By 4:30 in the afternoon of Friday, July 8, 1983, Bill Klingener wanted nothing more from work than to pack it in and go home. Executive vice-president of Professional Travel Inc. of Louisiana (#148 on this year's INC. 500), in Atlanta, he had been working for months to keep a host of troubles at bay -- overexpansion, undercapitalization, and, finally, in these recent summer days, impending bankruptcy. Now, as the Independence Day week came to an end, he thought the fight was over. Just one hope remained: PTI would have to file for protection under Chapter 11 of the Federal Bankruptcy Act before Fastern Airlines, the company's major creditor, could repossess the three Boeing 727 airliners that were PTI's major hard assets.
Timing was crucial; as a debtor in possession, there would be an outside chance that PTI could use the planes to fly its way out of its financial woes. The filing, however, wasn't Klingener's responsibility. James L. Shaw, PTI's founder, chief executive officer, and chairman was working with the company's attorney to make sure that the necessary papers were drafted and filed before the weekend.
When Shaw dropped by with a status report, it wasn't the one Klingener was expecting. Shaw needed a favor. He hadn't been able to reach the lawyer.The whole Chapter 11 filing was still up in the air. No big thing -- but could Klingener and Sheila M. Johnson, corporation controller and the second member of Shaw's backup crew, make a few calls on Monday and see about getting the bankruptcy under way? Shaw was leaving for the Virgin Islands on Sunday and wouldn't be back for a week. "I'll have to leave it to you guys," he said as he dashed off.
The story of the rise and fall of PTI is a common one among small, fast-growing businesses. Created out of one man's vision of vertical integration and total control of the travel experiencc, the company started in 1977 with one suburban travel agency and three employees. By 1982, PTI's sales had increased 1,109%; the company had grown to five retail travel agencies, two retail affiliates, a wholesale tour company, and a charter airline, with 90 employees and aggregate unaudited sales of $16 million. Fueling this growth was Jim Shaw's relentless optimism and his single-minded expansionist fervor -- the characteristics that also mired the company in accounting inefficiencies, internecine squabbles, and, ultimately, the cashflow calamity that led to its downfall.
On Tuesday, July 12, Eastern repossessed the jets, destroying Klingener's last hope. The next day, the PTI Chapter 11 finally was filed. The day his airline crashed, the captain was in St. Thomas -- not on a personal vacation, but as leader of a "familiarization trip" for new PTI travel agents. By the time the promotional tour ended on Sunday, however, there was little left to promote.
Jim Shaw came to PTI with a solid apprenticeship in the travel and airline industries -- and an impressive number of lucky breaks. In the late 1960s, while still a college student, Shaw was recommended by a family friend for a summer job in the baggage department of Continental Airlines. Casually undertaken as a way to earn pocket money, the job would turn into a five-year commitment, and the chance for Shaw to parlay his baggage-department and ticket-counter experiences into a marketing position with the then newly reorganized Texas International Airlines. In 1973 Shaw joined TI as a sales representative. In 1975, the 27-year-old Shaw was sent to run the New Orleans district. He was the youngest district manager in the company's history.
Shaw discovered his future business mode by chance. In the course of routine reading, he stumbled upon an article on vertical integration as a management and marketing concept. Although it would be months before he would make an overt move, his course was set.
"Vertical integration in the travel industry makes total sense," he says today. "If you've got a travel agency and a customer wants to go to Mexico, you find him a good trip, you sell him his tickets, he walks out the door, and that's the last you're going to see of that customer until he wants to take another trip. The guy's vacation hasn't even started and you've just lost control of the whole thing. And how much of that customer's vacation dollar have you got? Not a lot.
"So now -- vertical integration -- you say to yourself: What if you can do it all? What if you've got not only the travel agent, but the wholesaler and the airline and the hotel? Now you can control the quality of almost every minute of that customer's trip -- you can virtually ensure that nothing is going to go wrong from beginning to end and that you can do something about it if it does. And I'm a real stickler for quality and responsibility."
Bill Klingener wholeheartedly agrees when it comes to the conceptual under-pinnings of PTI. "It's a real shame that things fell apart so badly," he says. "The original concept was absolutely brilliant."
For a long time, however, the concept worked. In 1977, financed by savings and family loans, Shaw left TI to set up his first travel agency in Metairie, La. Eschewing advertising as an expensive way to share secrets with competitors, he depended instead on a door-to-door approach. Repeat business and word-of-mouth from satisfied customers led to sales that topped the $1-million mark a year after start-up.
