Skygods: The Fall of Pan Am

by Gandt, Robert

  Errol Johnstad wasn’t at all like his predecessor, Jim MacQuarrie, whose inclination was to punch the other guy’s lights out. Johnstad was more cerebral. As union chairman he did things like retain a psychology clinic to aid stress-impaired pilots. He introduced computers to the union office. He dragged his pilots into the information age by hooking them up to an electronic bulletin board.

  And he preached to his flock.

  We are Pan Am,” he told the flock. “And we must save ourselves.” By we he meant the pilots, and by extrapolation, all the employees. By Johnstad’s definition, the employees were the substance of Pan American World Airways, not the stockholders, not the board of directors, and certainly not the tall Texan, Ed Acker, for whom Pan Am was a third and probably not last airline.

  We are Pan Am. It was a novel idea. It struck a chord in the disgruntled grunts at Pan Am. Who in the company had more to gain or lose than they did? Who else but them, the employees, had their careers, their futures, their dreams invested in the airline?

  And so with Johnstad and the pilots’ union leading, the employees took on the task of saving themselves. Their avowed mission was to find a “white knight,” a person or entity that would take over Pan Am. As an inducement for the investor, Johnstad let it be known that the pilots were willing to consider substantial pay concessions to make Pan Am an attractive property. To that end the coalition of Pan Am unions—the Joint Labor Council—retained as its advisers the investment firm of Drexel Burnham Lambert, Inc., and the law firm of Skadden, Arps, Slate, Meagher & Flom, specialists in corporate mergers.

  Throughout 1987 the search went on for a white knight. The first serious candidate was a knight, a real one named Sir James Goldsmith, who seemed interested enough to sit down with the Pan Am unions and talk business. In the proposed deal, Sir James would invest at least $100 million in Pan Am. For their part, the unions would agree to pay concessions of about $180 million, for which they were to receive an increased equity in the airline.

  The Goldsmith deal made a brief splash in the business news, running up the price of Pan Am stock nearly 40 cents and making it the sixth most active issue in trading that day.

  Nothing happened. Goldsmith lost interest. Quietly, the white knight sheathed his umbrella and walked away.

  The next knight rode into town in October 1987. He was Los Angeles high roller Kirk Kerkorian, who owned, among other properties, MGM Grand. Since August, when he had been approached by the unions’ adviser firm, Drexel Burnham, Kerkorian had an exclusive privilege to review Pan Am’s books. What he had seen interested him enough that he was now willing to make an offer. His idea was to spin off the airline unit from the parent Pan Am Corporation and take over total management of the airline. The only other properties of consequence still attached to the parent Pan Am Corporation were the Northeast Shuttle, which Acker started in late 1986, Pan Am Express, the little Northeast commuter acquired in 1987, and the aviation services subsidiary, Pan Am World Services.

  As with the Goldsmith deal, the unions would have to agree to large wage concessions in exchange for Kerkorian’s investment. The amount of Kerkorian’s investment depended on the size of the concessions.

  There was a kicker to the deal, a condition attached to the concessions: Acker had to go. The Kerkorian group would bring in its own team to take over management of the airline.

  Whether or not this prospect influenced Acker’s thinking was not revealed in the announcement of November 13, 1987, in the Wall Street Journal. Pan Am had to turn the deal down, Acker said, because “the proposal is too highly conditional in many important respects. . .”

  What Acker meant was, Kerkorian was trying to buy controlling interest in the airline with contingency financing that might or might not materialize. Acker thought Kirk Kerkorian’s offer was mostly smoke and mirrors.

  Another white knight had come and gone. But before the Kerkorian troupe had left the city limits, yet another knight appeared, this one in the unlikely form of Towers Financial Corporation. Towers was a New York debt-collection agency. No one was taking it seriously. It paraded a list of “consultants” that included Edward Nixon, a geologist and brother of the deposed President; the former and also deposed Attorney General John Mitchell; and former Federal Reserve chairman Paul Volcker, who vehemently denied any connection with Towers, as did the firm of Paine Webber, which disputed the report that it was representing Towers in a Pan Am acquisition.

