Legal Matters: William A. Franke, Pioneer of Low-Cost Air Travel, On His Career in Business and Law

In Conversation with M. Elizabeth Magill

 

William A. Franke, LLB ’61 (BA ’59)
Co-founder and managing partner of Indigo Partners, LLC

The 2017 Dubai Airshow made headlines but not because of the new aircraft displayed there. It was Bill Franke and Indigo Partners, the private equity firm that he founded and runs, that stole the show by signing a deal with Airbus to purchase 430 planes with an estimated list cost of $50 billion—the largest commercial aircraft purchase on record. It may have shocked the airline industry, but it was just good business for Franke.

Before he became known as the “pioneer of ultra-low-cost” air travel, Franke was the go-to executive for troubled businesses, leading the repositioning of Valley National Bank (now Chase Bank) and the convenience store chain Circle K out of bankruptcy. It was because of his reputation as “Mr. Fixit” that Arizona Governor Fife Symington called on him when America West Airlines, which employed thousands of people in the state, was in bankruptcy with the creditors pushing for liquidation.

“He asked if I would be willing to take a look at it. I said I’d stay six months, and I stayed nine years. As they say, you get jet fuel in your blood. I enjoyed it,” Franke says in the interview that follows.

After serving as CEO of America West from 1993 to 2001, restructuring and repositioning it as a full-service low-cost carrier, he founded Indigo Partners, a private equity fund focused on worldwide investments in air travel. As the managing partner, he steered the firm to investments in no-frills, value air travel.

“Everybody thought I was nuts because nobody’s ever made any money with airlines,” he says.  “But I was able to attract capital to the idea and, with a sovereign wealth fund that was a major backer, we created our first airline, a low-cost airline based in Singapore called Tiger Airways.”

Franke went on to lead and reposition Frontier Airlines and Spirit Airlines and invest in other low-cost airlines including Hungary-based Wizz Air, Mexico’s Volaris, and Chile’s JetSmart. An outsider, he saw ways to cut costs and streamline the business, as with the Airbus purchase, which consolidated the aircraft needs for four separate airlines in Indigo’s portfolio.

When Franke has time off from his busy schedule, he prefers to spend it with his close-knit family. “That’s my main hobby,” he says. And a focus for the family has become philanthropy, primarily aimed at creating educational opportunities for first-generation, Hispanic, and Native American college-bound kids. But with his latest gift to Stanford Law School for the W. A. Franke Global Law Program, he and his family have added international business to the mix.  This new focus can be attributed to Franke’s experience in business, but also, perhaps, to his upbringing and military service.

Franke took his first trip on an airplane in the summer of 1948 when his family moved from Texas to Asunción, Paraguay. They made the journey on a Braniff Airlines Douglas DC-4, “the plane at the time,” making stops in Mexico, Panama, Peru, and Bolivia before finally reaching Asunción. “You had to fly up over the Andes out of Lima and the plane wasn’t pressurized, so we were given the oxygen tubes, which for a kid—I was about eleven—was pretty exciting stuff,” Franke recalls.

Franke’s father had taken an assignment with the State Department’s USAID program, moving the family first to Paraguay, where they lived for a number of years. Education for the young Franke was interrupted for a while because he initially didn’t speak Spanish and there were no English-speaking schools in Asunción. “I really didn’t go to school for a number of years. My mother tried to home school me, but that was pretty much a failure.”  A great-uncle who had moved to São Paulo, Brazil, in the 1920s, agreed to look after him when at age 15 Franke tested into the American high school there.

“It was a pretty broadening experience. I was a kid from a small town in Texas. I didn’t speak Spanish, though I subsequently learned it. I grew up fast because there weren’t the usual support systems you’d have back in the States. And I became pretty independent, traveling at a young age on my own to various countries for schools and then back and forth to high school in Brazil,” he says.

He and his buddies from the school’s basketball team applied to colleges together, flipping a coin to choose which one to attend. “My parents wanted me to go to Rice, which of course ruled that out,” he recalls.  Franke attended Stanford undergraduate in an accelerated academic program, finishing in three years, and then he went straight to Stanford Law.

