Hard Landing (57 page)

Under such incendiary circumstances, Luce thought, the board
must not divide itself from management; just as important, it could not be
seen
as divided. A unified front was essential, even if it meant that some of the directors had to stifle their true feelings about Ferris. Regardless of what happened to the cars or hotel, the airline, Luce resolved, could not under any circumstances be allowed to fall into hands that might manage it clumsily or greedily.

The
Journal
article appeared on Good Friday in 1987. Over the weekend Luce
drafted a response by hand and personally delivered it to the paper’s office on Easter Sunday. The letter appeared in the next day’s editions. Luce accused the
Journal
of publishing “inaccuracies and
anti-management bias.” He agreed with the article’s conclusion that United’s airline earnings were unsatisfactory but blamed nonunion competition from the likes of Continental Airlines, not Ferris.

“The UAL board,” Luce’s letter went on, “is four-square behind Mr. Ferris, his management team, and his long-range strategy.” The
Journal
, it appeared, had the story all wrong. Ferris’s job was safe.

Ferris himself, meanwhile, was arranging to protect Allegis even further, with the help of an old ally, Boeing.

In that one sector of the aviation business, life could not have been sweeter. There were no boardroom battles raging at Boeing, no rank-and-file rebellions, no ruinous fare wars, no bankruptcies. Boeing was riding a wave of aircraft orders unlike any ever, thanks in part to low fares and the greatest flying boom in history. In addition to expanding their fleets, the major airlines were also replacing their generation-old 727s, 737s, and 747s. These models were giving way to the 757 and the 767, with the two-engine, long-range 777 on the drawing board.
Boeing now had two thirds of the worldwide aircraft market to itself.

But Boeing was concerned about a long-term threat on the horizon. It was Airbus Industrie, the European aircraft-manufacturing consortium. Nearly a decade earlier Airbus had broken into the
United States on the strength of the big order from Frank Borman at Eastern. Airbus, it turned out, built wonderful jets. With subsidies from the governments of Europe, it had priced these planes cheaply and was making further inroads. Boeing could not let Airbus gobble too much market share, and above all it could never permit it to move in on its best customer ever, United Airlines, which Boeing itself had once owned. United urgently needed planes. Everyone knew that United would soon have to place a massive order. So despite its booming production lines, Boeing was in a mood to do just about anything to
clinch its standing with Ferris.

Agreeing to place a huge order with Boeing, Ferris simultaneously asked Boeing to provide $700 million to United through the purchase of notes. There was nothing unusual in an aircraft manufacturer providing financing to a customer, just as General Motors lent money to people to buy Chevrolets. But the $700 million in notes were convertible, at Boeing’s option, into 16 percent of the common stock of Allegis. Boeing also received options to raise its interest in United to 30 percent and possibly higher. It was a preposterous transaction—a bald antitakeover move passed off as an investment. With the ability to shift a huge block of stock into friendly hands whenever the need arose, Ferris, it seemed, had stopped the pilots dead.

The stock speculators who had loaded up on Allegis stock on the expectation of a bust-up or takeover quickly bailed out. But in their wake was a ready buyer: a single investment partnership called Coniston, consisting of three bright young traders who had already made a killing in takeover stocks and had a few hundred million dollars with which to wager on United’s shares.

Ferris would later recall dismissing this threat as “
Coniston Schmoniston.” But as he was preparing to announce the unveiling of the new
Allegis Visa card, Ferris learned that Coniston had picked up 13 percent of his stock. There was more: Coniston announced that it was embracing the pilots’ point of view. Coniston too believed that Allegis should be broken into pieces. Worst of all, Coniston announced that it would soon begin soliciting proxies from its fellow shareholders to have the Allegis board of directors thrown out.

A proxy fight was under way.

Ferris had been blindsided. Facing a genuine emergency, his people
notified Boeing that it should start preparing to convert its notes into stock; Ferris and his board would need as many votes as possible to survive the proxy fight. But the people at Boeing, stung by criticism surrounding the white knight deal of only a few days earlier, answered that they would take his request
under advisement. Ferris had been stiffed.

