Classic Longreads: Oil and Airlines
Classic Longreads: Oil and Airlines
Deep in the heart of Texas
Programming note: I’m trying out some different formats – feedback and suggestions are welcome in the comments.
The goal with this series is to highlight some classic essays and articles, with some additional commentary to put them into context.
It’s Time to Make a Deal – Joe Nocera, Texas Monthly, October 1982.
Joe Nocera gives an award-winning fly-on-the-wall account of an early effort by T. Boone Pickens to “drill for oil on the floor of the New York Stock Exchange” (as he liked to put it), in the early days of the 1980s M&A boom. He tags along as Pickens spends three weeks in New York to attempt an audacious hostile takeover attempt of Cities Service, a major oil company three times larger than Pickens’ Mesa Petroleum. As improbable as such a deal would seem, Pickens is convinced that Cities Service is massively undervalued, and that their shareholders are fed up with management's poor performance. He figures that with the right partners and enough financing, he could pull off the deal of a lifetime.
At the time, Wall Street was still a somewhat obscure place: Nocera has to explain that Morgan Stanley is a “New York investment bank house”. It was also a much more freewheeling environment, where the rules of the hostile takeover game were evolving; there were no poison pill defenses, and the players were formulating new strategies on the fly.
This is in full evidence at the outset. In response to Pickens, one of Cities Service’s first counter-moves is to launch a competing hostile takeover of Mesa Petroleum, a novel maneuver that would later become known as the “Pac-Man Defense”. For good measure, Cities Service then calls up Pickens’ financing partner, Southland Corporation (the parent of 7-Eleven), and threatens them with a hostile takeover as well if they don’t pull out. (Southland meekly complies, and when the dust clears, they later pick up Cities Service’s refining and retail arm, Citgo, which they eventually sell to Petróleos de Venezuela.)
What follows is an engrossing back and forth between Pickens and Cities Service, with tender offers and bear hugs and boardroom drama and spats played out in the media. We meet the major leading characters from Wall Street and the oil industry, as Pickens recruits financing partners while simultaneously fending off Cities Service’s attacks. As the deal unfolds, we learn more about T. Boone Pickens: where he came from, who he is, and why he’s doing this.
Pickens is ultimately unsuccessful; Cities Service sells at a higher price to a “white knight”, Gulf Oil (a deal that later falls through when Gulf Oil gets cold feet), and Pickens is left with his consolation prize, a $45 million profit on the shares of Cities Service that he purchased before the battle (before taxes and expenses). “Better than a punch in the eye with a sharp stick,” remarks the always-quotable Pickens.
For Pickens, Cities Service was just an appetizer for the big deal that would seal his reputation. The following year, he would accumulate a big stake in Gulf Oil itself, launching a proxy battle that would eventually culminate in the sale of the Gulf Oil to Chevron, netting Pickens and his partners a profit of $760 million, and making T. Boone Pickens a household name.
The Great Airline War – James Fallows, Texas Monthly, December 1975.
The “Great Airline War” turns out to be the “Great Texas Airline War”, fought entirely within the borders of the Lone Star State during the early 1970s between three small carriers. Also, it turns to be not so much a war as a prolonged campaign by two local incumbent airlines, Braniff and Texas International (“TI”), to murder a tiny startup, Southwest Airlines. This skirmish would foreshadow the battles to come in aviation after deregulation, and TI and Southwest would grow to play starring roles on the national stage.
Besides simply being an entertaining yarn, this piece is an outstanding example of explanatory journalism. He describes the major levers of airline economics clearly and accurately. Here he is describing the structure of the industry at the time:
In the airline industry, you make money by being in business. Like broadcasting, though to a less grotesque extent, the airlines are government franchisees, whose product is almost guaranteed to sell. Management and intelligence can make a difference…[b]ut the rules of the game are fixed far more than for most businesses. The most vicious competition—the efforts which will make the big difference in profit and loss—take place not before the customer but before the government: before the Civil Aeronautics Board, to be precise, which distributes routes to the various supplicant airlines.
The reader quickly grasps why Southwest, which circumvents this cozy arrangement through a loophole, is such a threat.
