The MacNeil/Lehrer Report; Braniff Bankruptcy

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HOWARD PUTNAM, Chairman, Braniff: In the seven months that we have been here, we tried to put a new formula in. We think the formula was right. Unfortunately, we took a 1950s airline with a cost structure and all, and tried to make it a 1980s airline. It didn't happen.

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ROBERT MacNEIL: Good evening. Braniff Airways declared bankruptcy today, and it shocked the airline and business worlds as if there had been a major air crash. For some 9,000 employees the shock came with sudden notices to stay home and warnings that paychecks coming in the mail were worthless because there was no cash. Thousands of stranded passengers had to scramble to get seats on other airlines. Other airlines began scrambling to pick up Braniff's domestic routes and its services to London and South America. The Civil Aeronautics Board held an emergency meeting on the situation as airline analysts wondered whether other big names in aviation were also in danger. It was the first time that a major airline had gone bankrupt since the modern industry emerged from the bushwacking days of the '20s and '30s. Tonight, what happened to Braniff and how many other airlines are vulnerable? Jim?

JIM LEHRER: Robin, Braniff was the airline of glamour. Its flight attendants and pilots dressed in Pucci-designed uniforms; its planes were painted in one of seven wild colors, from burgundy and chocolate to bright red and orange, one in a wavy modern-art design by the artist Alexander Calder. And its on-board food and wine were chosen by world-famous chefs and experts; its planes' interiors outfitted in soft browns with leather seats. It had bold, catchy advertising slogans: "When you've got it, flaunt it," used when the new uniforms came out; "The end of the plain plane," when the new paint was put on the airplanes. All of this glamour came after Harding Lawrence took over the airline in 1965. Braniff, founded in the '30s by aviation pioneer Tom Braniff, had been mostly a regional airline, flying in and out of Dallas and other cities in Texas and the Southwest. Mr. Lawrence, with some assistance from his wife, New York advertising executive Mary Wells Lawrence, changed both the image and the size of Braniff. It was the size change after airline deregulation in 1978-79 that most experts say now led to Braniff's financial downfall. Mr. Lawrence expanded Braniff's service quickly, dramatically into 15 new cities on one day alone. Ensuing high fuel costs, the recession and other problems soon led to heavy losses. In December of 1980, Mr. Lawrence was ousted, reportedly at the insistence of Braniff's major creditors. Under a new management team the company continued to lose money, and finally last September, Howard Putnam, who had been president of Southwest Airlines, was brought in. At company headquarters at the Dallas-Fort Worth Airport this afternoon, Mr. Putnam explained the whys of Chapter 11 bankruptcy now.

Mr. PUTNAM: Our company was very vulnerable to creditor action, be it an involuntary petition that might have been collectively filed against us or an individual attempt to seize and hold our assets. Our airline is spread out through North America -- and, as of yesterday, in South America -- Mexico, Hawaii and London. We had to minimize our risk and exposures as soon as possible. At that time, earlier, also yesterday, we began a shutdown plan of the airline which went extremely well under our executive vice president of operations' guidance, and as of last evening all airplanes had been put on the ground, had been secured, and were under intense security. For there to be a prospect for Braniff to reorganize financially and to resume operations on a profitable basis, Chapter 11 enhances our prospect, and does not diminish it. What we had to do last night was very difficult, not only for us but for them. And without notice, for which I am very sorry, but unfortunately there is a lot more at stake here than just the dollars involved. We're trying to provide a basis to have a future for this airline, and the only chance we had to do that was to preserve the airplanes and the assets to give us the chance to have a future. It's a shock to them, I know. There is no payroll. They were taken off the payroll as of last night. The payroll -- the checks that are out there now -- will not go through. There is no cash to support them. There is a lot of sacrifice in the short run, but now at least we've got a shot at having a long run.

MacNEIL: For more on Braniff's side of the story, we have the airline's senior vice president, Sam Coats. He's with us at public television station KERA in Dallas. Mr. Coats, why did this happen?

