Howard’s End

The Origins

Howard Hughes was eventually to surrender his ownership of T. W.A. in 1961, but the seeds of the denouement were planted as early as 1945. These lay dormant for many years, but the $30 million debenture loan that Equitable Life Insur­ance made at that time to T. W.A. (of which Hughes had a 67% stock holding) was to have far-reaching repercussions. In 1946, Equitable had increased the loan to $40 million, as T. W.A. entered its major route expansion program in the post-war recovery years. Early in 1947, when the airline was faced with big losses, Howard Hughes, through his Tool Company, put $10 million cash into T. W.A., in exchange for convertible notes and the power to name the majority of T. W.A. ’s directors. This was when veteran Jack Frye and Paul Richter resigned (see page 64), as Hughes Tool Company effectively took complete control of T. W.A. In 1948, Hughes exercised his convertibility option, raising his stock holding to 73%, a move that was approved by the Civil Aeronautics Board in 1950.

Signs of Distress

Things went well operationally for T. W.A. during the next few years, with the Constellations setting a merry pace both in the United States and across the Atlantic. But when, on 4 January 1956, president Ralph Damon died, he was not replaced for many months. Hughes had lost his reliable and capable adjutant, and not until 23 January 1957 was Carter Burgess installed as president. He never met Hughes, who held him responsible for a decline in the airline’s fortunes, and he resigned (or was forced out) on 31 December 1957, to be replaced, on 15 July 1958, by Charles Thomas.

With the advent of the Jet Age, Hughes’s T. W.A. was heavily committed. It had ordered eight Boeing 707-120s in February 1956, 30 Convair 880s in June 1956, and 25 more Boeing 707s in May 1957. The total of 63 big jets was a com­mitment of $300 million—a considerable sum in the 1950s. T. W.A. then made a one-for-one common stock offering, underwritten by the Hughes Tool Company, raising the equity capital to $43 million, of which Toolco had $35 million (rais­ing its equity to 77%).

But this was not enough. T. W.A. could not meet its pay­roll for the first quarter of 1958, and in April, Hughes was obliged to borrow $12 million from Irving Trust and the Bank of America. At this stage. Equitable Life, which had been one of the original backers in 1945, insisted on a long-term financing plan, to cover the $300 million jet procurement plan, which it had underwritten in 1957. Hughes held the lenders at bay by paying off the $12 million. Then, in July 1959, to cover the cost of the jet order, Toolco accepted the obligation, and leased the aircraft to T. W.A. on a day-to-day payment arrangement. To relieve the financial pressure fur­ther, an aircraft exchange was made with Pan American, trad­ing away six Boeing 707-120s for -320 series; and the Convair order for 30 aircraft was reduced to 20. In Septem­ber, 21 old aircraft were sold, with 27 more on option.

T. W.A. had managed to launch a domestic jet service on 20 March 1959—with only one aircraft (see page 64)—and, belatedly, started trans-Atlantic jet service on 23 November 1959; but the former initiative had been lost, and the airline was in serious financial straits.

At the end of the year, the Convair 880s on order were set aside from the production line—a move that resulted in a multi-million dollar loss for General Dynamics, Convair’s parent corporation.

Confrontation

The lenders’ patience was finally exhausted. In March 1960, Irving Trust shut off all further credit to Hughes, and with the other lenders, worked out a long-term financing plan that would cover the emergency. But Toolco had to agree to guar­antee all the obligations, the most important of which was that, if a change of management occurred, Metropolitan Life and Equitable could demand a voting trust to vote Hughes’s stock. This was Howard’s Achilles Heel, for on 27 July, the president, Charles Thomas resigned, amid protests from the Hughes lawyers that this was a contrived arrangement. The axe fell on 31 October, the due date for Hughes to honor the debt to Irving Trust. He could not or would not pay.

The Voting Trust

On 31 December 1960, Howard Hughes signed a $319 million financing plan for the jet fleet, under which his stock was placed in a voting trust. The banks then agreed to finance the purchase. On 27 April, Ernest Breech, formerly chairman of Ford, became chairman of T. W.A., replacing Warren Lee Pier­son, and was accompanied by Charles Tillinghast as president. Clearly there was no love lost between the adversaries of what was to become a long-drawn-out legal battle, the like of which was almost unpredecented in the history’ of American busi­ness. The first salvo was an anti-trust suit filed against Howard Hughes and the Tool Company on 30 June 1961. In May 1963, a Federal District Court judged Toolco to be in default, and the damage claim was increased from $115 to $145 million dollars. On 10 July 1964, the Civil Aeronautics Board issued an order, permitting Toolco to resume control by purchasing Series A notes from Equitable Insurance, provided that it divested itself from control of Northeast Airlines. The Court of Appeals then reversed the C. A.B.’s decision on 7 December, stating that a public hearing was legally necessary. This was upheld on 8 March 1965 by the U. S. Supreme Court. This court also refused to hear an appeal by Toolco, as it held that the public hearing was essential to determine if Hughes’s efforts were in the public interest.

Howard Hughes finally capitulated. On 3 May 1966, the Hughes Tool Company sold its entire stake in the company, through a secondary offering to the general public, 6,584,937 shares of stock (77%) valued at $86 per share. Howard Hughes, already rich, had, in about 20 minutes, become much richer, by $566,304,582.

The Judgement

The controversy over Hughes’s enigmatic role in the whole affair dragged on for years, and raised several questions, which were expressed neatly by Fortune in May 1965:

1. What is the justification for preventing a man who owes 77% of a company, however unorthodox he happens to be, from voting his stock and controlling the business?

2. How far into the control of a large-scale business are big institutional lenders entitled to go to protect their loans?

3. What is the public interest in these matters, particu­larly the unique public interest that arises in a quasi-public utility such as an airline?

Another commentary was made by the British aviation writer, Richard Worcester, who paid tribute to Hughes:

This may lay the foundations of a new T. W.A. struc­ture that will enable it to survive and justify the dreams that Jack Fiye and Howard Hughes had for the airline before the war when they conceived the Constellation. Whatever Hughes has done or not done, he will always be a great son of American commercial aviation for brilliance in sponsoring an aircraft so prescient in conception that the delay in its fruition of several years due to the war did not prevent it from going on to become a great intrinsic source of U. S. world prestige and wealth.