“We had a lot of country doctors in my family and I thought I might go to medical school. But I was fascinated by the law—particularly after living in a foreign country, but also seeing my father’s work and the application of law to some of what he did. So I thought it would fit me better,” he explains.

Franke had gone through ROTC at Stanford and infantry officer training after law school.  He was scheduled to depart for Laos but at the last minute got a change in orders. “They picked up that I had lived in Latin America and was fluent in Spanish, so they sent me to Army Intelligence School in Maryland, and then I was assigned to a special unit that focused on international military intelligence issues. I was technically based in Washington, D.C., but a lot of my career was spent in Panama and South America at a time when we were quite concerned about Fidel Castro and issues taking place in the region,” he says.  He recalls traveling to a major conference of military leaders in Panama. “We flew down on Air Force One—me, a colonel, and 19 staff. And, believe me, I did sit in President Kennedy’s rocking chair on the plane!”

After three years on active duty, Franke left for legal practice in Spokane, Washington. But he continued in the military as a mobilization designee. As to whether military experience helped him in his career, Franke is unequivocal.

“Some people take the view that their Army career was a waste of time. It was not a waste of my time. I learned a lot about how to manage myself up and down in an organization and how to manage people. It was a major opportunity for me. I have no regrets whatsoever about the time I spent in the Army,” he says.

Elizabeth Magill
Former Dean of Stanford Law School

Elizabeth Magill knows something about flying, though her view is from a passenger seat. In her nearly seven years serving as dean of Stanford Law School, she clocked hundreds of thousands of air miles as she hit the road—and skies—meeting thousands of SLS alumni around the world, sharing news of the law school, and gathering their insights about programs and plans. In many of those encounters, the topic turned to the changing international landscape and how JDs were being prepared, or not, for a global practice. For Bill Franke and Magill, it became an ongoing conversation—his thoughts on key elements of a program to address this challenge helping to shape what was finally announced in the fall of 2018: the W. A. Franke Global Law Program. It was a labor of love for Magill, the program launch a highlight of her deanship. The gift from Franke—the largest from an alum in the law school’s history—has allowed the law school to expand its global educational offerings dramatically.

“The Franke Program will help us transform the legal education we offer our students in ways that reflect the global nature of the world today. It is off to a terrific start, with very high student demand for our new educational programs. I’m thrilled that Bill Franke has thrown his support so fully behind this new initiative,” Magill said before sitting down for the interview that follows.

A teacher and scholar of administrative law and constitutional structure, Magill is a member of the American Academy of Arts and Sciences and the American Law Institute. After completing her BA in history at Yale University in 1988, she served as a senior legislative assistant for energy and natural resources for U.S. Senator Kent Conrad. She left the Hill to attend the University of Virginia School of Law, where she graduated in 1995.  She then clerked for Judge J. Harvie Wilkinson III of the U.S. Court of Appeals for the Fourth Circuit and for U.S. Supreme Court Justice Ruth Bader Ginsburg. She then immediately joined the faculty of the University of Virginia School of Law, where she served for 15 years, holding an endowed professorship and serving as vice dean. She is an award-winning scholar and held fellowships at Princeton University and Downing College Cambridge and was a visiting professor at Harvard Law School. Magill served as dean of Stanford Law School from September 2012 to April 1, 2019. She is leaving Stanford in the summer of 2019 to become executive vice president and provost of the University of Virginia. She interviewed Franke in March just before her deanship ended.

—By Sharon Driscoll

Legal Matters: Q# & A# 1

Illustration by: Riccardo Vecchio

MAGILL: You started your legal career practicing law in Spokane for a few years. How was that?

FRANKE: Yep. I went to Spokane after military service and I practiced at what was a good-sized law firm for Spokane, but what would be very small by anybody else’s standards—nine lawyers. It was a civil insurance defense firm, but it also represented the Washington State Medical Association and its biggest client was the Northern Pacific Railway, which is now the Burlington Northern Santa Fe. The railroad started in Portland, went to Seattle, and had a major facility in Spokane before heading east to St. Paul. As a young guy, I was focused on that work and I spent a lot of time in Idaho, Montana, all the way over to the Dakota border, working in small communities on railroad-related issues. And I enjoyed that.

MAGILL: How did you find yourself leaving legal practice and joining Southwest Forest Industries?

