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Content Warning: this article includes a brief description of self-harm.
"Frank [Lorenzo] has provided an entrepreneurial spirit and dynamic leadership to this company for many years. Our board appreciates his vision and tireless efforts, which have benefited not only Continental and its people, but the entire traveling public.”
—Carl Pohlad
Being an owner means hiring the right people. After all, you might own something, but these people make the choices that actually create value, shape consumer and public sentiment, and make it worth owning the damn thing. But you have to take responsibility. After all, owning the power of the purse means you can change course at any moment if you feel it isn’t working. So if the person you put in charge of your business takes responsibility for transforming an entire industry, you might as well claim to be the genius behind it all.
For Carl Pohlad, that has meant cheap GMs like Terry Ryan, who would pride themselves on not even spending the paltry budget given.
For more on the history of the Pohlad family and their business interests, please see Part 1, Part 2, Part 4, and Part 5 of this series.
In Part Three, I want to explain how Pohlad is in many ways not just financially responsible, but actually responsible for modern air travel. I'm guessing you have thoughts on modern air travel, and not the good kind. While experience discourages us from ever telling the story of a whole industry through the story of one man, many of the lessons the industry would copy originate with someone to whom Pohlad gave a green light to almost every point in his career. This did not just create a form of airlines; Pohlad and his ilk created the structures that now define modern private equity.
Pohald invested in Texas International Airlines (TIA), a dingy operation that only got its “international” name thanks to a single, money-losing route to Vera Cruz. The airline became famous for hitting a pair of trees while landing in Harlingen, Texas, due to lazy engineering in the altitude reading meters. A later plane crash in Arkansas in 1973 remains infamous for the fact that TIA never bothered to clean up the mess, which means you can hike out to it today.
Under Pohlad, the airline lost over $21 million between 1967 and 1971. The obvious idea would be to declare it a bad investment and sell it off, but Pohlad believed that the growth of the Texas oil industry along the Gulf Coast meant that this business would succeed one way or another. So they found a company and paid them $15,000 a month to study their business. And that would bring Frank Lorenzo to Carl Pohlad.
The son of Spanish immigrants, Lorenzo had briefly worked as an analyst for TWA before forming a “consulting” business in 1966. By 1969, he and a colleague formed Jet Capital, which was brought into Texas to help avoid bankruptcy with an infusion of cash from Chase Manhattan Bank and remake the airlines. Lorenzo acted as president and CEO, while Pohlad remained on the board.
Lorenzo had a plan that businesspeople loved: Be ruthless to customers and be ruthless to labor. He cut every cost involved, no matter whom it pissed off. Routes that lost money were canceled. The airlines introduced the first “Peanut Fares,” meant to attract new customers who would never otherwise experience the luxury of the Jet Age. In 1974, Lorenzo attempted to cut wages across both pilots and ground crew, resulting in a four-month strike. The only way Texas lived was a Mutual Aid Pact at the time that forced other airlines to pay for the strike. Lorenzo siphoned off over $10 million, angering other airlines in the process.
With ruthless cost-cutting, Lorenzo and Pohlad made TIA a “success,” though it was still mostly limited to its local area. Lorenzo was convinced they needed to expand, but not by growing their business. Airlines require more than just flying to new lines—you need crew and all the infrastructure. Lorenzo’s first push under the Reagan administration was to found New York Air, the first-ever non-union airline in the United States, promising low fares throughout the Eastern Corridor. But it could not compete with better-known airlines and a clientele who preferred the quality experiences of competitors.
Luckily, the 1978 Airline Deregulation Act would give him an opening, allowing Lorenzo to attempt to simply buy other airlines. Most businesses did not want to work with TIA and had no interest in combining them, so Lorenzo formulated a different plan: Use the profits from TIA to buy stock in other airlines, and use leverage to control them. The target? Continental Airlines.
At the time, Continental was probably the best-liked airline. It had reasonable costs; it usually ran on time. Its employees genuinely respected CEO Alvin Feldman, who was a union booster. It was going through a period of low profits, as many airlines were, but there was no reason it could not recover. It was also quite large—way outside Lorenzo’s means. That brought Pohlad and other major financiers on board on a different plan to go after Continental.
Pohlad and other bankers forced down the stock price of Continental so much that it was worth less than the value of its planes. By 1981, Lorenzo had gained 48.5% of the shares. In an attempt to stop it, Feldman attempted something daring: he wanted to give control of the company to the employees. The idea was to issue new shares and simply hand them to Continental’s 12,000 workers. But the banks suddenly pulled out, and there was nothing Feldman could do.
In August 1981, Feldman went to his office at LAX, put a revolver to his head, and ended his life. According to his family, after losing his wife the previous year, he had poured his heart and soul into improving Continental, which was now being torn from him. Without him, any chance that the company could be run by the employees was over. President Reagan later blessed the deal that gave Pohlad and Lorenzo control of Continental. As far as my research could ascertain, Pohlad was never asked about the circumstances of Feldman’s death.
