Bankruptcy at Braniff

An overly ambitious expansion grounds the ninth largest U.S. airline

Recession, price wars and sharply rising fuel costs have gravely wounded the airline industry during the past four years. Last week those troubles claimed their first major victim. Braniff International, the ninth largest U.S. airline, declared bankruptcy. It was the first failure of a major carrier since American aviation came flying out of the barnstorming era in the 1930s.

With a cool precision not always seen on its flights, Braniff in a matter of hours called in its 75 aircraft, canceled all flights, fired nearly 9,000 employees and threw a police guard around its lavish $70 million headquarters building at Dallas-Fort Worth Airport. Flight 501 was on its way toward Hawaii when it made an unscheduled stop in Santa Barbara, Calif., apparently to decide whether the plane should return to Dallas. The choice to continue was made. Captain Bob Gilchrist, the pilot of what possibly was history’s final Braniff flight, 902 from Buenos Aires to Miami, heard the message from the Miami tower over his radio: “Whether you know it or not, you have just been terminated. You have been flying for free.”

Braniff’s end in Dallas came, fittingly, in a driving thunderstorm that had already delayed some takeoffs. Bill Rafter, a salesman from Fort Wayne, Ind., was on the last Braniff flight from Dallas to Kansas City. Said he: “We had waited four hours because of the weather delays, and then we find out that the airline is shutting down.” One Dallas couple, Pete and Mary Ann Moxon, had built up enough promotional points by flying Braniff at odd hours to earn a nearly free trip to London. Now, with baby-sitting grandparents already in town from Delaware to free the couple, those plans had to be called off.

Braniff’s employees were dismayed. Morale had been high, and many Braniff people had been led to believe that the airline just might make it with its slimmed-down route system, put into effect this past spring, and its aggressively discounted fares, offered beginning last fall. Said Steven Suhn, 30, a Braniff reservations supervisor: “We had two yards to go before the goal line.” There were worries, too, among older Braniff employees over what would happen to their company pensions. They are protected under a 1974 law that guarantees at least part of their retirement pay if Braniff ends its pension plans.

Braniff President Howard D. Putnam, 44, had been publicly optimistic to the end. He told shareholders at the annual meeting three weeks ago that the changes he had made had turned Braniff into a “viable airline on the operating cost side.”

Last week, though, events moved quickly. The company’s last desperate effort to win passengers by slashing prices was not working well enough. Braniff flights had less than half of the seats filled. Early in the week, M. Philip Guthrie, the company’s chief financial officer, told Putnam that Braniff did not have enough cash available to pay bills for food, jet fuel and salaries. Airline officials held last-minute talks with other carriers, reportedly including United and Northwest, exploring the possibility of mergers, and solicited new cash from investors.

All those attempts failed, and so Braniff executives put into effect a plan that called for getting the airline’s planes back to a few domestic airports, including Dallas-Fort Worth and Miami, so that they could not be easily seized by the company’s creditors. On Wednesday the Braniff board of directors took the final decision to file for bankruptcy. At 5 p.m. employees were told unofficially to clean out their desks and not to come to work the next day, which was payday.

Just before midnight Putnam and Lawyer Michael Crames went to the home of Judge John Flowers in Fort Worth. The judge had been in bed, but he got up, donned an L.L. Bean shirt and gray slacks and ushered the Braniff executives into his living room. Flowers signed three bankruptcy petitions in all—for Braniff International, Braniff Airways and Braniff Realty—and was paid $600 on the spot for his services. Said Braniff’s boss later as he fought back tears, his voice cracking: “What we had to do was very difficult, and I’m sorry.”

The airline’s failure really surprised no one, least of all the 39 banks, life insurance companies and other institutions to which Braniff owes $733 million. The largest single creditor: Prudential Insurance, which is owed $75 million. Rumors of Braniffs demise had circulated for months. Employees had foregone half their pay for one week earlier this year, saving the airline $8 million. Even with that, Braniff had lost $336 million during the past three years and had not earned a profit since 1978. So far in 1982, it had lost $43.2 million.

