Braniff International Suspends Flight Operations Summary

  • Last updated on November 10, 2022

Braniff International Airways halted all flight operations in May, 1982, unleashing fears that other struggling airlines would also go bankrupt. The airline paid a heavy price for aggressively expanding during an era of deregulation.

Summary of Event

On May 12, 1982, Howard Putnam, chairman and chief executive of Braniff International Airways, was in New York City dealing with an urgent labor matter when he received word that Braniff, the eighth-largest airline in the United States, was broke. There was not enough cash to pay for fuel, buy food for passengers, or cover the week’s payroll for the company’s 9,500 employees. Putnam quickly returned to the firm’s corporate headquarters in Dallas, Texas, and met with his top executives. The decision they made that night sent a shock wave through the nation. Braniff, an airline pioneer with fifty-four years in the business, simply stopped flying. Thousands of passengers were stranded, and all but 225 of the airline’s employees were laid off. The following midnight, Braniff formally petitioned federal judge John Flowers for protection under Chapter 11 of the federal bankruptcy laws. Braniff’s was the first failure of a major carrier since the barnstorming era of the 1920’s and 1930’s. Airline industry;Braniff bankruptcy Bankruptcies;Braniff International Airways [kw]Braniff International Suspends Flight Operations (May 12, 1982) [kw]Flight Operations, Braniff International Suspends (May 12, 1982) Braniff International Airways Airline industry;Braniff bankruptcy Bankruptcies;Braniff International Airways [g]North America;May 12, 1982: Braniff International Suspends Flight Operations[04860] [g]United States;May 12, 1982: Braniff International Suspends Flight Operations[04860] [c]Organizations and institutions;May 12, 1982: Braniff International Suspends Flight Operations[04860] [c]Transportation;May 12, 1982: Braniff International Suspends Flight Operations[04860] [c]Trade and commerce;May 12, 1982: Braniff International Suspends Flight Operations[04860] [c]Business and labor;May 12, 1982: Braniff International Suspends Flight Operations[04860] Putnam, Howard Lawrence, Harding Flowers, John Pritzker, Jay A.

The company’s problems began in 1978, when airlines were deregulated and more than one thousand domestic routes went up for grabs. Harding Lawrence, Braniff’s chairman at the time, applied for more than six hundred routes, most of them outside the airline’s traditional areas of the Southwest and Southeast. Rapid expansion added routes to Asia, Europe, and the Middle East. Had fares and fuel prices remained stable, such an expansion of service might have paid off handsomely; instead, the opposite happened. Deregulation encouraged the airlines to embark on a price war of fare cutting, and fuel prices simultaneously skyrocketed. Braniff found itself vastly overextended. In 1979, its losses totaled $44.3 million; by 1981 they had grown to $160.6 million. Even more dangerous, its long-term debt climbed to a staggering $733 million. In December, 1980, Lawrence resigned as Braniff’s head and was replaced first by John J. Casey, Braniff’s vice chairman, then by Howard Putnam in September, 1982.

Braniff tried various means of reversing the worsening financial trends. It came up with an attractive new “Texas Class” fare package designed to lure passengers away from its biggest rival, American Airlines. It leased most of its Asian routes to Eastern Airlines for about $30 million. Creditors agreed to extend a moratorium on debt payments, and employees made cost-cutting concessions to save the carrier.

In the end, the downward pressure proved too strong to reverse. Even though Braniff had reduced its costs to a competitive 7.24 cents per mile by March, 1982, ticket sales plummeted in April and May as travel agents, unsure of the airline’s chances for survival, steered customers to other carriers.

Once the decision to shut down was made, Braniff moved quickly and quietly to preserve its assets. Its fleet of planes was parked at the airline’s Dallas-Fort Worth operation hub only thirty-six hours after the decision was made to shut down. Thousands of passengers ticketed on later Braniff flights were forced to scramble for alternative transportation. Braniff’s creditors were angered by the secrecy surrounding the decision to suspend business activities.

Following the bankruptcy petition, Judge Flowers appointed an administrator who, together with Putnam and other top Braniff executives, worked to put together a reorganization plan to salvage the debt-laden airline. On Monday, October 18, 1982, Dallas newspapers reported that Braniff and Pacific Southwest Airlines Pacific Southwest Airlines (PSA), a pioneer intrastate airline in California, tentatively had agreed to a plan to fly thirty Braniff jets under PSA colors. By mid-November, most of the obstacles to the PSA deal had been cleared, with the exception of problems with the labor unions. PSA refused to incorporate Braniff pilots, flight attendants, or mechanics into the PSA workforce on the basis of their Braniff seniority, and the wages offered to them were significantly lower than those they had earned with Braniff and considerably lower than PSA’s normal wage scale. The company refused to bargain with the former Braniff employees. The offer was turned down, and the deal was off.

