The demise of Laker Airways was transformed by the media into a national tragedy. John Harrison examines the reasons for the downfall of Margaret Thatcher's favourite capitalist, Sir Freddie Laker.
Most industries are in trouble these days, and airlines are no exception. Nine of the biggest American lines lost a total of $750 million last year. So Laker is partly just another victim of the slump. But the company always had a weak financial structure. Sir Freddie and his first wife put only £20,000 of permanent capital into Laker Airways — a small fraction of their wealth. So it has always been over-dependent on bank loans with fairly short repayment periods.
Laker's accounts were also 'massaged' to inflate profits. In 1973 Laker spent £267,000 on training air crews to operate new planes. The accounts deemed this money to have been spent over the next four years. Paper profits were thereby jacked up from £26,000 to £300,000.
Another device was the treatment of depreciation. Since capital assets must eventually be replaced, a portion of their value is rightly considered as costs every year. This is depreciation. The normal practice is to assume an asset life (say five years) and calculate depreciation correspondingly (say one fifth of the cost of replacement). Laker did this until 1973, assuming an aircraft life of about seven years. Then he switched to an approach based on flying hours (assuming, quite unrealistically, that planes only lose value in the air, not in hangars). This effectively doubled assumed life, halved depreciation and so boosted the bottom line of the accounts.
Laker played around with punters money too. Last March the accounts of his tour company, Laker Air Travel, showed a healthy £10 million in the bank, representing deposits made for holidays. A few days after the close of the financial year this money was paid into the parent company. The device is known in the trade as 'window dressing' — which is like describing a tar and feathers job as cosmetics.
So why did the banks lend over £400 million to a company with a chronic shortage of permanent capital and blatantly massaged accounts? Were they overwhelmed by Sir Freddie's patter — taken for a flight, so to speak? Laker certainly never underestimated his sway with bankers. When trying to bail the company out in August 1981 he remarked: 'I said to myself — Laker, you are an innovator. You have innovated the airline business. Now you must innovate the banking business.' The bankers tell a different tale. Several told the Sunday Times that they were under intense political pressure from the Thatcher government to lend Laker much more than made banking sense.
Laker's greatest financial foolhardiness was his cavalier attitude to exchange rate risks. Most of his debts were in dollars, while income was largely in pounds. If sterling rose against the dollar, Laker stood to make a killing. But if sterling fell, he would be in real trouble. He could have covered himself against exchange rate risks as most people in his position do. But he did not. In 1980 and early 1981 the pound rose against the dollar and Laker did well. In the year to March 1981 £1.5 million of the company's £2.2 million paper profit came from exchange rate movements. This may have seemed to Sir Freddie like money for old rope. But financial turbulence is as unpredictable as its aerodynamic equivalent.
Three months later, when the 1980-81 accounts were finalised, an 18 per cent fall in sterling against the dollar had effectively busted Laker. The bottom line had been transformed from a profit to a £30 million loss, and £200 million was owed for new planes. I remember an interview with Sir Freddie at the time. He seemed incoherent, insisting on a spurious distinction between 'real money' and the effect of currency movements. It was hard to know whether this was calculated dissimulation or ignorance about the importance of exchange rates. Certainly a top banker has attributed a key role in the Laker debacle to 'mismanagement of the business'.
A particularly bizarre episode in the affair is a 1978 meeting at Laker headquarters between Bernard Lathiere, a boss of Airbus Industrie, and Sir Freddie. Lathiere had flown in to sign a 'memorandum of understanding' on the sale to Laker of ten European Airbuses. But when he arrived there was no sign of the document he had drawn up. He was told it was being photocopied. As time dragged on he grew impatient; he was due in Paris for another meeting. Finally a copy arrived. It had clearly been retyped since it was no longer on Airbus Industrie notepaper. Lathiere quickly scanned and signed it. He failed to notice that Laker had altered the figures, significantly upping the 'launching aid' discount — a price cut for early buyers of a new type of plane. This escapade could have been lifted straight from the pages of a Paul Erdman thriller.
