Posts: 47
Joined: Wed Jul 11, 2001 1:15 am

An Airline Story

Mon Oct 17, 2005 11:31 am

A story that involves evil, intrigue and a fictitious airline. Grab a cup of coffee...

A factual book about the railroads written by a professor at Clemson inspired this.

Once upon a time:

Back in the 40's and 50's the railroads looked a lot like the airlines of the 80's and 90's. Passenger traffic had gone to the airlines; trucking was eating into their freight business, and the greedy unions were demanding every dime of profit the railroads were able to eek out in a very tough market. There were a great number of mergers of failing railroads and bankruptcies were common. Sound familiar?

Eventually, the big money behind the railroads had enough. They combined their assets into a few strong companies, concentrated their efforts at hauling coal and other heavy bulk materials that were not economical for trucks to carry and then they did one more thing: they sold off the equipment to their own leasing companies and had the railroads lease it back. They made sure there was never a "bottom line" for the unions to grab by setting lease rates so high that they could not make a profit. Profits disappeared into operational costs of the lease payments. The same people who used to back the railroads owned the leasing companies. This lack of profitability was used to beat up the employees, union and non-union alike. Huge pay cuts were taken; huge sacrifices were made to keep the railroads going. However, there were neither cuts deep enough, nor sacrifices great enough to overcome the design and construction of the equipment leases. Eventually the unions caught on to the scam. The unions had the solidarity to threaten to "park all the equipment until it rusted to the tracks". At this point the jig was up, since parking the equipment was the one threat that the equipment leassors had to take seriously. If the cars didn't run, there was no income. The railroads and the unions came to a "stasis" and today railroad workers are relatively well paid and none have been asked to pay for rising fuel costs, or make other sacrifices in the present business environment despite the rising and falling fortunes of their companies.

Fast Forward to 1985: US Air had taken up the railroad model and many of the other airlines were beginning to sell off their equipment to leasing companies. To sweeten the deal, the US government (in cahoots!) was passing laws that made leasing look more and more like a sound business practice. There were a couple of airlines that were not following suit; the largest of these was Dixie. Dixie owned virtually all of its assets and was "flush" with cash. This low hanging fruit was not missed by a sharp venture capitalist by the name of Gerald Grinkenstein. Grinkenstein and his investment-hungry partners did not have the capital for a frontal attack on Dixie. Dixie had adopted certain poison pill provisions that made a hostile takeover, or buyout very problematical. Instead, they decided on a Trojan horse strategy. Western Airlines was in its death-throes. Western was a victim of market forces, the early effects of de-regulation, and a certain amount of bad management. Grinkenstein and his buddies infused Western with enough cash to dress it up to look good as a merger partner. Grinkenstein had his eye on Dixie. Dixie had its eye on an asset to invest some of its huge stash of cash. Grinkenstein put on a show of "holding out for the best offer", but in retrospect, he probably would have sold out for a nickel in exchange for getting his claws into Dixie. The Western employees thought Grinkenstein was a magician!

When the merger was consummated, Dixie got three things: the Western route system, Gerald Grinkenstein and 13 leased 737-300's. These 13 737-300's were very interesting in that they had been leased to Western when no one else would loan it a dime, but when Dixie acquired these aircraft as a part of the merger, Dixie found the most unfavorable leases that the industry had EVER seen. Dixie couldn't fly these planes 28 hours a day and make a profit with them; the lease payments were stifling. Dixie looked into subleases (no one would touch them), outright sale (prohibited by the covenants) and actually parking them (the leases still had to be paid). In the end, Dixie continued to operate them since they lost "less" money operating them than any other option. If you think the 737-300’s were the worst part of the deal, read on. They were a bargain compared to Grinkenstein.

