CAN MARTY SHUGRUE MAKE PAN AM FLY?
Take a grand old name, some aging planes, and voila!-a transcontinental carrier
Five years ago, Martin R. Shugrue Jr. took to TV to assure consumers he would keep ailing Eastern Air Lines Inc. flying. As court-appointed trustee, he burned through $400 million of creditors' cash before rising fuel costs and fear of flying during the gulf war grounded Eastern in January, 1991. In 1994, he tried unsuccessfully to revive it as New Eastern. Now, the former Navy pilot aims to relaunch himself as chief executive of a resurrected Pan Am.
On Jan. 30, Shugrue, Pan Am's vice-chairman from 1984 to 1988, announced a plan to restart the airline, which filed for bankruptcy in 1991. Come summer, Pan Am's blue globe--symbol of the first airline to fly around the world--is to grace eight aging Airbus A300s providing low-cost, nonstop flights among New York, San Francisco, Los Angeles, Chicago, and Miami. But there are stiff odds against Shugrue's keeping the reborn line aloft.
The industry is littered with failed startups, and a familiar name may not help. Says Michael J. Boyd, president of Aviation Systems Research Corp.: "You can dress a cadaver in a three-piece suit, but you can't make him dance." Shugrue declined to comment for this article.
BLUE-COLLAR ROOTS. Even some of Shugrue's fans have doubts. Russell Thayer, chairman of Kiwi International Air Lines Inc. and a former Pan Am senior vice-president, praises him as "very capable, a good administrator" and able to attract experienced personnel. But the routes Shugrue has picked are major carriers' bread and butter, Thayer notes. And it will be hard to hold Pan Am's costs to 4.8 cents per mile--the level Shugrue says will make low fares viable.
Shugrue has the confidence--some former associates say the arrogance--to try to pull it off. The son of a Providence policeman, he joined Pan Am in 1968 as a pilot and flight engineer after six years in the Navy, moved into management, and made his way to the top.
His blue-collar roots always helped him relate to workers. "He's very charismatic and fosters loyalty among employees," says former Pan Am Vice-President Jeffrey F. Kriendler. Still, when the unions won the ouster of Chairman C. Edward Acker in 1988, the board asked Shugrue, his close associate, to leave also. He soon became president of Continental Airlines Inc. but, like many top Continental execs then, stayed only a short time. In April, 1990, he became Eastern's trustee.
Over creditors' objections, he kept the airline flying, initiating business-class service at coach fares. Within a year, he asked the court for a raise--from $35,416 to $50,000 a month--saying the reorganization was about to succeed. He got it--and less than three weeks later shut Eastern down. He stayed to handle the liquidation, and no one challenged the raise. Explains a creditor's attorney: "Everyone needs something from the trustee."
In 1994, Shugrue proposed New Eastern to use idle Eastern planes. But he couldn't raise the $100 million he needed. "No one was going to bankroll Shugrue," says an industry veteran who saw the plan. "What shareholder value has he created? The only value he ever created was for himself."
In January, 1995, Shugrue requested $2.2 million on top of the $2.29 million he had been paid, because of the value he had returned to creditors. Some creditors were incensed, but he got the money. Shugrue has previously defended his Eastern record. While it once appeared Eastern wouldn't pay even administrative claims, unsecured creditors owed less than $100,000 have received 11 cents on the dollar. Those owed more have gotten 8 cents on the dollar, with more promised.
NEW QUEST. Shugrue stepped down in February, 1995. But liquidating agent John J. Sicilian soon asked him to help find a home for some A300s grounded by Continental. Eastern had once owned the planes, and, because of a complex tax arrangement, stood to be out $6 million or so unless they were used domestically. Analysts SH&E Inc. suggested a transcontinental carrier might use them.
So Shugrue began a new quest for investors. He met with Charles E. Cobb Jr., former chairman of developer Arvida Corp., who paid $1.3 million for Pan Am's logo and name in 1993. Cobb had asked second-tier international airlines to form a "Pan Am Alliance" to exploit the trademark, but they wanted a domestic carrier to ferry passengers within the U.S. New Eastern looked like the ticket. Last fall, the two decided to use the Pan Am name instead.
Shugrue appears to have cleared the first hurdle--raising roughly $30 million in startup capital. He is contributing $500,000. Frost Hanna Mergers Group, a Boca Raton (Fla.)-based blind pool--which raises money before an investment is selected--will provide $10.2 million. While blind pools generally have questionable reputations, Frost Hanna's principals have done two successful deals. The pool is to merge with Pan Am, which will then trade publicly. Other investors will provide some $10 million. Cobb, who is chairman, is contributing the trademark and cash, together worth about $3 million. And Eastern is anteing up $4 million in facilities, assets, and cash. That came as a surprise to its remaining creditors. But Sicilian insists it's a good deal--and a small contribution to avoid a liability of $6 million or more.
Now Shugrue faces an outcry by survivors of victims of the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, who don't want to see Pan Am's name revived. Despite such clouds, dozens of old Eastern and Pan Am workers hope to sign on. "I want to know where to apply," says Maria Lobo, a Pan Am flight attendant for 26 years. Many others insist Shugrue has a shot. "People are underestimating this thing," says Robert Gould, SH&E's managing director of aviation safety, who worked for Shugrue at Pan Am and Eastern. "I think he's going to make a go of it." If so, chalk up one more first for Pan Am--reincarnation.BY GAIL DEGEORGE, WITH IVETTE DIAZ, IN MIAMIReturn to top