United - acquisition of Pan Am's Pacific Division 1986

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    Composite image;  Pan Am DC-10  by  Aero Icarus  via Flickr, CC 2.0 license, and  United DC-10  by Alain Durand, GNU 1.2 license

Composite image; Pan Am DC-10 by Aero Icarus via Flickr, CC 2.0 license, and United DC-10 by Alain Durand, GNU 1.2 license

A tale of two airlines

By late 1984, it was clear that Pan Am’s strategic blunders were not going to be fixed by a recovering economy: it had paid far too high a price to acquire Miami-based National Airlines for domestic routes that did nothing to feed its New York-JFK hub, and couldn’t even effectively feed its South American services. The airline was saddled with first-generation, fuel-hog jumbo 747s and 747SPs it couldn’t fill except at highly discounted fares, against high fuel prices and interest rates.

Delta, Northwest, and American were now competitors across the Atlantic, and flying from their respective fortress hubs where they could collect and re-route passengers much more effectively than Pan Am could through New York. On its historic Latin American services, Eastern picked up the former Braniff routes when Pan Am could neither pay nor get government approval, and had swiftly integrated them into its massive Miami hub.

On the Pacific side, Northwest had already exceeded Pan Am’s lift into Tokyo; United had been given flights to Tokyo and Hong Kong; and Japan Air Lines, Korean Air, and Singapore Airlines were not only adding capacity to the USA, but doing so with a level of service and seating comfort that Pan Am had not invested in.

Image by  Roger W  via Flickr, CC 2.0 license

Image by Roger W via Flickr, CC 2.0 license

Pan Am was bleeding cash and had sold off its InterContinental Hotels chain and its iconic Manhattan office tower, but its debt obligations were still daunting. And a ground-services strike in early 1985 consumed nearly all the cash Pan Am had on hand. The situation at their New York headquarters was desperate.

Meanwhile, in Chicago, United Airlines’ top management was full of confidence: revenue for the largely-domestic carrier was steadily climbing, as was profitability. They had successfully introduced a fleet of new, fuel-efficient Boeing 767 widebody jets and this was allowing them to phase out old-generation DC-8s and improve their margins at the same time.

Profits from operations meant United had a more-open wallet by lenders, and Chairman Richard Ferris was pulling together a plan to employ that leverage to create a vertically-integrated travel company: using United’s reservations system Apollo, and the Western International Hotel brand they already owned (now called Westin), he acquired more hotels and the Hertz rental car chain – with the goal of owning every step of a traveler’s journey. We would call it a “big data” strategy today – Apollo was one of the biggest computer networks on the planet in the 1980s and had strong penetration in the nation’s travel agencies, and Ferris’ theory was that a one-stop shop would allow United to win a higher percentage of big corporate travel contracts because Apollo could help those companies better track and control their travel expenses.

The corporate name was supposed to be a fusion of "allegiant" and "aegis", and what either of those two concepts had to do with travel no one really understood... 

The corporate name was supposed to be a fusion of "allegiant" and "aegis", and what either of those two concepts had to do with travel no one really understood... 

1983 route map - note the co-promotion of Westin Hotels

Yet United’s management still felt vulnerable: while it was the largest U.S. domestic carrier, it had nearly no high-margin/high-prestige international service, outside of its two Asian routes. The U.S. government had still not approved any of United’s other requests for Pacific and Atlantic routes, and so it found itself feeding its competitors, especially at its San Francisco and Los Angeles hubs.

 

Pan Am's Pacific system in 1982-1984

Pan Am's Pacific system in 1982-1984

Let’s make a deal

So when Ed Acker of Pan Am called Ferris in February 1985, both sides were hungry for a deal. Ferris, in fact, had been proposing an asset purchase for three years. Negotiations went on in secret for a month; neither sides’ creditors or investors were aware until the deal was announced at a joint press conference in April. Wall Street “was taken by surprise” but analysts quickly said both airlines would benefit.

