The story
Startup, early competition
PSA started as an offshoot of San Diego–based Friedkin Aeronautics, the flight school Kenny Friedkin started to train returning GIs. When GI business dried up, on May 6, 1949, Friedkin started flying once a week from San Diego to Oakland via Burbank with a $1,000-a-month leased Douglas DC-3. Friedkin obtained information from a travel agent upon starting the airline due to lessons learned from a failed precursor airline (Friedkin Airlines). Reservations were initially taken at a World War II surplus latrine refitted as a ticket office. The original fare from Burbank to Oakland was $9.99. In July 1951 PSA added a flight to San Francisco. Oakland was dropped in 1954, but restored to the system in 1965. DC-3s went in and out of the fleet, but the total number was never more than four.
PSA was one of eight California intrastate carriers that started flying in the 13 month period from January 1949 through January 1950 - but only California Central Airlines (CCA) and PSA lasted longer than a year. CCA started in January 1949 and through its demise in February 1955 was larger, and flew better equipment (Martin 2-0-2s) than PSA. But CCA was not as focused as PSA (which stuck just to the San Diego to Bay Area route) and ultimately went bankrupt. PSA bid on CCA in the bankruptcy auction, but lost to a group composed of Allegheny Airlines and Southwest Airways (no relation to today's Southwest Airlines) which shut CCA immediately, leaving PSA as the only intrastate competitor.
Better aircraft, expansion
In 1955, four Douglas DC-4s replaced the DC-3s, with PSA painting rectangles around the windows to make them resemble the more modern Douglas DC-6.
In January 1958, PSA scheduled 37 DC-4s a week Burbank to San Francisco (29 of which originated in San Diego) and four nonstops San Diego to San Francisco; United Airlines, Western Airlines and TWA then scheduled a total of 241 nonstop flights each week from Los Angeles to San Francisco, plus 49 flights a week from Burbank to San Francisco. About half of these flights by the competition were First Class only ($22.05); the rest carried coach passengers for $13.50, all fares subject to then 5% federal excise tax. In July 1958 PSA shifted some flights from Burbank to Los Angeles International Airport (LAX); that year it carried 296,000 passengers.
In late 1959, PSA began flying Lockheed Electra turboprops with 92 seats and a six-seat lounge, replacing 70-seat DC-4s. In 1963 PSA got its sixth Electra; by then it carried more passengers between the Bay Area and Los Angeles than any other airline. Total PSA passengers climbed from 355,000 in 1959 to 1,305,000 in 1963 and 5,162,000 in 1970.
Public company
On March 16, 1962, founder Kenny Friedkin, only 47 years old, died of a cerebral hemorrhage. He had lived to see his airline become a success, but it was still tiny, with only five aircraft. J. Floyd Andrews, one of Friedkin's fellow founders, took over. Andrews's era was tumultuous, PSA achieving a high national profile. This was the era of hot-pant clad flight attendants on pink-liveried aircraft, a classic image of California in the late 1960s and early 1970s. As discussed below, PSA became utterly dominant in the intra-California market, but also overreached to the point it almost went bankrupt.
Less than a year later, PSA went public, with a February 14, 1963, initial public offering, 313,000 shares (100,000 of them primary) at $19. Preparations had been underway for some time. PSA had an unusual corporate structure, with its aircraft owned through three companies owned by founders (Friedkin and others). In January 1962, these were merged into PSA. Prospectus facts that caught the eye of one observer included:
With only five 98-seat Electras, PSA nonetheless had the second-highest passenger marketshare in San Francisco, and the fifth largest in Los Angeles.
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Speedy 20 minute aircraft turnarounds and no-frills service.
Nine months profit to September 30, 1962, of over $1 million (at a time when the Los Angeles to San Francisco fare was just $13.50)
937,000 passengers carried between San Francisco and Los Angeles in 11 months ending November 30, 1962, compared to 642,000 in the same period the prior year.
CPUC era, 1965–1978
Until 1965, as an intrastate airline PSA had a free hand in terms of how and where it flew within California. The California Public Utilities Commission (CPUC) was limited to regulating PSA's prices. So long as PSA stayed within the boundaries of an intrastate airline, the federal Civil Aeronautics Board (CAB), which otherwise tightly regulated US airlines, had no say, though as with any US airline, the Federal Aviation Administration (FAA) operationally regulated PSA. As of September 17, 1965, the CPUC had new powers over California intrastate airlines of economic certification (PSA was grandfathered) route entry/exit and service quality (e.g. frequency).
