routes it served to United Airlines. Eventually, Pan Am had to sell off all its best routes to Trans World Airlines (TWA), United, and Delta. With emergency funding from Delta, Pan Am limped along until December 1991, when it collapsed in bankruptcy.

Ironically, TWA, one of the airlines that had benefited from Pan Am's initial troubles, itself fell prey to the pressures of a global recession in 1991 and an inability to cope with competition. Early in 1992, TWA declared bankruptcy. By 1991, only three major airlines, American, United, and Delta, controlled more than half of the entire commercial aviation market. The fall of Pan Am, Eastern, and TWA, as well as the numerous mergers of the 1980s, had left the “Big Three” to fight for the important North Atlantic routes. In this climate, a major airline company ran the risk of being consumed by a larger company or it could swallow up its competitors to better its own position.

This is exactly what USAir did in the early 1990s, as it swallowed up smaller airlines on both the West and East coasts to become the nation's sixth largest airline. In a predictable cycle of profits and losses, USAir was eventually plagued by debt of nearly $2 billion and unhappy unions. The company managed to stay alive and prosper only through a cooperative agreement with British Airways that allowed it to use the British carrier's international network to feed passengers into USAir's domestic network.

There was no single cause for the economic problems that plagued the major U.S. airlines in the 1980s. In the wake of deregulation, over-expansion and ambitious investments had strained their capacity to compete. The problems were made worse by economic recession and high fuel costs. In order to cope with rising debt, many airlines tried to cut wages, which put them at a bigger risk with their workforce. Desperately, many airlines tried to sell off their assets, but this measure proved to be a case of too little too late. For Eastern, TWA, Pan Am, and many others, the decade proved to be one long slide into oblivion.

—Asif Siddiqi

References:

Bernstein, Aaron. Grounded: Frank Lorenzo and the Destruction of Eastern Air Lines. New York: Simon & Schuster, 1990.

Bilstein, Roger. Flight in America: From the Wrights to the Astronauts, Rev. ed. Baltimore: The Johns Hopkins University Press, 1994.

Davies, R. E. G. Rebels and Reformers of the Airways. Washington, D.C.: Smithsonian Institution Press, 1987.

Heppenheimer, T. A. Turbulent Skies: The History of Commercial Aviation. New York: John Wiley & Sons, 1995.

On-Line References:

“Aviation Resource – History – 1950-Present.” http://www.geocities.com/CapeCanaveral/4294/history/1950_present.html

Additional Reference:

Robinson, Jack E. Freefall: the Needless Destruction of Eastern Air Lines and the Valiant Struggle to Save It. New York: HarperBusiness, 1992.