Hard Landing (69 page)

Wolf wanted nothing to do with the employee takeover scheme.

In the spring of 1989 the airline industry was transfixed by a new drama seizing Northwest Airlines, a drama that would ultimately reach the stage at United.

After buying Republic from Wolf, Northwest’s internal strife and service had plunged to the same cataclysmic lows that followed the National-Pan Am merger and the union of BOAC and British European Airlines. In one month only
25 percent of Northwest’s flights were on time. Marvin Davis, a 300-pound Beverly Hills billionaire and an airline deal waiting to happen, was suddenly on the scene. “When I was a boy, I liked to
play with toys,” he would later tell an ALPA official. “I still like toys. They’ve just gotten more expensive.” Davis offered to buy Northwest for $2.7 billion.

Another bidder for Northwest soon emerged, however—a partnership of three wealthy investors who had once worked together at Marriott Corporation. The Marriott men had backing from KLM Royal Dutch Airlines, which was eager to become the second foreign airline to buy into a U.S. carrier (following SAS’s move into Continental). Supplementing KLM’s money with funds borrowed in Japan, the Marriott men were able to outbid Marvin Davis handily.

The last had not been heard of Marvin Davis, however. The Northwest siege was barely concluded when he offered $5.4 billion for United Airlines. United shares climbed $46 in a single day—and with them the net worth of Stephen Wolf. A takeover of United that gave all shareholders that chance to cash out would put $42 million into Wolf’s pockets!

The United board gathered in Elk Grove Village, the portraits of United’s five previous chairmen looking down from the dark rosewood walls. “The
board has concluded Davis will be successful,” director John McGillicuddy said at one point. “If this is going to happen, Steve, would you consider joining forces with the employees in a bid for the company?”

Wolf turned the question over in his head. He knew that if a raider took over the company, he could hand over the keys and walk away wealthier than he had ever dreamed possible. On the other hand, if Wolf became part of an insider group taking over the company, he would keep his job
and
he would get his $42 million in stock proceeds—a happy combination of events, to be sure. But in that case Wolf would be seen handing $42 million of the company’s money to himself. It wouldn’t
look
good. People, he thought, would consider him a “
greedy son of a bitch.” He told himself, “There is
not an inch of upside here.”

“This is a
very serious decision for me because I have a very large stock option,” he told the directors.

And yet what of the airline? What of the employees? If Marvin Davis took it over, he would doubtless extract wage concessions to help pay for the deal. If the employees took it over, they would have to make concessions in that case as well—there was no doubt about that—but at least they would receive an ownership interest in exchange. Wolf agreed to join forces with the pilots, and to begin recruiting other employee groups to the plan.

The orders hurriedly went out to ALPA members across the United system: remove all the anti-Wolf buttons and stickers from the cockpits and locker rooms. “We
must now demonstrate that employee ownership means cooperation and employee-management peace,” a union official explained. The flight attendants were invited into the ownership group, the price of admission being a 10 percent cut in their pay. They told Wolf and the pilots to get lost. The machinists, unalterably opposed to the deal because it would so severely leverage the company, played the spoiler at every chance—through lawsuits, lobbying, and repeated threats of a strike. Brian Freeman, a witty and acerbic consultant to the machinists, said that no one should be fooled into thinking that this was the pilots taking over United Airlines. It’s “
just a Wolf in pilots’ clothing,” he said. Wolf and the pilots had to better Marvin Davis’s terms, of course, if they hoped to win the company; the price they offered was $300 a share—which, by happenstance, raised Steve Wolf’s take as a shareholder to $54 million.

To buy a company for something like $7 billion, the employees would need a partner with deep pockets. Wolf knew just whom to
call: Colin Marshall of British Airways. The two men had grown closer, despite Wolf’s warnings that United would someday seek to invade British Air’s territory in Europe. Marshall had arranged for the British Airways board to host the United board in London, wining and dining Wolf and his fellow directors. Wolf was planning to reciprocate the gesture by having the British Airways directors to dinner in his chic 63rd-floor apartment.

