Texas Air Corp. Chairman Frank Lorenzo's aggressive management style has enabled him to capitalize on opportunities created by the deregulation of the airline industry, experts said yesterday.
By agreeing to acquire Eastern Airlines, Lorenzo once again has shown that he is confident of his ability to buy troubled airlines and make them profitable in this era of deregulation. Twice before -- following his acquisitions of Texas International and Continental airlines -- Lorenzo's program of cutting labor costs and fares has transformed money-losing operations into strong carriers.
About five years ago, Lorenzo bet that a new, nonunion carrier could challenge Eastern's dominance of the Boston-New York-Washington airline shuttle market. Although marginally profitable, New York Air already has the largest number of daily departures from Washington's Dulles and National airports combined.
"Frank Lorenzo wouldn't be the force that he is under regulation as under deregulation," Texas Air Vice President Clark Onstad said yesterday. "He is a force for change. He is an airline builder."
It was difficult, if not impossible, to build airlines the "Lorenzo way" under regulation, which was phased out in the mid-1970s. For example, there was little incentive to cut costs because the federal government controlled airline fares and because entry to the industry was restricted.
"When deregulation occurred, you had the ability to price freely, which you never had before, and the ability to enter freely," said W. Bruce Allen, a transportation expert at the Wharton School. "Lorenzo grabbed the bull by the horns. He wasn't so steeped as some others in the industry who were wishing for a return to the good old days of regulation.
"Just like in the trucking industry, there were a lot of old dogs who couldn't do the new tricks. There were also ostriches who stuck their heads in the sand thinking they would be regulated again in a few years when the nightmare ended. Then there were the guys like Lorenzo."
Lorenzo's most controversial maneuver was his decision several years ago to take Continental into bankruptcy to get out of high-cost labor agreements with the unions, experts said yesterday. In 1983, Continental lost $218.4 million. By 1984, with lower salaries and longer hours for employes in place, Continental made a $50.3 million profit.
Lorenzo's union-busting activities have made it difficult for him to make airline acquisitions recently. His recent bids to buy Trans World Airlines Inc. and Frontier Airlines failed largely because of union opposition. If he is able to complete the Eastern acquisition, airline industry officials and labor experts will be watching to see how he works with Eastern's unions.
"I think if people are reasonable with him, he knows how to be reasonable, too," said Leon Black, co-head of the merger department at Drexel Burnham Lambert Inc., which has advised Lorenzo on prior acquisitions. "But if they are not going to be reasonable, he can be very tough. This is an industry where you have to be."
"I wouldn't say Lorenzo is better equipped than some others in the industry to operate under deregulation," said Harvard Business School Professor Jeffrey Sonnenfeld. "There is tremendous stylistic variety in the airline industry under deregulation when you look at American, Delta, Western and Continental. Labor costs alone may not explain why various airlines are successful.
"Lorenzo is brilliant and imaginative and has been very candid with both friends and adversaries," Sonnenfeld said. "He is a direct player, and he is ferocious. Going into the gladiator mold of Lorenzo is one of a number of possible approaches under deregulation. American and Delta can return to the well because they have a lot of good will in their organizations. I think many of us are suspicious whether [his] approach has the same long-term durability."
Lorenzo's love of the airline business began when he was 15, after taking his first flight. Immediately after returning from London aboard TWA, the teen-ager from Queens, N.Y., bought some stock in the airline.
After graduating from Columbia University, where he studied economics, Lorenzo studied at Harvard Business School, where he paid for his education by driving a Coca-Cola truck. His first job was as a financial analyst with TWA. He later became manager of Eastern Airlines' financial analysis department.
Following those jobs, he and a Harvard classmate, Robert J. Carney, formed Jet Capital Corp., which bought a controlling interest in Texas International Airlines in August 1972. At 32, Lorenzo became president of the ailing airline.