Texas International's Peanuts Fares and the Rise of Frank Lorenzo

Houston-based Texas International Airlines began in 1944 as Aviation Enterprises and in 1947 with a fleet of surplus Douglas DC-3s, renamed itself Trans-Texas Airways. As Trans-Texas grew as a local service carrier (what we would today call a regional airline only without the affiliation to a major airline like today), Trans-Texas expanded services beyond the state as it added Convair 240 piston twins. The Convairs were later re-engined with Rolls Royce Dart turboprops to become Convair 600s. By the start of the Sixties, the airline flew as far west as Albuquerque and El Paso and Memphis, Jackson, and New Orleans in the east. To maintain its competitive edge with the other Texas-based airline of the day, Braniff International, Trans-Texas added the Douglas DC-9 Series 10 to its fleet starting in 1967. Route expansion continued steadily and with the addition of a small handful of destinations in northern Mexico, the airline re-branded as Texas International in 1970, later unveiling a patriotic Lone Star livery in 1973 prior to the opening of the new DFW Airport. Unfortunately, Texas International's upgrades to jet equipment had saddled the airline with quite a bit of debt, not unlike what had happened to Mohawk Airlines just a few years earlier. Through the 1960s, Texas International and its larger rival Dallas-based Braniff International had more or less comfortably existed in a duopoly in the Texas airline market. That secure operating climate was upended in 1971 with the arrival of Southwest Airlines. Texas International had joined Braniff in the legal battle to quash the nascent upstart and lost, putting Texas International in the new position of having to compete to a degree it had not had to in its history. Combined with its mounting debts from the expansion in the 1960s and the upgrade to a jet fleet, the Houston-based operation was in need of help. 

Trans-Texas Airways (TTa) Convair 600 at Dallas Love Field

I had posted previously how in a similar financial situation, New York-based Mohawk Airlines had turned to the services of a small consulting firm called Jet Capital that was headed by a young and quite brash individual named Frank Lorenzo. Lorenzo and his primary business partner, Bob Carney, a fellow Harvard Business School classmate, had become a bit of an upstart darling on Wall Street for their financial wizardry in creating Jet Capital. In their stock offering, Lorenzo and Carney sold shares to the public at 10 cents each, but before the IPO for Jet Capital, they sold shares to friends at $3.50 each but more importantly, they sold shares to each other for 12 cents each. Investing only $44,000 of their money, the Jet Capital IPO netted them $1.5 million yet they controlled 75% of Jet Capital's shares. It was that seed money that Lorenzo used in his failed bid to takeover Mohawk Airlines. At the time of his Mohawk venture, Lorenzo had made friends with Don Burr, a mutual fund manager that had made a name for himself on Wall Street with some very astute aviation stock picks. With his clout as a mutual fund manager that held shares in Texas International, Burr convinced the airline to engage the consulting services of Jet Capital to effect a turnaround. Lorenzo arranged to have the airline's debt refinanced with Burr offering the injection of $5 million from his mutual fund. The result, of course, like their proposed Mohawk deal, was to take control of the airline, and like the Mohawk board several years earlier, the Texas International board was suspicious of Lorenzo and they might have scrapped the deal had it not been for two individuals that entered the ring to try to acquire Texas International themselves- Howard Hughes and Herb Kelleher. 

Ever since Hughes relinquished control of TWA in the late 1960s, he had been craving to get back into the airline business and got that chance with his acquisition of the local service carrier AirWest in 1970, immediately rebranding the airline has Hughes Airwest. But Hughes wanted something on the scope of TWA and his new airline only gave him the West Coast. Acquiring Texas International would get him 2/3 of the way across the country on his goal of recreating a transcontinental airline. For Herb Kelleher, getting Texas International would not only knock out a competitor who only recently tried to put Southwest out of business through legal action, it would also give Southwest the operating certificate of Texas International which permitted flights beyond the states of Texas, something Southwest wasn't able to do at the time. Faced with someone known to be eccentric and someone who they felt was bent on revenge for their failed bid to quash Southwest, the Texas International board sold the airline to Lorenzo in 1972. Like his structuring of Jet Capital, even though he controlled only 24% of the shares in Texas International, Lorenzo structured the deal to give him majority voting control of the airline. At only 32 years of age, Frank Lorenzo became the youngest airline chief since Juan Trippe at Pan Am. And he did it by defeating Herb Kelleher *and* Howard Hughes. Who wouldn't be on top of the world in those shoes?

