The Rise and Fall of Pan-State Airways

by Adam Young

The career of Juan Trippe and the rise of Pan-American Airways is an educating example of the nature of the "public-private partnership". Most do not know the story of how the legendary Pan Am grew into the world’s largest airline by being a defacto private tax-funded branch of the United States government.

Named after his mother’s Cuban stepfather, Juan Trippe began by cofounding Colonial Air Transport in 1925, with the sitting Governor of Connecticut, John Trumbull, and the aid of some of his Yale alums and the requisite government contacts. The United States Postal Office had that year been forced to give up its own monopoly on airmail by an act of Congress and it was in airmail contracts that Juan Trippe saw his big opportunity. The Post Office would now contract out routes to private carriers and pay a set amount of dollars per mile. Colonial Air secured the coveted and lucrative airmail route of New York to Boston, but before Colonial even had planes delivering that route, Trippe was already eyeing expansion, specifically the Key West to Havana route. Juan Trippe devised a plan to arrange a promotional flight in the only multi-engined plane then in the United States, a Fokker Trimotor and flew with its inventor, Antony Fokker, to Havana to impress then Cuban President Gerardo Machado. When he landed back in Florida, he had the landing privileges in Cuba securely in his pocket.

Back in New York the other partners in Colonial Air opposed Trippe’s new push for the New York to Chicago route. Believing that this route was essential to the future of the company and to his own plans, Trippe attempted a boardroom coup and lost.

Undaunted and using his experience in winning one contract already, he called on his Yale friends again and formed a new company, the Aviation Corporation of America, and set his sights on winning the Key West to Havana route. But he soon discovered that he had two competitors: Pan American Airways, founded by Major Henry H. Arnold, and another company called Atlantic, Gulf and Caribbean Airways, Inc., which was a Wall Street funded company pieced out of the remains of a bankrupt Florida carrier.

Not one of these airlines was flying planes between Florida and Cuba – or any planes at all – but each had a piece of the whole that was needed for success. Trippe had the Cuban landing rights. "Hap" Arnold’s outfit already had the contract for the route (without owning a single plane), and the Atlantic consortium had access to financing. It was the financier of the Atlantic consortium, Richard Hoyt, that engineered a deal. He assembled the directors of the three companies for a cruise on his yacht, along with Assistant Postmaster General Irving Glover, and in the spirit of the times, a solution was hit upon. The three competing firms would be coerced into one – or else.

Following orders, Trippe’s Aviation Corporation of America merged with the Atlantic consortium, which was set up as the new holding company and took over Pan Am as its operating subsidiary. Trippe was named president and general manager of Pan Am and on October 19^th, 1927, the new company finally began its Havana delivery. But by then, Trippe’s eyes were already wandering. New routes were calling, and the only thing that stood in the way was the need for new legislation.

Juan Trippe was eyeing the airmail route for Mexico, the Caribbean and all of South America, but in all three areas there were already established carriers. Undeterred, Trippe looked to Washington for help. During his lobbying efforts, he approached an old fraternity brother, Alan Scaife, who introduced Trippe to Melville Kelly, the author of the Contract Air Mail Act of 1925, and who was now drafting the Foreign Air Mail Act of 1928. Trippe appointed himself the industry spokesman and worked with Congressman Kelly to work out the details of the bill. Included in the new Act were provisions that Juan Trippe would build his career on.

The Foreign Air Mail Act of 1928 gave the Postmaster General the power to grant routes to "the bidders that he shall find to be the lowest responsible bidders that can satisfactorily perform the service...." With the stroke of a pen, the Postmaster General could now toss out the lowest bidders solely on his own authority that they were not "responsible".

With this new instrument in his back pocket, Trippe eyed the route from Cuba to Puerto Rico and down the West Indies to South America. A small outfit called West Indian Aerial Express was already flying this route and could be expected to be given the US Mail contract. But Trippe now had something his rival bidders did not: a friendship with the Assistant Postmaster General, Irving Glover, who helped him win the Florida to Cuba route. Trippe indicated his desire to bid for the Puerto Rico route... and Irving Glover showed him West Indian’s bid application.

Two weeks after submitting its bid, West Indian was turned down, and lacking a mail contract, soon went out of business. Its owner summed it up succinctly: "While we were developing an airline in the West Indies, our competitors had been busy on the much more important job of developing a lobby in Washington."