PSA was in favor of this. In the early 1960s, a number of new entrant California intrastate carriers had come and gone, the most notorious being Paradise Airlines, which had a terrible accident in 1964. PSA believed it would benefit from market stability, but observers predicted that over time the CPUC would become just as restrictive as the CAB, which, in fact, happened. From 1965 through US airline deregulation in 1978, the CPUC certified only two intrastate airlines: Air California and Holiday Airlines. From September 17, 1965, through 1978, PSA had to apply to the CPUC for all new routes, generally in competition with Air California.
Air California and lost opportunity
Despite having total network freedom, PSA evolved its network minimally from 1949 to 1965: it served only five airports: San Diego, LAX, Burbank, San Francisco and Oakland. In 1965, Orange County Airport (later John Wayne Airport (SNA)), had a new runway. It approached PSA (among other airlines) about serving it (SNA had long-standing minimal service from Bonanza Air Lines), and like the others, PSA demurred. This was a mistake:
The CPUC certificated Air California to bring intrastate air service to Orange County, and the airport became a big deal. The County was the fastest growing in the nation in the 1960s, population increasing from 700K in 1960 to 1.4mm in 1970. There was a lot of demand for Orange County service.
Having certificated Air California, the CPUC was open about its desire that Air California survive, so it kept PSA out of Orange County, gave other desirable routes to Air California and otherwise took steps to protect it. The CPUC assigned routes to PSA or Air California but rarely both. Despite a rocky first five years, Air California survived and the CPUC ensured minimal competition between it and PSA.
PSA tried to buy Air California twice:
In December 1969, an ailing Air California agreed to a merger, but the CPUC was slow to approve. In May 1970, PSA withdrew, citing the slow CPUC, and almost immediately thereafter, San Diego tycoon C. Arnholt Smith took control of Air California through his Westgate-California Corporation (WCC).
In mid 1972, PSA agreed to buy WCC's majority stake in Air California. Against heavy opposition, the CPUC agreed to the merger when WCC said it would no longer fund Air California losses. However, the US Department of Justice sued to prevent the merger, noting PSA had a 70% intra California market share and Air California had an 11% share. By now a year had passed. PSA withdrew from the merger after Air California auditors withdrew certification of 1971 and 1972 financial statements, one of the first steps in a scandal that enveloped C. Arnholt Smith including the 1973 seizure of his bank, the largest in San Diego, and the 1974 bankruptcy of WCC.
1960s–1970s fleet
PSA’s fleet changed constantly in the 1960s and 1970s. The 1960s started with Electras, then Boeing 727-100s arrived in 1965, PSA's first pure jet. The last Electra flight was September 1968 By 1969, PSA was swapping out 727-100s and replacing them with bigger 727-200s plus 737-200s. At the beginning of 1970, the fleet comprised one 727-100, 16 727-200s and nine 737s. In the late 1960s PSA also briefly had DC-9s, the justification was to train pilots of other airlines. As discussed below, the L-1011s made a brief appearance in 1974-1975, but by then PSA was shedding the 737s; the last left in the fleet in 1976. In 1975, Lockheed Electras returned to support flights to Tahoe (see below). Other than the Electras (required to operate to Tahoe), PSA settled on 727s in the late 1970s, acquiring used 727-100s as well as additional new 727-200s.
PSA entered Tahoe after Holiday Airlines collapsed. Holiday basically served nowhere other than Tahoe, a choice that sealed its fate. PSA applied to the CPUC for Holiday's routes in 1974 Holiday said it couldn’t afford to defend itself in front of the CPUC and went out of business in February 1975. The CPUC split the Tahoe routes between Air California and PSA on an emergency basis, but required the two carriers use Electras for Tahoe. One of PSA's first actions of the deregulated era (which started January 1, 1979) was to exit Tahoe, citing the high cost of Electras in a fleet that otherwise comprised 31 727s.
In 1967 PSA was finally allowed to use offshore airway V25 to San Diego, despite being an intrastate airline.