FRANKE: I had gone to Stanford Law School with a guy whose father was a lawyer in Houston and the senior director of a small forest products company based in Phoenix. The company was looking for somebody to manage an aggressive external growth program, which involved merger and acquisition work. And while I knew pretty much zero about that, they became convinced I was the right guy to do it. So in December 1969, I moved to Phoenix and went to work for Southwest Forest. And grew it dramatically. Somewhere along the way, about two years later, the CEO died quite suddenly and the board appointed as the new CEO a man who had run the company’s paper operations. And they named me to the curious title of assistant chief executive officer, which I’ve never heard of before or since. My job was to manage all of the non-operating stuff in the company. I pretty quickly became CEO of what was by then a Fortune 500 industrial company, listed on the New York Stock Exchange, with holdings and operations all over the United States.

MAGILL: So your first foray into business proved very successful. Why did you leave Southwest Forest?

FRANKE: We merged with another like-sized company based in Chicago. Chicago was a logical place for the headquarters. I didn’t want to go to Chicago. I didn’t have to go to Chicago. So I didn’t. I stayed in Phoenix and created an investment firm that I ran. I served on several boards, including the board of the largest bank in Arizona, Valley National Bank. I became chairman of its executive committee and I helped orchestrate several changes in the management strategy. It’s now part of JP Morgan Chase.

MAGILL: Was it about this time that you started to gain a reputation as Mr. Fixit—moving next to convenience stores?

FRANKE: That’s right. There is a local convenience store, Circle K, which is headquartered in Phoenix. It had grown pretty dramatically to more than 5,000 stores. Its controlling shareholder was Carl Lindner, a famous investor who was based in Cincinnati. Carl asked if I would take a look at Circle K. So I spent several days with the senior management and then called Carl up and said, “The company has to file bankruptcy—it can’t sustain itself.” He asked me to take a role in the restructuring and I became chairman. Circle K went through a dramatic restructuring, reducing stores to about 3,000 in number. On successfully emerging from bankruptcy, it was sold to an investment fund. It’s still alive and well.

“There’s a certain business school attitude about bleeding risk out of the decision-making process that can fatally delay decisions. Sooner or later, as you learn in law school, you have to make a decision and bear the benefit or risk of the decision.”

William A. Franke, LLB ’61 (BA ’59)

MAGILL: So how did you get into the airline business?

FRANKE: Right about the time I was leaving Circle K, the governor of Arizona, Fife Symington, called me and said that our local airline, America West, was in bankruptcy and the creditors had filed a motion to liquidate it and we were going to lose 6,000 or 7,000 jobs in Arizona. He asked if I would be willing to take a look at the airline. I said, “Governor, all I know about airlines is my seat assignment, but I’ll take a look.” I went out to the headquarters to learn more and I could see obvious things that should have been done, or could be done. I told the creditors I’d stay six months, and I stayed nine years. As they say, you get jet fuel in your blood.

MAGILL: And when you first entered the airline industry, how did the other big players greet you?

FRANKE: As I noted, I didn’t know much about the industry. I got on an airplane and I called on the CEO of United, the CEO of American, and Herb Kelleher who was the CEO and co-founder of Southwest. I just cold-called them, “Here’s who I am. Here’s what I’m doing. Can you help me out—give me some advice?” And they all gave good advice. In particular, Herb did. Mind you, Southwest was America West’s major competitor. Thirty-eight percent of our system competed with Southwest. But he was very open with tips on how to manage issues and what to watch out for. That’s how it began for me.

MAGILL: You brought fresh eyes to it—an outsider’s perspective.

FRANKE: Well, of course, since I hadn’t grown up in the business, I saw stuff traditional airline managers didn’t see. We’re all guilty of doing things in kind of “this is the way you do it” fashion. And that’s particularly true of the airline industry. Indigo has made radical changes to the airline sector, across the world. It’s exciting to be involved.

MAGILL: Why did you leave America West?

FRANKE: I have a view that at somewhere around 10 years, CEOs need to move on. You need new perspective—fresh eyes—so I left and set up Indigo Partners.

