Piloting A Course For Pan Am 

Chairman Tom Plaskett put the airline up for sale - but only on his terms

By Al Gordon

April 3, 1989, Monday, CITY EDITION;  CITY BUSINESS; Pg. 01

TOM PLASKETT’S tone is as emphatic as the red in the power tie he’s wearing: “We’re not under any immediate pressure to have a fire sale,” the chairman and chief executive of Pan Am Corp. says in an interview at the company’s Park Avenue headquarters.

Distress sales have been a familiar occurrence at Pan Am. The very executive offices from where Plaskett was speaking occupy the 46th floor of what is still called “the Pan Am Building” but is one of the many assets the airline company has sold off through the years in a so-far fruitless effort to stem the tidal wave of red ink on its balance sheets. In the past eight years, Pan Am’s losses have totaled nearly $ 1.8 billion, among the largest in the industry.

Long gone is the company’s Inter-Continental hotel chain. Gone are the carrier’s historic Pacific routes. Gone are the rights it held to 50 new Airbus A-320 jetliners. Soon to be gone is its World Services unit, which provides security and management services to corporate and government clients. 

And now, while Plaskett insists that he isn’t ready to give away the store, he has in effect put Pan Am on the auction block. Plaskett said, in February, “I said something publicly that we’ve all been saying [privately] for the last year,” telling aviation experts that the carrier cannot continue in its present form.

Among the main options he outlined for Pan Am were to negotiate a cooperative marketing deal with another carrier, to make an acquisition of its own or - as most experts expect - to be acquired by another airline or an investment group. But, Plaskett insists, such a deal can be done on terms favorable to Pan Am - no “fire sale,” in other words. The question, analysts ask, is can he pull it off?

“When you’re helicoptered onto the deck of the Titanic, there’s only so much you can do,” said Edward Starkman of PaineWebber Group Inc. “Every investment banker worth its salt has wanted to do a deal” on a Pan Am merger, he said, but no one is interested in buying because of the airline’s woes.

While the Eastern Airlines strike has given Pan Am at least a short-term boost by enhancing its market in the New York-Boston-Washington shuttle corridor and on routes to Florida, the Caribbean and Latin America, that may be more than offset by fallout from the terrorist bombing of its Flight 103, according to analysts and the company. Pan Am also is beset by rocky labor relations, a weak domestic flight network to feed its core international routes and insufficient financial resources to keep pace with competitors.

Among those most interested in the outcome are the company’s 24,500 employees, 11,000 of whom are in the New York area. Pan Am is one of the metropolitan area’s largest employers and a key tenant at New York airports. For all its troubles, it remains the leading carrier between the United States and Europe and for New York passengers heading south. And it is an historic name in aviation, having pioneered many of the key international air routes.

Plaskett, 45, assumed the hot seat at Pan Am in January, 1988, after abruptly departing another carrier: He was president of Continental Airlines from 1986 to 1987. He resigned from Continental as it was beset and besieged by operational woes and consumer complaints as a result of its merger with People Express. The episode put a little tarnish on Plaskett’s reputation as a rising star in the airline industry, earned during 12 years at American Airlines, where he had climbed to vice president of marketing.

According to one former executive at Texas Air Corp. (Continental’s parent), company chairman Frank Lorenzo was angered at Plaskett because his plan to integrate the carriers backfired.

In the interview last week, Plaskett sloughed off questions about the experience, saying “I enjoyed the time I spent at Continental, and I wish them every success - just not too much in my market.” As for Lorenzo, he said, “I don’t hold hard feelings; that’s a waste of time. I’ve got enough to keep me occupied here so that I don’t have time to think about those things.”

Plaskett said he announced his decision to put the company up for sale to signal management’s confidence that “we’ve now got an ability to control our own future. We’re not on the steps of the bankruptcy courthouse.”

Measures to improve the carrier’s competitive position through better facilities and service, the raising of cash through asset sales and accounting moves, a truce with its unions and about $ 160 million in wage and benefit concessions all have strengthened Pan Am’s hand, he said, to the point where “we can perhaps more easily lay out a future strategy without being concerned with near-term liquidity or getting through next winter or whatever it is. And that’s a major shift from where the company was in 1987.”

Back then, Pan Am’s crisis du jour was a revolt by its unions over demands for wage and benefit concessions. The unions, branding management as incompetent, balked at a deal and instead sought to orchestrate a takeover by outside investors or themselves. The Pan Am board pondered a sale of most of the airline to Braniff, but ultimately ousted then-chairman C. Edward Acker and brought in Plaskett.

In Plaskett’s view, the sharks - competing airlines - then were circling for the kill.

“Everybody thought Pan Am was gone,” he said, leading other carriers to take the attitude, “ ‘let it go and we’ll just pick up the pieces we want. Why go in and acquire the company and all of the headaches that an acquisition like that might bring?’ It was their judgment that the company was doomed anyway.”

“Things were in turmoil and chaos and out of control,” Plaskett said. “I think that situation has changed rather dramatically.”

Plaskett’s optimism is not widely shared.

“They need to stabilize their operation,” said Dan Kasper, a Boston-based aviation analyst. “I’m not optimistic they’re going to be able to do that.”

“Plaskett is a very capable guy,” he said, “but one person is not able to turn an airline around by himself.” Kasper said Pan Am “is running as well as it ever has, but it’s in almost an untenable position.”

Lee Howard of Airline Economics Inc., a Washington, D.C.-based research firm, said that while the Eastern strike “is going to help them plenty” on the shuttle and Florida markets, “I doubt that there will be any long-term change.” At best, he said, it “puts them in a more advantageous position” in merger talks.

