Crisis at Capital

With a banker's cold, purposeful look in his eye, Chairman Lord Knollys of Britain's Vickers Ltd. came to the U.S. to deliver a surprising warning last week to Capital Airlines, the fifth largest U.S. trunk line. If Capital did not immediately pay the $12 million in arrears to Vickers on the purchase of 60 Viscounts, Vickers would foreclose the $33.8 million mortgage it holds on Capital's entire fleet of 90 planes, thus put the line out of business. Capital, caught off guard by Vickers' move, did not get word of it until four hours after Lord Knollys went calling on the Civil Aeronautics Board to announce his intention.

Vickers' drastic step may have been designed to put new pressure on CAB to grant fare increases or a subsidy to Capital--but a fortnight ago CAB had already turned down a Capital request for a $12 million subsidy to check its heavy losses ($5,900,000 in the past quarter). CAB appeared in no mood to reverse itself. It was also plain that Vickers was not bluffing. It had taken a calculated gamble when it sold the 60 Viscounts to Capital, requiring no down payment. When Capital fell behind in its big payments, Vickers had granted several extensions. But as Capital's position steadily worsened, Vickers decided that it would salvage what it could.

Severe Doubts. A big part of Capital's trouble was the Viscounts themselves--the first turbine propeller aircraft on any U.S. line. The plane proved reliable and popular, but it was simply too small (44 seats) and too expensive to operate for Capital to make the needed profit. Competitors blanketed Capital's routes with piston-engine aircraft that were just as fast, more easily adaptable to coach travel, and able to carry 20 to 30 more passengers. Now, with the new jets filling the skies, the Viscount is fast becoming obsolete in the highly competitive U.S. air industry.

CAB is also reluctant to come to Capital's aid because it has severe doubts about the quality and efficiency of the airline's management. It questions the judgment of former Capital President J. H. ("Slim") Carmichael, who bought the Viscounts. But he had little choice; no U.S. firm would finance new planes. Capital's troubles were aggravated by its zig-zag route structure, which often ends nowhere, depends on seasonal trade, covers cities already heavily served by such powerful competitors as American, United and Eastern airlines.

CAB is also unfavorably impressed with the activities of the man who forced Slim Carmichael out of Capital: Charles Murchison, Capital's longtime general counsel, largest stockholder (80,532 shares), chairman of the executive committee and vice chairman of the board. Murchison is a wheeler-dealer who has profitably bought and sold his Capital stock.* He conducted a determined campaign to oust respected Chairman George Hann, one of the line's founders, in order to take over himself as chairman and chief executive officer. Things are due to come to a head at a stockholders' meeting this week.

Bankruptcy Preferred? While Vickers could force Capital out of business by foreclosing, Capital would prefer to file bankruptcy proceedings before this happened. This could block Vickers' recovery of its planes, give Capital more time to solve its problems. Last week, after a seven-hour meeting with Capital directors to discuss "our serious crisis." President David H. Baker announced that there would be "no interruption in the line's service."

* New York Journal-American Columnist Leslie Gould, whose wife is Althea O'Hanlon, assistant vice president of Capital and a close friend of Murchison's, charged that Murchison (no kin to the wealthy Texas Murchisons), armed with inside information, sold two-thirds of his shareholdings around the time when Capital stock was at a peak ($41.50) four years ago, later bought back his stock at substantially lower prices, quadrupling his former shareholdings. His law firm has been paid $588,500 in legal fees by Capital in the past six years.

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