SAM COATS: It happened because of a number of factors. As you indicated earlier, Braniff expanded rapidly in the aftermath of deregulation. Increasing fuel prices, a weakening economy, increasing interest rates caused us to incur a debt burden that now amounts to far more than $733 million. The creditors of the airline imposed restrictions on our operations. We have been operating under those. We lost public confidence, though, in the final analysis, and our loan factors deteriorated very precipitously in recent days.

MacNEIL: You mean people stopped buying tickets because they were worried about your financial status?

Mr. COATS: Yes, sir, exactly.

MacNEIL: Well, how is that going to work if you continue to operate, as we just heard Mr. Putnam suggest, in a bankrupt status? How does that work?

Mr. COATS: Well, it's never been done before. No airline has ever operated in Chapter 11. What we have done --

MacNEIL: Would you explain briefly what Chapter 11 is?

Mr. COATS: Sure. Chapter 11 is a section or a chapter of the U.S. bankruptcy code that places the assets of a corporation like Braniff under the control and direction of the courts, gives the management of the company the opportunity to collect those assets, marshal them in the most expedient and useful manner for the benefit of the company, and hopefully put together a plan of reorganization and a business plan that will allow the company then to come back into operation as a continuing entity. It is not a liquidation plan; it is reorganization plan under the direction of the courts.

MacNEIL: So the people you owe money to can't come and say to you, you got to sell some of those airplanes to pay us?

Mr. COATS: As of 12:01 this morning, when the judge in Fort Worth signed the orders, all of the debts, all of the assets of the company are under the jurisdiction of the court, and all of our creditors are precluded from taking self-help or other legal actions without the consent of the court.

MacNEIL: Was the decision of the Civil Aeronautics Board not to allow you to do the deal you wanted to do with Pan Am about a month ago -- to lease some of your South American routes to them and get a bit of cash; was that instrumental in causing this final state of affairs?

Mr. COATS: I don't think that the CAB can be faulted. They were trying to act in a prudent manner. When we went back to the board with Pan American and explained we did have an emergency situation, that we were facing a cash-negative situation in South America, they then did respond, and they responded by approving a transaction with Eastern Airlines; and we have been in touch with Eastern, and we're hopeful that Eastern can accelerate their entry into those South American markets so that service won't be disrupted.

MacNEIL: Come back to the question of your operating in the future. I know it's kind of a cruel question to consider on a night like this, but you've just said ticket sales were falling off just because you were in financial trouble. What are they going to do if you're operating as a bankrupt airline? What kind of sort of consumer confidence will that have?

Mr. COATS: The airline that ceased operations yesterday is gone. The airline that we would start up in the future is going to have to be a new entity. It will have to be created in a creative manner. That's going to be up to us as, hopefully, skillful businesspeople to do.

MacNEIL: You mean with a new name and everything?

Mr. COATS: You're asking a very valid question, and you're asking one of a very tired executive who has had about three hours sleep in the past two days, and that's the type of question that we will be addressing in the coming weeks. Once we have sorted out the assets, once we have put together a reorganization plan for the bankruptcy court, we will then begin a marketing plan, a business and operating plan, that will hopefully put back a slimmed down version of an airline, put in into the air in a manner that will be acceptable to the public because it will offer a valuable service, and that will be acceptable to a group of employees who will staff it, and that will provide a service for the traveling public.

MacNEIL: Mr. Coats, other airlines have faced and do face the effects of the recession at the moment and lower use of air travel, high fuel costs and other effects of the marketplace. Is Braniff's situation unique or are they threatened too?

Mr. COATS: There are some other airlines that are in a precarious position at the present time. The economy is not helping any airline. This industry is undergoing a lot of financial trauma because of the economy. There were three major carriers who in the first quarter of 1982 lost over $100 million each. The best thing that could happen to the entire industry would be for the economy to turn around.

