I recently finished reading a book called Hard Landing:
http://www.amazon.com/Hard-Landing-Contest-Profits-Airlines/dp/0812928350
This book tells an entertaining story of how the airline industry came to be what it is today. It starts around 1910 and finishes in the mid-90’s, when the book was written. There’s a big emphasis on the impact of deregulation in 1978, and on the power struggle among all the executives who ran the big companies. At times it’s hard to keep up with all the names, but the stories are fun.
Here’s my “Cliffs Notes” summary, the stuff I found interesting…
Air Mail
In the beginning the airline industry wasn’t for passengers, it was for air mail. Also, the government ran it. More specifically, the military ran it.
In the 1920’s, a well-connected Yale graduate named Juan Trippe managed to convince the government to hire private contractors to deliver air mail. The government received 5000 applications but only 12 were selected. Among them was one William E Boeing, a timber magnate from Seattle, who was able to bid low because he built his own airplanes. He won the line from Chicago to San Francisco, which was the beginning of United Airlines. Another line, from Atlanta to Miami, was awarded to the famous WW1 pilot, Eddie Rickenbacker. His company, Florida Airways, eventually became part of a huge airline called Eastern.
Incidentally, besides mail airplanes were a circus act. Troops of pilots went from village to village doing shows where they did crazy stunts, e.g. standing on top of a flying plane. These performances were called “flying circuses” (that must be the source for Monty Python’s TV show name).
Pan Am
In 1927 Charles Lindbergh flew across the Atlantic. He was mega-famous. He got all kinds of job offers, but he decided to join Juan Trippe to create a new airline: Pan Am. They weren’t able to score any of the US postal routes, so they decided to go international. Their first routes were to South America; these routes helped the continent largely skip over the costly investment of building railroad tracks.
Pan Am was the first company to offer passenger service. They put a few wicker chairs on their postal route to Cuba and advertised it as a quick way to get liquored up during prohibition, for $100 per person. This developed into the “first rule of airline economics”: if the plane is going to take off anyways then each additional passenger is almost pure profit.
In 1935, Pan Am wanted to expand westward, to Asia. The problem was that the Pacific is freakin’ huge, about 4x longer to fly across than Charles Lindbergh’s flight across the Atlantic. They tried to find a route via Alaska, but the weather up there was too rough. So instead they decided to create a route over the Pacific, with stops in various small islands. Trippe chartered a mammoth merchant ship with supplies necessary to create a chain of colonies in various atolls in the Pacific. These stations were the beginning of the Inter-Continental Hotels, and were useful to the US in WW2.
The Big Four
In the early 1930’s, a government official named Walter Brown took over the US airmail system and decided to change the rules. Instead of paying contractors by the weight of the mail they carried, he paid based on the distance they flew and volume of space they maintained in reserve. This gave contractors an incentive to purchase larger planes, the kind that make passenger travel more comfortable.
Brown also decided to simplify things by awarding all interstate routes to just four companies: United, TWA, American, and Eastern. These were “the big four”.
In 1933, president Roosevelt decided to do something about this favoritism. He had federal agents with synchronized watches storm 100 airline offices around the country to cart away evidence. Then he fired the private airlines and restored airmail service to the military. This turned out to be a big mistake. The military no longer had the skills to take care of airmail. About a dozen military pilots died. It was a big fiasco for the president, and soon the private contractors were reinstated. However, these contractors had to re-bid each year to win or maintain their routes.
By the late 1930’s, competition between the contractors grew intense. In one case Braniff Airways placed a bid to deliver mail for $0.000019 per mile. The established companies complained that this was not sustainable – they couldn’t invest in new $100,000 airplanes when they had competition from startups with unrealistic bids. They asked the government for more regulation…and they got it: 1938’s Civil Aeronautics Act. This law preserved all existing airmail contracts in perpetuity. The big companies no longer had to worry about competition (not for the next 40 years). Unfortunately for them, they also relinquished a lot of control to the government. They no longer had the right to establish new routes or to change prices. And this was just as passenger travel was about to overtake air mail as the bigger source of income.
