Braniff International Airways-A Case History Under Deregulation

Braniff’s conclusion that deregulation would be only temporary, and that re-regulation was inevitable, was probably the biggest mistake of all. That conclusion prompted Braniff to believe that new routes should be established as quickly as possible, before the window of opportunity slammed shut, and that the equipment to serve these new routes should be immediately acquired before the aircraft manufacturers became back­logged with orders from all of the other airlines that were sure to come.

In 1978 Braniff International Airways was a successful, established carrier with a reliable business clientele responsible for about 70 per­cent of its traffic. When Postmaster General Far­ley ordered the re-bidding in 1934 for airmail routes after the so-called “Spoils Conference” affair of 1930, Braniff Airways, Inc, as it was known then, had acquired the coveted Dallas – Chicago route. As it grew, its route system cen­tered on the Midwest, primarily on a north-south axis. Braniff was profitable and had been for much of its proud history as one of the 16 trunk carriers grandfathered under the Civil Aeronau­tics Act of 1938.

After World War II, Braniff became the first international competitor to Pan American certificated by the United States government when it began service to South America along its east coast. In 1950, Braniff was granted landing rights in Buenos Aires by the Peron government in Argentina.

By the late 1950s, Braniff had expanded to airports across the country using the DC-7, the last of the large piston engine airplanes, and would soon convert its entire fleet to turbine powered aircraft, including Lockheed turbo “Electras” and Boeing 707s. At this time Braniff was still a conservatively run organization with a solid balance sheet, excellent routes both domes­tically and internationally, and new aircraft. The future looked bright, indeed.

In 1965, Braniff was bought by GreatAmer – ica Corporation, an insurance holding company whose expansion into transportation included the purchase of National Car Rental. With its history as a solid Midwestern company serv­ing conservative business and corporate clients, its livery, as well as its management style, was considered rather staid. Under new management Braniff began to take on a different image, one that defines how it is usually viewed today.

Harding Lawrence, as Braniff s new CEO, inaugurated a “makeover” that became the talk of the airline industry. Madison Avenue advertising agencies, folk artists, Italian fashion designers, and architects were called in to recreate the “Braniff look.” The airplanes were painted in solid colors, a different color for each airplane, and the colors ranged across the pastel spectrum. During the 1960s, Braniff airplanes sported a total of 15 different colors, including ochre, tur­quoise, and lemon yellow.

Harding Lawrence loved the abstract, mul­ticolored paintings of the modern artist Alex­ander Calder and hung some 50 of his original creations around Braniff’s executive offices in 1972. Soon, Calder was engaged to design a paint scheme for an entire jet airplane, the first of several, in original, swirling, multicolor designs unique to each aircraft. Calder oversaw the paint­ing as an original work of art and insisted on personally painting one engine nacelle on each airplane with a special design. He was paid a fee of $100,000 for each aircraft design. This fee did not include the paint.

In December 1965, Braniff expanded its international reach by buying the 50 percent interest of W. R. Grace in “Panagra,” an airline operated as a joint venture with Pan American World Airways to serve the Andean countries of South America from the United States. Four months later, Braniff bought out Pan Am and continued to fly these South American routes as far south as Santiago, Chile. Pan American con­tinued to fly the east coast of South America.

Between 1975 and 1980, Braniff doubled in size. By this time 95 percent of the Braniff fleet consisted of jets.

Within a few days after the Airline Deregu­lation Act was passed in October 1978, Braniff had applied for 626 new routes. By early Novem­ber the CAB had granted Braniff 67 of these new routes, and by the middle of December, the airline had begun service to 16 new cities. Dur­ing the three months following the signing of the ADA, Braniff hired over 338 new pilots. It bracketed the American continent by establish­ing new hubs in Boston and Los Angeles. It expanded its fleet by buying and leasing all man­ner of new aircraft, including the expensive-to – operate 747, which served to compound the error as its cavernous interior flew practically empty on Braniff s new routes.

But possibly the most astonishing devel­opment after deregulation was in 1979 when Braniff began service with the new supersonic Concorde between Dallas/Fort Worth and

Washington, D. C. as the first leg of international routes to London and Paris with British Airways and Air France. The Concorde was the product of a joint enterprise of the British and French gov­ernments to develop the first supersonic transport (SST), and it had been introduced to the avia­tion world at the Paris Air Show in 1973. The advantage of the Concorde was its ability to fly at Mach 2; its disadvantage was that it could fly at Mach 2 only over the open ocean due to the shock wave produced by supersonic flight. Where Braniff flew the Concorde, which was over the continental United States, there was no advantage—it was limited to an airspeed of.95 Mach, barely over the normal operating speed of a Boeing 727. Worse, even with a nominal surcharge of only $100 added to the DFW-Dulles fare, the cramped 100 seat-configured Concorde usually flew at 15 percent capacity. Some wag observed that all of Braniff’s airplanes should have been painted yellow since the airline had gone completely “bananas.”

