How Harry Goodman Crashed And Burned

As a salesman, Harry C. Goodman had few equals--especially when hawking his scrappy, young airline, Air Europe Ltd. The ebullient British travel mogul would explain how looming European airline deregulation promised open doors for a cut-rate competitor. Warming to his pitch, he told of plans to dominate Europe's skies with a fleet of 140 jets. Never mind that buying planes and building service cost billions he didn't have. "The banks," he would say, "are queuing up to finance us."

Indeed they were. But those banks now rue the day they succumbed to Goodman's siren song. After several years of roaring growth, Air Europe crashed in a heap on Mar. 8, grounding its flights and sticking creditors with more than $800 million in losses. Goodman's package-tour operation--the second-largest in Britain--was part of the wreckage. Already, court-appointed administrators have dissolved most of the tour operation and have fired 3,500 of the group's 3,750 employees. As for Air Europe, administrators are frantically looking for a buyer to salvage it.

Behind the 52-year-old Goodman's meteoric rise and fall is a cautionary tale of financial engineering and alleged personal deterioration. Goodman didn't respond to phone messages or requests for comment through his attorney. But interviews with more than a score of insiders and financiers portray Goodman as a canny opportunist who exploited the aircraft-finance craze of the late 1980s to build an airline on a shoestring. They also paint a sad portrait of a brilliant entrepreneur brought down, in part, by what appeared to be his own self-destructive behavior.

Goodman's tale begins in London's hardscrabble East End. The son of a garment worker, he was orphaned at age 14 and started work as a gofer in a travel agency two years later. By 1973, at 34, Goodman had launched a small company that sold packaged vacations, a popular form of travel among Britons. Peter G. Woodward, a longtime executive with Goodman's companies, recalls working in a rat-infested shopfront with 10 other employees: "There were only seats for 10, so the last one in had to sit on the radiator."

Goodman's first break came in 1974, when one of Britain's largest tour operators collapsed. Seizing the opportunity, he dashed down to Spain's Costa del Sol and reserved many of the failed company's hotel rooms at a discount.

Within weeks, Goodman's tiny company had sold thousands of packages. By 1979, he had started Air Europe as a charter airline to ferry a growing volume of customers to vacation spots.

The former East End boy always had an appetite for high living. Even when his company was struggling, Goodman drove a company-owned Rolls-Royce. With his shock of curly hair and a taste for parties, he gained a reputation as the industry's wild man. After his company, dubbed International Leisure Group PLC (ILG), went public in 1981, Goodman bought a mansion outside London and a 170-foot yacht formerly owned by arms merchant Adnan Khashoggi.

The problem was that Goodman's private life was a mess. He divorced twice before marrying his third wife. Rumors of drug use were confirmed when he was convicted of cocaine possession in 1982. Goodman later swore he had reformed and gave huge sums to drug charities. But press accounts of drug abuse would continue to dog him.

BIG IDEAS. Former and current executives portray Goodman as a mercurial idea man who loved to take risks. "His motto seemed to be: 'Deal with today; let tomorrow take care of itself,' " says a close associate. Still, he had an eye for opportunity. In 1985, ILG made $60 million by purchasing London hotels, cashing out two years later. In another well-timed move, Goodman took ILG private in a $273 million leveraged buyout months before the 1987 stock market crash. He pocketed millions.

By that time, though, Goodman was getting bored with simple charters. Hauling vacationers to the popular Costa del Sol wasn't as glamorous as the scheduled-airline business. Determined to take on British Airways PLC and other commercial carriers, Goodman started limited scheduled service out of London's Gatwick Airport in 1985. The venture took off in 1987, when a clutch of European routes from from Gatwick became available after BA swallowed its rival, British Caledonian Airways PLC.

Not content with flying from Britain, Goodman dreamed of building hubs in every major European capital. Faced with various foreign ownership rules that restricted his ability to expand within other countries, however, Goodman bought minority stakes in small airlines in Spain, Germany, Italy, and Norway. They were run as franchises under the Air Europe umbrella.

Unfortunately, Goodman's costly dreams weren't backed up with much real money. Air Europe was precariously held aloft by debt. "We would have preferred to capitalize the company properly, but ever since the LBO we had been strapped for cash," recalls Hugh A. P. Parry, then its finance director. That didn't stop Goodman. With demand for aircraft outstripping supply, jet values were soaring. By placing orders for billions worthof new jets from Boeing, McDonnell Douglas, and Fokker, Good-man began to finance his expansionwith what amounted to aircraft"futures."