More bad news came in for Ferris. A poll conducted by a professional proxy solicitation firm predicted that Coniston would probably
win a proxy fight. Ferris and the incumbent directors of United would lose.

Frank Olson of Hertz Corporation had been a friend of Dick Ferris’s since long before United had purchased Hertz, and their relationship had grown much closer since then. As chairman of one of Allegis’s principal operating subsidiaries and as a United director, Olson was either a participant in the events swirling around Ferris or a front-row observer. Increasingly he was also Ferris’s confidant.

The two men grimly concluded that events had cascaded beyond Ferris’s control. Wall Street’s expectations had been raised; something was going to happen to the company, whether a takeover by the pilots, a takeover by a third party, the ouster of the company’s board by Coniston, or some combination of such events. Wall Street was extorting Allegis, and Ferris had to find a way to make a payoff. The only way to do that, Olson told him, was to begin dismantling Allegis voluntarily and putting the proceeds in the hands of the shareholders. “Dick, we’ve got to
sell something,” Olson said. “This is ridiculous, to continue to hold on to it.” Such were the ironies of corporate strategy in the 1980s: Ferris had taken the first steps in building his empire to help ward off a takeover, and now, just two years later, he had to take it apart to accomplish the same result.

What should Allegis sell? “Start with Westin and see if that satisfies them,” Olson said. “If not, then let’s sell Hertz.”

Ferris gave Olson no argument. Too much had changed; it was time to relent. Ferris would begin making preparations to sell at least part of his empire and distribute the proceeds to shareholders.

Even if that satisfied Wall Street, Ferris still had the pilots to worry about. Dubinsky was more fervent than ever in his desire to take control of the airline. But the International Association of Machinists,
an institution better known for slaying managements than for defending them, soon rose to Ferris’s defense.

The machinists and the pilots at United had been like quarreling stepsiblings for years. The pilots had crossed the machinists’ picket lines in a 1981 strike, and the machinists in retaliation had crossed the pilots’ picket lines in the Great Strike of 1985. At the national level the machinists’ union harbored grave philosophical misgivings about employee ownership. As Charlie Bryan of Eastern had proved, the IAM had become the vanguard of the American worker by bargaining over every nickel, every coffee break, every work rule, in the belief that such small things, cumulatively, would make a significant difference in the living standards of the membership. In order to get a little more here and there, the unions needed someone to bargain against. The union
needed
management. For that reason the machinists’ leadership in Washington was unalterably opposed to workers becoming the bosses. John Peterpaul, international head of airline operations for the IAM, came down forcefully on Ferris’s side. “If I
own the company,” Peterpaul would explain, “who am I going to strike?”

On April 14, 1987, Peterpaul sent a letter to Dubinsky of the pilots’ union declaring the machinists’ opposition to a takeover by the pilots, and he made sure that the letter became public. The machinists’ action was a breakthrough for Ferris, who assured his directors that the pilots were on the run. “
Don’t worry about the machinists,” Ferris told his board. “They’re with us.”

Unfortunately for Ferris, the machinists’ work contract at United at that moment was up for renewal; alas, the talks were going badly. With the fires still building against Allegis on Wall Street, the contract talks between Ferris’s people and the machinists fell apart on May 29, 1987, a Friday. The following Friday, June 5—with Coniston launching its proxy fight and the pilots pulling together the details of their takeover plan—the machinists’ union jerked the rug out from under Ferris. In a letter to Ferris’s board Peterpaul said that the contract negotiations were in a shambles and that a strike might begin at any time. “The management and the board has [sic]
lost our confidence,” Peterpaul wrote.

The directors were flabbergasted. Ferris had been so confident of the machinists’ support, so cocky about it. Among the board members
most disturbed was Richard P. Cooley, one of the Seattle delegates on the United board. Cooley was the chairman of Seafirst Corporation, the huge banking enterprise. Though far from the senior member, he commanded tremendous respect from his fellow directors. On Friday, June 5, 1987, Cooley telephoned Chuck Luce at his home.
Cooley said he and another director—William Jenkins, the retired chairman of Seafirst—agreed that “we ought to have a new CEO.” The two Seattle bankers would, of course, defer to Luce; as senior director it was his job to decide whether the board should conduct a vote of confidence. “It’s up to you,” Cooley emphasized.