Most analysts, though, had expected Braniff to last at least through the summer so that it could grab vacationing passengers with cut-rate fares. But the airline could not wait for the summer traffic. Passenger load factor, a measure of how much money a given flight is making, had dropped to 45% and less, whereas Braniffs planes needed 70% to meet cash-flow requirements. Said Senior Vice President Sam Coats: “We were way below water.” Not even the $11 million that Eastern Air Lines paid three weeks ago to buy the rights to fly some of Braniff’s Latin American routes was enough.

Braniff took legal action under Chapter 11 of the federal bankruptcy laws. That meant that the airline’s aircraft and other assets could not be seized by creditors and that time would be allowed for a reorganization plan to be set up and debt payments to be rescheduled. Braniff’s planes are worth an estimated $400 million in the current depressed market for used aircraft, but of even greater value were its landing rights at a number of U.S. airports. Some of those, like the one at Chicago’s O’Hare Airport, are worth $1 million each. A Chapter 11 bankruptcy differs from some other kinds of bankruptcies, in which, when all assets are sold off, creditors receive at least part of their money and the company ceases to exist.

At least theoretically, the Chapter 11 action meant that Braniff might once again fly after getting its affairs in order. Analysts, though, were highly doubtful that Braniff would ever be back in the air. Michael Derchin of First Boston, an investment banking firm, said he believed that the Chapter 11 proceeding was merely a prelude to eventual total bankruptcy.

Braniffs fall resulted from an overly ambitious expansion program in the late 1970s. The only major U.S. airline still bearing the name of the men who founded it in 1928, Tom and Paul Braniff, the carrier served routes mainly in the Midwest and Latin America until 1965, when Harding L. Lawrence, the flashy executive vice president of Continental, took over as Braniff’s boss. In 1967 Lawrence married Mary Wells, chairman of the Wells, Rich, Greene advertising agency in New York City. Wells took on Braniff as an account, and together the Lawrence-Wells team did playful, expensive things to Braniffs airplanes, like painting them in seven shimmering pastel colors and paying Artist Alexander Calder $100,000 for his design ideas. Braniffs stewardesses were decked out in Pucci-styled uniforms. “When you’ve got it, flaunt it” was the proud slogan in the late 1960s.

In 1978 the ambitious Lawrence sought to use the Airline Deregulation Act, which had just been passed, to expand Braniff aggressively. The airline moved quickly to inaugurate service to a host of new cities. In a single day, December 15, 1978, Braniff began flying 16 new routes and added dozens more after that in the U.S., Europe and Asia. It borrowed millions of dollars to buy 747 jumbo jets to fly the new runs. Passenger loads, however, were nowhere near what was needed to make the new service profitable. On some routes, Braniff was flying as few as eight people on a 727, which can hold 146.

At about that time, the economy turned down and fuel prices turned up. Braniff went deeper into debt. Its obligations nearly doubled from 1978 to 1979. Losses mounted, ballooning to $131 million in 1980 and $161 million in 1981. In December 1980, Lawrence resigned as Braniffs boss. He was replaced first by John J. Casey, Braniffs vice chairman, and in September by Howard Putnam.

Other airlines moved swiftly last week to take over the airline’s more promising routes. American, Continental and Eastern were bidding for the Dallas-London run, on which Braniff had been the only U.S. flag carrier, and the Dallas-Caracas route, a popular one with big-spending, oil-rich passengers.

Investors greeted the Braniff bankruptcy favorably, seeing the end of that airline as meaning more profits for the surviving ones. The air carriers indeed need profits. Four airlines have debts exceeding $1 billion, and most of the big ones lost money on operations during the first three months of this year. While other carriers, including Pan American, Western and Continental, are having serious troubles, none of them appear to be in as bad shape as Braniff was. Stocks of most major airlines were up late in the week.

Braniff had not sought Government assistance to avoid bankruptcy, and the Government was not about to give it. Washington’s best role, President Reagan said in response to a question about Braniff at his press conference last week, was “creating a better business climate and bringing interest rates down.”

Overall, the impact from Braniffs failure was not expected to be big. Braniff carried only 3.5% of U.S. air passengers. No comparison could be made with the monumental wreck a dozen years ago of the Penn Central Railroad, which was one of the main arteries of American rail traffic. By week’s end only two of Braniff’s routes were not being served by other carriers: Dallas-Wichita and Dallas-Omaha. Other airlines are expected to take them over soon. —By John S. DeMott Reported by Mark Seal and Michael Weiss/Dallas