MacNEIL: Will you expect any more bankruptcies?

Mr. COATS: I would certainly not hope so. I don't want anybody in the world to go through what we've been going through these past few days.

MacNEIL: Well, thank you. Jim?

LEHRER: What's left of the federal government's involvement in commercial aviation except in the safety area remains in the hands of the Civil Aeronautics Board. We get the CAB's view of the Braniff bankruptcy and its potential fallout now from CAB Chairman Dan McKinnon. Mr. Chairman, was bankruptcy the only way out for Braniff in your opinion?

DAN McKINNON: Well, it evidently was because they couldn't meet their cash flow requirements with what they were bringing in. They just couldn't meet their payroll, so that's the only way out.

LEHRER: Did they consult with you or notify you in advance of this?

Mr. McKINNON: I knew about it yesterday. Of course, I think the whole industry was aware that Braniff was having financial problems, but yesterday was the first I knew that they were going to go under.

LEHRER: Under deregulation there's no requirement that they give you advance notice or any kind of sign ahead of time or anything like that, right?

Mr. McKINNON: No. They were -- when they realized that they were in deep trouble yesterday, they called me and I talked with Howard Putnam particularly about the international routes. We didn't talk domestically, but they were going to close down internationally; they wanted me to be aware of it so the CAB could do whatever we could do to cover those routes.

LEHRER: All right. What are the CAB's responsibilities now in a situation like this?

Mr. McKINNON: Well, we have really two key areas. One, we're concerned about consumer protection so those people who have a ticket to fly on Braniff have a way to utilize that ticket or the money they have invested in the travel. And the second thing is in the international area -- to be sure that the rights the United States has internationally to fly in different routes is protected, and we have a United States carrier flying those routes.

LEHRER: All right. Let's take them one at a time. The question about people who have tickets now, Braniff tickets. What are their options?

Mr. McKINNON: Well, the first thing we did, Jim, was to set up a hotline telephone -- which is (202) 673-6047, and anybody that has a ticket and has a real question can call that hotline; we're manning it from 7 a.m. to 9 p.m. today and tomorrow, and if there's a big demand there, we'll do it over the weekend and until the demand slackens -- to share with people exactly what they can do, because the tickets fall into three areas. One, a ticket purchased from another airline, which will be honored by that airline or the cash can be refunded -- if you went to a different airline besides Braniff and bought your ticket. If you bought --

LEHRER: In other words, if you just happened to go to an American Airlines ticket counter to buy a ticket to fly on Braniff, you're okay? You can still fly?

Mr. McKINNON: Right. Well, American Airlines has your money; they're solvent --

LEHRER: No problem, okay.

Mr. McKINNON: -- so that your money or a refund is available there. If you bought your ticket from a travel agent, you have the option of working on a standby basis on the airlines, or if that ticket was bought after the 10th of May, you have the possibility of touching base with your travel agent and getting a total refund. So you're pretty well covered with the travel agents. If you bought your ticket from Braniff, there's no money for Braniff to refund it, but most of the major airlines in the country have all gone along and said, "We will carry people that bought a ticket with Braniff, on a standby basis." So you have a very good chance of completing your travel plans just on a different airline.

LEHRER: Now, that means those airlines are essentially going to be carrying those people for nothing in terms of -- they're not going to get any revenue, right?

Mr. McKINNON: Well, that's basically correct.

LEHRER: Now, you say "most major airlines." I read today that most major airlines, with the exception of TWA. Is that still the case? Has TWA come around?

Mr. McKINNON: I have not heard that they have. The last word I got was that they were considering it, but up to this point they're not going to honor those tickets.

LEHRER: Has the CAB asked these airlines to honor these tickets?

Mr. McKINNON: No, the CAB called around to find out what they were going to do about it. We did a study, but we didn't ask them one way or the other. I think they've jumped in in a magnificent style to fill up the gap here and help these standed passengers.

