Freefall: The crash of Pan American Airlines

Freefall: The Crash of Pan American Airways

Pan American Airways, or Pan Am for short; was America's premier international airline from the early 1930s until the early 1980s.  The airline went from the gold standard in service and innovation to bankruptcy in only two decades.  This was due to a litany events, some of which were beyond its control and some of which were self-inflicted.  To understand the failure of Pan Am, one must know the history of its development.  The other things one must know are how both its leadership and its relationship with the government changed over time.

In 1920 a German airline named SCADTA began operating in Colombia.  Several American army officers (to include future commander of the Air Force Henry 'Hap' Arnold) grew concerned that this may be a future threat to the Panama Canal.  In 1927 they created a shell company, Pan American Airways, to create a counter operation to SCADTA.  They were able to secure the air mail route form Key west, FL to Havana, Cuba but were not able to raise funds to equip the operation.  This is where Juan Trippe, a former naval aviator with ambitious plans, stepped in. 

The well financed Trippe had already formed the Aviation Corporation of the Americas which had Cuban landing rights.  He merged it with Pan American Airways and assumed their airmail contracts to Cuba.  With a rented float plane, Pan Am completed their first Key West to Havana mail run as required by October 19, 1927 (Millbrooke, A. 2006).  The American government saw this as a counter to SCADTA and gave quick approval to Pan Am's rapid growth in South America (Gandt, 2012).  Pan Am was on its way.

With support from the United States government and adequate financing, Pan Am quickly grew throughout South America.  It began operating out of Dinner Key near Miami, Florida and opened a world class training facility there as well.  Trippe hired the best and most famous pilots he could to pioneer routes.  Charles Lindbergh and Ed Musick were among them.  This worked to both establish new routes and promote the airline. He also acquired larger and more capable aircraft.  By 1935 Pan Am had bases at Midway atoll, Wake island and Guam.  Called Clippers, these planes flew routes that extended to the Philippines by the end of 1935.  Pioneering of the north Atlantic began in 1937 and later that same year Juan Trippe accepted the Collier Trophy from President Roosevelt on behalf of Pan Am.

In 1939 Pan Am accepted six large Boeing 314 flying boats and in 1940 they also began using the first pressurized airliner, the Boeing 307 Stratoliner.  With World War II looming, the planes would soon be taken for military service.  Pan Am volunteered to be completely subservient to the military for the duration of the war.  Its training facility at Dinner Key was used to train large numbers of military aviators in the science of long range flight operations.  During the war, Pan Am would expand its routes across the middle east and Asia as part of its duties to the military but would also gain valuable experience and contacts in the region.

Following World War II, Pan Am would resume operations but things had changed for the airlines.  The war had littered the world with large airports and good runways.  The advancement in transport aircraft was substantial so Pan Am, like most airlines, shifted its fleet from flying boats to the newer, more efficient, long ranged land planes.  The last scheduled flying boat service for Pan Am was completed in 1946.

Pan Am returned to a premiere airline status and continued to innovate.  It acquired new Boeing 377s and Douglas DC-4s.  What Pan Am could not acquire were domestic routes inside the U.S..  Pan Am was seen as an unofficial representative of the United States.  In fact, it was jokingly referred to as part of the U. S. State Department (Gellene, D., Dallos, R. 1991).

Competing carriers successfully argued to the Civil Aeronautic Boards (CAB) that Pan Am, with its worldwide network, would have an a virtual monopoly if it was allowed a domestic route structure as well.  The CAB instead handed international routes to other U.S. airlines that had vast domestic networks.  Pan Am was also having to compete with improving equipment. TWA ordered Lockheed Constellations in 1946 so Pan Am was forced to do the same or lose its competitive edge in the Atlantic but Pan Am had one advantage in Europe.  Post WW2 Berlin was prohibited from having service by a German airline so Pan Am got the job (Gandt, 2012).

1950 was a year of change for Pan Am.  In January they officially rebranded the airline as Pan American World Airways (PAWA) but the public still referred to it as Pan Am.  In September they also acquired American Overseas Airlines for $17.45 million dollars and bought 45 DC-6Bs in the same month.  In 1956 they bought DC-7Cs to keep up with TWA's improving line of Lockheed aircraft.  This helped Pan Am to maintain parity with TWA until 1957.

Juan Trippe had foreseen the end of piston engine airliners and he was not idle.  In 1955 Trippe met with Boeing about acquiring 21 of the new Boeing jets.  He also gained leverage over Boeing by ordering 25 Douglas DC-8s as well.  This gave Trippe the leverage to have Boeing design a second version of the 707, the 707-320, to Pan Am's specifications (Gandt, 2012).

