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Juan Trippe and Pan Am, Part II
Brian Trumbore
President/Editor, StocksandNews.com

As we pick up our story on Juan Trippe and Pan Am, around the time of World War II, Trippe had been trying to crack the European market. While FDR didn't care for Trippe, personally, he recognized that Pan Am wasn't about to go away, and the U.S. needed a trans-Atlantic presence, so Roosevelt assigned Secretary of State Cordell Hull to work out a deal with Britain's Imperial Airways to pool passenger and cargo traffic.

Trippe took it one step further, though, gaining exclusive rights to the Azores for 15 years (you'll recall that the first trans- Atlantic flights using the southern route weren't non-stop and needed the Azores for refueling). But this violated U.S. antitrust laws, a constant battle as we'll see, so Trippe had to back down.

As war approached, Trippe was making flights to Europe using Boeing Clipper pontoon ships, but still it was mostly for mail, and a few passengers. The inaugural flight was June 28 from Long Island and carried just 22, each paying $375 (one way).

Then the war hit. But this had little to do initially with Pan Am's troubles that first winter which saw only 40 of 87 scheduled trans-Atlantic flights completed due to the weather. Trippe was actually removed as CEO briefly in '39, though he was back less than a year later.

Before Pearl Harbor, FDR learned of Trippe's renewed attempts at a monopoly on overseas business. Trippe wanted to gain 'flag carrier' status and FDR was miffed. At the same time, the President had little choice but to work with him. "In government and in war, you have to use scoundrels," he said. Presidential aide Harry Hopkins chimed in, "I have never liked the idea of Pan American having a world monopoly of our airlines."

It was the War Department that came up with a solution, however, in awarding contracts not just to Pan Am, but the other carriers as well. While Trippe received the bulk of the business, American and Trans World were granted some routes to London, while United got the Pacific, Eastern and Braniff Latin America.

General George Marshall wasn't a Pan Am fan, either, noting "the recurring resentments of the British to Pan Am's expansion into the Middle East and the fact that Pan American tends to regard a military effort as a commercial operation."

Historian Robert Sobel describes what happened next.

"In 1943 the 19 airlines that had Air Transport Command (ATC) contracts were called to Washington for a meeting and were told the government had no intention of remaining in the transport business after the war. It was up to the airline executives to determine the shape of this part of the industry. Trippe had little to fear from them. From the vantage point of 1943, transcontinental airline growth seemed a chimera. United had commissioned a study, which concluded that few first-class steamship passengers - believed the only possible customers - would find the long, chancy passage appealing. After the war, thought United's economists, 43 passenger planes would be needed for the North Atlantic run. Since eight countries had indicated interest, that came to an average of little more than five per country. Perhaps two American companies could make a profit given such numbers, and Pan Am, the most experienced and best known, would certainly be one of these. United had a coast-to-coast route system, a natural feeder for travelers from other parts of the country wanting to fly to Europe, but declined to submit a bid. The domestic business seemed more appealing than anything trans-Atlantic passage could offer."

[Source: "When Giants Stumble"]

[I thought you'd enjoy what I imagine later became a Harvard Business School case study.]

Before the war the European Airlines had formed an alliance to set fares, including Pan Am as a "junior member," since under U.S. law Pan Am couldn't fix prices. But Trippe established the International Air Transport Association (IATA) for oceanic routes, and this organization fixed prices and restricted entry. Well, it was now a post-war world, and while Washington was against Trippe's move, Britain accepted competition into London so the U.S. said, O.K., do what you want, at least temporarily.

Not that Trippe was interested in charging huge fares, mind you; he actually wanted to lower prices to encourage more travel. So it went something like this.

Trippe wanted the $375 fare to be lowered to $275, while the European flag carriers sought to raise the trans-Atlantic fare to $572. In the end, Trippe convinced them to keep it at $375.

Around this time Howard Hughes entered the scene as the new head at Trans World Airlines. Hughes had deeper pockets than Trippe, and a strong route between New York and Los Angeles, along with faster land planes, forcing Trippe to scuttle his Clipper pontoon craft.

Here is the 1946 financial breakdown for the major carriers in the U.S.

Pan Am.revenues of $113 million, profit $3 mm
TWA.revenue $57 mm, loss $14 mm
United.revenue $65 mm, profit $1 mm
American.revenue $68 mm, loss $500,000
Eastern.$42 mm, profit $3 mm

One thing about Juan Trippe, he was a visionary, and after the war he began constructing hotels, Intercontinentals, for Pan Am's travelers. He even got the government to loan him 90% of the construction price. Trippe sought to bring the enjoyment of travel to the average person instead of just a privileged few.

"That person's holiday has, in the past, been the prisoner of two grim keepers - money and time," he said. "Their enjoyment of the world has been circumscribed by the high walls of an economic jail. We can level these prison walls only by bringing travel costs way down and by shortening travel time."

Of course after World War II travel of all kinds boomed, trans- Atlantic included. Ocean liners were also doing a big business and Trippe urged Douglas, Boeing and Lockheed to come up with planes that could make the trip non-stop. Washington again supplied the aid, this time to the manufacturers. [But it wasn't until 1957 that airline traffic exceeded ocean liners.]

Having earned $10 million on $238 million in revenue in 1955, at the end of the year Juan Trippe put in a jet order for $269 million; 21 Boeing 707s and 24 Douglas DC-8s, a gigantic deal which officially launched the commercial jet age. Boeing and Douglas raced each other to see who would be first, with Boeing winning in 1958. Its reconfigured 707s had a range of 3,000 miles and a top speed of 600 mph, though they still only carried 60-120. Douglas launched its DC-8s two years later and they had a longer range. Both models were in the $5 million range. You can imagine that all of Pan Am's competitors had to follow suit. Not a bad time to work on either assembly line, I think you'd agree.

By 1966, Pan Am was operating 115 planes, with revenue of $841 million and $72 million in profits. Juan Trippe, now 67- years-old, moved the company headquarters to a new building behind Grand Central Station in New York, installing a heliport on the roof for his top clients. It was called the Pan Am building, and the big, bold letters at the top could be seen all over New York.

As for the stock, on a split-adjusted basis Pan Am traded at $10 in late 1962, but by mid-1966 it was up to $40. Then the roof caved in.

I'll have the conclusion of our story next week, July 11.

Sources:

"When Giants Stumble," Robert Sobel
"The New York Times Century of Business," Floyd Norris and Christine Bockelmann
American Heritage / T.A. Heppenheimer

Brian Trumbore

BUYandHOLD does not recommend any securities. The securities mentioned above are being used for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.

 

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