LEHRER: Do you expect any people holding Braniff tickets to be completely shut out in terms of their money? They either don't get their money back or they don't have an opportunity to fly?

Mr. McKINNON: I think the great bulk of them should be able to succeed in flying to wherever they want to go.

LEHRER: All right. Now, on the routes --

Mr. McKINNON: -- and I did want to, just if I could --

LEHRER: Sure.

Mr. McKINNON: That number again is 202-673-6047 if you have a question. We have a staff there.

LEHRER: How many people do you think are out there who would have reason to call that number? Thousands?

Mr. McKINNON: Well, I don't know how many tickets Braniff has outstanding, but I assume there are thousands because they were hauling a lot of people.

LEHRER: Now, quickly on the routes, the routes that Braniff was flying. On a temporary basis now other airlines are free to come in and take over those, correct?

Mr. McKINNON: Jim, let me divide it into two areas: one, Braniff made a deal with Eastern which we approved here a while back. Eastern was phasing that in so they would go fly those routes by the first of June.

LEHRER: To South America?

Mr. McKINNON: To South America. To a variety of countries in South America. Eastern now has accelerated that phase-in. By Tuesday of next week they will be in place all over South America where those routes are, with the exception of Bolivia. La Paz, being the capital, is 12,000 feet high, and they had to make an engine change, so it will be another week longer before they cover that. So South America is covered. Eastern says they will honor all tickets on Braniff. So anybody going to South America has no problems. There are three exceptions. There is Venezuela, down to Maracaibo and Caracas from Houston; there is over to London from Dallas-Fort Worth; and there's down to Mexico City from Dallas-Fort Worth. Those are three areas that are uncovered where Braniff had route rights. And we have asked any airline that's interested to let us know by 10 o'clock tomorrow morning -- Friday -- if they would like to fly those routes. And then we're going to have a special Civil Aeronautics Board meeting tomorrow afternoon to figure out about emergency exemptions and how we should proceed to fill those routes as quickly as possible.

LEHRER: All right, thank you. Robin?

MacNEIL: For some people in the airline business the villain in their hard times is deregulation, introduced during the Carter administration. The chairman of the Civil Aeronautics Board at that time was Marvin Cohen, now a Washington-based attorney. Mr. Cohen, is Braniff's bankruptcy the price of deregulation?

MARVIN COHEN: It's not -- I wouldn't put in exactly that way. Braniff was given the freedom to make decisions that airlines didn't have before, and using that freedom they made decisions and took risks, and the circumstances were such that they lost instead of winning. Other businesses in a free economy are free to take risks, and sometimes they succeed and sometimes they fail. And the freedom to fail meant that inevitably some airlines were going to fail and we would inevitably have a bankruptcy or two.

MacNEIL: When you went into deregulation you expected -- during your time at the CAB you expected some airlines to go bankrupt?

Mr. COHEN: I didn't know when, but I expected that eventually there would be a bankruptcy or two, as in any industry.

MacNEIL: Let me put the question the other way around.If there had not been deregulation, would Braniff still be viable today, and what would your comment be on that?

Mr. COHEN: It's a good question. I think if there had not been deregulation, Braniff might not have gone bankrupt because they could not have expanded. They expanded shortly after deregulation, stretched their resources thin, and then were caught with the doubling and tripling of fuel prices for them, high interest rates and other things. They couldn't have expanded that drastically without deregulation.

MacNEIL: Apart from the pain to the people themselves in Braniff, and the inconvenience to their customers at the moment, is this healthy in your view for the airlines industry -- this kind of shake-out, this sort of survival of the fittest?

Mr. COHEN: In the long term, and I'm sad to say, but yes,I think the ability to fail is the other side of the coin of the ability to succeed. And the freedom to make mistakes is also the freedom to do things more efficiently and more successfully.So that the same freedom that allows Braniff to fail is allowing Southwest Airlines, for instance, to succeed and to offer people good service at fares much lower than others, and a whole new crop of new airlines to offer low-cost services, to keep fares down, and to achieve much greater efficiency in the airline industry than could ever have been, or was ever achieved in a regulated system.