For about $750 million in cash, United would pick up all of Pan Am’s routes to East Asia and the South Pacific, plus 2,700 staff and 18 aircraft (11 Boeing 747SPs, 6 Lockheed L1011-500s, and one McDonnell Douglas DC-10-30 – though United would give Pan Am 5 747-100s). Given that Pan Am was grossing about $770 million and making about $55 million in profit off its Pacific division, it’s clear that United made a very good deal.

Photo by Pedro Aragão via Wikimedia Commons, CC 3.0 license

Photo by Pedro Aragão via Wikimedia Commons, CC 3.0 license

Pan Am bought some time with the asset sale – on the positive side, they started to bring on Airbus A300s for Caribbean and transcontinental flights, and Airbus A310s for lower-traffic European routes, made a more-serious attempt to build domestic connecting traffic into New York JFK, and started a Washington-New York-Boston air shuttle. On the negative side, they were still carrying too much debt, the fleet was still 747-heavy, and competitors were moving much faster to claim market share. Pan Am would end up selling off its crown jewel of flights and landing rights to London’s Heathrow Airport to United in 1990, but still couldn’t cut its way to viability. After the Lockerbie bombing of a Pan Am 747, the airline attempted to form an alliance with Delta Airlines, but that deal unraveled and the carrier shut down entirely in December 1991.

Pan Am's final route map.

Pan Am's final route map.

United’s management was feeling great about the Pacific deal in April 1985 – but they’d left their pilots without a contract for two years. So in May 1985, the pilots and then the flight attendants went on strike for a month, shutting the carrier down nearly completely. United’s agreement to end the strike did not resolve the issues, but rather created a two-tier contract where newly-hired pilots would never see the wages or benefits that older pilots had earned. Instead of easing labor-management relations, the work environment only grew more tense. The pilots’ union considered Ferris an enemy.

Over the next two years, Wall Street would also find complaints with Ferris’ performance, as his vertical-integration strategy failed to deliver superior returns – leading the pilots’ union to ally with investment fund managers and attempt a takeover of the whole company.  Soon, Hertz and the hotels would be sold off, and Ferris would be out of a job. 

 

The new system

The pilots’ strike was a drain on cash and management attention, leading to delays in closing the deal. However, by February 1986 the Pan Am aircraft, gates, staffing, landing rights, and contracts had all been signed over, and after quick application of decals to the fleet, on February 11 United began operation on its new division.

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  Photo by  FotoNoir  via Flickr, CC 2.0 license  

Photo by FotoNoir via Flickr, CC 2.0 license  

Pan Am's former aircraft were given seating updates to match the "Royal Pacific" standard that UA had rolled out when they started Seattle-Tokyo/Hong Kong flights in 1983. (Click for seat maps of the United 747SP - 747-200 - and L1011-500.)

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  Photo by  FotoNoir  via Flickr, CC 2.0 license  

Photo by FotoNoir via Flickr, CC 2.0 license  

United would continue to suffer labor pains and incur debt issues in the 1990s despite continued growth and further asset buys from Pan Am, but for this story, the Pacific Division became a point of pride for the company and marked its ascendance to becoming a true global carrier. Through reorganizations, the crisis after 9/11, and the merger with Continental, these routes only grew in importance to the carrier.

March 2017 routes from United's Hemispheres Magazine

United - Transpacific Inaugural April 1983

Executives at United’s headquarters just outside Chicago must have been beyond frustrated in the early 1980s. They were the biggest airline in the U.S., yet for twenty years had been rejected to start international services, time and again. And not having international experience meant they weren’t getting preferential status when new route authorities were opened; a classic catch-22. United had made a big filing with the US Civil Aeronautics Board in the late 1960s to start Asia service, but not only were they rejected, their duopoly with Pan Am to Hawaii was broken apart and they had to compete with Western and Continental on what had been their lucrative Los Angeles/San Francisco-Honolulu traffic!

Northwest Orient and Pan Am had Asia; Pan Am and TWA had Europe and the Mideast; Braniff and Pan Am had Latin America. Braniff, Delta, and even little Air Florida had received European routes in the late 1970s – and Braniff had been granted flights to Korea, Hong Kong, and Singapore! When both Braniff and Air Florida had gone out of business, none of the available authorities went to United.