The credit does not all belong to Fallows; it helps that the protagonists supply him with clear examples to illustrate the tradeoffs that lead them (for example) to use smaller planes to increase frequency or to coordinate flights through a hub.
More impressively, they predict exactly how the airline industry will evolve if deregulation comes to pass (as it does three years later, in 1978):
Sadly, it seems at least as probable that three or four large [major carriers] would squeeze everybody else out of business…“What you’ll see under President Ford’s proposals,” says [TI President] Francisco Lorenzo, “is two types of airlines. You’ll see United Airlines, and you’ll see some lines like Southwest.” Braniff, TI, and all other inhabitants of the middle tier would be squeezed out of the market.
As predicted, fares would tumble after deregulation: in 1974, a round-trip coach ticket between New York and Los Angeles was fixed at $2,215 (in 2022 dollars), a ticket that can be found as cheaply as $218 today. Airline profitability would be destroyed, employee salaries would be slashed, and smaller players would be forced to merge or liquidate entirely.
Today, of course, Southwest is the largest domestic airline, when measured by total passengers carried. It has also been the most lucrative airline for investors; Southwest stock is up 2,000x since 1980, while other domestic carriers cycled in and out of bankruptcy. The Great Texas Airline War has been enshrined as part of Southwest’s corporate mythology, the triumph of the plucky upstart over the evil incumbents.
Braniff was one of the most profitable airlines in the country in 1975, but it was only the eighth largest, a third the size of giants like United and TWA. Braniff tried to survive by expanding rapidly as soon as the industry deregulated in 1978. This backfired, as they were forced to take delivery of new planes during an oil crisis and a period of surging interest rates; in any case, their expansion was too rapid and haphazard to have any hope of succeeding. Braniff also made the mistake of moving flights out of its profitable Dallas Fort-Worth hub, allowing American Airlines, under Bob Crandall, to swoop in and establish dominance. In 1982, Braniff was the first carrier to be forced into bankruptcy.
The most improbable story belongs to Frank Lorenzo’s tiny Texas International, portrayed in the article as a loveable but doomed bit player, reliant on federal subsidies, and only a tenth the size of Braniff. Frank Lorenzo would learn quickly from competition with Southwest, successfully lobbying authorities for permission to implement half-price “peanuts fares” to boost volume and profits the very next year. Instead of expanding organically like Braniff, he goes the T. Boone Pickens route, making hostile bids for larger players. He builds a stake in National, and pockets $35 million when it gets acquired by Pan Am. He gains control of Continental in 1981, and moves it from Los Angeles to Houston, combining it with TI. He adds People Express and Eastern Airlines and by 1987, his holding company, Texas Air, is the largest airline holding company in the country, with a 20% share of the market.
By this time, his battles with the unions have made him far less lovable in the eyes of the public, and he has trouble keeping the company profitable enough to service his heavy debt load. In 1990, Texas Air files for bankruptcy.
Further reading:
Books:
The Prize by Daniel Yergin (1990): A thorough history of the oil business. This is a much more entertaining book than one would expect, packed with fun anecdotes and colorful characters (like T. Boone Pickens). Probably one of the best business books ever written.
Hard Landing by Thomas Petzinger, Jr. (1996): The best resource to understand the airline industry as it went through deregulation, written by the Wall Street Journal reporter who covered it. Lots of great stories here as well.
Articles:
Bad Times at Braniff – D Magazine, February 1981
The Man Who Killed Braniff — Byron Harris, Texas Monthly, July 1982: The rise and fall of Harding Lawrence and Braniff. In 1978, Braniff was one of the largest and most profitable airlines; by 1980, Braniff was dying and Lawrence was out of a job; and by 1982, Braniff was bankrupt and gone forever. Life comes at you fast.
Top Gun – Wlliam P. Barrett, Texas Monthly, March 1987: A profile of Frank Lorenzo and Texas Air at its peak. This one is less flattering than the 1975 article.
Bob Crandall Flies off the Handle – Dana Rubin, Texas Monthly, August 1993: A look at Bob Crandall, the legendary CEO of American Airlines, which ended up besting both TI and Braniff.