Dan Morrell: Frank Lorenzo (MBA 1963) grew up in Rego Park, Queens, the son of Spanish immigrants. As a boy in the 1940s, he would watch the airplanes fly over his backyard and into LaGuardia Airport, imagining their exotic origins. He would go on to spend his career making those trips an attainable reality for millions of Americans, riding a wave of deregulation in the airline industry as both an advisor and an executive. He ultimately became CEO of Continental Airlines in 1986, seeing the airline through a strike and a bankruptcy before leaving the industry in 1990 to found the investment firm, Savoy Capital. Lorenzo offers a blow-by-blow of the industry's transformation in his new memoir, Flying for Peanuts: Tough Deals, Steep Bargains, and Revolution in the Skies. And in this episode of Skydeck, Lorenzo talks to contributor April White about the bumpy ride that was the early years of the deregulated airline industry.

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April White: Your career was defined by a lot of firsts. So I want to start at the beginning with your first interest in the airline industry.

Frank Lorenzo: Oh goodness. I guess maybe the fact that my parents had a home that was right on the glide path going into LaGuardia Airport. We used to look up and see the airplanes going by, and I think they had an impact on me as a kid. My parents also, when I was 15, decided to go see my brother who was stationed in Germany, and they let me, as a 15-year-old, put together the whole trip and make all the arrangements at the airport. In those days, you got your tickets either at the airport or on the phone. Nothing like today. I really got excited about that.

AW: Tell me about how you entered the aviation space as an entrepreneur.

FL: I got out of business school when I was 23 and went to work for TWA for a couple years, and then went in the Army in the interim and then went to work for Easton for a year. But we were, on the lee here is Bob Carney, also a member of the class of '63 with me. Bob and I had this idea of setting up our own advisory firm. We had this idea that the industry over time was getting to be more flexible on low fares. One of the first manifestations of this was the appearance of full plane load charters. You could sell a trip to Cancun and price it any way you wanted. And we had the idea of acquiring Supplemental Airlines, which had the license to do that, but in most cases they weren't doing that. So we were able to acquire a little airline called Zantop, and in many ways, that was the most important deal that we did because it launched us.

AW: If I've got my dates right, you acquired Texas International in the early 70s, is that right?

FL: Yes. We decided to use our precious capital to make a toe hole position in a troubled airline. And the most trouble at that time was Texas International, the smallest of the 18 airlines. They were well overdue on their loans, but the banks didn't want to put them into bankruptcy because it was too small for them to worry about and didn't want to go through the fuss of a chapter 11. So they readily agreed to a deal with us where we acquired control.

AW: How was government regulation shaping the industry at that time?

FL: Well, it held the industry back because the government regulated everything. I'll never forget, I was flying on a competitor airline one day, and I saw the whole first class cabin fill up with smoke from a guy's cigar smoking. So when I went back after that and I went to our management team, I said to them, "This is crazy. Let's stop cigars and pipes on our flights." We had to go to the government to get approval of that, a simple decision like that, just to give an example. And obviously fares, you could do nothing major in the fare area.

AW: You're starting to hear at this point some conversation about deregulation, and I know that that's something that attracted you philosophically.

FL: Well, it attracted us philosophically when we were in our twenties, but as we now had an airline that was being protected by deregulation, and we were up against Southwest Airlines starting up, I was terrified of deregulation. I testified against deregulation in my first appearance in the Congress. I explained that it would put us out of business. And when I sat down with the staff, they said, "Frank, we think that you're right. We think that there will be a loss of some small airlines, but we also think that's a small price to pay for bringing low fares and to get the government out of your hair." And boy, when I heard that, I said we had to develop another strategy.

AW: Talk to me about calendar fares, which I think was your first response to these coming pressures of deregulation, and amazingly, the first time an airline had thought about cutting ticket prices as an ongoing competitive play. Why was this so innovative?

FL: Well, in many ways, it was very much against the regulations. We decided to take our chances and try this, and it was strictly a promotional stunt. We were starting services to the new airport in Dallas, and I had some really capable marketing guys and gals, and they came up with this idea, well, let's offer everybody who comes to the airport $1 on the first day for the ticket, and we'll go up from there to $30. And the airport was mobbed, of course, and it was on newspapers all over the country, and it was a great promotional stunt, but it was also contrary to CAB regulations because we didn't get approval of our lower fares. But the Civil Aeronautics Board said nothing.