MacNEIL: What is your view, Mr. Cohen, of how many other airlines are at risk now?

Mr. COHEN: Oh, all airlines are at risk under deregulation. There are some that are stretched thin and that have more problems than others. All of them are at risk. I believe there are four airlines whose accountants have noted that they have some financial problems at the present time. I rather doubt that any of those four are facing imminent bankruptcy, though.

MacNEIL: Are any on that road if it's not imminent?

Mr. COHEN: Oh, I would think that there are some that may be on the road. They --

MacNEIL: Would you --

Mr. COHEN: -- could recover. It depends on the economy.

MacNEIL: Would you -- suppose the economy does not rurn around? I read in one of the stories today that a lot of these airlines are hanging on until July 1st when the 10% personal tax cut comes in and hope that that will stimulate the economy enough to help them recover. Are some just hanging on for an event like that?

Mr. COHEN: I don't know of any that are quite that close. Traffic is picking up. I would think they're hanging on for longer than that, but if the economy stays bad -- we're in the worst recession since World War II. If that recession continues, there's going to be more fallout, not only in the airline industry. Bankruptcies have doubled in general, and there's bound to be some more trouble if the recession doesn't turn around.

MacNEIL: Well, thank you. Jim?

LEHRER: Mr. McKinnon, do you know of any airlines that are hanging by their fingers out there, that may go down this same road?

Mr. McKINNON: I don't know if they'll go down the same road, Jim, but I think there are some airlines that do have troubles. But they're different kinds of troubles than what Braniff had. Each case is an individual case, and as Marvin pointed out, when they had the right to go to deregulation they had the right to make mistakes as well as to make profit. There is one thing that came to mind here just a moment ago in the conversation, and that's under deregulation the fact Braniff went bankrupt. Under regulation there was a lot of airlines that had a lot of troubles. The most recent was, in about '73 and '74 there was a case with Pan Am and TWA, and they switched a lot of routes around which provided protection which kept those airlines alive because they were in deep trouble at that time and they were able to maneuver that.

LEHRER: Yeah. Mr. Coats, Mr. Putnam said at the press conference today that he still favored deregulation and that he did not see deregulation as a villain in this. Is that the Braniff position on this?

Mr. COATS: You bet it is, and it's Howard's and mine, and I would echo what Marvin Cohen said. Braniff had the opportunity under deregulation to do some things it didn't do. In retrospect some of those choices were bad, or they turned out bad.But we have not gone to the government for a bailout. We do not advocate a return to a regulated airline industry, and we won't. We had an opportunity to fail, but we also had and have an opportunity to succeed, and I think you'll see Braniff planes in the sky again.

LEHRER: Mr. McKinnon, there were stories today -- and I'm going to ask you about this, too, Mr. Cohen -- that Braniff was a low-fare carrier. It had -- that's one of the things that Mr. Coats and Mr. Putnam did was lower fares dramatically on their routes. And the speculation already is that the airlines that were competing with them, with Braniff out of the way now are now going to raise their rates back up. Is that in the cards?

Mr. McKINNON: Well, I would think that's a good possibility. The problem is the airlines aren't charging what it costs them to fly the airplanes. Somewhere they've got to start charging what it costs them to operate or more of them would go bankrupt. So I think if you're going to fly, now's the best time in the world to go get on an airplane and fly someplace because rates will never be cheaper.

LEHRER: Do you agree, Mr. Cohen?

Mr. COHEN: Well, with a couple of exceptions. There are a lot of airlines out there, and if airlines raise their fares too dramatically, if, for instance, one airline has a monopoly because Braniff is not operating anymore on that route, another airline can enter it with lower fares. And in a time where there is overcapacity, which is the time we're in now, in a recession with overcapacity, the fares will tend to be low because the airlines want to attract people to occupy the airplanes.

