The Times - UK (2022-02-23)

the times | Wednesday February 23 2022 45

Business

In 1935 Eddie Rickenbacker took over a
small regional airline in the United
States named Eastern Air Transport.
The famous First World War aviator was
a grumpy man who swore a lot, but no
one really minded because he was
exceptionally considerate of everyone
who kept aircraft running. He guaran-
teed his mechanics a 40-hour week (an
industry first), linked pay with the com-
pany’s profits (also a first) and brought in
a company-wide pension. By the time of
his death as an industry elder in 1973,
that consideration had built Eastern
into the third largest airline in America.
His approach was in line with the
economic notion of efficiency wages:
pay more, treat workers well and you get
better, more motivated staff. Progressive
business schools are full of examples.
But one can be reminded of the physicist
Enrico Fermi’s remark, when presented
with theories of why there were likely to
be a multitude of advanced civilisations
among the stars. “Then where is every-
body?” he gently asked. If this consider-
ate approach to takeovers is so effective,
why doesn’t every newly acquired orga-
nisation develop this way?
The answer is that generating grati-
tude and helping a company’s workers is
far from being the only way to succeed
— if, that is, the law allows resources to
be funnelled away.
Eastern continued as a leading airline
in America until in 1986 a man with a far
different attitude assumed control.
Frank Lorenzo had grown up in mid-
dling circumstances; his father ran a bar
and their home lay under the approach
to New York’s La Guardia airport, into
which Eastern Air Lines flew daily. But
while Rickenbacker had been drawn to
aviation — “When I look up and see the
sun shining on a patch of white clouds,”
he’d written, “I think how it would feel to
be up above it watching the earth below”
— Lorenzo seemed immune to such
vistas. Like many of us, he was drawn to
money, the more of it the better. And he
had a distinctive way of acquiring it.
It didn’t harm Lorenzo that he was a
handsome, seemingly easygoing man —
the opposite of the blunt, irritable Rick-
enbacker — and on the surface he could
make himself appear concerned, ear-
nest and polite. Yet one of the first things
he started doing at Eastern was cutting
wages, starting with the mechanics and
ramp-service personnel. Then he began
breaking off assets: first landing slots,
then jets and finally selling an industry-

leading reservations system that his im-

mediate predecessor had developed.

This wouldn’t have been too bad if

he’d used the profits for new aircraft or

purchasing routes that Eastern needed.

Aviation is a tough business. “If the

Wright brothers were alive today, Wil-

bur would have to fire Orville to reduce

costs,” Herb Kelleher, founder of South-

west Airlines, once said.

But Lorenzo wasn’t the sort of builder

Rickenbacker was. Rather, perfectly

legally, he set up holding companies into

which he channelled much of the cash

from these sales. The reservations

system, investigators later found, was

sold at a low price to a group where he

had a certain amount of control. He then

charged Eastern for using it, with the

gains going to this outside group.

Lorenzo continued to reveal earnest

concern for Eastern in his public inter-

views, but to union officials it seemed he

was actually revealing an earnest strate-

gy for making his employees resentful

enough that they would go on strike.

With laws the conservative President

Reagan had recently promoted in the

1980s, once Eastern went bankrupt, he’d

be able to fire everyone, skip severance

pay, and then start again with new hires

on lower wages. He’d even get to break

the “previous” company’s agreement to

pay out any pension savings.

What Lorenzo needed to do was

trigger the machinists’ union to go on

strike, while ensuring the pilots stayed at

work. Then the airline would keep earn-

ing money in the brief period until full

bankruptcy protection came into effect.

To keep the pilots on his side, Lorenzo

mailed a videotape to each of them. It

showed him at his home in Houston,

avuncular and trustworthy. He held up

an agreement that, he said, guaranteed

if for any reason there was a strike with

the machinists’ union and the company

entered bankruptcy, Eastern would not

go to a judge and attempt to cut the

pilots’ pay. He then solemnly signed the

agreement before the camera.

As word of the video spread, the

machinists’ union lawyers gasped in

wonderment at their luck. Lorenzo was

misleading the pilots. By the law of the

time, a declaration of bankruptcy

invalidated all previous guarantees. The

lawyers spread the word. Lorenzo wasn’t

the friendly, trustworthy guy he pre-

tended to be. He wanted the pilots to go

along with an agreement that he knew

wouldn’t be worth anything. A few days

Frank Lorenzo united pilots, flight

attendants and mechanics against his

plans to drive Eastern into bankruptcy

in 1989. When the airline was split up,

he was banned from working with it

A takeover shouldn’t allow one

man to take flight with the cash

later, when the machinists went on

strike, Eastern’s pilots — conservative

Republicans almost to a man — joined

them. For good measure, the flight

attendants joined in too.

This was in early 1989. With his work-

ers united against him and staying out

for months, even as the profitable sum-

mer season began, Lorenzo became

frantic. At this rate, his income would

crash during the strike.

A few years earlier, in Reagan’s time,

any resentment from Eastern’s employ-

ees wouldn’t have mattered. The law

would have protected Lorenzo, allowing

his plans to work. But Reagan’s

successor, President Bush, had brought

in new legislation.

Unfortunately for Lorenzo, he’d sur-

rounded himself with people who were

either not aware enough, or not inde-

pendent enough, to warn him how

much federal laws and the mood among

his employees had been changing.

When he finally did manage to get the

airline into bankruptcy, almost a half-

year after the strike began, there was lit-

tle money left for management to gain.

All this time, an entirely different

approach had been possible. While

Lorenzo had been busy at Eastern, other

airlines were achieving record profits —

not through warring with employees

but, as Lorenzo’s immediate predecessor

(the distinguished astronaut Frank Bor-

man) had already begun, through

innovations in reservations systems,

route planning and customer service.

At the end, in the grand tradition of

kicking a man when he’s down, Michael

Milken, the junk bond king later jailed

for fraud, came out against Lorenzo,

while The Wall Street Journal declared he

had gone too far in diverting the airline’s

assets. After a final effort, the company

Eddie Rickenbacker had spent so long

building was split into fragments. The

Scandinavian firm that bought the larg-

est bits specified that Lorenzo could not

be involved with their work in any way.

Nothing that happened at Eastern

was illegal. But what’s defined as being

legal, at least in democracies, is always a

matter of negotiation. When Kraft took

over Cadbury a decade ago, there was no

UK law making its declaration to keep

open a factory at Somerdale near Bristol

legally binding. It was quickly closed. A

few years later, new legislation made

such promises binding. When Japan’s

SoftBank took over Arm, the Cam-

bridge-based chip designer, its guaran-

tees about investment were kept and the

refreshed company remained strong.

Every takeover raises the question of

who it is for. And it’s not in personal

goodwill but in our legislatures that the

answer will be found.

David Bodanis is the author of The Art

of Fairness: The Power of Decency in a

World Turned Mean

The story of the crash

of Eastern Air Lines is

as relevant today as it

was in the late eighties,

writes David Bodanis

DIRCK HALSTEAD/GETTY IMAGES ; BOSTON GLOBE