Among the carrier’s continuing problems:

External factors. The Eastern strike was a rare bit of good fortune for Pan Am. Its share of the shuttle market has soared from about 50 percent to an estimated 80 percent or 90 percent, and passenger loads on its Florida, Caribbean and Latin American service also are up. How extensive and long-lived the gains will be, the company and analysts say, depends on how long Eastern stays grounded and how many other carriers try to move into that turf.

Offsetting that good luck, however, is the Pan Am Flight 103 disaster. A terrorist bomb blew the 747 jetliner out of the sky over Lockerbie, Scotland, on Dec. 21, killing 270 people. The disaster has cast a pall over Pan Am’s North Atlantic service, which accounts for 60 percent of its business. The families of passengers killed in the bombing and congressional probers have raised questions about whether the airline, and U.S. and foreign governments, took adequate security precautions or gave travelers proper warnings of danger.

Even though Pan Am says it has strengthened its security procedures since the disaster, some passengers remain scared to fly domestic flag carriers in the aftermath of the bombing - a fear reflected in Pan Am’s first-quarter results, Plaskett acknowledged.

In January, Pan Am’s passenger traffic was down 10.7 percent from the year before and February traffic was off 13.6 percent.

He said it was “just too early to tell yet” about the crucial summer transatlantic travel season. “I would expect us to have a good summer, maybe not an outstanding summer.” Pan Am historically has relied on heavy profits from the summer months to offset losses in other seasons.

Cash shortages. Despite Plaskett’s moves, the company still lost $ 72.7 million on revenues of $ 3.6 billion last year, compared with a loss of $ 265.3 million on revenues of $ 3.1 billion in 1987.

In addition to the Airbus A-320 deal, the company wants to raise money by transferring its terminal lease rights at Kennedy International Airport to its pension plans, freeing $ 55 million, and by selling the profitable World Services unit, possibly getting $ 150 million to $ 200 million. The former deal requires federal approval; the latter plan requires lining up a buyer. Plaskett said there is “very strong interest” in the service unit and a deal is likely in “a couple of months.”

The proceeds will be used in part to finance about $ 200 million in refurbishments of Pan Am terminals and planes. The company also expects to take delivery of new Airbus A-310/300s next year (it has two firm orders and two options) and to buy some used Boeing 727 jets in lieu of the A-320s.

In contrast, long-time rival TWA just last week placed a $ 3.6-billion order for new Airbus equipment, and American Airlines, which is rapidly becoming a major player in the North Atlantic market, is expected to spend about $ 10 billion to order new airplanes for its domestic and international routes.

Plaskett agrees with his critics that Pan Am needs to become a party to a computer reservation system. The carrier would not get sufficent benefit from joining a domestic system to justify investing any of Pan Am’s “limited capital” on it, he said. But Plaskett said the airline “needs a presence” in one of the emerging international computer systems, Amadeus or Galileo, and he vowed to take legal action, if necessary, to stop European carriers in the consortiums from excluding Pan Am.

Labor woes. Concessions were obtained only after management threatened to sell off most of the airline’s remaining assets. Even then, the flight attendants initially rejected the contract proposal and the deal with the Transportation Workers Union, which represents mechanics and baggage handlers, had to go to arbitration.

Teamsters workers are still angry about the concessions and have threatened to strike Pan Am, although neither management nor other workers take the threat seriously.

“Plaskett is doing some positive things,” but “there are still a lot of guys who are bitter” because they’re making less than their counterparts at other airlines, said a Pan Am mechanic at Kennedy who asked that his name not be disclosed.

Domestic routes. Pan Am, said Airline Economics’ Howard, “didn’t take advantage of deregulation” by setting up a domestic route structure to feed its international gateways, particularly at Kennedy. Management, labor and analysts are unanimous that Pan Am’s one major venture into expanding domestically - the 1980 acquisition of National Airlines - was a disaster. Most of the planes and routes were subsequently discarded and there is still discord internally from the integration of the two work forces.

Plaskett said that even now one of his major challenges is reorienting the company’s “corporate culture” toward a more highly competitive marketplace.

Other airlines not only set up hubs for their domestic routes, but used them to set up new international routes of their own. Pan Am didn’t pursue that lower-cost strategy and it is too late to play catch-up now, said analyst Kasper.  “Where are they going to go?” he said, “They don’t have the financial resources . . . the good sites for hubs are already taken and they can’t bash their way in.”

Jeffrey Kriendler, a Pan Am vice president, said the company has flatly ruled out any substantial domestic expansion as an option. “We’re basically not in the domestic business. We’re in business to feed our international routes,” he said.

Finding a buyer. Wall Street for years has been rife with Pan Am takeover rumors, none of which has proven accurate. Just last week, for example, there was talk that NWA Inc., parent of Northwest Airlines, might be the target of a takeover and might bid for Pan Am as a defensive move. Plaskett wouldn’t comment on any merger talks, and many Wall Street analysts and other experts think that, as in 1987, there may be no takers.

Michael Derchin, airline analyst at Drexel Burnham Lambert, thinks otherwise. A “mega carrier” such as Northwest, United or Delta “would find Pan Am’s route franchise of strategic interest,” he said. Derchin estimates the company would fetch $ 8 to $ 10 per share - $ 1.1 billion to $ 1.4 billion.

Plaskett, in any case, refuses to characterize his role as saving the airline. He is “building on a very valuable franchise,” he said, and sees the Pan Am name and its ubiquitous blue-globe logo as likely to survive any merger. “Throwing out the name is a little bit like throwing out the baby with the bath water,” he said, “That’s where much of the value resides today.”

But, he also acknowledged, Pan Am and its employees “have come to understand that the future isn’t guaranteed.”

Copyright 1989, Newsday Inc.