Marshall wanted a piece of the U.S. airline industry more urgently than ever—and something stronger than joint marketing arrangements and code sharing. He told Wolf to count British Airways in, for $750 million.

Since 1926 U.S. law had restricted the voting control of foreign interests in a U.S. carrier to 25 percent. Therefore, Wolf’s group said, British Airways would receive only 15 percent voting control, safely within the statutory limits. This figure, however, significantly understated the financial influence that British Airways would wield in the newly constituted company. It was the twilight of the eighties, and the deal was practically all debt. The would-be buyers of United—Wolf, his fellow top executives, the legions of pilots, plus British Airways—were putting up a mere $1 billion in cash in a deal worth almost $7 billion. Anyone could see that British Air’s $750 million represented
75 percent of the equity. With voting control or not, British Airways was all but proposing to make a wholly owned subsidiary of United Airlines.

When the documents for the takeover were released publicly, there in black and white was the shocking truth of the monumental fortune that Wolf had riding on completion of the deal. Wolf knew in advance that the publicity would be ugly, but as he later put it, “I
underestimated by 4,000 percent how unpleasant it would be.” The facts were no different than if Marvin Davis were taking over the company, he thought; the value of his stock options was the same either way. Wolf kept telling himself that he was simply acting as the front man in a deal that enabled the pilots to walk away with a voice in United’s affairs—a greater voice, for sure, than Davis would offer them. But the media, Wolf was mortified to conclude, were more interested in the “greedy son of a bitch.”

On September 14, 1989, a Thursday, the United board gave its final approval to the takeover by Stephen Wolf and the pilots of United, with British Airways acting as Daddy Warbucks. On Friday
Marvin Davis withdrew his offer. All that remained was to nail down the financing.

The following week in Washington, Transportation Secretary Sam Skinner sat down for breakfast with Al Checchi, one of the former Marriott people now putting the finishing touches on the takeover of Northwest. Skinner was suddenly saying that he had a problem with one important aspect of the deal. The voting interest of KLM Royal Dutch Airlines in Northwest was to total only 5 percent, well within the statutory guideline, but there was a
second test of control, Skinner noted, not a statutory limitation, but a policy of long standing that allowed foreign airlines to hold no more than 49 percent of the equity of a U.S. carrier. By this test the debt-ridden Northwest takeover failed, because KLM was providing $400 million of the $700 million in equity. Their entire deal at stake, the former Marriott executives readily agreed to restructure the terms of the investment by KLM. But all eyes quickly turned to Elk Grove Village, Illinois, where British Airways was preparing to provide
three quarters
of the equity necessary to bring off Stephen Wolf’s takeover of United. Fears quickly spread that the United States government would scuttle the deal.

About then a top official of the machinists’ union was talking to an official of
Mitsubishi Bank when he happened to mention that the machinists would begin contract talks with United the following month. Regardless of who owned the company, the union man said, the machinists wanted a big pay increase and they were going to get one.…

At about the same time an official in Japan’s
ministry of finance was publicly expressing the first doubts raised in Tokyo about all that Japanese money feeding America’s LBO craze.…

And the
bankers who were expected to finance the takeover began studying the breathtaking personal profits that Wolf stood to gain—money, they realized, that they would be indirectly providing.…

And USAir announced that it was expecting lower earnings, causing people to wonder how United could justify its rosy financial projections.…

And soon, one by one, the banks were saying no thanks. The employee takeover of United was dead.

It was as if the door had slammed shut on the 1980s. On Friday
the 13th of October, 1989, as word spread that for the first time in the LBO era a big deal was falling apart for lack of financing, the Dow Jones Industrial Average plummeted 190 points in less than two hours.

Sir Colin Marshall had
not been warned about the imminent collapse of the deal. Stunned, he quickly washed his hands of the entire mess. Within so cautious and distinguished a company as British Airways, it mattered urgently to some people just who was to blame for the company’s embarrassment. In particular the PR people who worked for Lord King, still the titular head of British Airways, were intent on protecting their boss from the tarnish. Word went out to the British press on a hush-hush basis: This was Colin’s deal.

