BUSINESS

Sir Freddie Laker benighted

LENNY GLYNN February 15 1982
BUSINESS

Sir Freddie Laker benighted

LENNY GLYNN February 15 1982

Sir Freddie Laker benighted

BUSINESS

Stewardesses wept. Baggage handlers stood benumbed. Passengers en route to the sun of Tenerife found themselves heading home unexpectedly to Manchester. At an 8 a.m. board meeting at London’s Gatwick Airport, Sir Freddie Laker, knight of the cut-rate airways, had conceded defeat. After months of tense negotiations with bankers and aircraft manufacturers, Laker Airways had % simply run out of cash—and time. Far more than any ordinary bankruptcy, what Laker termed his “demise” sent a shock wave through the airline industry that he had revolutionized. Whether they greeted the news with despair or glee, Sir Freddie’s friends and enemies agree that it may mark the end of an era: the age of mass travel at rates that vacationing janitors, backpacking students and penny-wise grannies could afford.

In the teeth of bitter opposition from established carriers and endless foot-dragging by government regulators in Britain and the United States, Freddie Laker mounted the biggest challenge in memory to a commercial oligopoly. When his first-come, first-served Skytrain flights began operation in 1977, their $236 round-trip fare to London from New York undercut competitors by more than 50 per cent. For airlines used to the cosseting of the agreed-on fare set by the International Air Transport Association (IATA), Laker’s entrance on the North Atlantic run was an intolerable irritant. Reluctantly, most tried to match Sir Freddie’s rates, though none undercut him for long. The result was a bonanza of low fares for travellers—many of whom had never boarded a plane before—but a financial bloodbath for Laker’s IATA rivals. Losses on the North Atlantic corridor last year soared to more than $500 million.

Still, until recently, Sir Freddie himself managed to stay in the black. The key was an almost instant popularity, bordering on legend, that kept Laker’s “load factor”—the percentage of seats occupied and paid for—among the industry’s highest. Knighted for his con-

tribution to British commerce shortly after Skytrain’s initial takeoff, Laker was a most uncommon airline boss. Confident, effusive, gifted with the common touch, he would load baggage, write tickets, jolly up passengers and fly—with a bubbling champagne bottle in hand—on most of his company’s maiden flights. In 1980, Laker’s ambition moved him virtually to double his

fleet—on credit—and spin schemes of extending Skytrain service throughout Europe and around the world.

Nothing, however, could have prepared him for the financial air pocket that world airlines first encountered in 1980 and that has been lowering profitability ever since. Socked simultaneously by the surge in fuel prices that followed the Iranian revolution and a recession-induced falloff in passenger traffic—the first since the Second World War—the more than 100 airlines that belong to IATA shed fully $900 million in operating losses in 1980. It was, said IATA, “the worst year in civil aviation history.” Last year, however, proved even worse, as many airlines engaged in desperate rate

wars on oncelucrative routes.

Not even Laker was immune. The mortal blow was probably delivered by Pan American World Airways, which slashed its transatlantic fares to $261 one way late last year, less than $10 above Laker’s. The move was matched by TWA and other competitors, setting off a new rate war that had even Sir Freddie sounding like a nervous reactionary. “Nothing less than suicidal,” he snapped of the Pan Am cut. “It could endanger the fabric of the airline industry as a whole.”

In fact, it did. Pan Am itself lost an astounding $127 million on operations during the quarter when the price dogfight erupted—a total of $359 million in 1981. But by enticing passengers away from Skytrain—whose load factor dropped below 50 per cent—the cuts by Pan Am and other airlines struck at Laker’s jugular. Burdened with more than $350 million in debts incurred during its 1980 fleet expansion, Laker’s revenues—nearly half in pounds sterling—simply

could not meet the firm’s obligations. The loans, after all, had been negotiated when the pound was close to $2.45. Last week it had fallen to $1.87.

That forced Laker Airways to begin negotiating a stretch-out of its debts to the U.S. Export-Import Bank, a consortium led by Britain’s Midland Bank and Laker’s suppliers, McDonnell Douglas and Airbus Industrie. Only a week ago, an agreement seemed imminent, and Sir Freddie declared himself to be “flying high.” The rescue package unravelled, however, and Laker’s bankers called a halt to huge overdrafts on the company’s accounts. One reason for the deal’s collapse was the reported reluctance of three of the banks in the Midland syndicate, themselves deeply enmeshed in loans to Poland, to take on any further risk.

Sic transit Laker Airways amid mourning from travellers—Canadians are thought to have invested heavily in Sir Freddie’s $100-off summer flights to Britain—and ill-disguised delight from major airlines. David Venz, a spokesman for Trans World Airlines,

declared: “This is the big leagues and when you don’t have the wherewithal to withstand the competition, someone gets hurt. It was distressing that so many Laker employees would be out of work,” he added, but “that’s what happens when the competition gets hot.” As if in deference to Laker’s popularity, his British rivals were more sympathetic. Said British Airways’chief executive, Roy Watts: “We don’t get any pleasure out of the situation in which Sir Freddie finds himself.” But regardless of the public statements, the real mood in most airline boardrooms was more likely one of triumph tinged with fear. The banks’ unwillingness to bail out Sir Freddie can only be unnerving for many airlines that are themselves circling the financial abyss.

likely soon to be up for sale, there are literally dozens of wide-bodied jets glutting the world’s used-aircraft market. In the far more competitive environment that Sir Freddie himself helped forge, if prices go too high, too fast, someone surely will have the wit to buy some and try, try again.

Against that hazard, however, is the prospect of new gentlemen’s agreements to boost fares—a process under way even as creditors dissect Laker’s assets. Assured of immunity from antitrust action by a sympathetic Reagan administration, U.S. airlines are now hammering out accords with other IATA members that should send transatlantic fares up by 15 per cent or more by summer. The domestic U.S. fare wars—which have brought New Yorkto-Florida rates to a loss-making $77 one way—are due for an armistice soon. By March 1, carriers will be hiking the price of those tickets to the $135 level that prevailed until Christmas, while prices on most other U.S. routes rise 10 per cent as well.

But if Sir Freddie’s departure prompts an attempt to return to the status quo BL (Before Laker), his memory should inspire some caution among major airlines. With Laker’s own fleet

LENNY GLYNN