So much for the background to the crash. The story of the final fatal nosedive can be told very briefly. By August 1981 the game was effectively up. Laker was ridiculously overstretched debt-wise and the global collapse of the industry made it impossible to reduce debts by selling off some of the aircraft on order; planes were unsaleable except at knock-down prices. The fall in the pound was the straw that broke Sir Freddie's back.
But Laker does not give up easily. That month he and his wife blithely signed a set of accounts which included the amazing statement that: '...it is not practical to estimate the financial effect of the change in the American dollar.' In reality, Laker Airways could have survived only if millions of dollars had suddenly parachuted into its lap.
The costs of flying the Atlantic are horrendous. To park an aeroplane at Gatwick costs over £55 per hour. Landing a DC10 will set you back over £810 (if you put up; towards the end Sir Freddie did not). The direct costs of flying a skytrain from Gatwick to New York and back exceed £36,000. At around £200 for a round trip Laker needed to average 180 passengers per flight to break even. To cover overheads he needed to fill almost half the seats in his DC10s. Last summer he made the break even point. But by the second half of January the Gatwick-New York flights averaged only 125 passengers. Those from Manchester managed only 107. Laker began cancelling skytrains and the average dropped even further.
Then the banks moved in.
More interesting than the crash itself is the public response. Saving Sir Freddie became a national mania. Dozens of people spontaneously organised appeals and money poured in. Senior citizens contributed from meagre pensions and unemployed workers dug into their redundancy pay. None of them had any real idea where the money would go or any adequate safeguards. Demonstrations were held and songs sung. The explanation is partly Laker's charisma. He is a self made wheeler-dealer whose story is a movie writers' dream. (The TV series Airline is loosely based on Laker's early days.) His father was a merchant seaman and his mother a scrap dealer. Freddie was dull at school. When asked his ambition in life he replied 'to be a millionaire'. His class mates laughed.
In 1945 he joined BEA, as did many wartime flyers. But he soon left. With the family savings he bought government surplus trucks, which he resold at a profit. Then he bought a cherry orchard, which he resold at a profit. Then he bought radio spares. There are no prizes for guessing what he did with those.
He made his fortune in the Berlin airlift. With £38,000 borrowed from a friend in a pub, he bought BOAC's fleet of 12 converted Halifax bombers. By the end of the airlift he owned 100 aircraft and 6,000 spare engines (which he melted down and sold to a saucepan manufacturer).
Freddie is flamboyant. The Times has described him as an 'airline buccaneer' and written off his 'unashamedly daredevil approach to business, his talent for flying right up to the legal limit of accepted practice, not so much to break the sound barrier as to extend it...' He fosters this image by feeding the media clever off the cuff quotes. Being wined and dined at Number 10 has helped. So has the knighthood.
But the main thing that has endeared him to the public is Laker Airways' image as a champion of the people. Sir Freddie may seem an unlikely person to front such an image. His origins may be humble but he has been very rich for a very long time. He and his first wife sold their airline in 1958 for £800,000 (worth £4 million at today's prices). Only £20,000 was ever put into Laker Airways. In 1979 the company bought a £650,000 yacht for his use. In 1980 the Lakers issued themselves £4.5 million worth of free shares.
His present financial position is unclear. The shares are worthless and much play has been made of the fact that his sixteenth century Tudor house is up for sale at £350,000. But his 1,000 acre farm, near Guildford, and his stud farm, with 24 thoroughbreds, near Epsom, are not on the market. They are worth about £2 million. The key unknown is whether Sir Freddie has personally guaranteed any company. In any event there is no evidence he has resorted to giros as yet.
Despite such handicaps, Laker has managed to cultivate a Comrade Freddie persona by clever use of populist rhetoric. This dates from the introduction of the skytrains, when he put himself across as a people's David fighting the Goliath of state bureaucracy. (Perhaps the lone spitfighter pilot is a more appropriate image). He also debunked some of the absurd mystique of air travel. The success of this image seems to have gone to Sir Freddie's head. By the summer of 1980 he was describing his new rates as the 'first truly democratic air fare in history'. Eighteen months later, when he was bust, he confidently announced that 'The People's Airline' would soon fly again. Well, maybe. If it does, I trust its slogan will be 'Fly the Red [illegible]'.