Southwest
The government regulation mentioned above applied to interstate travel only. As long as they didn’t cross state lines, carriers were allowed to fly any schedule, on any aircraft, and charge whatever they wanted. One of these local carriers was Southwest Airlines. They started with just 3 cities in Texas: Dallas, Houston, and San Antonio.
Southwest was kind of scandalous. Flight attendants were chosen for their looks and made to dress in orange hot pants, clinging tops, white belts, and vinyl knee-high boots. In-flight almonds were called “love bites”. Eventually the automatic ticket dispenser was called a “quickie machine”. They were based in Dallas Love Field and their stock symbol is LUV. Southwest wasn’t the only carrier to make sex a vital part of its branding. In 1965 Braniff Airways introduced a ritual called the “air strip”, in which stewardesses peeled away layers of their designer uniforms during the course of the flight. Incidentally, many airlines had “no-marriage” rules for flight attendants, well into the 1960’s. Later Southwest relaxed the dress code, but they always maintained a fun spirit, an air of spontaneity. Flight attendants occasionally did the safety demonstration to the tune of William Tell Overture or Beverly Hillbillies. Sometimes they held contests to see which passenger had the biggest hole in their sock.
In 1972, after making a splash with their sexy brand, Southwest still hadn’t managed to establish a consistent ridership to sustain their costs. They faced pressure from the established Texas (Texas Air and Braniff). They had to sell one of their 4 planes to pay back creditors, which meant that they would have to cut back their flight schedule, which would mean less revenue. It looked like the beginning of a downward spiral. But Southwest’s employees came up with a plan: they would bust their butts to maintain the same schedule with 3 planes. To do this, they had to achieve a “10-minute turnaround” (the plane could be on the ground for no more than 10 minutes between flights), which was completely unheard-of at the time. But they got creative and they got it done. Management helped with bags. There were no seat assignments and tickets were collected on board. Drinks were loaded from a rear door while passengers entered from the front. Flight attendants did some cleanup on the way out of the plane. In exchange for this hard work, the employees became owners: each employee received stock. They were the first employee-owned airline.
Southwest had great discipline. Other carriers kept spending money on each new type of airplane, but Southwest stuck to a limited fleet, primarily 737’s. This meant that maintenance was far simpler: they needed fewer replacement parts on hand and it was much easier to train their maintenance crew. Other carriers clamored to grow big fast by acquiring other carriers or taking on debt, but Southwest made sure to grow at a steady pace, so they could maintain their culture with each new city. Other carriers created complex hub-and-spoke routes which gave them reach into many new markets and dominance in the hub cities. There’s a supposed S-curve that shows that the carrier who has the largest number of routes out of a city gets a disproportionately high market share (I guess passengers are attracted to the local dominant carrier). But Southwest stuck to simple, non-stop, back-n-forth flights between pairs of cities. In fact, they didn’t bother with a computer reservation system for a long time after they became the norm in other carriers. And while other carriers had major highs and major lows financially, Southwest was absolutely stable, making profits consistently, year after year.
Southwest was creative in its pricing too. They were the first to offer off-peak pricing, charging one price during the day and a lower price after business hours and on weekends. To entice business travelers, they started offering a fifth of liquor as a freebie to passengers who bought full-price tickets.
After reading the book, I have a lot of respect for Southwest and for their founder/CEO, Herb Kelleher. On top of everything mentioned above, when Southwest built its revamped headquarters in the 1980’s, Kelleher gave strict orders that his office should have no windows – he didn’t want special treatment for management.
Frank Lorenzo
If Herb Kelleher is the hero of the story, then Frank Lorenzo is the villain. Frank made a career out of raising money from Wall Street, acquiring a struggling airline, then slashing costs by firing employees or renegotiating contracts at drastically lower salaries. He was prone to secrecy and outright lies. He was hated all around.