  The Towers team, on close inspection, was neither white nor even knightly.

  And then came a new player in the game. Jay A. Pritzker controlled Braniff Inc., a resurrected shell of the once-mighty airline that had gone Tango Uniform in 1982. Pritzker had become convinced that the Financially Troubled Pan Am would dovetail nicely with the similarly troubled Braniff, which he was managing under Chapter Eleven of the bankruptcy code.

  Unlike the Towers group, which was still trying to put together an investment package, Pritzker had solid backing. The union coalition was taking him seriously, though what Pritzker wanted from it was steep—$200 million worth of pay concessions annually over three years, for which he would give them a 20 percent equity in the merged company.

  All this took place in the autumn of 1987, the season of the white knights. And out in the high desert of Reno, Nevada, it was again the season for the national air races.

  Errol Johnstad had sometimes wondered how he would handle himself if the engine of his race plane actually quit. But it was one of those calamities you didn’t let yourself think about, not too much. In air racing it was better not to dwell on calamity. You just did what you had to do when the time came. Anyway, engine failures in real life happened so rarely they were hardly worth considering. So Johnstad put the possibility out of his mind. There were other things to consider.

  As he settled himself into the sleek-winged little race plane, Johnstad could see the wind sock snapping and the sagebrush bending in the twenty-five-knot gusting winds. It was still morning, but heat waves shimmered from the concrete. He knew it was going to be hellishly rough out there when he went skimming along the floor of the desert at two hundred miles per hour.

  This was supposed to be a practice session, to get a feel for the course. He would just fly a few laps around the circuit to learn the location of the turn pylons and to acclimate to the spine-jolting turbulence that was gathering over the high desert.

  He took off, and. . . holy shit. . . sure enough, no question about it, it was rough. The little race plane slammed through the bumpy air like a dune buggy on a washboard. It was all Johnstad could do to keep his eyes focused on the rapidly passing terrain outside. Inside, the instrument panel jiggled so hard the gauges were blurred.

  He flew one lap, hugging the ground and fighting the bumps. Then another. And another. On the fourth lap the event so rare in real life that Johnstad had deliberately banished its very likelihood from his conscious thoughts happened. The howling 0-200 Continental engine delivered one great retching, gasping, gulping noise.

  And then nothing. Utter silence.

  The adrenaline level in Johnstad’s body shot through the saturation point. He yanked on the stick, hauling the race plane’s nose up. . . up. . . all the way up to the vertical. . . soaring way up above the airport and the high desert. . . losing airspeed rapidly . . .

  The idea was to slow the airplane so that the propeller would stop rotating in the windstream, which would give the airplane a longer gliding range. It wasn’t a great idea, all things considered, but it happened to be the only idea Johnstad could come up with.

  The propeller did stop. And immediately thereafter the airplane ran out of airspeed. It fell off on a wing and commenced a spin back toward the earth.

  After a turn-and-a-half spin, Johnstad regained control. Now the airplane was gliding normally. All he had to do was land.

  But where was the damn airport? It was directly beneath him, but the effects of a hard vertical climb, an inadvertent spin, and several gallons of adr
enaline had skewed Johnstad’s internal gyros. His once-formidable brain had shrunk to the size of a pea.

  There was the runway. But he was going away from it!

  A hard turn back. He was on a base leg now. He could still make the runway. But the wind, gusting more violently than ever, was blowing him away.

  Turn tighter. Johnstad yanked back more on the stick. The powerless airplane shuddered once, then snapped a wing downward into another spin.

  Johnstad saw the sagebrush and gullies whirling toward him, filling up his windscreen. The little racer hit the floor of the desert with the force of a freight train.

  They stood around the chapel at Kennedy a few days later, pilots, union types, company executives, eulogizing the late Errol Johnstad. It was an overflow crowd. Vice-Chairman Marty Shugrue delivered a eulogy. He praised Johnstad, calling him “a formidable adversary,” meaning that the union leader had caused him fits at the bargaining table. But that, of course, was what union leaders were supposed to do.

