How Western Air became takeover bait
Washington — Last spring, when Western Airlines was celebrating its 60th anniversary, employees threw parties in the 58 cities the carrier serves. Gerald Grinstein showed up at more than half of them, protected by an apron as he barbecued hot dogs and flipped hamburgers. Mr. Grinstein is not a professional chef. But this former lawyer from Seattle, now Western's chief executive officer, has managed to turn the troubled airline into a tantalizing acquisition candidate.
At least that's what Delta Air Lines thinks. The Atlanta-based company, looking to expand its service from the East and Midwest into the Western United States, has agreed to pay $860 million for Western.
If the deal is accepted by stockholders and the Justice Department, it would create the country's second-largest airline. The largest would be an Eastern Airlines-Texas Air combination, which has run into antitrust trouble at the Justice Department.
``Gerald Grinstein is probably one of the best chief executives in the industry,'' says Robert Joedicke, an airline analyst at Shearson Lehman Brothers. Under his inexperienced stewardship -- he had been a Western board member since 1977 but never an executive at any airline before he took the reins in 1983 -- Western became ``one of the few airlines to turn itself around through basic management moves,'' Mr. Joedicke says.
And it has not been an easy time to manage an airline. Deregulation has spawned rapid expansion for upstarts like People Express, followed by fare wars that left the entire industry gasping for breath.
High-cost airlines like Eastern saw their profit margins disappear. Carriers tried to wring concessions out of their unionized employees, resorting to threats of bankruptcy -- or, in the case of Continental, filing for Chapter 11 to break its union contracts.
In the early 1980s, Western was in much the same situation as Eastern and Continental. It was losing $1 million a day. It tottered on the edge of bankruptcy.
``They recognized they'd have to lower their unit cost of operation to compete with the majors and low-cost specialists like Southwest, Jet America, and the `new' Continental,'' says Lewis Schneider, vice-president of Temple, Barker & Sloan, a consulting firm that advised Western.
The ensuing ``competitive action program'' included aggressive marketing, building up a hub in Salt Lake City and a secondary hub in Los Angeles, changing routes and equipment, and lowering labor costs.
The Salt Lake City hub was key, because it took the airline in large part out of Denver, where strong competition recently felled Frontier airlines, and into an airport the Western could dominate.
Actually, it was Grinstein's predecessor, Neal Bergt, who switched Western from a ``linear'' airline to a hub-and-spoke system. Grinstein built up the hubs, however, and matched the airline's equipment to the new route structure, lowering costs and gaining airplanes that would later become a major selling point for Delta.
More important, perhaps, were the wage concessions Grinstein got. That is where loading baggage at Salt Lake City, flying in the cockpit with the pilots, and dropping by the hangars paid off.
``He had a rapport with the employees,'' says Joedicke, a plus in a labor-intensive industry. In late 1983, management asked for, and got, a one-year, 10 percent pay cut in exchange for profit sharing, stock ownership, and two labor seats on the board.
A year later, amid some employee grumbling, management got a further, 12.5 percent cut for enhancements in profit sharing and two more board seats (out of 15 total). Employees also agreed to work-rule changes that increased productivity 8 percent over two years.
In 1980, the average wage at Western was about $3,000 above the rest of the industry, according to Airline Economics Inc. In the beginning of 1986, the average wage was $35,000 -- nearly $7,000 below the industry average.
In 1985, Western posted a $67 million profit, the first time it had been in the black since 1979. In the first quarter of this year it was one of a handful of airlines to be profitable.
Things turned sour last quarter, when fare wars in Denver forced Western to cut prices. The company lost $10.9 million. But with Frontier in bankruptcy, those fare wars might have ended. Western spokesman Glenn Bozarth says August was the strongest traffic month in the company's history.
The industry turmoil is far from over, however, and Western appears to be shifting its strategy again.
``In order to survive, a small major airline needs to have marketing agreements with other major airlines and to be exceptionally good in niche markets, or else to merge with a larger airline,'' says Marilyn Royce, an airline analyst at Value Line Investment Survey.
She points out that Western's competitors, like Pacific Southwest Airlines, are linking up through marketing agreements with bigger players (in PSA's case, with Northwest) and creating nationwide airlines. Western felt pressure to do the same, and Delta provided that opportunity.