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Wall Street History
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07/11/2003
Juan Trippe and Pan Am, Part III
And now the brutal conclusion to the story of Pan American
Airways. On April 13, 1966, founder and chief executive officer
Juan Trippe placed the largest commercial aircraft order in
history, $525 million, for 25 Boeing 747 jets.
At the time Boeing was dominating the industry with its 707 and
727 planes, leaving Douglas Aircraft and Lockheed far behind.
The Soviets built them as well, but outside the Soviet bloc they
sold few, while the Europeans had yet to enter the market.
The 747, with a capacity of 490, 2 times the standard jet of
that era, was one of the great aviation successes of the century. It
had an average speed 10% faster than other jets and at a
maximum altitude of 45,000 feet could avoid the increasingly
crowded skies found at lower levels.
Of course in the case of Pan Am, Trippe saw the 747 as the
perfect vehicle for international travel and he estimated it would
increase 70% over the next five years. Economically, the 747
also reduced operating expenses per passenger mile by 35%. But
I got a kick out of this line from a 4/14/66 piece in the New York
Times by Robert Bedingfield.
“The plane will have a range of 6,000 miles, which would enable
it to fly from New York to Baghdad.”
Trippe’s purchase was contingent on the revolutionary 747s
being delivered between September 1969 and May 1970, with
Pan Am taking delivery before any other airline got it. This put
tremendous pressure on Boeing, which had loads of initial
production problems, particularly in meeting its overall company
goal of 400 planes by 1975. By fall of 1966 Boeing was hiring
600-1,000 employees a week, most of which were still working
on the 707 and 727 aircraft.
But back to Pan Am, in order to place the mammoth order
the company had to pony up $265 million before the 747 flew
commercially. On top of this, Pan Am had also put in for 19
more 707s. Ergo, debt soared, and looking back, with little
competition on its routes Juan Trippe needn’t have been so bold.
Pan Am did post revenue of $950 million and earnings of $65
million in 1967 (having earned a record $72 million in ’66), but
this was during a boom economy and increased international
travel. When the tough times hit, it would be a far different
story.
And remember Panagra, the South American venture between
Trippe and Peter Grace? Grace had become co-founder of
Eastern Airlines and the two had a falling out, with the offshoot
being the two men sold all of their shares in Panagra to Braniff.
Meanwhile, back on the production ramp, the Europeans were
talking of a supersonic aircraft, which American companies
luckily managed to stay out of.
In 1968 the global economy began to suffer and Pan Am lost
money in the first quarter, setting in motion a worrisome trend.
Juan Trippe, now 69-years-old, announced he was going to retire
and longtime second in command Harold Gray took over. But
Gray had cancer and after 1 years turned the reins over to
Najeeb Halaby, a Washington insider.
From 1969 through 1971, Pan Am lost $120 million and the debt
service on the 747s was a major reason. The other U.S. carriers,
like TWA, United, Northwest, and American had strong
domestic routes that Pan Am lacked, so these were better able to
weather the tough economic landscape.
Halaby began searching for a partner, approaching American
because it would unite American’s domestic lines with Pan Am’s
international routes. But American said no, as did Eastern,
United and Delta. Then Pan Am tried to merge with TWA, but
the Justice Department slapped it down on anti-trust grounds.
In December 1971, Halaby was replaced by former Rolls-Royce
Aero executive William Seawell, who proceeded to oversee job
cuts that would reduce Pan Am’s workforce from 42,000 to
27,000 over the next few years. Seawell abandoned money-
losing routes to Paris and Moscow, among others, and then had
to deal with the oil crisis of 1973-4 that fueled inflation and
resulted in skyrocketing interest rates, the latter particularly bad
if you were servicing the kind of debt Pan Am had. As a result
the airline lost $85 million in ‘74.
Suddenly, the Shah of Iran offered to buy Pan Am and merge it
with Iranian Air, but wasn’t able to pull it off. Imagine if this
had gone through? The Ayatollah would have owned it during
the hostage crisis.
Between 1968 and 1976, Pan Am lost $318 million, or more than
it had earned in the company’s prior history. By the end of 1978,
its net working capital was a negative $288 million.