If nothing else, Lorenzo deserves credit for being financially brilliant. For example, he started by establishing a company called Jet Capital to offer airline consulting and investment. He and his partner, Robert Carney, invested $44K into their business at 12 cents per share, then listed the company on the stock exchange. Wall Street bought their Kool Aid and their $44K became $1.5M, even before they did much work. Magic.
Their first purchase was Texas Air. The unions there weren’t satisfied with the terms Lorenzo put before them, so they launched a strike. But the airline industry at the time had a program called “mutual aid” in which all airlines subsidized the losses incurred by any one of them that took a strike (it was the airlines’ way of ensuring that wages never got disproportionately high at any employer). As a consequence, Lorenzo pulled in $10M during the strike. He turned a bad situation into a blessing.
Lorenzo’s empire eventually grew to include Texas Air, Continental, Frontier, New York Air, and People Express. In its peak, it was the top airline conglomerate in terms of number of routes. And it all came crashing down in the 1990’s. More on this below.
Computer Reservation Systems (CRS)
In the 1930’s, if you wanted to purchase a flight you called the airline and they wrote your name on a piece of paper, a ledge for the flight. If you cancelled, they erased your name to vacate the seat.
Business grew, the number of flights increased. These ledgers became books. When a single book was impractical, multiple copies were made, and these copies had to be reconciled at the end of the day. It was a laborious pain in the butt.
Some carriers had reservation agents sit at a round table and spin a big lazy susan to reach the ledge for the appropriate flight. Other carriers introduced giant chalk boards or electronic boards. These setups helped, but only to a point.
Mohawk Airlines was the first to experiment with computers for their reservation systems, but American Airlines was the first to go big with the concept.
As early as the 1940’s, American tried to hire contractors to build a computer reservation system, but nobody was willing to place a bid — the project sounded too complicated. American’s own technical people decided to build their own. Their first attempt was a mechanical contraption. There were tall cylinders, each representing a different flight on a different day. The cylinders were filled with marbles, one for every unsold seat. With each reservation, a button was pressed, a hatch opened, and a marble escaped. If a reservation was canceled, a different hatch opened and a marble was deposited into the tube. The contraption was totally impractical for actual use, but it served as a proof of concept.
In 1953, American’s president, C R Smith, was on a flight and happened to sit next to an IBM sales representative, Blair Smith. The two Smiths struck a deal for IBM to build a new reservation system for American. IBM was already working on a system called SAGE (Semi Automated Ground Environment) that the military was using for cold-war simulations; it was one of the first “real time” systems, before that term was even coined. They decided to repurpose the technology from SAGE to create a new product with an equally sexy name: Semi-Automatic Business Environment Research, SABER. It was later renamed to Sabre.
Sabre was flipped on in 1962, and it was a marvel for its time. It kept accurate inventory for every flight. It knew who had made a reservation, including their name and phone number, special meal requests, and car rental or hotel information. For passengers, it was a fast and reliable way to book a ticket. American began gaining market share immediately.
But more than that, Sabre gave American insight. This was the “big data” analytics of its day. They could tell which routes were popular, make informed decisions on which markets should be targeted for expansion. Later, after de-regulation hit in 1978, Sabre gave American Airlines useful insight into the effects of different prices on sales.
At first each airline had its own reservation system. American had Sabre. United created Apollo, which came later but by some accounts was much better. A few European carriers joined to form a system called Galileo. Eastern and TWA had their own too. These were used by each airline internally, in their own reservation departments.
By the 1970’s travel agents accounted for about half of all reservations. Some travel agencies already had American or United terminals installed, and some US travel agents were hatching a plan to create their own reservation system, one that would show all flights from all carriers. Robert Crandall, president of American Airlines, heard these plans and wanted none of it. He looked down the road and imagined a world where American would have to pay a booking fee for each ticket reserved on this travel-agents-owned system. So he changed Sabre to itself show all flights from all carriers, and he began a campaign to aggressively push Sabre terminals to as many travel agencies as possible. Other airlines did the same, and thus began a contest to see which airline could hard-wire its reservation system into the most travel agencies. Sabre and United were the clear winners, with Sabre in the front of the pack.