Photo by Ralf Manteufel via Wikimedia Commons, GNU 1.2 license

Photo by Ralf Manteufel via Wikimedia Commons, GNU 1.2 license

The Japanese government in the 1970s and 1980s took a dim view of letting US carriers expand services to Tokyo any further; while Japan Air Lines still had the largest single-carrier market share across the Pacific, agreements after World War II allowed both Pan Am and Northwest Orient generous “fifth-freedom” rights to pick passengers and freight up in Japan and take them to other points in Asia, and this put JAL into serious competition on both sides of the island chain. While Japan also had similar rights beyond the USA, it was only used on one route to Brazil, so they did not consider the treaty to be well-balanced.

JAL wanted to fly to additional points in America, but was not keen on the prospect of giving NWA or Pan Am an even greater assortment of cities to fly to Tokyo from as a result of negotiations with the US government. Talks went on for years, until someone had the idea to suggest giving United Airlines a route to Japan. United would not have “fifth-freedom” rights … and United’s massive domestic operation could put NWA and Pan Am at a tactical disadvantage. Both elements appealed to the Japanese side, and it was agreed: United would get a Seattle-Tokyo slot, and JAL would get access to both Seattle and Chicago. And Northwest would go from having a monopoly on the Seattle run to having two strong competitors in one blow.

Once the US government agreed on Japan’s conditions, United lobbied hard to pick up landing rights at Hong Kong, where there was an unused daily frequency after Braniff’s collapse. Hong Kong’s government was agreeable, but United would have to fly there without stopping in Japan.

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  Photo by  clipperarctic  via Flickr, CC 2.0 license

Photo by clipperarctic via Flickr, CC 2.0 license

United’s fleet of seventeen 747-100s, delivered from 1970-1972, would be stretched thin on services to Hawaii as well as the Tokyo flight, but the airline’s large and more-recently built fleet of DC-10-10s was the “lightweight” version – enough range to handle flights to Hawaii or from California to New York, but not nearly enough to make Japan, much less another four hours’ flying to Hong Kong.

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  Photo by  contri  via Flickr, CC 2.0 license

Photo by contri via Flickr, CC 2.0 license

The solution came from across the northern border: Vancouver-based carrier CP Air was willing to lease United three longer-range DC-10-30s, and this would be just enough to cover the schedule. Plus, United was quite familiar with the DC-10 so crew training for -30 version would be minimal.

On April 2, 1983, United started its Tokyo service with six weekly nonstops from Seattle/Tacoma, daily except Tuesdays, and on Tuesdays they offered a nonstop from Portland, Oregon, using the 747-100 on all flights. The aircraft would sit at Tokyo-Narita for about four hours before returning to the USA.  Both the outbound and return flights terminated at Chicago-O’Hare.

Click to enlarge this route map

Then on May 28, 1983, United began Seattle-Hong Kong nonstops with daily frequency, with both inbound and outbound flights terminating at New York-JFK. The DC-10-30 would arrive Hong Kong’s Kai Tak airport at 6:15 pm and not depart until 1:45 pm the next day – while HKG was happy to have United fly there, the one-runway airport had severe congestion and these were the best times United could get. But even if UA could get a later landing slot and a morning takeoff slot, they’d still need three aircraft to run the routing, and the arrivals and departures at Seattle worked well for connecting traffic from across United’s system, as they had a large operation at SEA in the 1980s.

Outside of a few flights to Toronto, Vancouver, Cancun/Cozumel, and the Bahamas, the Tokyo and Hong Kong routes from the Pacific Northwest would be all the prestige international flying United would do for the first half of the 1980s. But in 1985, UA’s management began quiet negotiations with Pan Am that would change the carrier’s fortunes…

 

Also see:

http://m.csmonitor.com/1983/0328/032837.html

and other weninchina resources - - -

Our Transpacific Flying folder on Pinterest

Our Tokyo-Narita airport guide

Our Hong Kong airport guide

Our Seattle/Tacoma airport guide

Our Portland airport guide

Our Chicago O’Hare airport guide