Frank Lorenzo at the time he took control of Texas International

Don Burr left Wall Street in 1973 to work with Lorenzo in Houston running Texas International. At the time Southwest was adding its fifth and sixth Boeing 737-200 to its nascent fleet and even though Texas International had routes outside of the state of Texas, it was beginning to lose market share within Texas to Herb Kelleher's operation. It was at Texas International that Lorenzo began to earn his reputation as a union-buster- in order to better compete against Southwest, Lorenzo began making deep cuts in labor costs that sowed discord among the employees at Texas International. With labor contracts up for negotiation, the atmosphere became contentious at Texas International. In a pattern that set Lorenzo's pattern for negotiations with both unions and investors, he would often add or change at the last minute agreed-upon terms for the contract. This angered the unions at Texas International and they struck, the very first strike in the history of the small airline. The airline was grounded for four months, but back then in the days before deregulation, there was a mutual aid pact in place where other airlines gave financial support to airlines that were grounded by labor actions. As a result (and much to the other airline's chagrin who felt Lorenzo could have prevented the strike), Texas International got millions under the pact and the strike eventually ended. 

Texas International Douglas DC-9 Series 30, the airline's largest aircraft

Having got his labor concessions the way he wanted, Lorenzo could now turn his attention to competing with Southwest. At the time, Southwest operated within the "Texas Triangle" of Dallas, Houston, and San Antonio, the state's three largest cities. Kelleher had engaged the services of a seasoned airline executive, Lamar Muse, to guide Southwest's growth. Muse picked the agricultural town of Harlingen in the Rio Grande Valley as Southwest's next destination. The city was ripe for the picking- being at least a seven hour drive from the nearest large city, Harlingen was dependent upon air services from Texas International and the four month strike at the airline had hurt the city economically. Muse had also astutely noted that Harlingen was a short drive from South Padre Island which was at the cusp of starting its tourist boom as a Gulf Coast beach destination. While Texas International would have charged a one way fare of $40 for Harlingen, Southwest charged only $25 and traffic soon boomed with thousands of passengers filling Southwest flights whereas the year prior, Texas International would have only had a few hundred a month. Before long, residents from northern Mexico were crossing the border to also take Southwest flights. Texas International tried various approaches, but it was painfully clear to Lorenzo that he wasn't able to compete head-to-head with Southwest. 

In the days before deregulation, airline fares were set by the Civil Aeronautics Board (CAB) in Washington. Any airline that operated beyond a single state was an interstate carrier and would fall under CAB regulation as was the case with Texas International. Southwest, however, only operated in Texas and therefore was free to set its fares whatever it wished as long as the state authorities in Austin had no objections, which was rarely the case. In November 1976, Lorenzo petitioned the CAB to be allowed to cut its fares- and not just to match Southwest, but to undercut Southwest with a 50% discount- what Lorenzo called "Peanuts Fares" since you could "fly for peanuts". For years airlines had been allowed to implement fare discounts by the CAB, but these were usually for charter flights, holiday flights and red-eye flights and were rarely ever long-term and only applied to a few flights. What Lorenzo was petitioning the CAB to be allowed to do was unprecedented in the airline industry- he was asking for individual authority to set his own ticket prices across the board based on market conditions. This had never been done in forty years, but there were already deregulation forces at work in Washington on the heels of Jimmy Carter's election to the White House. The CAB approved Lorenzo's petition and the Peanuts Fare" were introduced not just to Harlingen, but across Texas International's route system. By the end of the first week, passenger loads on the airline had shot up an astounding 600 percent. 

Peanuts Fares didn't just apply to routes where TI competed with Southwest

Peanuts Fares were a success for the airline and Frank Lorenzo was hailed as a hero by consumer advocate groups. But there was a catch that gnawed at him despite being flush with success at such a young age with such a small airline- the fare experiment suggested strongly that airlines were more than able to manage their own fares without the bureaucracy of the CAB. To the advocates of deregulation, it was ammunition in the battle to eliminate the CAB and deregulate the US airline industry. Just a few years earlier an airline executive could face criminal charges for setting fares without the approval of the CAB, now here was Texas International doing just that and making a huge pile of money in the process and stimulating a boom in passenger traffic. Lorenzo didn't want deregulation, though. Texas International at the time was only the 20th largest airline in the United States. He knew he could be crushed instantly by the Dallas-based giant Braniff International should deregulation happen. Even bigger American Airlines was growing its presence at the new DFW Airport as well, and American had resources and deep pockets that would make Texas International a quick snack in a fully free-market environment. During press interviews at the time, Lorenzo was quick to point out the experimental and temporary nature of the Peanuts Fares. For the time being, the CAB's bureaucracy did shelter him from being crushed by larger airlines for the time being, giving him time to plan his next move. 