These CRS’s were the “Google” of their day. Being first in the search results mattered a lot — travel agents often booked that first suggested flight without much thought. The people at Sabre coined the term “screen science” for the act of manipulating search results to your own benefit. Sabre always showed an American flight in the #1 spot, even if it wasn’t the cheapest or most direct. It was only in 1984 that the government stepped in to forbid these shenanigans.
See slides 2 and 21 here: http://www.slideshare.net/magielsr/gds-overview-1232798141856259-2-2359117
Also: http://www.wired.com/wiredenterprise/2012/07/sabre/#slideid-36482
Experiments with Discount Pricing
Before 1978, the airline industry was heavily regulated. For “standard” interstate flights the government had full control of routes and prices.
As mentioned above, in-state travel wasn’t regulated. Also, chartered flights were an exception. These were flights that did cross state lines, but not on a regular schedule. Chartered flight carriers could charge whatever price they wanted. They were often able to charge very low rates by requiring all tickets to be purchased way in advance and ensuring that the plane is full. For example, they could set up a vacation package for a week’s stay in Las Vegas.
When the chartered flight schedules appeared to become “too regular”, the big carriers would complain and the government forced the charters to cut back. This cycle repeated.
Some big airlines created their own charter subsidiaries to compete for these vacation packages. Some thought it was silly to create a subsidiary with new planes when the planes they already had weren’t full. American Airlines wondered if there was a way to take a single flight and pretend half of it was “regular” and half was “chartered”; in other words, could they get some passengers pay regular fares and some to pay charter-style discount fares? This isn’t a question of first class versus coach. They wanted different people, all sitting in coach, to pay different prices. The cheaper sets would have to be purchased in advance (like a charter) while the regular-price seats could be purchased at the last minute. In 1977, American won the right to try this form of pricing.
Another odd exception was Lorenzo’s Texas Air. In the mid-1970’s they successfully petitioned the Civil Aeronautics Board (CAB) to be allowed to charge special discount prices called “peanuts fares”.
American’s experiment with charter-style fares and Texas Air’s “peanuts fares” both served to show that perhaps airlines shouldn’t be regulated. Perhaps they should be allowed to choose their own prices.
Deregulation
Politically, there were a lot of factors that lead to deregulation.
Because prices were fixed, the big airlines didn’t have as much incentive to compete, to make an effort to lower costs. Each time their own costs increased, they simply went to the government office (CAB) and lobbied to have airfares increased accordingly, and the CAB happily complied.
Unions were strong and wages were high. Airlines increasingly used jets, even jumbo jets (747’s), and these planes were gas guzzlers. In 1973 OPEC declared an embargo and started the “oil crisis”, so gas prices were up. Inflation was up too.
In the late 70’s, Senator Edward Kennedy had his eye on the presidential seat and was looking for campaign issues to promote. The idea of deregulating the airlines was a great fit. He would look like a populist by reducing the price of flights, thereby making air travel more accessible to the people. And he would appeal to the right by removing government regulation. Win win. Kennedy worked with a couple of aides, Phil Bakes and Stephen Beyer (see http://blogs.wsj.com/middleseat/2009/08/26/kennedy-pushed-airline-deregulation-changed-us-air-travel/)
The in-state carriers of course were happy about this deregulation plan. It would give them a chance to open new interstate routes, and they already had an efficient operation with low costs.
Most of the big airlines fought back hard. They were content in their cushy position. They worried that new airline startups would appear with non-union labor, and they wouldn’t be able to compete. Eastern Airlines dispatched 47 flight attendants to Washington for a “lobbying excursion”. In fact, the unions too were initially apprehensive about the plan. They only came around when the proposed deregulation bill included a clause forbidding the “mutual aid” program that helped Lorenzo in Texas Air.
Surprisingly, United Airlines broke ranks and pushed in favor of deregulation. They figured they had cash in the bank to withstand a pricing war for a few years, and deregulation would give them a chance to expand to many new markets. Perhaps more surprisingly, the CAB’s own head, Robson, also argued to deregulate, to gut his own office.