We started looking at investment opportunities in the airline sector. Everybody thought I was nuts because nobody’s ever made any money at airlines—even Warren Buffett lost several hundred million bucks investing in airlines some years ago. I was able to attract capital to the idea. In particular a large investor became a major backer, and with its help we created our first airline, which was a low-cost airline based in Singapore called Tiger Airways. It flew in Southeast Asia and it was very successful. We’ve since had airlines in Indonesia and Russia. We are now major shareholders in airlines in Mexico, the U.S., Chile, Argentina, and Eastern Europe. And we’ve just announced that we’re setting up an airline in Canada. It’s been quite the run and our fund has done very well.

MAGILL: What has kept you interested in airlines and Indigo Partners?

FRANKE: With airlines, there’s only so much you can control and a heck of a lot you can’t control. I can’t control fuel price and I can’t control issues around aircraft availability and performance and so on. There’s a lot of stuff going on and, if you’re intellectually curious, it keeps your attention. It’s been the right career for me.

The Mr. Fixit part kind of went away after I went to America West, though I use some of those same tools today.  I’ll give you an example.  We acquired Spirit Airlines in Florida, and it was a mess. They’d never made much money but we could see a path and we developed management that could follow that path. I’m sure much of that vision for change came from the years I spent restructuring businesses. I’ve enjoyed creating the strategy and helping with the growth that follows. That’s different from the Fixit element.

MAGILL: Can you talk about seeing opportunity as you have in the ultra-low-cost area?

FRANKE: Southeast Asia and Central and Eastern Europe, where we started, are good examples. There were a lot of people traveling by boat in Southeast Asia. Or, if they were in Central and Eastern Europe, they were on buses and trains. In both cases, traveling by air was just beyond their financial means. So we analyzed where the price break point was that would induce travel, particularly in emerging economies like Southeast Asia and Central and Eastern Europe, and we focused on how to get people off other forms of transportation and onto planes. That required a dramatic reduction in the cost of the seat that you flew.

MAGILL: And how did you develop a business model that worked and is profitable?

FRANKE: This all happened in stages, but, for instance, we only fly newer airplanes, because they’re more fuel-
efficient and have fewer maintenance issues. But that wasn’t the industry practice—airlines fly planes for 10 or 12 years. Another area is maintenance. Airlines have huge maintenance facilities and that to me was just not a good use of resources. We have all of our heavy maintenance performed, in general, by companies like Lufthansa that have heavy maintenance facilities with extra capacity and so we contract with them to provide our maintenance. As a result, we don’t have the expense, the capital requirements and the management issues associated with maintenance operations. And you can follow that path through various other sectors of the business ranging from airports, baggage management, and so forth. We contract with third parties to provide those services and that has made our model lean. In every market in which we operate, our airlines have the lowest cost and that permits us to offer fares 35 to 40 percent below the competition.

MAGILL: Indigo Partners recently purchased 430 Airbus airplanes—a record, I think. Can you talk about that a bit?

FRANKE: That was the largest order, I believe, ever. The list price for the aircraft is about $50 billion, though we didn’t pay that.

Indigo Partners, at that point, had four airlines in the portfolio of which we were the de facto controlling shareholder. And each airline was separately considering buying more airplanes. Buying aircraft is a long campaign—it takes months of work with Boeing or Airbus to get the best order possible. And it’s a very complex process. You buy the motors separately from the airframe and select the avionics for the front of the airplane, and so on.  So it occurred to me that, gee whiz, why don’t we all band together—the four airlines—and present the market with a stunning order size, and let’s see what happens. I thought we should be able to drive better pricing, better terms and better delivery streams. And we did.

MAGILL: Do you think there’s still room for growth in the ultra-low-cost air travel sector?

FRANKE: I do. In Europe, for example, Ryanair, easyJet, and our airline, Wizz Air, carry almost 40 percent of the domestic passengers. In the U.S., about 7.5 percent of domestic passengers travel on what you would think of as an ultra-low-cost airline. So the market here in the U.S. is fertile ground for ultra-low-cost carriers that can charge a reasonable fare to people like college-age kids, grandparents, vacationers or others who want to travel and don’t want to pay for the service they get at a higher cost traditional airline. They want safe, reliable service at a low price.