But that'll be a blog post for a later date..........

Source: Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos by Thomas Petzinger. Times Business/Random House, 1996, pp 38-50. Grounded: Frank Lorenzo and the Destruction of Eastern Airlines by Aaron Bernstein. Beard Books, 1999, pp 11-15 Photos: Wikipedia, Flickr/Bob Garrard Collection

The Difficult Birth of Laker Skytrain

On 8 February 1966 when Freddie Laker formed Laker Airways, he already had an established reputation as an aviation entrepreneur, having already established his name with the maintenance and overhaul company Aviation Traders and with the independent airline British United Airways (BUA). In the very beginning, using loans and financing, Laker bought a pair of used Bristol Britannias from BOAC and three brand-new BAC One-Elevens and started flying services in July 1966 under a contract with Air France while entering the package holiday market. By the following year Laker introduced time-charters which committed tour operators to contacts with Laker that guaranteed him a fixed number of flying hours per year to carry tour operators' customers to holiday destinations in the Mediterranean. His innovative contracts allowed him to sell seats on his One-Elevens two years before he took delivery of the aircraft. In 1969 Laker purchased two used Boeing 707s and with other European independent carriers, began trans-Atlantic services at low prices to travel groups. 

At the time these travel groups were set up for a variety of reasons that often were simply to evade the high prices on established airlines across the Atlantic. At the time there were strict rules governing the carriage of such passengers and the charter airlines were held legally responsible to verify the authenticity of a group's operation. Since the fares were strictly regulated between the United States and the UK at the time, an airline that sold seats to non-members of such groups could face heavy fines. Despite Laker employing lawyers to take sworn statements from his passengers, he still was accused of circumventing the rules and was threatened with heavy fines that could have shut down his airline. 

Laker became an outspoken critic of what he felt was a protected market with the implicit collusion of the regulatory authorities. He decided to do away with advance booking and the need for groups to fly between the US and the UK for reasonable prices. The Skytrain was born- all a passenger had to do was show up at the airport with a valid passport, buy a ticket and board the aircraft. Laker's inaugural prices were set at approximately US$60, about 25% of the lowest advance fare on an IATA carrier. When Laker applied to the British Air Transport Licensing Board (ATLB) in 1971 for the rights to operate services between New York and London, both the British and US governments along with IATA and its member airlines immediately protested. In 1971 14 million passengers a year were crossing the Atlantic by air and Laker believed he could grow the market by another 2 million easily with his pricing structure and no-frills service. 

The ATLB rejected his application and also rejected his subsequent appeal. However, Laker's efforts at launching service caught the attention of the newly-formed Civil Aviation Authority (CAA) which was established in 1972 to regulate all aspects of UK civil aviation. The CAA was empowered to take over several regulatory areas that were previously the responsibility of the ATLB and one of its first acts was to overturn the rejection of Laker's application and offered him traffic rights at London Stansted. Laker wanted to operate out of London Gatwick which had rail connections to central London where Laker's main ticket offices were located. In 1972, Stansted was a small airport that lacked good ground transport links to central London. Despite this, however, the CAA designated Laker as a national flag carrier so that the airline could not be blocked by the US government. 

Laker went ahead and ordered two McDonnell Douglas DC-10s which he first put into service on his Mediterranean holiday services with the intent of using them on his innovative Skytrain services. However, in 1973, the US Civil Aeronautics Board (CAB) refused to grant Laker traffic rights for the United States on the basis that he was still in violation of the old rule regarding travel groups flying across the Atlantic. Laker was fined despite a lack of proof that he had violated the rules back in 1969. After a lengthy series of discussions, by 1974 the CAB decided to retract the fines and approved his applications for services to the United States. However, under pressure from the US airlines that held a significant share of the trans-Atlantic market (led by TWA and Pan Am), President Nixon refused to approve the application. Laker responded by threatening lawsuits against the US and UK airlines that were lobbying the refusal of his application. Under pressure from BOAC, the CAA eventually canceled the license for Laker Skytrain. 