The Airline Deregulation Act finally passed in 1978. Kennedy of course didn’t win the White House. Carter signed it into law.
As it was being signed, a line of people formed outside the CAB office to apply for about 2000 routes that would become available immediately.
After Deregulation – Battles with Labor Unions
Next came a very tumultuous decade.
A bunch of new low-cost airlines formed, using Southwest’s efficient model but operating in other parts of the country. For example, Don Burr left Texas Air to form People Express. They operated in the east coast and focused on customer service and employee happiness. Texas Air created its own subsidiary, New York Air, to compete head to head.
Wages dropped. New York Air paid pilots $30,000 a year, as compared to the average union rate of $45,000. Flight attendants had it even worse. When you hear how the median household income hasn’t increased much in recent decades, I think it’s partly due to major setbacks like this.
Meanwhile the public was drifting to the right and was increasingly fed up with labor unions. In 1981, 13,000 of the nation’s air traffic controllers walked off on the job. It was chaos. It was also illegal for these employees to strike and President Reagan ordered them back. They refused. Two days later he fired them all. This was a big turning point for the strength of organized labor.
American Airlines was paying significantly higher wages than these low-cost carriers. American’s unions wouldn’t accept a contract for lower pay all around, but they agreed to a “b-scale” plan: all current employees would continue to enjoy high pay, whereas new employees would receive lower pay. For example, current flight attendants continued to receive $30,000 a year, whereas new ones would receive $15,000. Over time this put a strain on American, as the number of b-scale employees increased and saw that they received lower pay for equal skill and equal work.
Eastern Airlines got their employees to accept a “variable earning plan”. If the company performed well, employees could receive more than their standard pay, up to 103.5%. But if the company performed poorly, pay would drop to as low as 96.5%. On the surface this sounds fair: employees have skin in the game and a chance for higher pay. But in essence Eastern turned its own employees into its bankers, giving the company a way to borrow money interest-free. And most often wages were lower, not higher. Eastern had a few strong years, but eventually declined.
United Airlines tried to negotiate hard with its unions. The unions threatened to strike. Union tried to call their bluff (things worked out for the other big airlines). They also trained a number of substitute pilots to take over in case there was a strike after all. In the end there was indeed a strike, and almost none of the substitute pilots showed up. United got the worst of both worlds: a strike and a lousy settlement.
American Airlines didn’t have its own strike until 1993. The consensus by that point was that pilots were hardest to replace, so if pilots threatened a strike it was taken seriously. Next came the mechanics, and finally the flight attendants — nobody took them seriously. But it was flight attendants to pulled off a strike in 1993. By that point their union had learned from other strikes and was well organized, with buttons and telephone trees, and so on. The strike was brutal because by this point American had developed a finely tuned hub-n-spoke system. If they didn’t have enough flight attendants to take care of the passengers on a given flight, the plane still had to take off in order to be there for the next connection. American was forced to run many empty planes. Meanwhile passengers showed up at the airport only to watch these empty planes take off. This strike lasted 11 days and nearly killed American. President Clinton himself intervened. But American bounced back, and in 1995 had it’s biggest quarterly profit ever.
Lorenzo’s Shopping Spree
There were 20 major airline merges in the 1980’s, of which 11 happened in 1986 alone. Frank Lorenzo of Texas Air was one of the most active buyers.
First he tried to quietly purchase a controlling interest in National Air, buying shares secretly, though intermediaries, in small increments (a hostile takeover). But Pan Am also wanted a piece of the US market now that it was free to do so, so they competed with Lorenzo for control of National. Eventually Pan Am won, but this was a windfall for Lorenzo: he made about $108M selling the shares of National to Pan Am that he had already purchased at a lower price. Again, he turned failure into incredible success.