Attempted Western Air Lines merger
An early indication that, for J. Floyd Andrews, PSA was not enough came in December 1968 with an audacious bid for Western Air Lines, then under attack by Kirk Kerkorian. Western was four times the revenue of PSA, and as an interstate carrier, regulated by the CAB. It was unclear how this would work, putting together two airlines with different regulators, whether CAB approval would be forthcoming. PSA pulled the bid in April 1969, citing deteriorating Western results. By that time, Kerkorian was, while not a majority owner of Western, difficult to dislodge, controlling nine out of 21 seats on the board. As outlined in a section below, PSA instead pursued a non-airline acquisition strategy.
Southwest Airlines
Southwest Airlines was founded in 1967, but grueling legal challenges caused its operational start to be delayed until June 1971. Founder Rollin King took inspiration from PSA. Founding president Lamar Muse was open about the debt to PSA, saying "we don't mind being copycats of an operation like that", including hotpants. PSA hosted King and Muse for a four day visit in 1971 and gave them a copy of PSA's FAA operating manuals, from which Southwest created its own in what Muse said was "primarily a copy-and-paste procedure". PSA helping Southwest made sense in 1971, with each airline strictly limited to flying within its state and seemingly no prospect of that ever changing. Mutual admiration was expressed monetarily: in 1978, Southwest management and directors owned 6% of PSA, while PSA directors and management owned 10% of Southwest.
Laid low by diversification and widebodies
In July 1968, PSA bought rental car company Valcar, a former Hertz subsidiary with a west-coast presence. Like PSA, Valcar had a budget orientation, but PSA couldn't make it work and shut it down in 1971, after failing to sell it.
In April 1969, PSA bought the San Franciscan Hotel in downtown San Francisco. In June, PSA bought the Islandia in San Diego's Mission Bay. In June 1971, PSA committed to a to-be constructed hotel at the Los Angeles Hollywood Park Racetrack (now the site of SoFi Stadium), and in December 1971, committed to a to-be constructed hotel within the Queen Mary attraction in Long Beach The synergies were not obvious. None of the hotels were located at airports, none of them were value-oriented. In 1973, CEO Andrews called the hotels "a complete flop" and in 1974 gave three of them to Hyatt to run. It took years for PSA to extricate itself. In 1979, PSA finally sold the San Franciscan but had yet to sell the Queen Mary hotel.
In August 1970, PSA started buying radio stations. By 1975, its four stations were for sale. PSA also bought a catamaran. In 1973, PSA created a holding company, "PSA, Inc." for the airline and many non-airline subsidiaries.
In late summer 1970, PSA ordered five Lockheed L-1011 widebody aircraft, deliveries starting 1972. In the next 12 months, the L-1011 engine maker, Rolls-Royce, went bankrupt, and Lockheed required a US government bailout to avoid the same. In December 1971, PSA cancelled the order, but Lockheed said it couldn't. In September 1972, PSA signed a new order, deliveries starting 1974. PSA grounded its two L-1011s after eight months. A 300 seat aircraft never made sense in a business model that depended on quick aircraft turnarounds. Economics presented to the CPUC showed L-1011 per-seat costs no better than a 727 despite being twice as large. PSA refused the last three aircraft and was stuck paying a 15-year lease on the first two. It entered into years of litigation with Lockheed.
By 1975, losses from diversification and L-1011s brought PSA to the brink of bankruptcy. Operating losses on rental cars, radio stations and hotels through 1974 (not including cost of acquisition) were almost $9M. Through 1977, PSA lost another $1M on discontinued businesses and recognized $18mm in L-1011 losses. In 1982, PSA took another $4.2M loss against its two L-1011s, still unable to find a home for them. PSA's troubles attracted national attention. PSA went to the CPUC asking for a fare increase to bail them out. The CPUC excoriated PSA, questioning management competency at length and especially withering about a 1974 $8mm share buyback. In March 1976, J. Floyd Andrews gave up the CEO position, and in May, resigned as chair of the board.
Getting out from under the CPUC
As airline deregulation was being debated, for most of the country, it promised lower prices. But California already had lower prices, set by the CPUC. By comparison, in Texas, Southwest Airlines set its own fares, the Texas Aeronautics Commission didn’t get involved. The concern (and expectation) was deregulation would lead to higher prices. California legislators and governor Jerry Brown wanted the CPUC to remain in charge of any airline that did over 50% of its business in California. This amendment was voted down in the relevant US House of Representatives subcommittee by one vote. Instead, deregulation as passed included strong Federal preemption – states had little say over an airline with a Federal certificate.