This started a long public debate that by 1976 the UK Parliament's House of Lords called on the government to approve the Laker license on the basis that it was in line with public opinion of the day. The UK courts agreed with the House of Lords after Laker proved that the British government and the CAA were violating their own regulations in rejecting his license application. In the United States, though, Laker found an ally in President Jimmy Carter who was an advocate of deregulation (Carter would later sign the Airline Deregulation Act in 1978) and readily signed off on the US regulatory application to allow the Laker Skytrain to begin services. With victory in the UK courts in hand and victory in the United States with the help of President Carter, the first Laker Skytrain flight departed London Gatwick for New York JFK on 26 September 1977. Freddie Laker himself was aboard that aircraft which had been christened "Eastern Belle". His second DC-10 was christened "Western Belle". 

Source: Airliner Classics (in association with Airliner World), November 2009. "Sir Freddie Laker: The Man Who Gave Us Skytrain" by Bob Bluffield, p81-83.

Mohawk Airlines Gets the BAC One-Eleven

When the BAC One-Eleven was developed, it faced competition from two other short-haul twinjets in the form of the Sud-Aviation Caravelle and the Douglas DC-9 Series 10. And further ahead lay Boeing's 737-100/200. BAC's sales team as soon as the One-Eleven was launched wasted no team in getting themselves set up in the United States, keen to follow on the success of the Viscount turboprop in the world's most lucrative air travel market. However, the BAC sales team found opposition not from the airlines, but from a completely different quarter.

Shortly after the launch of the One-Eleven letters of intent came in from local service carriers Ozark Air Lines (five aircraft) and Frontier (six aircraft). However, the US airlines of the day were tightly regulated by the Civil Aeronautics Board which not only set fares and routes, but also administered government subsidies to maintain "competition". The local service carriers of the day were particularly dependent on the government subsidies for what were usually uneconomic short-haul routes to smaller cities. In the case of Frontier and Ozark, the CAB felt that operating pure jets would require increased subsidies and threatened to withdraw financial support. As a result, Ozark and Frontier had to abandon their plans to buy the BAC One-Eleven.

The following year in 1962 Bonanza Air Lines signed a letter of intent for three One-Elevens. This time the CAB refused to guarantee Bonanza's loan and the purchase had to be canceled. When Bonanza was able to later on order the Douglas DC-9 Series 10 (as well as Ozark), accusations of protectionism flew from the British government and press.

Though success came with Braniff's order for six One-Elevens and options on six more (Braniff was much less dependent on government subsidies), the next local service carrier to order the One-Eleven, Mohawk Air Lines, was determined to make a case for operating the jet. When Mohawk ordered four One-Elevens, the CAB again tried to intervene and prevent Mohawk from getting jet equipment. The CAB stated in their denial that Mohawk's Convair twins carried on average 20 passengers and at least 30-35 passengers would be needed on the One-Eleven to operate without an increased subsidy.

Mohawk's president, Robert Peach, wasn't going to accept the CAB's verdict. In a very detailed rebuttal and analysis written by Peach himself, he pointed out that the CAB had just awarded Mohawk route extensions as well as nonstop route authorities between major cities in the Northeast that brought Mohawk in direct competition with the trunk carriers like American and United. Peach argued that modern equipment was needed to compete on these routes and that failure to acquire jets would mean an increase in subsidy would be needed for Mohawk to maintain those very routes.

Peach then detailed the rationale for the One-Eleven purchase, showing that operating the One-Eleven over a 200-mile route would break even at a load factor of 46%, something he pointed out that Mohawk had easily done historically. Mohawk wasn't getting jets for sake of getting jets, Peach concluded, the airline was doing it to meet economic and customer demand for modern aircraft on its route network.

It was one of the rare victories against the CAB that increased Robert Peach's stature amongst the other local service carriers. The CAB conceded and Mohawk operated their first BAC One-Eleven service on 15 July 1965 between Utica, New York, and New York City.

Source: BAC One-Eleven by Malcom L. Hill (Crowood Aviation Series). The Crowood Press Ltd, 1999, p25-27.