Then Lorenzo acquired Continental. The employees there tried to gather a competing bid to take ownership of their own airline. They failed. Lorenzo took over and immediately fired 15% of employees. The he looked for a way to reduce pay for the remaining employees. The unions refused Lorenzo’s offer and their contracts were good for some time still. So Lorenzo made the unusual move of declaring bankruptcy in order to dissolve the existing contracts. He then invited employees back at a new contract. Pilots who previously earned $90,000 a year were offered $43,000, if they received an offer at all. Later, congress moved to reform bankruptcy laws to forbid this sort of game.
When People Express faltered, Texas Air scooped them up too. This was a full-circle moment, given that People Express was formed by Texas Air defectors. Texas Air also picked up Frontier Airlines, and about 15 regional feeder airlines.
Lorenzo wanted to acquire an airline with a computer reservation system. He went head-to-head against Carl Icahn to control TWA. He failed, but again he walked away with a $51M gain.
Then he moved to acquire Eastern Airlines, which had an even bigger computer reservation system. Again the employees tried to fight this, and again they failed. Eastern’s board of directors was worried that they would be sued if the public suspected that they chose to sell the company for their own benefit but not the shareholders’. So Lorenzo modified his offer to grant Eastern’s directors legal protection to the tune of $35M. The sale took place.
But Eastern was a turning point of Lorenzo’s march. The airline was a mess. It had two bases, one in New York City and one in Florida (the remnant of Florida Air, the company founded by the WW2 ace Rickenbacker). Employees from the two bases hated each other. There were lots of middle managers. Morale was low. When Lorenzo wasn’t able to bring Eastern under control, he decided to use it as a “financial junk yard”, a resource to tap into, to help his other businesses. For example, Lorenzo had Texas Air purchase a dozen gates from Eastern for $1M each, about half of their appraised cost. Eventually it was discovered that Texas Air had plundered about $403M from Eastern to its other businesses.
In 1987 Lorenzo made a decision to mash all of his airlines, except Eastern, into one mega airline with a single schedule. This turned out to be a terrible move. For example, Continental meal trays wouldn’t fit into Frontier warming carts. People bought tickets for Continental and found themselves boarding New York Air planes. Their on-time record was awful. It was a mess. Three months after this “big bang” merger, consumer complaints against the entire airline industry more than doubled. In 1988, the combined operations of Texas Air lost about ¾ of a billion dollars, almost as much as the entire airline industry had lost in its previous worst year, and this happened when the rest of the industry was having its best year ever.
Eventually the chorus of complaints from both consumers and Texas Air’s own employees grew too loud for the government to ignore. In 1988 the FAA swooped in for a “white glove” inspection of Texas Air’s operation. The investigation concluded in 1990 and the government declared that Lorenzo was not fit to run the airline. He was ousted.
But no need to worry about Lorenzo. He had cashed out his own personal holdings near the peak, and netted about $10M for himself.
Here’s an interesting point to illustrate how big Lorenzo’s conglomerate grew before it toppled, and to show how ready Lorenzo was to take on debt: at its peak, his empire was paying $600M in interest each year, more than the sales of ⅕ of the Fortune 500 companies.
Competing in Other Ways
American looked for other ways to increase business and lower costs. They already had variable pricing based on advanced purchase (charter-style pricing). Then they created fancier models with discounts for passengers willing to stay the weekend or who agreed to a no-cancellation policy. They used their computer system to view real-time demand and tweaked their pricing for each flight separately. This became a science called “yield management”. American was the leader and for them it was a big advantage. Other carriers who lacked this insight attempted to offer blanket cheap fares, but few carriers could offer cheap fares selectively, and make money doing it. In 1992, a pricing war with $99 fares across the country caused the US long distance telephone system to lock up: so many people were trying to reserve tickets at the same time.
American realized that something like 40% of its business came from about 5% of its customers — “frequent flyers”, if you will. They decided to create a loyalty program for them, the next evolution of the free liquor offered by Southwest years before. They tried to use the passenger’s phone number as the ID, but initially that failed: many travel agencies simply put their own phone number instead of the passenger’s.
American tried to fight the low-cost carriers by forcing them to pay a fee for each booking on their reservation systems. Southwest refused and pulled its flights out — they would take their reservations directly.