On December 2, Judge Flowers threw out the machinists’ contract with Braniff and reinforced a precedent that a corporation could rid itself of union contract obligations in bankruptcy if the unions refused to agree to a reasonable offer. On December 9, a new deal was cut with PSA. PSA planned to start a subsidiary division that would lease Braniff airplanes and slots and hire mostly former Braniff employees. This plan made it over all the hurdles except one the U.S. Fifth Circuit Court of Appeals in New Orleans, which ruled that Judge Flowers could not order the return of Braniff’s landing slot to the new entity. The second PSA deal therefore fell through.

On April 6, 1983, Putnam received word of an offer from Texas Air Corporation to purchase all of Braniff’s remaining 727’s. If the sale was approved, Braniff would have no more planes to fly. Jay A. Pritzker, chairman of Hyatt International Corporation, Hyatt International Corporation offered an alternative. He offered to invest $70 million and made a promise to operate the airline under the Braniff name. Also at stake in the offer was $350 million in tax write-offs that Hyatt could use if it acquired more than 80 percent of Braniff’s stock. On March 1, 1984, Braniff launched its first scheduled flight in more than twenty-one months, under Hyatt ownership. Two thousand Braniff employees had been rehired. The company’s strategy was to carve out a new market niche with superior service from highly motivated people.

The Braniff story did not have a happy ending. Efforts to save Braniff were unsuccessful. In August, 1991, Braniff International Airlines filed for protection from creditors under Chapter 11 of the federal bankruptcy code. That airline was the third to carry the Braniff name; it lasted only thirty-seven days after beginning service. All three airlines filed for bankruptcy, and the two previous carriers had ceased operations.

Significance

In 1978, deregulation in the airline industry promised many things for airline managers and consumers. Managers would be free to restructure their route networks and thus gain control over product lines. They would also be able to set fares without having to get approval from the Civil Aeronautics Board. Consumers would benefit by paying less for travel and enjoying a wider choice of flight options. Braniff International Airways

Consumers did benefit. Although airline expenses increased by 58 percent during the first five years after passage of the Airline Deregulation Act of 1978, Airline Deregulation Act (1978) fares rose only 48 percent. The number of flights rose slightly. Predictions that smaller markets would be abandoned did not become a reality; rather, when large carriers moved out, commuter carriers moved in, often offering more flights and greater flexibility.

The impact of deregulation on the airline industry, however, was largely unfavorable. Airline industry;deregulation The Civil Aeronautics Board took its first tentative steps toward deregulation in 1976. Through 1978, when President Jimmy Carter Carter, Jimmy [p]Carter, Jimmy;airline deregulation signed the Airline Deregulation Act, the move toward deregulation coincided with a booming general economy. Soaring traffic provided a perfect climate for new airlines to be created, for small airlines to become big ones, for regional airlines to go nationwide, and for all airlines to concentrate their assets where they could find the greatest return.

One year after deregulation became official, the airline industry hit a financial slump. Profits of American Airlines fell 97 percent, and Trans World Corporation, owner of TWA, posted a 52 percent drop. Braniff lost money after a $15 million profit in 1978. Such results indicated that deregulation was about to get its most severe test.

Unfortunately for the industry, economic recession came before the airlines had a chance to complete their transition to deregulation and settle into the new environment. The recession and increases in fuel costs were very disruptive. They made it increasingly difficult to maintain profit margins on existing service. Increased competition combined with these adverse trends led to instability and a high failure rate. In 1978, the major carriers earned $1.2 billion in profits. In just three years, this figure plummeted to a $672 million operating loss. Economic conditions and the fuel crisis in 1978 were beyond the airline’s control, but many managers in the industry also made strategic errors. The most prominent examples were those at Braniff International.

Like many airlines, Braniff was a proponent of deregulation. Braniff executives saw deregulation as an opportunity to apply some of the aggressive marketing techniques that Southwest Airlines and others had used against Braniff in the past. Braniff engaged in vigorous price competition and pursued a policy of building national market share by entering into many diverse areas. Braniff was the first to apply for automatic market entry for unused routes. It soon discovered, however, that other carriers were not flying these routes because of a lack of traffic.

