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Airline Dealmaker Frank Lorenzo Says Doug Parker Got It Right

Tickers in this article: AAMRQ.PK LCC LUV UAL

CHARLOTTE, N.C. ( TheStreet) -- Let's just say upfront that Frank Lorenzo was not the most popular person in the history of the airline industry. He was perhaps the most unpopular.

But in hindsight, Lorenzo shaped the industry as very few people have done. He was the first to use bankruptcy to restructure an airline; now bankruptcies represent a common industry strategy. Combining assets from Eastern and Continental, he started the buildup of the Newark, N.J., hub that became the most profitable hub in the U.S. airline industry. He also redesigned airline fares, introducing both low "peanuts" fares and restrictive, non-refundable fares.

Lorenzo was also a leader in growing through mergers. In 1972, he took over Texas Air International , a small, insignificant, cash-squeezed western airline. In 14 years, he built the world's largest airline holding company. Similarly, in 2001, Doug Parker took over as CEO of America West , a small, insignificant, cash-squeezed western airline. On Thursday, when US Airways (LCC) is expected to merge with American Airlines, (AAMRQ.PK) , Parker would become CEO of the world's largest airline.

"Those guys have put together a wonderful story of growth," Lorenzo said. "Assuming they can get the deal put together, it's a heck of a story. You have at US Airways a very entrepreneurial team, which is nice to see, because often at the bigger companies you don't find as much of an entrepreneurial spirit." Others have done deals, of course, but few have been so focused for so long on deal-making, and none have started with so little and then built airline companies so large as the ones Lorenzo and Parker built.

Lorenzo thinks the US Airways/American merger will work, but not immediately. "Merger is a tough game," he said. "You have to take a long-term perspective. Over the short term, as United(UAL) has found out, it's not a party. It's very tough. There's so much technology that has to be brought together, in addition to labor groups. But looking down the road, it's going to be a healthier industry."

Lorenzo, 72, formed Jet Capital Corporation , which advised airlines, in 1969. In 1972, Jet Capital acquired Texas International, which "was threatened with extinction because Southwest (LUV) was breathing down its throat," flying the same routes out of Love Field, Lorenzo said. "(Southwest president) Lamar Muse said he was going to put Texas International out of business." The threat devalued TIA enough that Lorenzo could afford it.

"I have often said that we wouldn't have had an opportunity if it wasn't for Southwest," he said.

Soon thereafter, the Civil Aeronautics Board awarded new routes, including Dallas to Los Angeles via Albuquerque, to TIA, and the airline had a chance to become profitable. "In 1977, we came up with peanut fares, the first unrestricted fares to be filed," Lorenzo said.