After brooding over the weekend Charles Luce polled the board, except for Ferris and the other officers of the company who sat on it. The outside directors were unanimous that a special meeting should be held in New York on Tuesday to decide the fate of Dick Ferris.

As the directors made their travel arrangements, Luce scheduled a visit to the midtown Manhattan offices of Hertz. If the board decided to oust Ferris, Luce knew that Allegis would need a new chief executive officer, and Frank Olson, he thought, was the ideal person for the job. Olson had been singly identified with the tremendous success of Hertz for more than a decade. He was a leading figure in the international business community quite apart from United Airlines. Having joined the United family after the bitter pilots’ strike two years earlier, he was untainted by any involvement in that event.

“Frank, we’ve got to have an
alternative to Dick,” Luce said. “You’re the logical guy.”

But to Olson it was as if Luce had come to his office bearing not a job offer but 30 pieces of silver. The whole thing stank. Yes, Ferris remained a lightning rod, but he had agreed to come to terms with Wall Street by selling part of the Allegis empire; Olson himself had helped convince Ferris of the need to compromise. The idea of becoming chairman of Allegis was horrifying. Olson could not bear the thought that Ferris might see him as part of the plot. In addition Olson did not want to leave his position as chairman of Hertz. Hertz was his life. It was obvious, moreover, that Hertz was destined for the auction block. The sale of any company was a delicate event and could easily become a traumatic one; Olson wanted to devote his loyalties
and energies first to the protection of Hertz. Every fiber in him told Olson to say no way.

Luce began a little pressure play. “
If you don’t do it,” he said to Olson, “one of the other directors will.”

Great, just great, Olson thought. While he was no airline person, Olson thought he knew more about the business than anyone else on the board. He had been doing business with airlines for most of his years at Hertz. He had been close to Eddie Carlson back when Carlson left the Westin chain to save United. Olson counted a number of the currently reigning CEOs—not just Ferris, but Crandall and others—among his friends. Olson, furthermore, had built his career in the rental car business around raising capital for high-cost assets, dispatching them according to rapidly changing economic conditions, pricing them as perishable products, and maintaining them mechanically for reliability and longevity—the essentials of airline management. He knew computer reservations systems. He had a large and geographically diverse labor force.

Olson began to soften. He told Luce that if the board unanimously determined to eject Ferris, he would serve as chairman, although only until a permanent successor could be found.

While Luce was meeting with Olson, the Securities and Exchange Commission in Washington approved the documents that Coniston Partners planned to use in the proxy fight against Allegis. The firm began preparing the mailings by which it would try to convince the shareholders to have all 16 directors of Allegis summarily removed.

The directors of Allegis gathered at Morgan Stanley in New York on Tuesday, June 9, 1987, exactly 50 days after they had declared themselves “four-square” behind Dick Ferris and his corporate strategy. These same men had voted to approve, in some cases with great enthusiasm, all the acquisitions they now wanted to shed. Only weeks earlier, in fact, they had signed Ferris to a five-year employment contract.

What had happened in 50 days that they now wanted to be rid of him?

For one, the stock speculators had accumulated the strength to replace this board. The board could not let that happen. Getting thrown out in a proxy fight would be a monumental humiliation.
Worse, resisting the proxy fight while defending the status quo would expose the directors to shareholder lawsuits, with the attendant personal liability, the same threat that had provoked the directors of Eastern Air Lines to consent to a takeover offer from Frank Lorenzo a year earlier.

Finally, the directors had a commitment to protecting the integrity of the airline—a commitment that some of them, including Chuck Luce, put even higher than their fiduciary duty to the company’s shareholders. Back in 1970, when Eddie Carlson had been brought in as chairman during the last leadership crisis, Luce, then a new director, saw nothing less than the economic security of the nation in the balance. He took the airline, the biggest in the free world, very seriously, almost as if the free world itself were at stake.