  Now that Johnstad was departed, and having managed it in a flamboyant, show-stopping manner, it seemed that perhaps he had been larger than life. It was, everyone had to admit, a hell of a finale. As exits go, it was almost. . . Skygodly.

  Chapter Twenty-Eight

  Mister Nice Guy

  There’s no way Acker and Shugrue can work together after this. One will have to go.

  —A PAN AMERICAN WORLD AIRWAYS DIRECTOR,

  December 7, 1987

  Never had such a thing happened. Not in the long and glorious history of Pan American World Airways had there been a fistfight in the boardroom. It was unthinkable, a brawl in the imperial court of Juan Trippe and the blue-blooded Skygods. But that’s what it was coming to.

  The chairman of the board was on his feet. He was red-in-the-face, spittle-dripping, lip-curling furious. C. Edward Acker was so infuriated his finger trembled when he aimed it at the vice-chairman. “Shugrue is trying to sabotage the Braniff deal!”

  Which was a true statement. And Marty Shugrue was just as nostril-flaring, pop-eyed furious as the chairman. He had placed himself in vehement opposition to a sellout to Jay Pritzker, and over that issue the two top executives of the Financially Troubled Pan American were about to punch out each other’s lights.

  Astonished, the directors watched the two glowering executives. Someone had the sense to step between them. Another director moved that the meeting adjourn until things cooled down.

  Acker thought he nearly had a deal with Pritzker and the Braniff crowd. In his view, Braniff represented the best and last hope for Pan Am to salvage something from its current nosedive. Jay Pritzker wanted to spin the airline off from the Pan Am Corporation, leaving the parent company—and Acker—with the Pan Am Shuttle and Pan Am Express. The key to the deal, however, was pay concessions from the airline’s labor coalition amounting to $200 million. This meant that the employees, by giving up part of their wages, would be partly subsidizing the buyout of the airline for the new owner. In exchange, Pritzker was giving the unions assurances of no layoffs and representation on the Braniff board.

  Pay concessions. For months Acker himself had been sparring with the unions over that very issue. Pan Am needed payroll givebacks.

  The key to getting the concessions was, as usual, the pilots. The pilots were the most highly paid group in the labor coalition. Acker knew he hadn’t the slightest chance of extracting concessions from the other unions unless the pilots ponied up their share first. Pan Am was teetering toward the point where there no alternative. None except Tango Uniform.

  The executive feud began the week before when Shugrue had taken matters into his own hands. He knew he was playing with fire. Some heads were going to roll, and one would very likely be his.

  But, damnit, the Pritzker deal had to be stopped. He couldn’t stand on the sidelines and watch the airline get spun off to the oblivion of Braniff Fly-on-the-Cheap Airlines.

  But there was another reason, even stronger and more abstract, that compelled him to put his job on the line. Shugrue had been with Pan Am for nearly twenty years, longer than any other senior executive and certainly longer than C. Edward Acker, who was an itinerant airline manager. Pan Am was Shugrue’s life. He had begun as a new-hire pilot—a Skygod-in-training—then lived through the furlough and chaos of the seventies, finally having clawed his way to the second-highest job in the Imperial Airline.

  There was something faintly sinister-looking about Marty Shugrue, with his slicked-back hair and riveting eyes and demonic expression. It gave you the feeling that you should be glad he wasn’t mad at you.

  “I fix things,” Shugrue liked to say. “That’s what I’m good at—fixing things.” That’s how Shugrue had ascended the pyramidal management structure at Pan Am, bottom to top. He was the guy who fixed things. Shugrue could conjure solutions to problems no one else had the guts to tackle. When the boss had a problem, he could give it to Marty Shugrue. Shugrue’s skill at fixing things had taken him all the way to the top of the Pan Am hierarchy, to his current job as Pan Am’s chief operating officer. Shugrue had become a Maximum Skygod.

