Pan American World Airways, Inc. History

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Incorporated: 1927
Dissolved: December 1991

Company History:

Over the course of its over six decades in operation, Pan American World Airways, Inc. was one of America's most widely recognized airlines. The firm's pioneering flights to Europe, Asia, and South America helped earn it an important role in aviation history. Under the direction of Juan Trippe, the firm encouraged long distance air travel and secured the technology necessary to achieve international flights. At one time, the company moniker was one of the most recognized trademarks in the world, second only to Coca-Cola. But after eluding total financial ruin several times in the 1970s and 1980s, a combination of bad management, high debt, poor employee relations, and just plain bad luck brought the airline's demise in December of 1991.

The architect of Pan Am's prominence, and ironically of its later decline, was a man named Juan Terry Trippe. Upon graduation from Yale in 1920 Trippe worked for a year in his father's bank. Soon thereafter he left the bank in order to pursue a career in the airline business. When his father died suddenly, Trippe used his inheritance to purchase nine Navy "Jennys" for a new endeavor, Long Island Airways. Unable to generate enough business, the company failed.

Trippe and two wealthy friends from Yale then organized a second airline after the passage of the Kelly Air Mail Act. Their company, Colonial Air Transport, won the first airmail contract route between New York and Boston. They purchased two three-engine Fokker airplanes the following year which enabled them to transport passengers as well as mail. A dispute among stockholders soon resulted in the sale of the company to what later became known as American Airlines. Trippe and his partners were excluded from both the decision and their airline.

Undaunted, Trippe's group purchased Aviation Corporation of the Americas with the intention of bidding on the Key West-Havana mail route. In 1928 the company merged with Pan American Airways and Atlantic, Gulf and Caribbean Airways. The new company retained the Pan American name and instituted the first scheduled international commercial destination, to Havana, Cuba.

Passengers' often well-founded fears of flying high above 90 miles of open water made it difficult for Pan Am to book all eight seats on each flight. The bravado of the airline's pilots didn't help: some were known to enter Cuban bars and dare American tourists to fly back to Florida. In Miami the company tried a more subtle tack: "Fly with us to Havana, and you can bathe in Bacardi rum four hours from now." One of Pan Am's three Fokker airplanes was, in fact, lost in the ocean in 1928. Nonetheless, Pan Am's embrace of such new technologies as directional radio, navigational instruments, and meteorological measurement helped make long-distance air travel safer and more popular.

Trippe was now planning Pan Am's expansion in the Caribbean. Due to a lack of airports in the region he supported the development of the water-landing Sikorsky S-38 "flying boat." Pan Am purchased 25 of the five-ton airplanes, which could travel 100 miles an hour and had a range of 300 miles. In anticipation of the U.S. Postal Service opening several new routes, Trippe had his flying boats make survey flights beyond Cuba over routes that, at his insistence, were to be selected for airmail contracts. He also dispatched advance men to secure landing rights, mail contracts, and other concessions so that when the post office finally invited airmail bids Pan Am would be the preferred choice. In this way the company secured routes to Puerto Rico, Panama, and other points throughout the Caribbean.

In 1930 Postmaster General Walter Brown compelled the merger of Pan Am and its biggest airmail contract competitor, the New York, Rio and Buenos Aires airlines. The union doubled Pan Am's fleet and earned it the extremely lucrative South American East Coast airmail contract. These routes served as a springboard for future business and promoted Pan Am to the world's largest airline and the "chosen instrument" for flying the U.S. flag abroad.

Pan Am's use of flying boats helped consolidate its coverage of the Caribbean and turned its attention to traversing the oceans. The airline used the newly developed China Clipper (a Martin M-130), with a range of 2500 miles, to transport passengers and mail from California to the Orient. Overcoming huge obstacles of diplomacy, financing, and engineering, Pan Am established service to Europe in June of 1939 using the larger and faster "Dixie Clipper" aircraft.

Pan Am's aeronautical pioneering was quite costly. Trippe was said to have been obsessed with the idea of "having a plane in every airport in the world." This left little money for dividends and, as a result, the stockholders voted to replace him with his old friend and associate "Sonny" Whitney in March of 1939. Whitney, however, was an ineffective manager and proved unable to maintain control of the company. Less than a year later Trippe was asked to return.