By 1980, vertical integration had gone beyond the conceptual stage: Professional Travel Inc. of Louisiana, d/b/a Independence Travel, had four retail operations, all doing a healthy business in commercial and vacation travel and specializing in ski trips packaged by Professional Travel Inc. of Louisiana, d/b/a Westwind Tours. But the largest part of the vacation dollar was still eluding PTI, and a significant aspect of vacation quality control was still out of Shaw's hands. So Shaw decided to start an airline, moving PTI's central offices to Atlanta and filing with the Civil Aeronautics Board (CAB) for certification to operate a charter airline flying large aircraft throughout the Western Hemisphere.
The decision in favor of charter service was simply a matter of supply and demand. "You ask yourself who wants to fly and isn't getting the service they want," explains Shaw. "Tell them you can take them where they want to go, when they want to go, and you've got their business."
In time, PTI's Aerostar, organized for legal purposes as a wholly-owned subsidiary rather than an operating division, would indeed get business, but first there was work to be done. Shaw, striving for total control, decided to forgo any help from lawyers and take the fledgling airline through the administrative certification process himself. Even with help from the CAB, the cost in time, paperwork, and patience was a lot steeper than Shaw had originally estimated.
On July 17, 1980, Aerostar received its operating certificate from the CAB, making PTI the first wholesale and retail travel company also certificated for airline operation. In October of that year, the new airline's operating authority was extended to include international flights. All PTI needed was the planes, but how to get them became a source of contention between Shaw and his closest associates. Aerostar's charter function necessitated large, comfortable jets, but PTI didn't have the money to buy them. Not that Jim Shaw thought cash was a necessity. If the airline could just be put into service, he maintained, the vertically integrated company would soon be making all the money it could possibly need. Not all of his PTI colleagues agreed; some of them wanted outside money to fund an airline, while Shaw wanted an airline to generate money.
As CEO and sole stockholder, Shaw prevailed. In 1981, Aerostar purchased a Boeing 727-100 from Eastern Airlines for a stated purchase price of roughly $3.3 million. The plane was bought on a so-called conditional sale, an installment purchase under which the asset and all legal paper thereon transfer to the buyer, while legal title remains in the seller until full payment has been made. The relatively small (about $170,000) down payment came from travel-agency revenues. Aerostar's original contract with Eastern contained an option for the purchase of two more 727s on similar terms. In 1982, Aerostar exercised its option. Almost overnight, PTI -- a company with equity of under $1 million -- incurred debt of around $10 million, all to a single creditor.
Although Jim Shaw wasn't worried, Bill Klingener, his second-in-command, was. No less a believer in the benefits of vertical integration than Shaw, Klingener nevertheless felt that things were moving too quickly. "The problem can be summed up in two words," says Klingener, "and those two words are 'cash flow.' The fact is, we were never really capitalized at all."
Hi Hopkins, executive representative of aircraft sales for Eastern Airlines, recalls the members of the Aerostar management team as having been "a bit naive" in their financing. "Unfortunately, as far as I can determine, they were not cognizant of their costs, or in control of their cost," he concludes. "If you're flying airplanes, you've got to have a very good idea of your costs, and I mean fixed and variable."
The impression that PTI wasn't on top of its finances, unfortunately, had a solid basis. The first problem was in accounting: The company lacked an accounting system suitable to a commercial enterprise bringing in millions of dollars from three separate businesses. Somehow, with seemingly more pressing needs and certainly more exciting challenges presenting themselves at any given point along the way from Metairie to Atlanta, Shaw always pushed the accounting issue to the end of the line. By the time he faced it squarely, the muddle was almost hopeless.
"[Shaw] never had his accounting together from when he started in 1977," says Klingener. "We didn't have a general ledger until three years ago. . . . We weren't too far away from a bunch of pieces of paper stuffed into a cigar box." By the summer of 1983, Klingener remembers, "we were getting to the point where we were only three or four months behind. When you have to start in the middle and work backwards while you're trying to get ahead, you have to play a helluva game of catch-up, don't you?"
The second problem plaguing PTI was capital. Shaw was gambling heavily on the assumption that PTI's dramatic earnings would more than cover the company until bookkeeping could be streamlined and reserves built up. He had always landed on his feet before, and there wasn't any reason to believe that this time was going to be different. And in fact, from its first flight in June of 1981, the new venture appeared to be a winner. The money kept rolling in -- from Independence, from Westwind, and now, most of all, from Aerostar.