  Now the fixer was trying to wreck the chairman’s carefully wrought merger plan. He knew Ed Acker, and he knew that when Acker learned about his efforts, it would have roughly the same effect as shoving a lighted cigar up a bull’s rectum.

  But he was running out of time. The board was scheduled to meet on Tuesday when Chairman Acker would present the details of the Pritzker deal. Jay Pritzker himself would be there to explain how the deal would work, that it was contingent on the unions’ agreeing to Pritzker’s requirement of $200 million in concessions.

  To head off the deal, Shugrue needed to have a cost-savings plan of his own to present to the board. So he dispatched vice presidents Bob Gould and Ray Grebey to negotiate with the pilots’ union.

  Gould and Grebey were a good-guy-bad-guy team. Gould could talk to the pilots because he was a pilot and had been the union chairman only three years before. Ray Grebey was another matter. Since the 1985 strike, the very mention of C. Raymond Grebey in a union office produced torrents of epithets.

  All Monday night Gould and Grebey bargained—good guy, bad guy—with the deadline of Acker’s board meeting the next day hanging over their heads. It went down to the wire. Twenty minutes before the board of directors’ meeting, they reported to Shugrue that they had an agreement with the pilots.

  The meeting convened. Chairman Acker brought up the Pritzker proposal. And then Marty Shugrue cleared his throat and put his bombshell on the table. He told the directors that he had a cost-savings agreement from the pilots that amounted to $55 million. When the other unions came aboard it would net a total savings of $180 million. Pan Am didn’t need to sell itself to Jay Pritzker and Braniff.

  The board members were stunned. All heads turned toward Chairman Acker, to observe his reaction.

  It was just as Shugrue expected—the same effect as a lighted cigar up a bull’s rectum. . .

  The forty-sixth floor divided itself into Acker backers and Shugrue backers. The fighting went public, with the press reporting the comments of both sides.

  “Here’s Acker trying to put together a must deal with Braniff, and some goddamn staffers come in at the last minute with a pilots’ agreement that aims to sabotage the deal,” an Acker backer told the Wall Street Journal.

  “Slicing up Pan Am’s operations doesn’t make any sense,” replied the Shugrue backers. “The Braniff deal stinks.”

  On the surface, the infighting appeared to revolve around the value of the concessions offered by the pilots. Acker insisted that the cost saving didn’t add up to $55 million, that it was more like $42 million. Shugrue said it did, and offered an outside accounting firm’s audit to prove it.

  But the real dispute, as everyone knew, was more a gut issue. Acker wanted to merge with Braniff. Shugrue wanted to keep Pan Am independent. It was an issue of life or death of the Imperial Airline. In such a dispute, there could be no midd
le ground.

  The board of directors observed the feud with growing horror. It was like watching their own generals slug it out while the enemy was torching the camp. “This just can’t go on,” an executive told the press.

  And so it didn’t. In the first week of the new year, 1988, Pan Am’s labor coalition announced that the unions were ready to concede $180 million in givebacks—but for a price: new management. They wanted Ed Acker’s head.

  By now the board was of a similar mind. Not only were the directors appalled at the schism in the executive ranks, they had grown steadily dissatisfied with the tall Texan’s management of the airline. In particular they had become critical of Acker’s 1986 creation of the Northeast Shuttle, the Pan Am commuter operation based in the old marine terminal at La Guardia Airport. The shuttle operated like a separate airline, competing with the Eastern Shuttle hauling commuters between Boston, New York, and Washington. Acker had spent $150 million of the proceeds from the Pacific sale on the shuttle, and though the operation was breaking even, it didn’t feed passengers to Pan Am’s overseas routes. The $150 million, the board believed, should have gone into a real domestic system—a route network connecting America’s heartland to Pan Am’s international hubs.

  That week the word leaked out to the street: Pan Am was looking for a new chairman. Ed Acker, the Texas deal-maker, was on his way out.

  And not just Acker. It was a package deal. The chief operating officer went with the chairman. Marty Shugrue’s career at the Imperial Airline was over too.