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Wall Street History
https://www.gofundme.com/s3h2w8
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07/04/2003
Juan Trippe and Pan Am, Part II
As we pick up our story on Juan Trippe and Pan Am, around the
time of World War II, Trippe had been trying to crack the
European market. While FDR didn’t care for Trippe, personally,
he recognized that Pan Am wasn’t about to go away, and the
U.S. needed a trans-Atlantic presence, so Roosevelt assigned
Secretary of State Cordell Hull to work out a deal with Britain’s
Imperial Airways to pool passenger and cargo traffic.
Trippe took it one step further, though, gaining exclusive rights
to the Azores for 15 years (you’ll recall that the first trans-
Atlantic flights using the southern route weren’t non-stop and
needed the Azores for refueling). But this violated U.S. antitrust
laws, a constant battle as we’ll see, so Trippe had to back down.
As war approached, Trippe was making flights to Europe using
Boeing Clipper pontoon ships, but still it was mostly for mail,
few passengers. The inaugural flight was June 28 from Long
Island and carried just 22, each paying $375 (one way).
Then the war hit. But this had little to do initially with Pan Am’s
troubles that first winter which saw only 40 of 87 scheduled
trans-Atlantic flights completed due to the weather. Trippe was
actually removed as CEO briefly in ’39, though he was back less
than a year later.
Before Pearl Harbor, FDR learned of Trippe’s renewed attempts
at a monopoly on overseas business. Trippe wanted to gain ‘flag
carrier’ status and FDR was miffed. At the same time, the
President had little choice but to work with him. “In government
and in war, you have to use scoundrels,” he said. Presidential
aide Harry Hopkins chimed in, “I have never liked the idea of
Pan American having a world monopoly of our airlines.”
It was the War Department that came up with a solution,
however, in awarding contracts not just to Pan Am, but the other
carriers as well. While Trippe received the bulk of the business,
American and Trans World were granted some routes to London,
while United got the Pacific, Eastern and Braniff Latin America.
General George Marshall wasn’t a Pan Am fan, either, noting
“the recurring resentments of the British to Pan Am’s expansion
into the Middle East and the fact that Pan American tends to
regard a military effort as a commercial operation.”
Historian Robert Sobel describes what happened next.
“In 1943 the 19 airlines that had Air Transport Command (ATC)
contracts were called to Washington for a meeting and were told
the government had no intention of remaining in the transport
business after the war. It was up to the airline executives to
determine the shape of this part of the industry. Trippe had little
to fear from them. From the vantage point of 1943,
transcontinental airline growth seemed a chimera. United had
commissioned a study, which concluded that few first-class
steamship passengers – believed the only possible customers –
would find the long, chancy passage appealing. After the war,
thought United’s economists, 43 passenger planes would be
needed for the North Atlantic run. Since eight countries had
indicated interest, that came to an average of little more than five
per country. Perhaps two American companies could make a
profit given such numbers, and Pan Am, the most experienced
and best known, would certainly be one of these. United had a
coast-to-coast route system, a natural feeder for travelers from
other parts of the country wanting to fly to Europe, but declined
to submit a bid. The domestic business seemed more appealing
than anything trans-Atlantic passage could offer.”
[Source: “When Giants Stumble”]
[I thought you’d enjoy what I imagine later became a Harvard
Business School case study.]
Before the war the European Airlines had formed an alliance to
set fares, including Pan Am as a “junior member,” since under
U.S. law Pan Am couldn’t fix prices. But Trippe established the
International Air Transport Association (IATA) for oceanic
routes, and this organization fixed prices and restricted entry.
Well, it was now a post-war world, and while Washington was
against Trippe’s move, Britain accepted competition into London
so the U.S. said, O.K., do what you want, at least temporarily.
Not that Trippe was interested in charging huge fares, mind you;
he actually wanted to lower prices to encourage more travel. So
it went something like this.
Trippe wanted the $375 fare to be lowered to $275, while the
European flag carriers sought to raise the trans-Atlantic fare to
$572. In the end, Trippe convinced them to keep it at $375.
Around this time Howard Hughes entered the scene as the new
head at Trans World Airlines. Hughes had deeper pockets than
Trippe, and a strong route between New York and Los Angeles,
along with faster land planes, forcing Trippe to scuttle his
Clipper pontoon craft.
Here is the 1946 financial breakdown for the major carriers in the
U.S.
Pan Am revenues of $113 million, profit $3 mm
TWA revenue $57 mm, loss $14 mm
United revenue $65 mm, profit $1 mm
American revenue $68 mm, loss $500,000
Eastern $42 mm, profit $3 mm
One thing about Juan Trippe, he was a visionary, and after the
war he began constructing hotels, Intercontinentals, for Pan
Am’s travelers. He even got the government to loan him 90% of
the construction price. Trippe sought to bring the enjoyment of
travel to the average person instead of just a privileged few.
“That person’s holiday has, in the past, been the prisoner of two
grim keepers – money and time,” he said. “Their enjoyment of
the world has been circumscribed by the high walls of an
economic jail. We can level these prison walls only by bringing
travel costs way down and by shortening travel time.”
Of course after World War II travel of all kinds boomed, trans-
Atlantic included. Ocean liners were also doing a big business
and Trippe urged Douglas, Boeing and Lockheed to come up
with planes that could make the trip non-stop. Washington again
supplied the aid, this time to the manufacturers. [But it wasn’t
until 1957 that airline traffic exceeded ocean liners.]
Having earned $10 million on $238 million in revenue in 1955,
at the end of the year Juan Trippe put in a jet order for $269
million; 21 Boeing 707s and 24 Douglas DC-8s, a gigantic deal
which officially launched the commercial jet age. Boeing and
Douglas raced each other to see who would be first, with Boeing
winning in 1958. Its reconfigured 707s had a range of 3,000
miles and a top speed of 600 mph, though they still only carried
60-120. Douglas launched its DC-8s two years later and they
had a longer range. Both models were in the $5 million range.
You can imagine that all of Pan Am’s competitors had to follow
suit. Not a bad time to work on either assembly line, I think
you’d agree.
By 1966, Pan Am was operating 115 planes, with revenue of
$841 million and $72 million in profits. Juan Trippe, now 67-
years-old, moved the company headquarters to a new building
behind Grand Central Station in New York, installing a heliport
on the roof for his top clients. It was called the Pan Am building,
and the big, bold letters at the top could be seen all over New
York.
As for the stock, on a split-adjusted basis Pan Am traded at $10
in late 1962, but by mid-1966 it was up to $40. Then the roof
caved in.
I’ll have the conclusion of our story next week, July 11.
Sources:
“When Giants Stumble,” Robert Sobel
“The New York Times Century of Business,” Floyd Norris and
Christine Bockelmann
American Heritage / T.A. Heppenheimer
Brian Trumbore
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