With the advent of Grinkenstein on the board, there was a rapid change in the make-up of the BOD. The "old guard" Dixie board members (Bedenbarn, etc.) were eased out under the guise of age limits and "the new breed" ushered in. The management team also began a transformation from the “red-white-and-blue-Dixie-True”, to the slick, business school type managers who were well versed in the new ethics and who preached the gospel of "sell and lease-back". Hollis Hairless was the poster child, but the change was rampant in every department at every level. In flight operations, no one personified this new breed better than Harry Algae. The new breed promoted only those who sang from their hymnal and critics were ferreted out and fired. Absolute loyalty to those up the chain and ruthless treatment of those down the chain replaced the “Dixie way”. Ron McDonald was promoted to CEO, not for his expertise, but because he looked like a Deltoid and he was weak and naive. The BOD began to exercise "the plan". Leo Muffins succeeded Ronald McDonald, not because of his expertise at running an airline, but because of his connection with the Easy Credit Corp. A lot of Dixie’s aircraft carry paperwork proclaiming them to be the property of General Easy Credit Corporation.

After the Western merger, Dixie began a series of equipment and facility sale and leaseback deals. The proceeds from these sales were not invested in new equipment and facilities as would have been expected, but instead went into the general fund and eventually disappeared. Despite raising considerable capital through these sales, the fleet count stayed relatively constant leading to the question: What happened to the money? Good question! Even those aircraft that were still technically "company owned", sported leased engines, leased brakes, leased everything. They were flying lease obligations. Lease obligations that Michelle Burnshugh was brought aboard to convert into long-term debt. Under Michelle’s guidance, Dixie’s debt jumped from 8.5 billion dollars to nearly 20 billion dollars. The leassors were protected, but Dixie was mortally wounded. Michelle and her girl friend walked with a fortune and lifetime first class positive space passes. The BOD was very appreciative of her efforts to protect the leassors.

Dixie motored along when the economy was good, it was still able to show profits because of all the sales, but the operating funds were going for equipment leases at a faster and faster pace. By 1995, management, with crocodile tears in its eyes, convinced the pilots that it didn't have the money for a fact it needed concessions. "The plan" was in place and had started to bear fruit. In ten short years, Grinkenstein and his henchmen had made Dixie into their own cash cow.

The rest is recent history. Dixie's overhead has forced it into bankruptcy where management continues to have the upper hand in pressing for wage and benefit cuts for the employees. All the while avoiding the subject of why it is paying $150,000/mo. for each of its MD-88's when the market rate is less than $100,000/mo.

Based on what I’ve written, it isn’t hard to see what the future holds for what was once a moneymaking Dixie Air Lines...Can I point out that USAir which adopted this business model much earlier has shown a profit only 2 out of the last 23 years? Isn't it very strange that in all the airline bankruptcies today, not a single airplane has stopped flying? The leassors will not permit it.
Posts: 6467
Joined: Wed Aug 29, 2001 8:47 pm

RE: An Airline Story

Mon Oct 17, 2005 4:23 pm

Well, Muffin, Grinkenstein... etc etc...

Can I point out that USAir which adopted this business model much earlier has shown a profit only 2 out of the last 23 years? Isn't it very strange that in all the airline bankruptcies today, not a single airplane has stopped flying? The leassors will not permit it.

No it's unpatriotic to stop those planes from flying according to a 250k miles a year on Dixie Air Joe Widget who says that we should continue flying Dixie and telling us to fly BeachBall Air is unpatriotic... And therefore continuing to pay for Dixie's management getting richer on the backs of the Dixie employees...

Mech24... It's funny that there's a CEO to an airline here that is there not because he'd make a good airline CEO but because of his connection to General Easy Credit Corp too! And guess that this "Mr. Plugatyre" of Pigeon air's doing? Probably doing what Muffin did to Dixie too! ("Plugatyre" is an ex General Easy Credit Corp of Indonesia director I am told)...

Funny eh? Is this just a moral hazard that airline management needs to avoid or is it a trend for General Easy? (Hope it's the former)

When losing situational awareness, pray Cumulus Granitus isn't nearby !

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