LEHRER: Mr. Coats, one decision that was made by your management -- you and Mr. Putman, not by Harding Lawrence or those who preceded you -- was this decision to lower the rates, slash them 50%, I think it was. Was that a mistake in retrospect?

Mr. COATS: We don't think so. We had a short fuse when we got to Braniff in October.We had no cash so we had to get our cost structure in line, and we also had to stimulate traffic. It was easier to cut fares and simplify fares, and that's a strategy we think is still valid. Where we fell short was that we ran out of cash before our cost structure got down to a point that would give us the war chest on the cost side of the equation to allow us to compete on a long-term basis. It is still a valid strategy, in my opinion. It is one I hope we get a chance to employ again.

LEHRER: I see. Robin?

MacNEIL: Mr. Cohen, to come back to the possibility of other airlines being shaken out in the competition following deregulation, do you have in mind some idea of how many trunk carriers would be really healthy to retain enough competition and yet keep enough business to keep them viable in this country? Do you have a kind of number in your mind?

Mr. COHEN: You mean a minimum number of trunk carriers to survive to keep a competitive airlines system?

MacNEIL: Yeah. I mean, so many other countries have just one or two subsidized airlines.

Mr. COHEN: Oh, the number that's been bandied around for two or three years is six or so, but --

MacNEIL: How many are there now?

Mr. COHEN: There are 10 trunk airlines, but USAir is now considered a trunk. That would make 11, counting Braniff, but then you have, see, these categories change all the time. You have some up and coming airlines that have been smaller that are now growing. USAir is the perfect example. Republic used to be a small airline -- used to be three small airlines: North Central, Southern and Hughes Air West. Now it's one larger airline. You have Piedmont that's very healthy and could grow. You have Frontier that'svery healthy and could grow. So I think there are enough airlines out there.

MacNEIL: Are there too many?

Mr. COHEN: No.

MacNEIL: Mr. McKinnon, are there too many? Is there going to need to be a shake up for survival?

Mr. McKINNON: Well, I think to a great extent it depends on the economy. If the economy recovers, I think we can handle the ones we've got very well, and they could be very profitable. I think we need to remember the steel industry, the savings and loan, the lumber, the farmers, automobiles -- we are all suffering, and it's not correct to assume an airline should be highly profitable and the whole industry of this country to be suffering a recession.

MacNEIL: Mr. Coats, do you think that there are too many airlines to make a healthy piece of competitive business for enough of them to survive?

Mr. COATS: No, I think that deregulation is dependent upon a high level of competition. If concentration develops to the point where you only have one or two giants, then deregulation doesn't stand a ghost of a chance of succeeding.

Mr. COHEN: And you should remember that airplanes carry people, not airlines. If an airline is too big and it gets into trouble, it can shrink, and successful airlines will grow; unsuccessful ones will shrink. And it's a matter of airplanes, not airlines.

Mr. COATS: And Marvin, as an industry we're just now coming out of 30 years of a regulated environment. We haven't grown up as an industry, in my judgment. I think we're still fairly adolescent in our pricing policies. We're adolescent in our marketing activities --

MacNEIL: What does "adolescent" mean, Mr. Coats?

Mr. COATS: It means that we're like a kid with the family car for the first time. We don't exactly know how to behave as an industry. The high technology changes of the '50s and '60s, the phenomenal growth that the airline industry went through in the '60s and '70s covered up a lot of lousy management in the airline industy. And it is just now becoming halfway as financially astute, halfway as astute in a marketing sense as some of our brother and sister industries have been for years.

MacNEIL: Sorry to interrupt you there, Mr. Coats, but that is the end of our time. Thank you very much for joining us in Dallas, and Chairman McKinnon and former Chairman Cohen, thank you in Washington. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back tomorrow night. I'm Robert MacNeil. Good night.