Pan Am began jet service in October of 1958 ushering in the jet age in America with a flight from New York to Paris.  The early 707s needed a fuel stop in Gander but by 1959 the 707-320 was making non-stop flights both ways with profitable payloads.  The DC-8s began non-stop European service in 1960.  The total value of the combined aircraft orders was $269 million dollars.  As impressive as that order was, Juan Trippe had yet grander plans.  In 1965 he again approached Boeing, this time with the idea for a massive airliner that would bring down the cost of overseas travel to be within the reach of the common man.  He teamed with Boeing to layout the idea for a jumbo jet later to be called the 747.  Boeing had to build an entirely new factory to construct the behemoth yet it still managed to be operational by 1970.  The $525 million dollar order would revolutionize air travel; and almost bankrupted Pan Am.

President Johnson was no friend of Pan Am.  He  preferred American and Braniff (both based in his home state of Texas).  Johnson even overruled the CAB on occasion and gave routes to Braniff and American despite CAB rulings that they should go to Pan Am.  Although not crippling to Pan Am, it was a harbinger of things to come. 

Juan Trippe retired in 1968 and was followed by Harold Gray.  Gray, who was terminally ill, only served as CEO until 1969.  Najeeb Halaby Jr. then took over Pan Am until 1971.  Neither man was successful in getting Pan Am any domestic routes.  When President Nixon came to office in 1969 Pan Am expected to have Johnson's decision reversed but Nixon, after noting that Pan Am was not on his donor list, elected to leave Johnson's decision intact.  The government that had been so good to Pan Am in its formative years was now seemingly intent on holding it back or at least ambivalent.

In 1971 former Air Force brigadier General William Seawell would become CEO of Pan Am.  Where Trippe had been famous for his building of relationships with business partners and governments, Seawell was quick tempered and ruthless.  He was seen more as airplane operator than a visionary.  Just as with previous CEOs, Seawell was also unable to obtain domestic routes for Pan Am.  The airline's financial situation was beginning to weaken in the face of increased competition from carriers who had strong domestic networks as well as an increasing international presence.  Despite this, Pan Am's international dominance was still seen as a justification for the CAB to deny them domestic routes.  Pan Am still managed to flourish and 1969 was a record year with the company earning $89 million dollars. 

But by mid 1970 the company had lost over $30 million dollars in what was becoming a recessionary economy.  In 1973 there was an oil embargo to the United States which exacerbated the existing economic recession.  This was just after Pan Am had begun operating many of its new 747 Jumbo jets.  With a decline in travel, the airline now had considerable overcapacity and massive costs, both for the payments on and high direct operating expense of the 747s. 

The airline had accumulated $364 million dollars in losses over the past decade and had almost one billion dollars in debt.  By the mid 1970s it was looking at a possible bankruptcy.    This forced Seawell to reduce Pan Am's size by 25% and engage in harsh, but badly needed, austerity measures.  It took until 1977 for Pan Am to return to profitability. 

But Pan Am's meager profits were muted by President Jimmy Carter denying Pan Am the Atlanta to London route (UPI, 1977) and the Dallas to London route (API, 1977).  However, on  October 4, 1978, President Carter deregulated the airline industry and Pan Am was finally free to pursue a domestic feed and cease operations on unprofitable routes.  They immediately dropped some European routes and began looking at either starting a domestic feed or buying a domestic carrier.  Seawell decided to buy. 

In 1980 Pan Am bought National Airlines for $437 million after a bidding war with Frank Lorenzo of Texas Air and Frank Borman of Eastern airlines.  He had been warned by many at Pan Am that he was paying too much.  At the same time Pan Am was being hit by expanding low cost competition and declining passenger travel. 

Pan Am's debt topped one billion dollars and it was forced to divest itself of one of its most famous non-core assets, the Pan Am building in Manhattan.  It sold for $400 million.  This only helped offset the financial burden temporarily as the operating losses for 1980 were $248 million (Gandt, 2012).  Part of this loss was because National Airlines had a very different fleet and corporate culture than Pan Am.  In addition, the National route structure did little to help feed Pan Am's international route structure.  Also, National employees were brought up to Pan Am pay scales (Gandt, 2012).

In 1981 Chairman Seawell was replaced by former Braniff executive and Air Florida CEO C. Edward Acker.  Acker constantly tinkered with the routes and kept changing corporate strategy back and forth between domestic and international emphasis.  Under his management Pan Am was losing record amounts of money, nearly half a billion dollars by the end of 1982 (Gandt, 2012). 

In 1984 Acker proceeded with a fleet modernization program which included buying the new Airbus A-300/310.  These planes replaced some of the older Boeing 727s and 747s once the ETOPS certification was approved by the FAA.  Despite this they still had a large number of incompatible aircraft as a result of the National Airlines purchase.  This situation was partly rectified in April of 1985 when Acker sold Pan Am's Pacific operations to United airlines for $750 million dollars.  United also took the mismatched fleet types but this sale represented a quarter of Pan Am's route system (Petzinger, 1996).

In 1986 Pan Am acquired the Eastern Shuttle and several regional feeder airlines.  The shuttle was profitable and Pan An held on to it until their last year of operation but it never had an impact on the international feed.  In January of 1988 Acker was replaced by Thomas Plaskett as the CEO of Pan Am and immediately set to improve the airlines appearance and on time performance.  The now much smaller airline had just begun to have profitable quarters again when it became a victim of its own brand. 

