During a year and a half in the airline business, Donald Trump leveraged up too much, defaulted on his loans, fired the airline's president and then wouldn't make good on the president's contract.
He also improved the property, won praise from the employees and made a little money. "It worked out well for me," Trump said in an interview with TheStreet. "I ran an airline for a couple of years and made a couple of bucks. The airline business is a tough business, [but] I did great with it."
With Trump considering a bid for president, it may be timely to review his stewardship of the shuttle, which he purchased from Eastern Airlines in May 1989 for $365-million (U.S.), branding it with his name and seeking to bring a luxury to a largely utilitarian segment of the airline business that provided convenient, hourly service in two key markets: New York's LaGuardia/Washington National and LaGuardia/Boston.
In particular, Trump recalls the positive relations with Trump Shuttle employees, many of whom embraced him after moving over from Eastern Air Lines, which had an acerbic labour climate and rundown equipment and facilities. "I was tentative about it at first, but i ended up with some of the finest employees," Trump said. "They worked as hard as any employees I ever had, because they wanted to prove that what was said about them was not true.
"Even today, I sometimes hop on the shuttle, or on a plane back from Florida, and there are people who say 'Thank you, Mr. Trump, for the great job you did at the shuttle.'"
The positive view of Trump was not universal. "Donald was challenging," recalled Bruce Nobles, president of the Trump Shuttle from October 1988 until June 1990. "Like a lot of charismatic entrepreneurs, he tended to be intimately involved in a lot of the details, [although] he didn't interfere in the operations per se. He didn't really know much about the airline business.
"When I first met him, I told him that old joke about how the way to make a little money in the airline business is to start with a lot of money, and he thought I was kidding," Nobles said.
In fact, despite the industry wisdom, the late 1980s and early 1990s were a time when airlines, for some strange reason, were viewed by many as trophy investments. Even Warren Buffet bought in, later declaring that his US Airways LCC investment was his biggest mistake. Trump's own airline itch intensified after the shuttle purchase. In August, 1989, the Miami Herald reported that Frank Lorenzo had several times solicited Trump to buy Continental. In October, Trump bid $7-billion or $120 a share for American Airlines .
Trump said he thought about buying Continental and later American, but that was before he realized just how difficult the airline business is, primarily because of its extremely high-fixed costs.
'We Spent Too Much Money'
Trump Shuttle service began in June 1989. Early on, Trump had the airplanes painted with big red T's on the tail. "He got upset with the first paint jobs because the T wasn't big enough," said Ray Belz, who was vice-chairman of the Trump Shuttle chapter of the Air Line Pilots Association.
In seeking an image of Trump-style luxury, "we took old 727s and spent a huge amount of money stripping them down to the frame and refurbishing them with chrome seat belts, maple bulkheads and faux marble bathrooms," Nobles said. "It was a problem: we spent too much money on the airplanes."
But the Trump Shuttle had far bigger problems. Within months of the acquisition, the Northeast began to lead the economy into a recession. The total number of shuttle passengers was shrinking as the Trump Shuttle sought to grow. "Unfortunately, Trump got there at the wrong time," Belz said. "The economy was going south"
Moreover, Nobles said, "the acquisition was substantially overleveraged." Trump paid $365-million for about two dozen old 727s, parts, gates, and most importantly, slots at La Guardia and Washington National. He borrowed $380-million from a syndicate of 22 banks led by Citicorp and, according to Nobles, put in about $20-million of his own money. To satisfy its bank covenants, the airline had to spin off about $40-million annually.
In competition with the Pan Am shuttle, later sold to Delta, the Trump Shuttle did well. It managed to get to about 50 per cent market share, after starting from scratch with an operation that had been shut down. The venture actually operated profitably, but did not produce enough cash flow to pay debt.
The Problem Wooing Women
One more negative was that Trump became involved in a highly public affair with Marla Maples, whom he later married. "It was in the headlines every day and [as a result] we could not get women business travelers," said Randy Smith, an airline veteran who was hired as director of sales. "Most of them had gone through a divorce or a split-up, and so we couldn't grow in that market." One day, Nobles called Trump to discuss the negative impact of the coverage: "I said he had to get out of the headlines, and he said 'Why?' I said, 'business women are boycotting.' He laughed and said, 'the guys love it.'"
