Aviation: In with the Fuel Bill

Late last year, having lost all patience with capricious Industrialist Howard Hughes, a consortium of eleven U.S. banks and insurance companies did its best to put him out of the airline business. In return for a $165 million loan that Trans World Airlines desperately needed to finance its new jet fleet, the consortium obliged Hughes to place his 78% of TWA's stock in a trusteeship. Last week, clearly unfazed by his setback at TWA, wily Howard Hughes, 55, made a dramatic bid for re-entry into commercial aviation. His newest ploy: a request to the Civil Aeronautics Board for permission to acquire control of Boston's Northeast Airlines.

Losses for All. Hughes was in a strong position in bidding for Northeast—primarily because Northeast itself was in such a weak one. Five years ago, accepting Northeast's contention that it could never make money as just a regional New England carrier, the CAB authorized the line to fly the busy New York-Miami route. The CAB's reasoning: with the profits from the Miami run, Northeast could offset its New England losses.

The plan went sadly awry. Where the New York-Miami run had once turned a tidy profit for two airlines—Eastern and National—it became a losing proposition for three. Eastern and National blamed their new losses on the competition from Northeast. Northeast Chairman David Stretch, 53, who is also president of Atlas Corp. (which owns 56% of Northeast's stock), blamed his losses on financing problems. By granting Northeast only a five-year certificate on the Miami route, the CAB frightened the bankers, who would only give Northeast five-year loans (v. the normal seven-to ten-year loans) to buy new equipment it needed. The result: an inordinate part of Northeast's earnings had to be earmarked for debt service and repayment.

Humiliating Choice. A bigger reason for Northeast's losses, which hit $10.8 million in 1960, was the fact that the line could not match the jet service offered by its competitors. To its aid late last year went Hughes, who at that time still controlled TWA and harbored a grand scheme for merging Northeast and TWA. Hughes let Northeast take delivery on six Convair 880s that he had originally ordered for TWA and gave Northeast a $9,500,000 loan to help cover the cost of the transition to jets.

The 880s boosted Northeast's share of the Miami-New York traffic to 20%, but even that was not enough to keep the line from losing $5,200,000 in the first seven months of 1961. Meantime, the cost of maintaining the jets had become an unbearable burden. Six weeks ago, Hughes once again came to the rescue, guaranteed to pay Northeast's fuel bills. But when the CAB ominously wondered out loud whether he might be gaining control of the line illegally, Hughes abruptly withdrew his support.

Last week, on the heels of a desperate declaration by Northeast that it might have to suspend service within days for lack of fuel money, Hughes proposed that Atlas Corp. sell him its controlling interest in the airline. The CAB has never made any secret of its distaste for Hughes, and to invite him back into the airline business would be humiliating indeed. But since no one else seemed prepared to bail Northeast out, to rebuff Hughes would very likely mean that Northeast would become the second major U.S. airline (the first: Capital) to disappear within a year.