AW: I think we also have you and your team to thank for the first ever loyalty program for airline travelers, but we might also have you to blame for unbundling, the idea for the fees that we see these days for checked bags and seats and food. I know that's something that you thought about.

FL: Well, yes, we were the first airline to think of what became frequent flyer programs in later years. We had a program where you could get a free ticket if you just had a certain number of flights. It's funny, American Airlines gets all the credit for frequent flyer programs, and they should, they did a great job, but they weren't the first. So the unbundling was something we worked on internally, but we really never did it. Yes, we could be blamed for some of that, but the unbundling, everybody likes to say, "Oh, it's terrible." But what they don't realize is that airline fares have barely changed over many years, and it's because airlines have a much more diverse revenue structure. So we look at the additional costs, we don't look at what we've gained from it.

AW: Throughout your career, you thought about growth mostly through acquisitions and mergers, some very successful, some thwarted repeatedly. Why did you pursue this strategy?

FL: To survive as the smallest carrier, we knew we couldn't stay the way we were. I had developed a strategy of get smaller, get bigger, or M&A, and we tried all three of them. M&A was sort of natural to us. Bob Carney and I were financial guys to some extent, and we weren't afraid of the marketplace, and we were the first to go out and buy stock of another airline and do something with it. We made, for example, the first unfriendly overtures and takeovers.

AW: So let's talk about TIA's merger with Continental. This is the early 1980s. It's probably the best known of your mergers. There are a lot of twists and turns to this story.

FL: Well, the most important story was that we ultimately were successful and ended up putting together two airlines that were perfect for each other. My preference was not doing a hostile deal, my preference was to do a friendly deal. And I twice flew out to have dinner with Bob Six, the then chairman, to see whether I could interest him in it. But in those days, airlines were very much of a prestigious thing, and Bob Six had his eyes set on doing something much bigger, much higher. He was not interested in lowly Texas International.

AW: After the merger, you became chairman of Continental, and that was followed by what you've called the darkest and scariest moments of your career, and that was the bankruptcy. Tell me about that moment.

FL: Well, we tried to get the unions to recognize that Continental was a troubled company when we took it over. It was losing money, kept on losing money. We'd looked at all kinds of approaches, but the fact remains is that all the competition around it was low fare, low cost competition, and we had to be competitive with them. We recognized that we had to affect change in these cost structures, and we'd negotiated with the unions and they just refused to do anything. But we even uncovered a document that said, "Make Frank Lorenzo the issue. Don't talk about economics, don't talk about deregulation."

And they really kept the information from their members to explain what was going on at the time. And they would come back with deals of, oh, they would give us three years of relief from their high costs. And then at the end of the three years, it was bounced back to where it was. And the other airlines, by the way, did these deals. But to me, it was nuts. We had a permanent change in our revenue structure, and it needed a permanent change in our cost structure if we were to survive. So what we finally did is we had to put the company into bankruptcy. We were the first airline to ever file bankruptcy, but with no intention of going out of business, we were going to rebuild the airline.

AW: You stepped away from Continental in 1990. Why did you make that decision?

FL: Well, I had been up to my ears fighting the unions, and I really got to the point of thinking that there was life outside the airline business. The unions had done a very good job of painting me out to be a tough guy. The media just ate it up. One of the many mistakes I made in the business was not realizing we needed to put more resources in public relations. I had this sort of belief that if you do the right thing, a water will seek its own level, that you'll get your message out. And boy was I wrong.

AW: What made you decide to write a book?

FL: What made me want to start to write the book was several things. One, to set the record straight because nobody had written about deregulation from the inside before. So I really, in the book, really tried to get out there and lay out what we were facing and the realities of it. It was also pointed out to me countless times that the book was great because it would show such a major transformation in an industry and how we went about facing change, how we created a successful outcome even though if there was a list of who would perish under deregulation, we would've been at the top.

Skydeck is the Harvard Business School alumni podcast featuring interviews and insights from across the world of business. It’s produced by the External Relations Department at HBS. Our audio engineer is Craig McDonald.

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