Given the bad economy, its impact on his other businesses, and the debt load, Trump "was under tremendous pressure," Nobles said. In June 1990, Trump moved to replace Nobles, telling The New York Times that the shuttle "will be a financial success, but right now I'm upset with the people running it."
Nobles said he chuckles when Trump, on his TV program, aggressively fires people. "He didn't walk into me and say 'you're fired,'" Nobles said. "Earlier, I had tried to resign, and he asked me to stay, but then he came in and said 'it's time to make a change' and I said 'okay, good, let's do a transition.' It was okay except he wouldn't honour my contract. He told my lawyer 'go ahead and sue me, it will drag out in court.'"
Nobles said he was owed an amount in the high six figures on his contract, which had a year and a half to go. Trump made a "lowball" and the two sides ultimately settled "for something higher, but still lowball."
Trump said he fired Nobles and disputed the contract terms because "I didn't like the job he did. If I had liked the job he did, I would have paid him."
The situation at the shuttle did not improve after Nobles left. In September 1990, Trump defaulted on the loan and the banks took over the property. During 1991, the price of oil surged to $32 as war raged in Kuwait. The banks searched far and wide for a buyer before they reached a long-term agreement with US Air to manage the airline until 1996, and then to buy it.
As far as defaulting on the bank loans, Trump noted that the shuttle business crashed in the bad economy. "When the markets crash, you negotiate with banks," he said. Has Trump earned a reputation for defaulting on loans? "In some cases," he said. But in other businesses, he reminded, "I've done lots of great work with banks."
The Lighter Side of Working With Trump
While it failed to survive an economic downturn, the Trump Shuttle was hardly a gloomy place. "Trump was pretty good to work for," recalled Belz. "Everybody liked Trump. He would come on the airplane and talk to us. Everybody thinks those two years with Trump were the best years of our careers. Trump made that thing spick and span. He said the shuttle was going to be the 'diamond in the sky.'"
Of course, the pilots' enthusiasm largely reflects the labour situation at Eastern. On March 4, 1989, pilots and flight attendants struck Eastern, agreeing to honour an International Association of Machinists picket line. In response, Eastern sought bankruptcy court protection. A few pilots trickled across the picket line, but most stayed out as the carrier shrunk. The 168 Eastern Shuttle pilots who went to the Trump Shuttle -- along with a close-knit team of flight attendants, fleet service workers, mechanics and agents -- considered themselves to be far better off.
With Nobles absorbing many of the punches, some of airline's middle managers also found the shuttle a good place to work.
Randy Smith recalls that Trump would suddenly call management meetings at the Trump Tower, with some staffers coming from an office near La Guardia Airport, a 30-minute drive. "He would suddenly call you all together," Smith said. "I would ask my boss, 'what's the topic?' and he would say 'I don't know.' Sometimes it would be something out of left field. "But he recognized that he was a real estate and casino guy, and he let the airline people run the place," said Smith, who has since left the airline business. "He had ideas, he would poke around asking questions, and he exhibited one of the things I love when I am hiring and promoting people: he has the curiosity gene. If you had the facts and approached him in the right manner, you could persuade him to a different position."
Ironically, Trump won the shuttle in a bidding war with America West, now part of US Airways -- meaning it would have ended up with US Airways in either case. Another irony is that the pilots from US Airways insisted on seniority integration that gave shuttle pilots little credit for their years at Eastern, said Belz, now retired from the carrier. The seniority formula was devised by arbitrator George Nicolau, who would later apply a similar formula in the integration of US Airways and America West. But the second time, the US Airways pilots opposed it.
Although Trump said in 1989 that he wanted to create ''the best transportation system of any kind in the entire world'' at the shuttle, aviation consultant George Hamlin said "One of the lessons of the shuttle is that you are providing basic transportation." Passengers would not pay extra for luxury. Moreover, the shuttles competed not only among themselves, but also with Amtrak, which kept a lid on fares.
As a historical lesson, Trump's involvement underscores the proposition that "when you burden an airline with debt, bad things off happen," Hamlin said. "Trump said the shuttle was going to be a diamond in the sky, but it turned into a lump of coal."