The Last Jumbo, House of Cards times 2 and the next Chapter of the Harry Steele story.
December 19, 2022 Volume 3 # 37
The Last Jumbo Jet
After 54 years of production, the last Boeing 747 left the assembly line in Everett, Washington, this month. Boeing has made 1,574 of these planes in various configurations. The green aircraft below is a 747 8F a freighter to be delivered to Atlas Air in early January. Some airlines still fly the passenger version, including Lufthansa, Korean Air and Air China and a few smaller airlines.
The first Jumbo Jet I saw flew in to Montreal’s Dorval airport on a press run, I think in late 1969. On first sight it seemed like the bumblebee, so big it was, in theory, incapable of flight. Bit fly it did. The first commercial flight was a Pan Am flight on January 22, 1970 from New York to London Heathrow. In April of the next year I flew on BOAC’s first New York to London flight. The airline that became British Airways was late to the game because pilots and flight crew were in a labour dispute about working conditions on the giant plane. It was like that in Britain in the 1970s until Margaret Thatcher came along in 1979.
The upper deck of the BOAC Jumbo was a discotheque. There was a party atmosphere all over the plane; I won’t go into details. By 1972 both BOAC and Air Canada were flying Jumbos to Montreal and Toronto.
Eventually the discotheque was replaced by passenger seating and the upper deck was stretched. A tremendous aircraft.
Predictions You Wish You Had Never Made
A snapshot from the Daily Telegraph that was in the bottom of my paper to be used as a fire starter. Charles Moore, former editor, was keen on Megan Markle.
The full page.
The Rush to Kill Inflation
House of of Cards
The crypto Ponzi artist Sam Bankman-Fried (SBF) was arrested. The head of the Securities and Exchange Commission, Gary Gensler, called it: “A house of cards on a foundation of deception while telling investors it was one of the safest buildings in crypto”
Next to come under the microscope will be SBF’s parents. They are both law professors at Stanford University. You might think they might have spotted that their son was up to something when he showered them with Bahamas real estate.
The New York Times even criticized the way the young crypto king dressed,
And the NYT ran this unflattering photo with SBF between two well dressed women.
Another House of Cards
Housing prices in the Toronto area, at the peak one of the most over-priced teal estate markets in the rich world. Some suburban markets are down 46%. Even downtown Toronto is off more than 20%. It can only get worse as rising mortgage rates push people who are hanging on to finally give in and sell. Sorry for the tiny print.
A Housing Solution That Will Never Work
Is there any group as earnest as the soft-left, well-meaning councillors of the City of Toronto? They voted to tax people who leave their houses empty, denying the use of them to others. And how do they police who is home and not home and for how long in a city of three-million? Send out a questionnaire to every household.
You have to wonder how many people are going to fill out this yellow form and volunteer to pay a tax? There’s a website, but it isn’t working. Naive in the extreme.
Who Retires When in Rich Countries
As everyone knows, Otto von Bismarck was the first to come up with the idea of an old age pension, to do an end run around his socialist opposition. It started in 1889 for people who were 70. Bismarck was 74 at the time and the average life expectancy in Germany was around 40 years, though that was from birth. Make it past early childhood and the average German might get to collect the pension.
Essay of the Week
This is the next chapter of the Harry Steele book. It is popular with subscribers, so I will be running a new chapter every few weeks from now on.
Chapter Eight
Making a Go of It
He who has the gold makes the rules.
— Harry Steele
From the start, Harry set about making the airline more efficient.
As the journalist Stephen Kimber points out in a 2014 article in Atlantic Business: “Steele transformed EPA’s$815,000 oper- ating loss the year he bought it into a $4.4-million profit five years later.”
Eastern Provincial Airways became the first airline in Canada to ban smoking. Along with doing the crew and passengers a favour in the health department, it also saved money. Cleaning ashtrays in every seat took a lot of time, in particular with an airline that was doing a lot of short hops.
Keeping operations tight meant finding a way to cut EPA’s Boeing 737s’ fuel burn. Doing so required finding routes that better suited them. The 737 may have been faster, more comfort- able, and safer than all the other planes that came before it, but it was ill-suited for many of the routes in Atlantic Canada. They were too short to allow the jet to get up to a high altitude where it could economically cruise. Many of the short hops meant the planes used too much fuel.