But there is a service trade-off. You have more passengers on the plane and people pay for whatever services they want. They don’t pay for services if they don’t want them.

Legal Matters: Q# & A# 1

Stanford President Marc Tessier-Lavigne, Carolyn Franke, William A. Franke, and former Dean M. Elizabeth Magill

MAGILL: What are the biggest challenges in the airline industry worldwide today?

FRANKE: Safety is the first. Running a safe, reliable airline is critical. That said, the biggest day-to-day challenge for the airlines is, generally speaking, fuel. There are studies going on now looking at alternative fuels or electric engines, but we’re still 99 percent dependent on jet fuel. That is a refinery derivative of oil, so you watch carefully what happens to oil prices—the up and down. That’s the biggest single unknown to the sector. Many of the big airlines don’t hedge jet fuel: If jet fuel goes up, they believe they can move prices up to cover the costs. Well, albeit with a timing lag, you can, maybe, if the economy’s stable. But there’ll be limitations on your ability to do that if oil is moving up at a pace or the economy is in a slump. I won’t take that risk. So, we hedge jet fuel.

In some geographies, the availability of adequately trained pilots is an issue. We’ve done well in our airlines so that hasn’t been an issue for us, but in some parts of the world, it’s a big issue.

MAGILL: How did your legal education help you to transition to a business career—a very successful one at that?

FRANKE: I knew that I was intellectually stimulated by business. Training in law is very valuable for a business career. While you don’t get the same accounting and corporate finance that you do in business school, you do get trained on how to make decisions, how to analyze data—you know, the good, the bad, and the ugly around the data—plus sorting through all that to a solution. And this is going to sound like I’m talking about myself, which I hate to do, but I’ve always had an ability to see solutions more quickly than most of my peers. And I give most of the credit for that to my law school education.

MAGILL: Can you say more about that—the analytical tools you develop as a lawyer?

FRANKE: As you know, in law school, a lot of the training is around determining the logic of a court’s decision, or the legal principles that should be applied to a set of facts. And sometimes there’s more than one legal principle that might be relevant to those facts. So you go through an analytic process and, if you’re intellectually focused, it’s fascinating. I was energized by the choices and the decision-making path that I saw in law.

I spend a fair amount of time with the young MBAs in our firm and at our airlines, helping them understand decision making. There’s a certain business school attitude about bleeding risk out of the decision-making process that can fatally delay decisions. Sooner or later, as you learn in law school, you have to make a decision and bear the benefit or risk of the decision. And in the business world, the sooner you make a decision, the better. You have to aggregate the facts, you have to analyze the facts, and you have to move forward. Law school is a great training ground for that.

MAGILL: I think the standard view of legal training is that it makes lawyers very good at identifying risks, but not necessarily good at solving problems, or seeing the lowest risk solution, or the best solution under conditions of both risk and uncertainty—that, in short, lawyers are too cautious. But that’s not your experience. Why do you think that is?

FRANKE: It’s a fair question, and part of it just may be my own upbringing, growing up outside of the U.S. I had to be self-sufficient from a very early age, so I had to make decisions. Law school gave me the tools to analyze and problem solve. But you’re correct that a lot of lawyers believe they’re traffic cops and their job is to control process and define risk attached to process. But the really good lawyers, particularly really good transactional lawyers, are more focused on how do we get this done—and on how do we moderate the risk associated with getting it done. I don’t think that’s an educational issue—I think that’s more of an issue around your perception of your role.

MAGILL: I understand that you are responsible for training a fair share of the leadership at American and United airlines. Is that true?

FRANKE: That’s right. A lot of the guys I hired in ’95 and ’96 at America West now run American Airlines, which is the largest airline in the world. The current American CEO is someone I recommended as CEO of America West when I left. And the current president of United is someone I hired at that same time.

“It occurred to me that, gee whiz, why don’t we band together—the four airlines—and present the market with a stunning order size. I thought we should be able to drive better pricing, better terms, and better delivery streams. And we did.”

William A. Franke, LLB ’61 (BA ’59)

MAGILL: What do you look for when you’re hiring someone, and how do you know you got the right talent?