In hopes of resolving its myriad problems, Pan Am still sought
strategic partners. CEO Seawell went after National Airlines in
1979, National being strong on the East Coast and South. But
then Frank Lorenzo, chairman of upstart Texas International
Airlines, and Pan Am got into a bidding war over National that
saw its shares soar from $20 to $50. Pan Am emerged the
winner for $400 million. Of course just as with the massive 747
purchase, the overall economy didn’t cooperate and recession hit.
As interest rates shot ever higher (inflation was soaring in ’79 as
well, you’ll recall), in many cases companies were forced to
borrow at rates in excess of 20%. The whole airline industry
tanked.
At the same time the forces of deregulation hit. Economist
Alfred Kahn had been appointed to head up the Civil
Aeronautics Board by President Carter in 1977 and he proceeded
to make it easier for new airlines to be certified. When the
existing carriers complained he is reported to have said his job
was “to protect competition, not companies.” The era of
government price fixing in the airline industry was over. The
Airline Deregulation Act of 1978 had turned everything upside
down.
Meanwhile, as the airlines scrambled to make sense of the new
world, and as overseas markets opened up to increased
competition, Delta received permission for Atlanta to London;
National, Miami to Paris, all while foreign carriers obtained more
landing rights into the U.S.
Enter Sir Freddie Laker and his “Skytrain” between New York
and London, a no frills operation that was a huge success. Pan
Am and the others were forced to slash fares, but Laker kept
xpanding.
By 1980 Pan Am was in major trouble. [It just kept ratcheting
up.] Historian Robert Sobel writes of these times, “It resembled
the scene in the motion picture, ‘Around the World in Eighty
Days,’ where Phineus Fogg orders the captain of his ship to
dismantle it and feed the wood to the steam engine to keep it
afloat.” The airline sold its Pan Am Building to Metropolitan
Life for $400 million, at the time the highest price ever paid for a
Manhattan property. Pan Am was allowed to keep its name on
top for a while, however, and it retained some offices there.
With profits on the sale of $294 million, the company was able to
report “earnings” of $80 million for the year, but everyone then
realized what a disaster the rest of the financials were. The
banks canceled Pan Am’s $470 million line of credit.
Juan Trippe died on April 3, 1981, after suffering a cerebral
hemorrhage the previous September. In August, Seawell
resigned as CEO but remained chairman. New CEO William
Waltrip then split the company into 3 divisions; Pan Am World
Airways, Intercontinental Hotel, and Pan Am World Services.
Intercontinental was sold to Grand Metropolitan for $500
million, but the company’s bonds were still trading at junk status.
The following year C. Edward Acker took over the helm and
promptly lost $495 million! The unions had no other choice but
to agree to wage freezes and even executive pay was cut. Then
Pan Am frantically began disposing of its remaining routes and
selling its aircraft. American purchased 15, United 18 and the
Pacific routes. It was bloody. Then the pilots struck in ’85.
But by 1988, a drastically scaled back operation managed to
approach profitability under former Continental CEO Thomas
Plaskett. Some thought that Pan Am just might survive. Then
terrorists blew up Pan Am Flight 103 on December 21 over
Lockerbie, Scotland.
While this could have happened to any airline, what did Pan Am
in was the fact it bungled the crisis unbelievably; wrong phone
#’s were released, victims’ families put on hold listening to “I’ll
Be Home For Christmas,” the media was notified on specifics
before families were, just a tragic operation all around.
Finally, on January 8, 1991, Pan Am threw in the towel,
emerging briefly from Chapter 11 as a Miami-based airline with
Latin American routes. In other words, right back where Juan
Trippe had started the company.
[A little anecdote. Reader Mike B. wrote in of a personal
encounter with Trippe and the airline back in 1963 when he was
with a company working on Pan Am’s Annual Report. Trippe
walked into the conference room, surprising those in attendance,
and began to change the numbers, with comments to his
associates like, “Let’s make this higher. Let’s make this lower.”
Seems like the Tripster was a bit ahead of his time in more ways
than one, eh?]
Sources:
“When Giants Stumble,” Robert Sobel
“The New York Times Century of Business,” Floyd Norris and
Christine Bockelmann
American Heritage / T.A. Heppenheimer
Wall Street History will return July 18.
Brian Trumbore
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