“If you’re flying the planes half-empty or a third full, you’re losing money. On the 737 on a thirty-minute haul, you climb and descend, you hardly have any cruising until you got some long-haul stuff,” says Harry.
In the end, the cost of fuel was cut by 10 percent, saving a million and a half dollars a year. Under The Commander, EPA had the lowest cost structure of any airline in Canada.
That sunny piece of news hid the reality that the fleet was get- ting older; replacing the aircraft would involve a cripplingexpense. The person to point that out was Ivan Kilpatrick, the financial guru Harry Steele had brought to EPA. Ratherthan tackling that problem head on, what Harry Steele did was make the airline a valuable asset, valuable enough foranother airline to buy it, before new jet aircraft were needed. That involved a couple of tough battles at Eastern Provincial Airways.
First, the big airlines, Air Canada and CP Air, blocked his plans to expand to Montreal and, more importantly, Toronto.He won that battle. Unions blocked his drive for reasonable hours and lower costs. He won that battle as well.
Airlines were a cozy monopoly in the 1970s and early 1980s. Air Canada was a state-owned airline with a bloatedbureaucracy; CP Air, an arm of the giant Canadian Pacific group, the richest conglomerate in the country at the time, wasa solid number two. Neither of them wanted competition.
The Halifax to Toronto route was a lucrative run, the eighth busiest in the country, and Air Canada had it all to itself. Inthe fall of 1979, CP Air applied to the Canadian Transport Commission (CTC) to compete on that route. So did EasternProvincial Airways. The national media had never heard of this upstart airline and the man running it. Maclean’smagazine called him Barry Steele, and the Financial Post had his last name as Steel, without the E. The establishment sided with CP Air. It looked like a cake walk. Like many government regulatory bodies, the CTC knew the big players;its members underestimated Harry Steele, as did CP Air.
Their mistake.
Harry Steele went to work. He played the Atlantic Canada card to the hilt and recruited endorsements from all fourConservative premiers from the region. The hearing was held in January of 1980, right in the middle of a rare winter federal election, as Joe Clark’s Conservatives were defeated on the issue of Finance Minister John Crosbie’s first budget.
At the hearing, there were twice as many people appearing for the EPA side as there were on the CP Air side. It didn’t matter, though. In April of 1980, the CTC came down on the side of CP Air. No surprise there. Ottawa bureaucrats supporting the status quo. The essence of the ruling was that the public would be better served by a large airline than a small one: “the pres- ent and future public convenience and necessity requires the approval of the CP Air application and the denial of the EPA application.”
Harry Steele characterized it as “a kick in the teeth for all Atlantic Canadians.” While CP Air’s hired hands sat back and congratulated themselves, Harry Steele kept working. It wasn’t over until CP Air jets landed in Halifax.
Just after the hearings ended, the federal election brought back Pierre Trudeau and the Liberal Party. “Welcome to the 1980s,” said a jubilant Trudeau. Harry Steele welcomed the 1980s by lobbying the cabinet minister from Atlantic Canada in the new government.
David Bruce helped Harry acquire stock in EPA before he took control of the airline. The Toronto stockbrokerwatched as Harry built that into a success. It took more than just attention to detail at the airline. Harry also had to fightthe government to make sure EPA acquired the lucrative routes that in the end made Eastern Provincial so attractive to a potential buyer.
“When he had EPA he was really plugged in. He used to be in Ottawa at least once a week. He used to call me from Ottawa,” recalls David. “He’d see the prime minister, the minister of trans- port all the time. He was really plugged in.”
At the end of June, the ruling was reversed. Transport Minister Jean-Luc Pepin made the announcement in the House of Commons, giving EPA and Harry Steele a major win.
The decision was cheered on by members of the federal cabinet from the Atlantic provinces: Finance Minister Allan J. MacEachen, a fluent Gaelic-speaking intellectual from Cape Breton, Nova Scotia; Minister of Labour Gerald Regan, an MP from Halifax; and Minister of National Revenue Bill Rompkey of Newfoundland — a politician who was also a lieutenant in the Royal Canadian Navy reserve.
