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Airline Dealmaker Frank Lorenzo Says Doug Parker Got It Right

CHARLOTTE, N.C. ( TheStreet) -- Let's just say upfront that Frank Lorenzo was not the most popular person in the history of the airline industry. He was perhaps the most unpopular.

But in hindsight, Lorenzo shaped the industry as very few people have done. He was the first to use bankruptcy to restructure an airline; now bankruptcies represent a common industry strategy. Combining assets from Eastern and Continental, he started the buildup of the Newark, N.J., hub that became the most profitable hub in the U.S. airline industry. He also redesigned airline fares, introducing both low "peanuts" fares and restrictive, non-refundable fares.

Lorenzo was also a leader in growing through mergers. In 1972, he took over Texas Air International, a small, insignificant, cash-squeezed western airline. In 14 years, he built the world's largest airline holding company. Similarly, in 2001, Doug Parker took over as CEO of America West, a small, insignificant, cash-squeezed western airline. On Thursday, when US Airways (LCC) is expected to merge with American Airlines, (AAMRQ.PK), Parker would become CEO of the world's largest airline.

"Those guys have put together a wonderful story of growth," Lorenzo said. "Assuming they can get the deal put together, it's a heck of a story. You have at US Airways a very entrepreneurial team, which is nice to see, because often at the bigger companies you don't find as much of an entrepreneurial spirit." Others have done deals, of course, but few have been so focused for so long on deal-making, and none have started with so little and then built airline companies so large as the ones Lorenzo and Parker built.

Lorenzo thinks the US Airways/American merger will work, but not immediately. "Merger is a tough game," he said. "You have to take a long-term perspective. Over the short term, as United (UAL - Get Report) has found out, it's not a party. It's very tough. There's so much technology that has to be brought together, in addition to labor groups. But looking down the road, it's going to be a healthier industry."

Lorenzo, 72, formed Jet Capital Corporation, which advised airlines, in 1969. In 1972, Jet Capital acquired Texas International, which "was threatened with extinction because Southwest (LUV - Get Report) was breathing down its throat," flying the same routes out of Love Field, Lorenzo said. "(Southwest president) Lamar Muse said he was going to put Texas International out of business." The threat devalued TIA enough that Lorenzo could afford it.

"I have often said that we wouldn't have had an opportunity if it wasn't for Southwest," he said.

Soon thereafter, the Civil Aeronautics Board awarded new routes, including Dallas to Los Angeles via Albuquerque, to TIA, and the airline had a chance to become profitable. "In 1977, we came up with peanut fares, the first unrestricted fares to be filed," Lorenzo said.

Subsequently, Lorenzo initiated efforts to acquire larger airlines National and TWA, accumulating shares in the stock market. When the efforts failed, he sold the shares at a profit. In the case of National, he sold out to Pan Am, which then took over National in one of the worst airline acquisitions ever.

"You didn't have to go to UT (University of Texas) to realize that it didn't make business sense to buy a company with a lower cost structure and then raise all the employees to your standard," Lorenzo said. When the National bid started, TIA's net worth was $12 million; the stock sale produced $45 million of profit.

Besides merging TIA with Continental and Continental with People Express and with Frontier, Lorenzo started New York Air from scratch and acquired Eastern, which was operated separately by his holding company, Texas Air Corp., in 1986.

Throughout his career, Lorenzo battled labor, using bankruptcy to force concessions at Continental. But in 1989, when he tried to force concessions on the International Association of Machinists at Eastern, the union struck and was followed out by flight attendants and pilots, forcing the carrier into bankruptcy court. There, a judge took control from Lorenzo and awarded it to a trustee, who ran Eastern until it failed in 1991.

It should be said that other models exist for building an airline. Ed Colodny, who led US Airways from 1975 to 1991, presided over four mergers. He was generally liked by employees, who called him "Uncle Ed," and labor problems were rare. But even after the four mergers were completed, US Airways was not big enough to break through to becoming a global carrier. Essentially, starting out in 1939 as a regional carrier, when American, Delta and United were already major trunk carriers, meant that US Airways would never acquire the heft to enable its name -- which changed three times -- to survive.

Lorenzo loves to talk about the airline industry, but said he has no regrets about leaving it in 1990. "I was CEO of Continental and its predecessor for 18 years," he said. "I put in my time. Afterwards, we set up a private investment business, Savoy Capital, in Houston and New York, and I love what we do now."

-- Written by Ted Reed in Charlotte.

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