As the only established American international airline, Pan Am played a major role in the war effort when it placed itself at the disposal of the U.S. government in the early 1940s. In November of 1940, the company signed a contract with the War Department providing for the construction of airbases and remote supply, radio, and weather stations. In October of 1942 the airline established a war transport service from the United States across the South Atlantic to West Africa and from there to points in the Middle East. Pan Am was rewarded handsomely for having devoted up to three-quarters of its resources to the armed forces during World War II. When the war ended the company's hegemony over international air routes was at its peak.

Trippe hoped to maintain the profitable relationship forged during the war between Pan Am and the federal government through the creation of one official airline that would compete with foreign carriers. His proposal that Pan Am be made a regulated monopoly (not unlike utility companies) was rejected by Congress, however. Furthermore, the government opened the door for the competition Pan Am had never previously experienced. With an eroding market share Pan Am looked to the future, commissioning the development of Boeing's first jetliner, the 707. The delivery of the first 15 of these airplanes precipitated the jet age and propelled Pan Am once again to an enviable competitive advantage.

In the early 1950s Pan Am expanded its transportation holdings through the acquisition of American Overseas Airlines. The company also diversified into hotels, real estate, and corporate jet aircraft, and contracted with the National Aeronautics and Space Administration (NASA). These extracurriculars proved profitable, particularly a New York real estate deal involving the construction and leasing of the Pan Am building, which was dedicated in 1963.

But as the 1960s wore on, the company again lapsed into poor performance as a result of overextension. By the time Juan Trippe announced his plans to retire in the latter years of the decade, his goal of having a plane in every airport in the world had brought about a sprawling 81,430-mile route system. Competition from government-subsidized overseas airlines intensified. Trippe chose Najeeb Halaby, former head of the Federal Aviation Administration, to succeed him in 1969. Halaby found himself presiding over a firm so decentralized that he characterized it as "an airline without a country." Worse, Pan Am was nearly bankrupt. Some thought the system could not be maintained without the award of a government subsidy or a compensatory monopoly, neither of which were likely. The fuel crises of the 1970s only exacerbated existing problems. Pan Am chalked up losses of $364 million from 1969 through 1976, and accumulated over $1 billion in debt.

With the help of tax-loss credits, Pan Am made its first profit in nearly a decade in 1977. The man responsible for this was William Seawell, who was brought in to replace Halaby in 1972. Unable to obtain subsidy relief from either the Civil Aeronautics Board or the White House in 1974 and 1975, or possible funding from the Shah of Iran, Seawell instituted austerity measures in 1976 and renegotiated the company's debt. Abandoning Trippe's grand strategy, he reduced the system 25 percent by severing money losing services. He reduced personnel by approximately 30 percent and approved an offer by employees to accept a wage cut. By these measures complete financial ruin was averted.

Late in 1979 Pan Am received approval for the $437 million acquisition of National Airlines, with which Seawell hoped to bolster Pan Am's relatively weak domestic operations. But the purchase, later criticized as too expensive, was also poorly timed. The early 1980s ratification of Airline Deregulation Act triggered sometimes cutthroat competition from new domestic and foreign carriers. The company was once again on the brink of financial ruin, this time as a result of fiscal overextension. Only by selling a large portion of its assets, including the Pan Am building headquarters, was it able to avoid bankruptcy.

Edward Acker became chairman of Pan Am in September of 1981. This cautious but optimistic manager continued to divest Pan Am's assets. On September 14, 1984, Pan American Airways created a holding company called Pan Am Corporation to assume ownership and control of the airline and the services division. Although the fast-growing Pacific market was one of the few profitable areas Pan Am could rely on, the company was so strapped for cash that it sold its Asian routes to United Airlines for $715.5 million in 1985.

