The war hero vs. the bureaucrats
Pity poor Eddie Rickenbacker. His life so closely resembled the clichéd "American Dream," that you can't blame him for buying into American mythology. So, when the World War I hero and son of immigrants took over a major company, he tried to get ahead by hard work, and through frugality, plainspokenness, and responsiveness to customers. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Eddie Rickenbacker, as CEO of Eastern Airlines, set a game plan for success in a free market. But the airline industry at the time was really just an extension of government bureaucracy. Rickenbacker gets the blame for Eastern's poor showing in the 1960s, and rightly so: He refused to kowtow to the Leviathan State and play the big business-big government game; but he was in a business where the bureaucrats were always right, and so he failed as a CEO. His story is important because it shows another cost of the over-regulated corporate welfare state: good business sense and prudent business practice is denigrated in favor of familiarity with regulations and friendships with the regulators and politicians
The company suffered under his reign in the 1960s, and the board finally forced him to resign, almost disgraced. One biographer, W. David Lewis, tells Rickenbacker's story in an essay titled "A man born out of season." Rickenbacker's life story shows the traits that made him a failure in the airline industry.
Rickenbacker grew up in Ohio as the son of Swiss immigrants. His parents worked hard, and Eddie worked hard, too, launching his own business at five years old. He started working regularly when he was ten. After his father was killed, 7th-grader Eddie dropped out of school and started working full time to support his mother.
The Rickenbackers grew their own food and kept a goat for milk. They all wore hand-me-downs, and Eddie went for a while in mismatched shoes. The trials and poverty of his youth might have been the source of Eddie Rickenbacker's first fatal flaw: frugality.
Rickenbacker's Eastern Airlines ran much more frugally and efficiently than any other airline. One airline executive said, "Eastern's costs were simply on a different plateau," from those of other carriers. But low costs were hardly a virtue for an airline at the time. Federal airline regulations nearly outlawed price-cutting. Eastern, then, couldn't do what Wal-Mart does today: transform savings into lower prices, and thus more customers.
The lower costs, however, didn't even necessarily mean higher profits. A big part of the industry back then was airmail contracts from the federal government. These contracts were not competitively bid out--Washington openly considered them subsidies to airlines. Bureaucrats set the rate for mail based on the airline's costs. This meant that less efficient airlines got much more money than Eastern for the same amount of ton-miles.
Rickenbacker's frugality--a virtue in a free market--became a liability in the unfree airline industry of his day.
Responsiveness to Customers
Rickenbacker said that the point of the airline industry was to "get [rear ends] into seats." He put a premium on reliability and timeliness. He figured that people were paying to get somewhere, and he would make money by getting them there reliably.
But in an industry in which you could not compete on price or on routes (the Civil Aeronautics Board [CAB]) also controlled who could fly which routes), the only way to compete was by adding frills: prettier stewardesses, fancier food, or a piano bar. Rickenbacker's frugality and his business sense made this idea offensive to him.
Rickenbacker's more successful competitors in the regulated skies knew that responding to customer demands took a back seat to responding to the demands of the CAB and politicians.
Lewis described the situation: "[For Rickenbacker, s]ervice meant getting passengers where they wanted to go at reasonable prices that would yield profits to Easter without federal subsidy. To the CAB, it meant indulging the public with amenities designed to make flying as pleasant as possible, whether or not subsidies had to be paid for this purpose."
In 1944, the CAB allowed National Airlines to compete against Eastern on a New York-to-Miami route, but the federal government also subsidized this smaller airline. The next year, CAB allowed Delta to enter the Chicago-to-Miami route also subsidizing Delta. The following year, Eastern applied to fly from Florida to Caribbean destinations, but the CAB said no, granting the routes, instead to less efficient airlines who would charge customers more.
Rickenbacker didn't act like he was working for the federal government, and the politicians and regulators remembered that slight. National Airlines' success was built largely on Uncle Sam's dislike of Eastern. Lewis writes that National "stayed in business chiefly because the CAB needed it as a way to discipline Eastern."
Delta succeeded because it "adroitly played a shrewd political game by nurturing its contacts with powerful Democratic senators and representatives at a time when Eastern, even under the Republican Eisenhower administration was on less than ideal terms with the CAB."
Once again, the regulatory regime punished Rickenbacker for trying to satisfy customer needs while rewarding Delta for satisfying bureaucratic and political egos.
Rickenbacker's parents spoke German at home, and Eddie's English was never great. He lacked the refined East Coast Ivy-League manners of his fellow airline executives, and also the habit of flattery ingrained in every experienced Washington lobbyist.
Eddie shot down 22 airplanes in World War I. In World War II, he volunteered for a secret mission that got him stranded on a raft in the Pacific for three weeks, surrounded by sharks. He won 300-mile auto races, ran a handful of businesses big and small, and wrote a best-selling book.
He had the love of his employees, and his comrades in war. Almost anyone who saw him work admired him. But these traits did not impress the bureaucrats. They wanted to be adored. Instead, Rickenbacker would tell them, in his heavy accent, what he thought. This won him no love from the CAB, and thus Eastern won few routes from the CAB.
The Moral of the Story
Had Eddie Rickenbacker been around when Congress deregulated the air and handed control back to consumers, he would have flourished. Instead, he was forced out of Eastern Airlines and Eastern bought into the big-business-big-government game. In 1977, the President of Eastern was Frank Borman. Borman begged Congress to preserve federal regulation, saying a free market in the airline industry "ultimately could destroy our air transportation network."
Airline regulation drove up prices, costing customers $1.8 billion per year according to a GAO study in the late 1970s. But Eddie Rickenbacker's story shows another cost of government regulation: it denigrates the virtues that add value to our society, and rewards the traits that mostly just gratify politicians and bureaucrats.
Pity poor Eddie Rickenbacker for playing by the rules of a different game. But pity also the society that is still poorer to this day by the crooked rules the government wrote.