Here's how it worked. Rising aircraft values meant that delivered jets were often worth more than the price Goodman agreed to pay for them. For instance, after ILG ordered Boeing 757s at about $ 42 million apiece, the market price quickly surged to $50 million. By selling the planes as soon as they arrived to eager leasing companies, Air Europe turned a quick profit. It could then lease the planes back.

BULL RUN. As the market heated up, banks and finance companies were falling all over themselves to finance Goodman. In addition to the sale-leasebacks, financiers were even willing to lend ILG part of the "premium" between the market value of an airplane and its purchase price--before the plane was delivered. They were confident ILG could pay them back from the profits when the plane arrived. Meantime, manufacturers were so backed up that ILG could also sell its positions in the delivery lineup for cash. It was through such deals, says Parry, that the company raised more than $ 200 million in cash from 1987 to 1990.

Financiers were caught up in typical bull-market foolishness: They allowed Goodman to pile lease obligations and other forms of debt onto an already overburdened company. At the same time, the drive into scheduled service was costing more than expected. In rapid order, Air Europe had introduced routes from London to a dozen destinations, including Paris, Brussels, and Rome. Lofty marketing costs combined with a huge interest bill to create heavy losses. Parry says the scheduled-airline business ate up about $60 million in cash in fiscal 1989.

Goodman began beating the bushes in late 1989 for up to $200 million in new capital. Investors in the 1987 buyout were looking to cash out, and Air Europe needed more money. An executive close to the talks says Goodman held discussions with numerous big airlines, including American Airlines Inc. and All Nippon Airways Inc., about buying part or all of the company. Later, Goldman, Sachs & Co. tried to interest other types of investors, including now-failed British conglomerate Polly Peck PLC.

Some insiders believe investors balked at Goodman's estimate of what the company was worth. It included a $365 million premium value for the airplane orders. As the aircraft market stalled last year, that premium began to evaporate. Then, last September came a salacious article on Goodman in Britain's Sunday Mirror. The paper claimed Goodman had recently indulged in a 10-day orgy of sex and drugs involving prostitutes working in shifts and vast quantities of cocaine. Goodman told the paper it was "a total tissue of lies." But so far, he hasn't sued, raising eyebrows in a country where successful libel suits are common.

Even if the stories were false, one executive believes they may have scared off potential investors. And the lack of new capital proved fatal when the Persian Gulf crisis spiked fuel prices and led to a sharp falloff in business. By early this year, packaged-tour bookings were down by more than 70%, while Air Europe's passenger traffic plummeted 60%. ILG lost nearly $ 100 million from November to the end of January.

"As soon as I saw the war break out on CNN, I knew it was trouble," says Peter D. Smith, the company's longtime managing director, who left in January. Parry says the company was counting on raising up to $100 million by selling its six orders for McDonnell-Douglas MD-11s. "But banking confidence disintegrated," he says. Pressured by fellow directors, Goodman stepped down as chief executive in January, remaining as chairman. A new team raised $68 million in fresh equity from the major LBO shareholder. But that was eaten up within a month, and the airline collapsed.

CRASH. Curiously, Goodman was mostly absent from the scene in the final weeks. He had checked himself into a London hospital to treat what turned out to be diabetes. Then another bombshell hit. This time, the sensationalist tabloid The Sun led its front page with a piece headlined "Fallen Hols Boss In Sex Orgy." Just 10 days after ILG collapsed, the paper claimed, Goodman left the hospital for another 36-hour fiesta of self-indulgence. Harry Goodman, it seemed, had crashed along with his airline.

The final toll from the collapse has yet to be tallied. Lloyds Bank PLC, out at least $150 million, looks to be the biggest loser. Lessors are also licking their wounds. "Two years ago, this company was very good," laments Kazuhiko Murasato of Kawasaki Leasing (U. K.) Ltd., which lent Goodman money against two 757 orders. "It was a surprise for us." Some think the lenders have only themselves to blame. "Had credit been more difficult to obtain, Harry would have had to ration his ambition accordingly," says Paul C. Deighton, ILG's investment banker at Goldman Sachs.

As for Harry Goodman, he was already hatching plans for a new airline from his hospital bed. One aircraft-leasing executive says he recently refused a Goodman request for a couple of planes. With his energy and savvy, Goodman could conceivably come back some day. But after flaring and burning out so brilliantly, it seems the troubled executive will first have to learn how to take care of himself.