Pan Am was still seen as America's international airline and as such became a target for terrorists.  On December 4th of 1988, Pan Am flight 103 was destroyed over Lockerbie Scotland by a bomb (Kane, 2012).  This set in motion a series of events that Pan Am could not recover from.  One of the worst effects was the shattering of public confidence in the airline.  There was near constant television coverage broadcasting of the cockpit wreckage which clearly displayed Pan Am's paint scheme and the Clipper name.

Following this, passengers simply would not fly on Pan Am out of fear.  It also slowed international travel which only compounded Pan Am's situation.  From this point on Pan Am was selling assets to stay in the air and the financial decline following Lockerbie was to prove terminal.

In 1989 Pan Am tried to recover its position by merging with Northwest Airlines but the merger never took place as Pan Am was outbid (Petzinger, 1996).  In August of 1990 the first Gulf War began.  This resulted in a plunge in transatlantic travel which hit Pan Am's bottom line even harder.  Also, the Berlin Wall had fallen and the result was that Germany no longer needed a foreign airline to fly its routes to Berlin.  Pan Am sold its internal German route system to Lufthansa for $150 million dollars and reduced its workforce by another 9% (Gandt, 2012).  This was not enough to reverse Pan Am's losses and in January of 1991 Pan Am declared bankruptcy. 

Delta Airlines bought Pan Am's Atlantic routes and became a 45% owner for $416 million dollars plus a $100 million dollar cash infusion.  The remaining 55% of Pan Am was controlled by the Pan Am Creditors Committee (PACC).

In October of 1991 former Douglas Aircraft Company executive Russell Ray Jr. was hired as Pan Am's CEO (Sanchez, 1991).  Pan Am was to move their headquarters to Miami and become a primarily Caribbean carrier.  Downscaled to 60 airplanes and 7,500 employees Pan Am's only remaining transatlantic routes were Miami to London and Paris CEO Ray and the PACC to soon found themselves at odds.  Ray was seen by Pan Am employees and the PACC as "Delta's man".  Ray and Delta saw that even after the restructuring Pan Am was losing over $2 million dollars per day (Petzinger, 1996). 

Delta was to give Pan Am a $25 million dollar cash infusion following Thanksgiving in 1991 but at the last minute withheld that payment (Gandt, 2012).  Delta claimed that it did not see how Pan Am could become viable.  Pan Am employees felt that Delta had picked off the best assets of Pan Am and cut the remainder loose.  Since Pan Am needed $15 million dollars just to operate for another week, the airline was effectively broke.  Ray was left with no option and on the evening of December 3rd he gave a three word command that effectively ended Pan Am's 64 year history; "Shut it down".  On Dec. 4th, 1991, flight 436 from Barbados to Miami was Pan Am's final flight.  Upon its parking at the gate, Pan Am ceased to exist as an airline.

In conclusion, the failure of Pan Am has many reasons but there are four key events that sealed its fate.  First were the changing government policies from just after World War Two up through deregulation.   Secondly was the 1973 oil embargo and its resulting weakening of Pan Am's finances.  Thirdly was the inept merger with National Airlines.  The fourth and fatal blow was the terrorist bombing of Pan Am flight 103 over Lockerbie, Scotland.  After the Lockerbie bombing Pan Am never saw financial daylight again.  The era of the premiere carrier was over and the era of the cost effective airline was in.

Juan Trippe and Charles Lindbergh in the early days of Pan Am

The Pan Am Worldport at JFK in New York

                   B-757 Logo changes

Low cost carriers such as Peoples Express became the new normal

                                                          

                                                         References

AP Wire (1977). Pan Am asks CAB to delay Routes. Retrieved from this web link     

     http://news.google.com/newspapers?

Gandt, R. (2012). Skygods: The Fall of Pan Am. New York, NY: Wm Morrow Co. Inc. Gellene, D., Dallos, R. (1991) Pan Am's Dive. Retrieved from  http://articles.latimes.com/1991-01- 
     09/business/fi-7339_1_united-airlines

Kane, R. (2012) Air Transportation. Dubuque, IA: Kendall Hunt

Krishnaiyer, K. (2013). Politics and the Growth/Fall of Pan American World Airways (Pan Am)    in Florida. Retrieved from this web link.
     http://thefloridasqueeze.com/2013/08/11/politics-and-the-growthfall-of-pan- american-world-
     airways-pan-am-in-florida/

Millbrooke, A. (2006) Aviation History. Englewood, CO: Jeppesen

Petzinger, T. (1996) Hard Landing. New York, NY: Random House
Sanchez, J (1991). L.A. Executive Ray Gets Top Posts at Pan Am. Retrieved from this web link.

     http://articles.latimes.com/1991-09-21/business/fi-2509_1_aerospace-executive

UPI (1977). Pan Am Chairman makes Pitch for Atlanta to London Route. Retrieved from this
       web link. http://news.google.com/newspapers?