But in February 1982, the dream machine ran into its first foul weather: A tour operator with which PTI had contracted filed in bankruptcy. "When you've already booked trips and flying time and an operator goes bankrupt against you, there are only two things you can do," Shaw says. "You can try to find replacement services, which takes time, or you can eat it."
PTI tried to line up alternative arrangements, but the time wasn't there. Neither were there cash reserves to allow the company to "eat it" without distinct discomfort. Shaw had been banking on the assumption that any emergency that came along in Aerostar's early months wouldn't be a big one, but the February '82 tour emergency was big enough to all but deplete PTI's meager reserves.
Then, what little remained in the company kitty was exhausted when repairs to a plane's injured wingtip later the same year ended up costing mere dollars below the deductible amount on the company's insurance. With the second disaster, even Shaw realized that PTI needed to build a capital cushion. That realization, however came too late in the game. In April 1983, a second tour company went bankrupt, again too far along in the travel cycle to allow for alternative arrangements to be made. This time, PTI's cash flow was seriously compromised. For the first time, the company couldn't meet its obligations.
"It was clear to me that if we could just put off our creditors for a little while, there would be plenty of money available to make it up to them," says Shaw. And for three months, put off their creditors they did, including their major creditor, Eastern Airlines. While Shaw claims that Eastern and Aerostar were in the process of negotiating a restructuring of Aerostar's debt, by late spring friendly dealings between Eastern and Aerostar had turned cold. Certainly the Eastern directors, who had faced numerous payment defalcations other than Aerostar's, were in a far from comfortable position in 1982 and early '83. Shaw speculates that Eastern's renegotiation of its own debt positon with Chase Manhattan Bank in the spring of 1983 contained, directly or indirectly, provisions that made it prudent or even mandatory to call in its receivables. Klingener speculates that Eastern was simply and justifiably fed up with "so many payment plans and so many broken promises. By the end," says Klingener, "I was the only one they'd even deal with." On July 1, Aerostar received a demand letter: Fastern was to get $3.8 million within the next five days, or the planes would have to be returned.
"I spent the next three days running around trying to get the money," says Shaw, "but it was just too much. I couldn't raise four million in personal loans, the venture capital guys didn't want to hear about an airline, and the banks wouldn't touch us."
By the 12th of July, Eastern had taken back all three planes. Pursuant to a so-called Dead Man's Agreement, PTI was allowed to regain possession of the planes and fly them for three weeks while attempting to find additional funding. It never materialized. PTI was grounded.
The branch bank in suburban Atlanta looks like a branch bank in suburban Anywhere, USA. The carpet, the furniture, the wall decorations are equally pleasant and unmemorable; the friendly, helpful personnel might have been sent over from central casting; the car is waiting outside in an adjacent parking lot placed there for the customer's banking and shopping convenience.
The journey from a vision of a vertically integrated travel service to a $23-million business ends here, with Jim Shaw leaning over a laminate desk top, smiling, signing away his dream company to a buyer in bankruptcy.
The two PTI travel divisions have been bought, subject to court approval, by a consortium of five independent investors; Bill Klingener and Sheila Johnson will stay on to help run the newly formed venture. It is anticipated, says Klingener (who, despite his condemnation of Shaw's financial and managerial approaches, still numbers him among his personal friends), that the Independence and Westwind creditors will be paid off on a dollar-for-dollar basis. For the immediate future, Shaw's job will consist of selling Aerostar. Several potential buyers have already made their appearance.
Not that Shaw is despondent. "This has been a fantastic experience for me," he says. "I've had an education that money couldn't ever buy. I've met interesting people, and learned things you could never learn from books. We've all been involved in something incredible here, seeing a major business built up from the inside. I've lived a businessman's lifetime in just this short period of time. . . . Look at the company. . . . Look what I built in just six years."
Shaw's signature is on every paper that requires it; there is no reason for him to hang around the bank.
Back in the car, asked if he feels anything in these first few moments as the official ex-CEO of PTI, he answers without hesitation: "Absolutely. I feel elated." He has learned a lot, he says. Now he is going to use it, maybe in the airline business, maybe in something else altogether, something entirely new -- the sky is the limit.
"It's a little sticky this afternoon," he says, rolling up the window and turning on the air conditioner. "But tomorrow is gonna be beautiful."