Beginning in 1980 and extending into the early years of the decade, fuel prices spiraled upward due to the OPEC oil crisis, interest rates shot up to 20 percent, and the attendant recession had a stifling effect on passenger traffic. When deregulation did not end, and upstart airlines con­tinued to enter the field and pose significant com­petitive pressures on Braniff’s expanded routes, Braniff began suffering catastrophic losses. In order to maintain cash flow, Braniff began to sell off its newly acquired fleet of aircraft at dis­tressed prices to its competitors, further weaken­ing its position. It then turned to selling off its biggest prizes, its European routes and then its Asian routes, as well as some of its domestic ser­vice. This was a pattern that had never been seen before in American aviation, but it was only the beginning.

By 1982, Braniff could no longer keep its doors open against the clamor of creditors, and it filed for Chapter 11 protection under the Bank­ruptcy Act. It was the first United States airline to do so since airline regulation was begun in 1938. Due to the crushing debt that had accumu­lated under Braniff’s bizarre management style since deregulation, the company could not secure an agreement from its creditors to continue operations under Chapter 11. On May 12, 1982, Braniff grounded all of its beautifully designed and painted aircraft and shut down its opera­tions. It had been 52 years since Paul Braniff first coined the slogan, “The World’s Fastest Airline.”

■ The United States Bankruptcy Act4

The Constitution of the United States (Article 1, Section 8) specifically provides that Con­gress be empowered to establish “uniform laws on the subject of bankruptcies throughout the United States.” Congress has done so on repeated occasions since 1801. Bankruptcy in the United States, therefore, is mainly a federal exercise, administered in the federal bankruptcy courts, which are an adjunct of the United States District Courts located in each state across the land.

The concept of bankruptcy first implies that one’s debts exceed one’s assets. This is called “insolvency.” Under U. S. law, a petition in bank­ruptcy can be initiated either by creditors of the insolvent debtor, called “involuntary bank­ruptcy,” or by the debtor himself, called “vol­untary bankruptcy.” As we saw in Part I of this book, the industrial revolution, and particularly the advent of the railroads, caused the rise of the corporate form of business entity. Under U. S. law, corporations are entitled to the same basic privileges as individuals, including the protection of the bankruptcy laws.

The bankruptcy code is sub-divided into “Chapters,” each one dealing with a separate kind of bankruptcy. The most common form of bankruptcy, known as “straight bankruptcy” is found in Chapter 7 of the Code and results in the shutting down of the business. This procedure provides for the appointment of a trustee to liq­uidate all of the debtor’s assets and to distribute the proceeds to the creditors. Chapter 11 is a more complex procedure that allows the debtor to remain in business under the supervision of the bankruptcy court while it goes through a “reor­ganization” of its debt structure and contractual obligations.

The intent of Chapter 11, in allowing a com­pany to remain in business under reorganization, is to provide a way to pay most if not all of the creditors, to save jobs, to preserve the engine of profitability (which is the corporation’s opera­tions in place, good will, experience, and hope of the future), and to allow the business to earn a “fresh start.” One trade-off to accomplish this result is the cancellation or renegotiation of pre­viously incurred debts and contracts, including labor contracts. This is accomplished either by compromise between the debtor and the credi­tors, or by rulings of the bankruptcy judge.

During the reorganization process, which may take months to years depending on the complexities of the reorganization, the debtor is considered “under the protection” of the bankruptcy court. This means that the debtor is shielded from lawsuits that could otherwise be brought by creditors, and from general harass­ment associated with its unpaid debts. At the same time, the operations of the debtor are sub­ject to the scrutiny of the bankruptcy court and the creditors.

In the following chapters of this book, we will see how Chapter 11 bankruptcy has become an integral part of the air transportation business in the deregulated world. Other sophisticated free market techniques, previously unheard of in commercial aviation, would be brought to bear as airlines attempted to cope with the new world of competition. Hostile corporate take­overs, leveraged buyouts, downsizing, outsourc­ing, and employee pay givebacks and salary cuts were only some of the new developments that loomed over the horizon. Chief practitioner of these ideas was a Harvard MBA by the name of Frank Lorenzo.

4. The bankruptcy law is codified at Title 11 of the United States Code. The U. S. Code is a series of books contain­ing all of the laws of the United States arranged sequen­tially from Title 1 through Title 50A. Each Title is devoted to a particular subject matter. Title 49, for example, con­tains the federal statutes in the field of transportation.