Braniff International Airlines
Summary (from the Bankers ’and
Regulators’ perspective):
We break this up into three periods. Period 1: 1965-1970
(“Initial”), Period 2: 1970-1978 (“Profitability”) and 1979-1982 (“Decline of
CEO”).
Bankers- In period 1 Bankers were wise to invest in
Braniff because of: a) History of success of Harding Lawrence at
Continental, b) Braniff was seen as
“reasonable risk” c) Airiline industry was in good shape.
In period 2, Braniff proved it was profitable
and with ROE of 18.2% (1974) and 19.6% ( 1978), it was a leader in the
industry,
In period 3, the question is, WHO are the
Bankers that decided to invest in Braniff? Were they budies with H.L? Or were
they people who were prone on taking unnecessary or excessive risk (as we’ve
seen with Bankers and financiers during the Great Recession)??
Regulators:
CAB: The CAB was seen as complacent and bureaucratic during
the 1960s and 1970s.
·
Regulation generally harmful to the macroeconomy
because of limits on competition and competitive pricing (argue DWL and loss of
economic output when there is strict regulation; ex. Monopoly, oligopoly,
Tariff regulations)
·
Cite economic argument for inefficiency of
regulation in Airline industry
·
Cite Jimmy Carter’s bid for reelection and
attempt to increase economic output, thus advised by economist to deregulate
Airline industry.
·
Cite the 10+ years it took for route to get
approved; thus less people traveled, thus less business (be careful to mention
that many new routes that Braniff took were poor and bad investments because
they were “dry markets.
·
Lawrence: Applied for too many new routes (300+)
without having enough resources!
·
End with quote by:
In 2011, Supreme Court
Justice Stephen Breyer
(who worked with Senator Kennedy on airline deregulation in the 1970s) wrote:
“What
does the industry's history tell us? Was this effort worthwhile? Certainly it
shows that every major reform brings about new, sometimes unforeseen, problems.
No one foresaw the industry's spectacular growth, with the number of air
passengers increasing from 207.5 million in 1974 to 721.1 million last year. As
a result, no one foresaw the extent to which new bottlenecks would develop: a
flight-choked Northeast corridor, overcrowded airports, delays, and terrorist
risks consequently making air travel increasingly difficult. Nor did anyone
foresee the extent to which change might unfairly harm workers in the industry.
Still, fares have come down. Airline revenue per passenger mile has declined
from an inflation-adjusted 33.3 cents in 1974, to 13 cents in the first half of
2010. In 1974 the cheapest round-trip New York-Los Angeles flight (in
inflation-adjusted dollars) that regulators would allow: $1,442. Today one can
fly that same route for $268. That is why the number of travelers has gone way
up. So we sit in crowded planes, munch potato chips, flare up when the loudspeaker
announces yet another flight delay. But how many now will vote to go back to
the "good old days" of paying high, regulated prices for better
service? Even among business travelers, who wants to pay "full fare for
the briefcase?"[5]
Question that remain:
1.
Why should the CEO not take full responsibility?
The article we read implies that H.L
gained the full trust of the Board and Bankers so that he could freely
do as he saw fit in exchange for him taking full responsibility of the risks
involved.
2.
What are H.L past relations? He is described as
a man who could persuade others to do anything? More research needs to be made
to see which Bankers he persuaded to provide him loans in period 3.
3.
Can Bankers have the power to reign in spending.
More research needs to be made to see what the terms of the loans were when
they were made?
a.
Argue volatility: Did Bankers who made this bad
loans have a history of taking on highly volatile projects?
b.
Argue that maybe the Bankers felt that their
losses were so much that they decided to “ride the waves.” Ex. If one invests
10,000$ in a mining company today, and tomorrow one loses 90% of her
investment, she is left with $1,000. Is it more rational for that person to
sell her stock right away and take the $1,000 to cut her losses short, or wait
out the volatility and hope that the stock rises to recover her losses?
Arguments can be made for both.
c.
Metrics- The metrics were good until period 3.
Again, which Bankers invested in period three is a critical question!
d.
CEO wasteful and spendthrifter; Board rubber
stamp approval machine; can’t blame regulators when governances is a complete
joke. Cite CEO of Continental “caution and prudent approach.”
4.
Lawrence not necessarily a “Marketing Genius,”
relied on Wells, Rich, and Greene Co that his wife ran for marketing aide.
Also, overpaid artist to paint his planes during the “End of the Plain Plane”
era.
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