But no one’s reputation suffered as much Stephen Wolf’s. His credibility with employees lay in ruins. He had allowed himself to be diverted from his real job. Wolf resolved to recover—to restore his reputation and put the nightmare behind him. Although the pilots were already investigating how to resuscitate their deal yet again, Wolf tried to snap everyone’s attention back to the airline itself—the need to improve quality, the need to grow. There were planes to order, destinations beckoning around the globe. He was planning a new color scheme for United’s fleet.

And on so many fronts, there was a war to fight with Bob Crandall.

Almost from the minute Wolf had walked into the executive suite at United, the people around him, and around Bob Crandall at American, began to look on the competition of the companies as a battle of two chief executives, a battle on the order of Godzilla versus the Thing. Both men would forever deny any personal motivations in their corporate warfare, yet both would consistently take actions and make comments in the presence of others that betrayed an intense personal rivalry. Although the competition lacked the emotional intensity of the Lorenzo-Burr dispute, it
was
tinged with personal history. Wolf’s career had hit dead calm at American, so he quit, and his career had thereafter blossomed. Crandall privately expressed annoyance and a touch of jealousy at the wealth Wolf was in line to accumulate at United. Although Crandall had shaken loose a bonus worth at least $12 million after turning down United’s job offer,
Wolf, having accepted that offer, was now in a position to profit by that much in a good week—assuming another graceful opportunity presented itself for him to begin cashing in his options. Wolf, moreover, was not the only American Airlines exile working at United headquarters; Jack Pope, long Crandall’s top finance man, had also recently quit American to go to work for United.

“Need
I remind you,” Crandall told a group of his managers at one point,

there are several former AA employees sitting up there in Elk Grove Village, Illinois, making a lot of noise? Just last week the big guy up there was quoted as saying, “Quality comes first. Growth will follow.” Now, where do you suppose he got
that?
He was reading the inscription on
our
trophy! Our job is to make sure that’s as close as he ever gets.

The fight raged on many fronts, from 1989 through 1991. United laid out $72 million to
buy Air Wisconsin, a large feeder airline at O’Hare, principally as a way of scooping up more landing slots in the market-share battle with American. It was a perfectly straightforward transaction; United simply happened to beat American to the prize. But Crandall sought to reverse the deal in the federal courts, mounting every imaginative antitrust claim he could muster. United finally agreed to part with a dozen of the Air Wisconsin slots, although in the bargaining Crandall agreed to pay nearly $3 million for each. It was all part of a pattern of
singling out United for harsh treatment, Wolf believed. “Very unusual corporate behavior,” he would call it.

Wolf took his own steps to keep the authorities abreast of Crandall’s mischief. Wolf had made a point of getting to know Sam Skinner, who before becoming transportation secretary was a well-known lawyer in United’s hometown of Chicago. Skinner was widely thought to have political ambitions in Illinois, and it went without saying that the support of one of the state’s biggest employers would be of no small value. Wolf and Skinner had become pen pals of a sort—“Dear Sam,” “Dear Steve”—to the point that Wolf felt comfortable sending the transportation secretary the text he had obtained of a Wings Club speech given by Crandall. In the speech Crandall derided political leaders for mishandling international aviation
negotiations and accused Skinner’s agency of suffering from a “leadership problem” and “diplomatic dithering.” Wolf transmitted the speech to Washington with a cover letter that noted, “
Bashing of this type is simply not constructive.” Skinner answered with a
friendly thank-you.

But nothing compared with the battle royal over one of the great questions of U.S. aviation policy in the early 1990s: which of the two airlines, American or United, should win the authority to fly between Chicago and Tokyo?

For years
only a single U.S. carrier, Northwest, had enjoyed the privilege of carrying passengers between the two great cities, but a new round of multilateral bargaining had opened up the route to a second carrier of the U.S. government’s choosing. With Wolf and Crandall battling for every last passenger at O’Hare, the Tokyo route would become a vital source of passenger feed—at full-fare and first-class prices to boot. The route was worth an estimated $300 million a year in business. The profit margin was projected at 18 percent, the kind of return available in the cosmetics business maybe, but nowhere else in aviation.