Integral to the developing Pan Am system was the two routes through Mexico. Under Mexican law only a Mexican company could deliver mail inside the country, but such a company already existed – the Compania Mexicana de Aviacion, although it was completely American -its founders, capital, pilots, and planes all originating from north of the Rio Grande. Trippe offered them a scheme to secure a US Mail contract, which would provide much needed revenue for the firm. Next, Trippe called on his old Yale chum Cornelius Vanderbilt Whitney, to lobby the President of Mexico, who was a friend of Whitney’s.

The president of Compania Mexicana, George Rihl, agreed to a buyout. With this and the agreement of the Mexican President, Trippe would achieve his fait accompli. When in 1929, the Postmaster General solicited bids for the route to Mexico City, American bidders found the door to Mexico closed as George Rihl indicated he would only subcontract for Pan Am. Trippe entered the higgest bid possible under the law – two dollars a mile – and he was the only bidder that had the legal privilege to deliver mail in Mexico. With this contract Trippe now had his airmail monopoly over Central America and the Caribbean, controlling all US Mail routes between Panama and the Rio Grande River.

Juan Trippe next laid his eyes on the eastern coast of South America and its cities of Rio de Janeiro, Montevideo and Buenos Aires, but a potential opponent was lying in wait – the New York, Rio and Buenos Aires Line, or NYRBA, which already held airmail contracts for the governments of Argentina, Uruguay and Brazil. But NYRBA was badly overextended after October 1929 – losing $400,000 a month operating its current routes. A US Mail contract would’ve saved the company, but Juan Trippe was in a position to make sure that would never happen.

The new Postmaster General, Walter Folger Brown, threw out the competive bidding process and split Latin American airmail routes between Pan Am and NYRBA. Needless to say, Trippe was determined to prevent this. In his view Pan Am should be the sole American overseas airline, arguing that its real competitors were the national airlines of Great Britain, France, Germany and the Netherlands. All enjoyed lavish subsidies and state favors and were – as Britain’s Imperial Airways was officially described – "the chosen instrument of the state."

To rig the system to produce his desired monopoly on overseas flights, Juan Trippe decided to use his connections in Washington to push the company into bankruptcy. George Rihl summarized the plan like this: "If we can keep the contract from being advertised for eight or nine months, I believe the NYRBA will disappear or make any kind of agreement we want." As 1930 rolled around and NYRBA was bled dry, Trippe offered NYRBA’s investors a buyout of 33 cents on the dollar. The deal was concluded on August 19^th. The next day, the Postmaster General solicited bids for NYRBA’s routes. Pan Am was the only bidder and got them all. Trippe scorned his NYRBA adversaries: "They were nice young men who thought that they would like to run an international airline. But they really didn’t know what it was all about." Maybe. Or maybe they were just honest businessmen.

So over the course of just three years, Juan Trippe had parlayed his Washington connections to grow a 90-mile route to Cuba into the world’s largest carrier, with routes totaling 20,308 miles of airway in 20 countries. And on most of these the Post Office would pay 2 dollars a mile. Funded by taxation, Pan Am would sail through the Depression era.

Pan Am grew into a military contractor during World War II as Pan Am and Juan Trippe met up again with Pan Am’s founder, now General Hap Arnold, the head of the U.S Air Force. Out of this wartime role would come the price-fixing scheme called the IATA. Even before the war was over, Trippe was at work building this post-war cartel, the International Air Transport Association. The cartel would unanimously fix fares, which the member’s governments would then ratify and enforce. No matter which airline a passenger traveled on between countries, he would pay the exact same fare. Although Pan Am was the largest international airline in the world and in passenger miles carried more than its British, Dutch and French rivals combined, there was a problem. The terms of the IATA violated the Sherman Anti-Trust Act. No matter what he said, US officials refused to budge on concessions, so Trippe turned to the British government to run interference for him. The British were strong supporters of the IATA scheme and the United States government dropped its objections and accepted the IATA cartel. Juan Trippe won again and gave a new dimension to the ‘Special Relationship.’

But by the 1980’s deregulation would pull the rug out from under Pan Am’s comfortable privileged position, and beset by astronomical fuel prices in the late 70’s and a crushing burden of debt service rates, Pan American Airways began shedding pounds and collapsed into liquidation at the end of 1991.

For six decades Pan Am dodged market competition through advantageous political connections and regulations, all the while imposing public expenses to serve private gain.

September 12, 2001

Adam Young [send him mail] is studying computer science in Ontario, Canada. His articles have appeared in Ideas on Liberty, Mises.org, LewRockwell.com, The Free Market and Pravda (Yes...THAT Pravda).

© 2001 LewRockwell.com