There is, of course, a grain of truth in the rhetoric. Otherwise it could hardly have got off the ground. Laker did play a key role in bringing down fares on transatlantic routes. If he had broken into Europe, as he intended, he could have crashed fares there too. Internal US flights are about one third the price of their European equivalents. The standby fare — Laker's real innovation — also cut out much of the inconvenience of charters, the only other cheap way to fly. And Sir Freddie flew ordinary people. My best memory of the skytrain is the atmosphere, which was nothing like a typical scheduled flight. There was not an expense account in sight and I was the only person reading the Financial Times. Kids were everywhere. It was like an outgoing holiday charter where people feel more at home with each other than with the prospect of flying. The trip was fueled by nervous exuberation and booze.
But that is only part of the picture. Laker did not pioneer cheap transatlantic fares. British Caledonian did with charters, which already accounted for a quarter of the traffic when skytrains took off. Laker was also only able to cut fares so much by sticking to more profitable routes. Most airlines over-price these to subsidise others. Disquiet has also been voiced about the long term effect of price wars on safety (10 per cent of airline costs go on maintenance), though Laker's own safety record is excellent.
Laker was certainly no man of the people when dealing with employees. Sir Freddie has always been virulently anti-union. Annoyance at spending time negotiating with trade unions influenced his decision to quit as managing director of British United Airways in 1965. In 1977 the transport union, TGWU, sought negotiating rights with Laker Airways for cabin crews. Laker refused. The TGWU went to the arbitration service, ACAS. But the company refused to co-operate and set up a staff association, the Laker Airways Cabin Attendants Association, and gave it sole negotiating rights. Forty per cent of the cabin crew were TGWU members at the time and an ACAS survey found that nearly 70 per cent of respondents wanted the TGWU to represent them. But Laker stuck to his guns. By 1979 half of the 550 cabin crew had joined LACAA. Staff associations had also been formed for flight crew, engineers and clerical staff. All had sole negotiating rights. Laker Airways never recognised a proper union.
Laker also paid below the going rate. In 1979 ACAS observed that: '...LACAA understood that the company worked on a much lower profit margin than its main rivals and was prepared to accept that this must inevitably affect the rate of pay the company was able to offer'. In 1981 some stewardesses earned a paltry £2,800, that is £2,000 below the British Airways rate. Not much trace of 'Comrade Freddie' here.
Will Laker get airborne again? Plenty of people are keen. It is not only small shopkeepers who want to see him fly into the Florida sunset one more time. Top bankers and financial whizz-kids are also gripped by a Battle of Britain spirit where our Freddie is concerned. The first to jump in was the Orion Royal Bank. Its rescue plan was simple. Debt servicing and repayment costs would be pruned drastically by turning much of the debt into share capital, and some multi-millionaire who fancied a flutter would put £35 million of new money into the company. This would have involved the banks taking enormous losses on their outstanding loans and continuing to back Sir Freddie. Serious financial commentators say that the plan stood less chance than a refugee column strafed by Messerschmitts. Many were on TV within hours of its launch, denouncing Orion for deluding Laker employees.
It is hard to decide what Orion was up to. Did it naively believe it could persuade the banks that the package was financially sound? Did it figure on enough political pressure to make the banks bail out Laker anyway, and reckon Orion might as well take the credit for putting the deal together? Or was the whole exercise simply a publicity stunt? The latest, and possibly more serious, potential backer is Tiny Rowland, head of the multinational conglomerate Lonhro, once dubbed 'the unacceptable face of capitalism' by Edward Heath. Tiny has since devoted much energy to trying to rebuild his image. Recent efforts have centred on a boardroom battle for control of Harrods. That is still his main concern. But bailing out Sir Freddie would be smart public relations.
So a wheeler-dealer denounced by Heath may well join hands with one féted by Thatcher. This shows how far the Tories have moved to the right. It also shows how wafer thin is the divide between the acceptable and unacceptable faces of our social system.