By then, the CPUC had become the restrictive bureaucracy observers had predicted when it was given additional powers in 1965, second-guessing (in glacial and burdensome processes that could and did last for years) everything California intrastate carriers did, and even itself, as exemplified in the role the CPUC played in the 1975 demise of Holiday Airlines. PSA also played a special role at the CPUC. It was assumed to be the most efficient carrier, therefore CPUC fares were set relative to what would make the highest permissible profit for PSA – all other carriers operating in California then had to toe that line. So PSA had ample reason to regret its support of that 1965 legislation. However, under the Airline Deregulation Act, the minute PSA started flying to Nevada in December 1978, it was free of the CPUC. The CPUC didn’t take that lying down. The CPUC sued in Federal court to overturn the Airline Deregulation Act, lost, appealed, and lost again.
Flight 182
As the regulated era drew to a close, PSA suffered a fatal accident in September 1978 when a Boeing 727 collided with a small aircraft over San Diego, killing all occupants of both aircraft and several people on the ground. The impact on PSA was compounded by:
The presence of a large number of deadheading employees on board, resulting in the deaths of 37 PSA employees out of 135
The fact that San Diego was the company's hometown
The flight crew’s failure to maintain visual separation from the smaller aircraft prior to the collision
Harold Simmons
At the end of 1978 it transpired corporate raider Harold Simmons had accumulated a 20% stake. When PSA, appealing to investors, referred to a 30-year history of success, Simmons printed ads summarizing PSA’s far-from-successful 1970s financials and noting 1977 profits were about half those of 1971, despite revenues almost twice as large. But as PSA said, Andrews was gone. Simmons evinced no desire to "destroy" PSA, seeing it instead as a takeover candidate from which he could profit. PSA won a shareholder vote to implement takeover defenses with just a bit more than 50% but the company had post-dated the shareholder record date to ensure Simmons couldn’t vote his whole stake. Simmons said he’d sue. In the end, PSA paid him off by giving him some aircraft in exchange for his stake. To be fair, notwithstanding Flight 182, PSA’s 1978 financials were somewhat better, but significantly flattered by an accounting change.
PSA on the brink of deregulation
As PSA headed towards deregulation, both the airline and Wall Street thought it would be a winner. But in December 1978, Paul Barkley, then PSA’s chief operating officer (later CEO), spoke about the deregulated future a few weeks away. He expected something fairly sedate, quite different from the bitter Darwinistic struggle that would engulf the industry:
Discounted airfares would fade away due to a shortage of aircraft and “passenger capacity”. Another factor against discount airfares was that they were too hard to administer.
Capacity would be tight through the mid-1980s due to lack of aircraft
The airline industry would be healthier in deregulation, there would be no revolutionary changes. Competition would not be intense, again, due to lack of aircraft.
Striking out in Texas
Dallas-Fort Worth–based Braniff International Airways was the first trunk carrier to fail after deregulation. US trunk airlines were the descendants of the original 16 airlines certified by the CAB and thereafter regulated to be the main US carriers. Braniff had been successful just prior to deregulation, but Harding Lawrence, Braniff’s imperious long-time leader, expanded the carrier excessively immediately after deregulation, resulting in its May 1982 bankruptcy and shut-down. Until Continental did so in 1983, no one knew an airline could recover from Chapter 11 bankruptcy.
In October 1982, PSA announced a cheap and low-risk deal to expand into a new geography: under an eight year contract, Braniff would fly 25 to 30 727s from its Texas base with PSA colors and marketing, employing 1,500 Braniff employees (who would have to agree to lower wages and higher productivity) as well as gates and takeoff/landing slots. These slots were key Braniff assets. In the wake of the August 1981 air traffic controllers strike, the FAA had limited air traffic control capacity, so allocated each airline takeoff/landing slots at specific airports. When Braniff collapsed, those rights were temporarily allocated to others. If Braniff flew again, it could recover those rights, grounding some operations at other carriers. It was a strong competitive lever.
From Wikipedia’s article on Pacific Southwest Airlines, shared under CC BY-SA 4.0.4