Some carriers turned to illegal practices. There were a few reported cases where competing flight mysteriously disappeared from Sabre. The head of Braniff Airlines recorded a conversation he had with Bob Crandall of American, where Bob suggests price fixing: “raise your goddamn fares twenty percent. I’ll raise mine the next morning. You’ll make more money and I will too.” Braniff refused, and eventually (years later) the recording was turned to the authorities. Braniff eventually failed.
United decided to diversify its business, to become a one-stop shop for all kinds of travel. They acquired Hertz. They acquired Hilton. Other airlines were fearful of what this could become. But inside United, the employees were dissatisfied. The pilots wanted it to be an airline and floated a plan to take ownership of the company. They didn’t succeed, but eventually United was forced to fire its CEO (Dick Ferris) and to sell off the other businesses (for a nice profit).
Across the Atlantic
The book is primarily about the US market, but it does touch on Britain, specifically British Airways and Virgin Atlantic.
British Airways was also a government-run organization. It began as two airlines: BOAC, which handled long-haul routes, and BEA, which handled European flights. The two companies merged to form British Airways, the biggest airline in the world: in the early 1980’s they employed 55,000 passengers. But their service was terrible. People joked that BA stands for Bloody Awful.
Privatization was sweeping through England as well. Prime Minister Margaret Thatcher made it her mission to clean up British Airways and prepare it for private sale. BA invited a new CEO, Colin Marshall, who had previously worked at Hertz and ran Avis. He was new to the airline industry, but he made a lot of good moves: placing a focus on customer service, inventing business class seats, etc.
In international politics, choosing which airline is allowed to use which airport is a hot topic. For the airlines, winning the right to run flights from a major international airport is a big deal, and they lobby their governments hard for this. London Heathrow was the biggest international gateway, and the British government controlled it carefully, awarding most flights to BA. Conversely, BA was allowed to land in the US, but then only American carriers were allowed to fly the domestic legs.
Passengers, it turns out, are willing to tolerate a lot of pain when flying. One thing they really can’t stand is surprises — they want the airplane to take off on time and land on time, and they want their bags to arrive. On a related note, passengers hate having to transfer from one carrier to another, perhaps because this is when mistakes happen more frequently.
Carriers in the 1980’s invented something called “code sharing”, where the same flight would be listed twice, once under the “operating carrier” (who actually flew the plane), and again under a “marketing carrier” (who was there to make the sale). BA managed to secure code-sharing agreements with its partner, United, which gave the impression that you could fly from London to many places in the US using BA for the entire route. Later, BA worked their political influence to win unlimited code-sharing rights with all US carriers in exchange for some landing rights for US carriers in London. Specifically, it was coded into law that only two US carriers, Pan Am and TWA, or their eventual successors, had rights to land in Heathrow. That made these airlines prime targets for later acquisition. Eventually, United acquired Pan Am.
Meanwhile, Richard Branson was getting into the music industry. He actually first started by making a magazine for young people. It didn’t make much money, so then he experimented with a mail-order music service. That was better. He called it Virgin Music because he knew nothing about the industry. Next he became a producer. His first record was the soundtrack for The Exorcist, Tubular Bells, which was a huge hit and made him his first million. Next came a string of successes: The Sex Pistols, Phil Collins, Sting, Boy George. Eventually Branson sold Virgin Music to Thorn EMI for nearly $1B.
Branson decided to start an airline: Virgin Atlantic. It began as the Southwest Airlines of the North Atlantic. They competed on price and had scantily clad flight attendants. But the airline industry wasn’t as easy to conquer. Branson is famous for saying: “If you want to be a millionaire, start with a billion dollars and launch a new airline.”
Other Random Notes
The CEO’s of the major US airlines formed a club called Los Conquistadores del Cielo. They would gather each year in a dude ranch for a week of fishing, hunting and high-stakes poker.
In the book’s conclusion, the author mentions that in the 1990’s the biggest threat to the airline industry was teleconferencing: businesses were simply choosing not to fly more and more often.