In expanding aggressively, Braniff encountered huge start-up costs and low passenger load factors. Braniff planned its expansion into new markets but failed to protect its existing markets. Deregulation provided an environment for Braniff to succeed, but external economic factors led to the downfall of the company. The tragedy of Braniff was a dramatic reminder of the perils of taking airline freedom too far. In hindsight, a better plan of action would have been to expand from strength and focus on gaining a larger market share on existing routes. This strategy would have allowed Braniff to maintain cost control and yet would have offered enough flights per route to adequately cover the market.

The airline’s failure surprised no one, least of all the banks, life insurance companies, and other institutions to which Braniff owed $733 million. Employees had forgone half of their pay for one week earlier that year, and Braniff had not earned a profit since 1978. Most analysts, however, expected Braniff to last at least through the summer of 1982, so that it could grab vacationing traffic with cut-rate fares. Its passenger load factor, a measure of how much money a given flight or group of flights is making, had dropped to 45 percent, but Braniff’s flights needed 70 percent load factors to meet cash flow requirements.

Even though expected, Braniff’s bankruptcy intensified fears that other large corporations would be headed for similar fates. It was a reminder of the poor financial state of a number of the country’s major air carriers in the 1980’s. The airline industry learned that price cuts could not provide a competitive advantage because competitors almost always matched them. Many airline executives failed to anticipate the potential of new rivals to achieve significant cost advantages. Under regulation, the airlines had been insensitive to costs, as regulated fares would cover them. Following deregulation, instead of cutting costs and raising productivity, the airlines relied on increased revenues generated from lower fares to meet their high fixed costs. This situation soon resulted in failure, as airlines all tried to increase market share by cutting prices. The market as a whole did not expand significantly, and market shares changed little. Management at each airline had to turn attention to making their enterprises cost-effective, a lesson Braniff learned too late.

The problems and managerial errors at Braniff International as the airline industry was deregulated provide lessons for other industries moving out of regulation. The collapse of entry barriers almost always produces competition. Competitors will almost always enter when and where profits are highest. Established companies with low costs respond most easily to the price competition presented by newcomers. Companies in newly deregulated industries should avoid the urge to expand; expansion should move deliberately from areas of strength. Braniff erred in expanding into unfamiliar areas and failing to reduce costs. Braniff International Airways Airline industry;Braniff bankruptcy Bankruptcies;Braniff International Airways

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">“The Airlines Hit a Downdraft.” BusinessWeek, November 5, 1979, 104-112. Explains the problems faced by the airline industry after deregulation. Discusses the impact of fuel price increases, fare increases, and load factor declines on the industry. The challenges of reducing costs, increasing productivity, and designing a more flexible management style are also included.
  • citation-type="booksimple"

    xlink:type="simple">“Born-Again Braniff Rolls Toward the Runway.” BusinessWeek, September 19, 1983, 29-30. Discusses Jay A. Pritzker’s efforts to put together a rescue deal for Braniff, the problems that arose in setting up terms, and the results of this reorganization effort.
  • citation-type="booksimple"

    xlink:type="simple">“Braniff Files for Chapter 11.” Aviation Week and Space Technology 135 (August 12, 1991): 49. Discusses the rescue attempts at Braniff, culminating in the 1991 bankruptcy filing. Suggests that problems experienced by the airlines when deregulation occurred were still not completely remedied.
  • citation-type="booksimple"

    xlink:type="simple">Bulban, Erwin J. “Braniff Files for Reorganization.” Aviation Week and Space Technology 116 (May 17, 1982): 29-30. Discusses the impact of the Braniff failure on customers, traffic patterns, service, and landing slots. A brief article that raises some of the concerns of aviation officials after the announcement of Braniff’s filing for reorganization under Chapter 11.
  • citation-type="booksimple"

    xlink:type="simple">Demott, John. “Bankruptcy at Braniff.” Time, May 24, 1982, 62-63. Discusses in detail the events that led up to the failure of Braniff as well as the events that took place when the bankruptcy decision was announced. Explores the reactions of customers, employees, and creditors as it pieces together the reasons behind Braniff’s request for protection under Chapter 11 of the bankruptcy code.
  • citation-type="booksimple"

    xlink:type="simple">Nance, John J. Splash of Colors: The Self-Destruction of Braniff International. New York: William Morrow, 1984. A behind-the-scenes story of the destruction of Braniff International, written by a Braniff pilot. Offers a unique perspective on the events that led to the failure as well as the impact of the failure on Braniff employees.
  • citation-type="booksimple"

    xlink:type="simple">Petzinger, Thomas, Jr. Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos. New York: Times Books, 1995. An in-depth history of the airline industry from the 1930’s to the mid-1990’s. Recommended.

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