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Free «Frank Lorenzo» Essay Sample

Frank Lorenzo whose real name is Francisco Anthony is an American businessman and philanthropist. He was born on May 19, 1940, in New York City. Frank Lorenzo graduated from Columbia University in 1961 and Harvard Business School in 1963 (Delaney, 1999). He became attracted to the airline industry, when he was a financial analyst for TWA. Frank Lorenzo later worked as a financial planning manager at Eastern Airlines, but he yearned to run his own airline (Delaney, 1999). In 1966, at the age of 26, Lorenzo joined forces with Robert J. Carney, a friend from Harvard and started an airline consulting firm called Lorenzo, Carney & Co (Bernstein, 1999). In 1969, each of the partners raised $25,000 to start a new company, Jet Capital Corporation.

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In 1972, six years before airline deregulation, Lorenzo used the money, which was raised from venture capitalists to take control of Texas International Airlines, a debt laden regional carrier based in the Southwest (Delaney, 1999). Lorenzo’s $35 million recapitalization plan gave him his first real foothold in the airline industry. Lorenzo thus received 26% of Texas International Airlines stock and 59% of the voting rights, which gave him control even though he did not have the majority share. Lorenzo experienced a taste of the deregulated world.  As a result, Texas International Airlines was forced to compete against an airline that could offer rock bottom fares.

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Through his efforts, Lorenzo sought to approve the introduction of half price, off peak fares in the regulated industry (Delaney, 1999). Texas International Airlines application to the CAB for introduction during the times of strict regulation earned Lorenzo a reputation of a fare and cost cutter. According to Bernstein (1999), regulation blocked smaller players like Lorenzo from taking a market share from the established airlines. Because of the high percentage of institutional investment in Continental, Texas International Airlines was able to purchase 49% of Continental (Delaney, 1999). By June of 1982, Lorenzo and Texas International Airlines gained control over Continental after a bitter battle that had lasted close to three years. Delaney (1999) noted that “Frank Lorenzo became the chief executive officer of Continental and merged Texas International Airlines Inc. and Continental Air Lines Inc. into the Continental Airlines Corporation” (p. 93). As a result, there appeared a pyramid of companies with Lorenzo at the top. 

Lorenzo played a major role in the aviation industry, because he offered the International Association of Machinists and Aerospace Workers (IAM) a 19% rise, if they would allow the management to subcontract repair work of the airline outside machine shops (Bernstein, 1999). Bernstein (1999) noted that “the machinists walked off the job and Lorenzo began hiring replacement workers at $10 an hour instead of $16 the unions had been getting” (p. 15). Lorenzo further went bankrupt, when Harvey Miller suggested that Continental circumvented its unions by declaring bankruptcy. Again, on September 24, Lorenzo declared bankruptcy, abrogated the union contracts, and told his employees that they could work twice as many hours at half pay (Bernstein, 1999).  As a result, Lorenzo focused on three main groups of unionized employees pilots, flight attendants and mechanics striking against the major companies he owned.

 
 
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Lorenzo enabled Continental Airline Corporation, the country’s eighth largest airline, with 12,000 employees to cop wages in half. Its labor expenses lowered from 35% to 22% of total costs. Delaney (1999) says that “Continental’s low fare received tremendous publicity and customers began to line up at airports for the cheap flights” (p. 101). Through Lorenzo, this low fare gave Continental not only publicity, but also credibility, inducing consumers to take the chance of flying with the airline. Delaney (1999) says that “Continental had dramatically altered its cost structure, reducing labor costs by 50% in one fell swoop, which enabled it to cut fares dramatically” (p. 103). Competing airlines could match those fares, but only at substantial losses, since they continued to operate with much higher cost structures.

The importance of Frank Lorenzo in the aviation industry cannot be undermined, because his move triggered a wave of labor strife throughout the industry. Bernstein (1999) says that to compete with him, every other airline began to ask employees for drastic concessions. Another major contribution of Lorenzo in the aviation industry is that the strikes were a watershed for the airline unions. As a result of Lorenzo’s contribution, Delta imposed a wage freeze on its 32,000 non union employees. While, those actions were considerably less drastic than Continental’s wage cuts, they were the beginning of an adjustment triggered by Continental’s actions.

In conclusion, Lorenzo seems to be driven less by money than by a burning desire to run the biggest and strongest airline in the country. Therefore, the tremendous changes in the aviation industry occurred, especially the reduction of fare prices to $49. Through the contribution of Frank Lorenzo, the aviation industry analysts feared the major fare wars, hence every airline continued to monitor Continental’s progress. This laid behind his efforts to cut down labor costs in the aviation industry and increased his impulse to buy up every airline in sight.

   

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