When Bill Rompkey announced the government decision at a press conference in St. John’s, Harry Steele was sittingbeside him. The press switched sides and cheered the story of the unlikely victory of the underdog. “As the smoke settlesfrom the political bombshell that blew CP Air out of the skies over Atlantic Canada, the airline may be forgiven for wondering what hit it,” wrote Southam News correspondent Brian Butters after the Cabinet decision. “What [CP Air] may eventually come to realize is that it was the unsuspecting victim of a devilishly effective piece of lobbying by some wily politicians from the east coast.”
Route map of Eastern Provincial Airways after its victory to expand to Montreal and Toronto.
The Halifax journalist and author Stephen Kimber says most of the lobbying was done by none other than Harry Steele.
When the EPA service to Montreal and Toronto started, there was a reception for five hundred people at the Sheraton Centre in Toronto, including 115 people flown in from Atlantic Canada.
Harry’s stock market mentor, Seymour Schulich, was on the board of EPA and would soon be chairman of the holdingcom- pany, Newfoundland Capital Corporation; William Sobey, one of the most prominent businessmen in Atlantic Canada, joined the board; and Harry pinched an Air Canada marketing guru, William Verrier, moving him from London,England, to Gander. Ivan Kilpatrick was the financial and managerial genius Harry brought on board to make sure things ran smoothly. As in the navy, Harry believed a commanding officer needed to serve with people he could trust.
Harry Steele was beefing up the board and management team of the once sleepy airline, and at the same time spreadinghis ten- tacles into the boardrooms of corporate Canada. It may not have been a plan, but in the rear-view mirror, it sure looks that way.
The stock price of EPA, trading around $1.85 when Harry was accumulating stock before the takeover, was trading at $18 in what investors lovingly call “a ten bagger.” That meant Harry Steele was free of the personal debt he took on to buy EPA and he had a war chest to expand.
The CTC decision resulted in EPA running numerous flights to Montreal and Toronto. With that development, it no lon- ger made sense to maintain the company’s base of operations in Gander. There was quite a kerfuffle, however,when the decision was made to run the airline from Halifax rather than Gander.
Discussing the issue, Rob Steele says, “EPA stayed in Gander when the airline had all those milk-run routes. Of course, the airline was very high profile and a big employer in Gander at the time, but once he got those routes to Torontoin the evolution of EPA, it didn’t make sense to be in Gander because he’d have to re-position aircraft to Gander and it’s costly to do that. It made more sense to have a base more centrally located for his routes in Halifax. So that was quite acontroversial thing to take the airline out of Newfoundland to Halifax. It created some real PR issues.” “But we survived,” interjects Harry, who is clearly annoyed at the suggestion that he is in any way disloyal to the town where he had a home for fifty years. “It was a tempest in a teapotfor six months or a year. Catherine [has] stayed in Gander to this day. Gander is where I do my business and Gander iswhere I vote.”
Many people would have basked in the glory of victory. Harry set about making friends with the enemy. His big rival was Air Canada; it was by far the dominant player. The state-owned air- line was also CP Air’s worst nightmare. It hadbottomless amounts of cash. To fight Air Canada, Harry employed the old military strategy that he had seen used soeffectively in the Cold War: The enemy of my enemy is my friend.
On September 10, 1982, CP Air and EPA held a joint news conference to announce a deal that had been a year in themaking under the code name “East Meets West.” The news conference was held via satellite link from Halifax andVancouver. Though the dual-location news conference gave the impression that it was an announcement of equals, in fact, EPA had the upper hand.
“It was clear to EPA employees and anyone else who analyzed the deal that their little company had emerged as the unques- tioned winner in the battle for Atlantic Canadian skies, and that CP Air was simply being allowed to skulk quietly out of the east with its corporate tail between its legs,” wrote the author and journalist Stephen Kimber in an analysis of the company.
There was a bonus to the agreement: in its routes to Montreal and Toronto, EPA could do a “codeshare” with CP Air, which meant passengers could fly seamlessly into the CP Air system.
“Mr. Steele said he expects the integration [with CP Air] to produce a significant increase in profit and load factor,”said an article in the Globe and Mail. “The merger should mean a big increase in EPA’s presence in the Montreal andToronto market and a renewal of its request for access to Ottawa.”