In spite of the divestment of most of the firm's most important assets, Pan Am's domestic division alone lost over $1 billion from 1980 to 1987 and accumulated $914 million in long-term debt at the same time. Several groups--including Kirk Kerkorian, a Beverly Hills financier; Chicago's Pritzker family; and a group of investors led by former Navy Secretary John Lehman--made takeover overtures, but a new chairman, Thomas G. Plaskett, turned them away. In 1988, Plaskett negotiated $180 million in concessions from Pan Am's five unions&mdash-ough to get the airline through what would become the harshest winter of its history.

On December 21 of that year, Pan Am's flight 103 en route from London to New York, was demolished by the blast from a terrorist-planted bomb over the town of Lockerbie, Scotland. All 243 passengers and 16 crew members were killed and another eleven people on the ground were crushed by debris. This human tragedy soon began to make a significant impact on the already-struggling airline. Lawsuits on behalf of the victims' relatives found Pan Am and its subsidiary, Alert Management Systems Inc., guilty of willful misconduct in 1992. Damages, which would be assumed by the airline's insurer (the United States Aviation Insurance Group), totaled hundreds of millions. But Pan Am's insurers continued to appeal the decision into late 1994 and refused to make any compensation to the victims' families.

In the meantime, rising fuel costs and increasing competition in the United States and abroad forced Plaskett to layoff 2,500. To raise the cash necessary for continued operation, Plaskett and the board of directors decided to sell the firm's only consistently profitable subsidiary, Pan Am World Services, as well as an important German route, in 1990.

That fall, Plaskett worked to open all Pan Am's options. Although he was, by this time, actively seeking a merger partner, he also optimistically announced an eight-point plan to improve service, marketing, liquidity, and employee relations with the ultimate goal of turning a profit in 1990. The divestment of hubs at Heathrow Airport in London and Washington, D.C.'s Dulles International Airport brought in $290 million, but were not enough to keep the company from seeking bankruptcy protection on January 8, 1991.

After decades of struggling to survive, let alone prosper, Pan Am was by this time left with few options. Having sold most of its assets, opportunities for divestments were seriously limited. In spite of his weakened bargaining position, Chairman Plaskett resolved to sell all the airline, including its employees, or none of it. But after months of negotiations involving most of the industry's largest players, Pan Am's creditors lost patience with Plaskett's pace. Midway through 1991, they voted to accept an offer of $621 million in cash and the assumption of $668 million of Pan Am's liabilities from third-ranking Delta Air Lines Inc.

Delta's acquisition of the majority of Pan Am's international route system catapulted it from a 1990 ranking of 23rd among the world's airlines to a position among the top ten. The addition of most of Pan Am's North Atlantic routes as well as its American and German hubs gave Delta more European destinations than any other American carrier. The purchase also gave Delta a serious case of "corporate indigestion:" it posted a $500 million loss that year. Still, Delta chairman and chief executive officer Ronald Allen stood behind the decision. In August of 1992, he told Terry Maxon of the Journal of Commerce and Commercial that "A lot of people may point to the Pan Am acquisition and say, 'Oh, that's why Delta's having so many problems.' That's not true. We had some surprises with that, but overall that's gone very well."

Instead, Allen blamed the same industry forces that brought about Pan Am's December 4, 1991 demise: high costs, fare wars, and inadequate traffic due in part to economic recession and fear of terrorism. By the time Pan Am filed for bankruptcy protection, two other major competitors, Eastern and Continental (both subsidiaries of Continental Airlines Holdings) were also in the midst of Chapter 11 reorganizations, and Trans World Airlines, Inc. joined that list early in 1992. United Airlines, American Airlines, and Delta were able to take advantage of their competitors' weaknesses and together amassed over half of the U.S. market in the early 1990s. Some analysts surmised that Pan Am's failure even benefited struggling carriers like TWA and Continental by reducing industrywide overcapacity.

Pan Am's creditors auctioned off its famous logo, a blue globe, for $1.325 million in 1993. The buyer, Charles Cobb, hoped to license the well-known symbol to travel companies or airlines. Although Pan Am's dissolution was perceived by some observers as just another business failure, others mourned the airline as they would a respected colleague. In a February 1992 editorial for Air Transport World, James P. Woolsey called for "a moment of respect" and praised Pan Am's pioneering spirit, charismatic leadership, and extraordinary perseverance.

Pan American World Airways, Inc. History

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