Lorenzo had control of a major airline. Now, he just needed a chance to run it his way, which meant destroying the unions. Rather than bargain with the union employees, Lorenzo purposefully defaulted and sent the airline into Chapter 11 Bankruptcy. This was despite holding $288 Million in the bank in cash. Doing so allowed the airline to entirely escape its union contracts, something the increasingly conservative and labor-hostile Supreme Court affirmed in NLRB v. Bildisco & Bildisco (1981). The whole process would cost Continental $60 million.
But Lorenzo got his way: he slashed the 12,000-employee work force to fewer than 5,000, offering the workforce the right to come back at less than half pay. Pilots went from $89,000 a year to $43,000 and were considered scabs throughout the industry (often spat on for a decade onward). Meanwhile, Lorenzo poured his energy into training for the New York Marathon. Even Congress was so appalled at Lorenzo’s behavior it changed the law in 1984 to prevent something similar at another business.
As the president of ALPA explained, Lorenzo didn’t actually specialize in tough negotiations, “but rather in breaking his commitments to his employees and others and devising schemes to circumvent the time-honored collective bargaining process.” Of course, Wall Street loved it. Michael Milken, creator of the infamous junk bonds that almost destroyed the entire financial system at the end of the 1980s, raised $1 billion for Lorenzo to do whatever he wanted.
That meant going after Eastern Airlines, one of the crown jewels of the industry. With so much cash in hand, it was an easy takeover. Pohlad and Lorenzo now owned America’s largest airline, carrying one-sixth of the passengers across the United States. It would implode within two years.
Once he took hold of Eastern, Lorenzo began quickly stripping it for parts. First, Eastern had modernized airlines by creating a travel agent registration system that allowed them to quickly find and book fares. That setup was worth almost half a billion dollars, but Lorenzo had Eastern “sell” the system to a holding company he owned at a bargain price of $100 million. He then charged Eastern $10 million a month to continue using the system. He created another holding company within Texas Air to charge $1 million a month for providing the service of supplying Eastern with fuel—not even the actual charge of fuel. Lorenzo sent $22 million from Eastern to Continental to operate as a “strike fund” so they could run all of Eastern’s lines. And of course, all the best jets and lines quickly became Continental lines. During all this, Lorenzo played hardball with the unions, forcing them to take bigger and bigger cuts to help keep the business “afloat.”
Lorenzo also sold his stock at the top during this. Overall, in the process of dismantling the airline, he repurposed or made off with $750 million in cash and assets.
Soon enough, Eastern was drowning in debt—almost $4 billion. This was one of the most successful airlines in the country not long before Lorenzo, but suddenly, it was on the brink of implosion. Pohlad, Milken, and others soon realized they needed to get Lorenzo out of there, but Lorenzo had just as much influence over Pohlad as Pohlad had over him. Pohlad had arranged a deal in 1989 to sell the airline to baseball commissioner Peter V. Ueberroth for $464 million, but Lorenzo pushed back and killed the deal.
During all this, the unions knew they needed another tactic against Lorenzo. Striking could destroy the business, so they kept negotiating and negotiating. But by March 1989, the pilots, machinists, and flight attendants had become sick of Lorenzo’s stalling and gimmicks, and finally went on strike.
That would eventually force the sell-off. Lorenzo turned to businessman Donald Trump to buy the airline at a discount. The real estate mogul took 17 planes covering Boston—New York—Washington D.C. in an attempt to make a luxury line, but it never became profitable.
The rest would be so bad that a judge would have to force the company into bankruptcy, ousting Lorenzo from his position and hiring a trustee. The business, by that point, was useless, and all that could be done was to sell the rest of the scraps. In bankruptcy court, all fingers pointed to Lorenzo—except Carl Pohlad, who called him “the most dedicated and decisive” businessman he knew. Meanwhile, the beneficiary of Eastern’s downfall, the still Pohlad-owned Continental, was now known for being “unreliable, unpredictable, often late, and frequently lost luggage.”
In 1991, the New York Times allowed Lorenzo to publish an op-ed lamenting the death of Eastern Airlines. He blamed the high cost of labor for baggage handlers who made a stunning $48,000 a year and called for Congress to abolish the National Mediation Board, which he called “unaccountable and completely beholden to the interests of organized labor.”
Pohlad stayed in airlines through Continental, eventually investing in Mesaba Aviation, a key partner for Northwest Airlines. During a strike in 2005, Northwest declared bankruptcy, and despite the law passed in 1984, snuck out of its union contracts and pulled the plug on a pension plan with over $4 billion in obligations. As one article noted, “None of the profits that Pohlad had accumulated over the years from Mesaba's relationship with NWA were to be considered in the bankruptcy process.” On the long list of people who lost money when Northwest passed through bankruptcy, you won't find Pohlad.
At the time, most airline executives initially found what Pohlad and Lorenzo did distasteful. But because they had so decisively altered the market, even their detractors had no choice but to follow. Almost every major airline killed their union pension in the mid-2000s, just as profits in the industry began to skyrocket. Flying has restored some of the luxury of the jet age era, if you are willing to pay thousands for a seat. Otherwise, that bottle of water will be $3. Some of those frustrations, large and small, trace back to Pohlad and a vulture he empowered for decades.
In Part Four, we'll turn to one of Pohlad's sons and begin asking: is there a different way to do business?
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