The Globe said the only benefit for the loser, CP Air, would be that EPA would funnel passengers into its routes fromMontreal and Toronto.
The future was looking bright for EPA, but, in fact, there were dark storm clouds on the horizon. Ever since Steele had bought the company, it had, in effect, been operating at two lev- els. On the public level, Eastern Provincial was the epitome of the upbeat but unlikely corporate success story so loved by jour- nalists. Eastern Provincial itself helped foster that image, which, after all, was not only truthful as far as it went but was also good for investor confidence.
That perception of the company was reinforced in the 1981 NCC annual report, which read like a glowing statistical sam- pler: “In every month, [reduced fuel use] producing an [annual] $835,000 saving to the company, while flight crew utilization improved by 9 percent in the cockpit and 6 percent in thecabin,” the report notes with pride, “we improved our boardings over last year, with an overall margin gain of 4.6 percenton boardings. We added sixty-seven million seat miles (10 percent) to our capacity and slightly increased the load factorto 56.9 percent. Boeing 737 daily utilization increased from its already high 1980 level of 9.05 hours per day to 9.29 hours per day in 1981. For the Hawker Siddeley 748, utilization improved dramatically from 3.56 hours per day to 5.16 hours per day.” And on and on.
The rate of fuel burn had been reduced. Most important, of course, was the fact that the airline’s net income had increased nearly four times over its 1980 level of $1,242,000 to $4,402,000 in 1981.
At the private level, within the upper reaches of corporate man- agement, there was a frightening recognition that thejournalists’ and analysts’ rosy forecasts of future prosperity were based on a kind of smoke-and-mirrors illusion thatthere would simply be a continuation of the present. In fact, Eastern Provincial was already operating on borrowed time.
Shortly after he arrived at the company in 1979, Ivan Kilpatrick had discovered what he called “an absolute bomb thatwas about to go off, two bombs, in fact, one was a nuclear bomb, probably hydrogen, and the other was just an ordinary nuclear bomb.”
The ordinary nuclear bomb threat involved the company’s fleet. EPA’s jets, which had been obtained back in 1970, would soon have to be replaced. EPA had originally purchased one of these planes outright; it leased five others. Whenthey were put in service, they were worth five million dollars each, with interest calculated at 7 percent over a fifteen-yearamortization period. Based on an estimation that the planes were flying an average of three thou- sand hours per year, thecompany determined that the planes were costing the airline $182.99 per hour to operate. That figure was used by EPA asa guide in setting the fares it charged passengers.
The cost to replace those airplanes, however, was three times as much as it had been in 1970, and interest on the new fifteen- million dollar price tag would have to be calculated at more than twice the 1970 interest rate, or 15 percent, and the loans them- selves would probably have to be paid off in ten years instead of fifteen.
The long and short of all the fancy number-crunching was that a plane costing $182.99 an hour to run today would soon have to be replaced by an aircraft that would cost $996.26 an hour — nearly five and a half times as much. Theairline, therefore, would either have to tightly squeeze its other costs to hold down fares or push fares through the roof.
There was another solution, it seemed: EPA could sell the one plane it had purchased outright and purchase two of itsfive leased jets for their depreciated value of one million dollars each, thereby reducing the real replacement cost of thoseplanes. However, that seemingly attractive option was, in fact, not an option. The reality was — this was Kilpatrick’shydrogen bomb — the three remain- ing leased planes contained an option clause that virtually forced EPA to buy them back at the end of the lease period for “fair market value.” What that meant was that when the leases ran out on December 31, 1984, EPA would have to buy its own used airplanes again for more than they had originally paid for them. By the time it finished “buying” each airplane twice, it would have spent millions and it would have wound up with a twenty- five-year-old jet.
Despite those twin time bombs, Kilpatrick and Steele were undaunted. All we have to do is get the guys onside, Kilpatrickcon- vinced himself at the time. They’ll see the problems. There’s lots of scope here for winning. Business looks good; we’llsimply re-finance the airline and keep going.
He had one other problem to solve first: work rules and pay for the pilots of EPA.