FRANKE: You know, part of it is intuition. I mean, you can look at the track record of the particular applicant to see that he or she has done X, Y, or Z, but those are just stops along the path. So you have to spend time understanding how they’ll fit in your environment. The biggest thing I look for in this regard is “coachability”—can they be coached? Or are they satisfied they know it all?

You probably wouldn’t be shocked at the egos involved, but a lot of people at senior level management think they don’t need advice. So we evaluate things like: Do they listen? Are they self-focused? Or are they willing to talk about ways that they might fit? Are they candid about issues they have? When you self-evaluate, what do you think about yourself and what have other people told you about yourself?

MAGILL: I’d like to turn, for a moment, to your philanthropy. Can you talk about your focus on education, particularly on underserved communities?

FRANKE: We have been focused uniformly on education, and it has to do with my own observation of the importance of education. It also has to do with my view that, while we all have different ideas about immigration—building walls or what we’re going to do to manage immigration and so on and so forth—the fact of the matter is that we have an existing and significant immigration-related problem in many states with large resident Latino populations. It is hard for Hispanics to get through the education process and into the economy. Living in Arizona, this is a major issue, and of course you see it in California as well.  In Arizona, we also have a large Native American population—the Apaches, the Navajos, the Hopis, and several other tribes all have reservations here—and they have a similar challenge from an educational standpoint. Both groups have a very poor college completion percentage. We started off looking at ways to help Hispanics and Native Americans and that has led us to support first-generation kids as well.

The school that we focused on in Arizona is Northern Arizona University in Flagstaff. It has a very high first-generation ratio and one of the largest Native American populations of any university. We created a program in the business school there that is focused on scholarships for first-generation, Native American, and Hispanic students. We then made a gift to the University of Montana that’s focused on the same scholarship issues but with sustainability underpinning that gift.  And we recently made a commitment to the Arizona Mayo Clinic, which has started a medical school in Arizona focused on supporting opportunity for those in need to attend medical school. Stanford Law School is a bit of an exception. In your case, we’re focused on giving students an understanding of international issues and that will become a bigger focus for us as we look at further gifts.

MAGILL: How did you come to see global education as a priority? 

FRANKE: I think you and I talked about this, way back when, and I told you that I’ve been interested in the training of U.S. lawyers. At Indigo, we do business around the globe and when we have particular legal issues, we use U.S. law firms as our primary source of advice. And, no surprise, we found that frequently the U.S. firms don’t have offices in some of the jurisdictions or geographies where we are working so we tie local firms to the U.S. law firm. We’ve found there is a gap in practice standards and in understanding the differences in the legal systems between our U.S. lawyers and foreign advisors. A lot of the world is based on the Roman civil law and much of it is based on English common law. And guess what? We were spending an inordinate amount of time trying to manage international legal issues because of that gap in understanding of the differences in the systems.

The U.S. has been pretty self-focused over the years. I, on the other hand, have been interested in internationalizing legal education to the extent possible. And that’s what began this year with the program that we’ve established at Stanford Law School.

Bill Franke and John Leahy, COO of Airbus, at Dubai airshow, November 2017, after announcement of
biggest aircraft purchase on record

Legal Matters: Q# & A# 2

MAGILL: And so for students interested in the kind of path you followed—what’s the advice you would give them about their legal training?

FRANKE: At the end of the day, they need to have an opportunity to understand both the legal and business perspectives of operating in a world economy.

I talk at the business school at Stanford every year, and I say, “Look, you’re going to be involved in either working directly for international companies, or working in the international markets, or working for companies that have a supply stream or delivery stream that’s associated with international markets. So you have to internationalize yourself.” That’s the same message you have to give to law students. If you’re a Stanford graduate and you’re going to big city law, the odds are overwhelming you’ll work for a firm that has an international practice. And you can move yourself forward at a pace in front of your contemporaries if you have had exposure to, and an understanding of, international political, business and legal issues.

MAGILL: The compelling vision that resonates so much here is that someone with legal training has the right habit of mind to be a great counselor and problem solver for a businessperson, but not without exposure to the rest of the world.

FRANKE: Yes, I mean, those days are long gone. If you want to succeed in the world today, it’s almost irrelevant whether you’re running, say, a discount tire store in Anaheim. Sooner or later, those tires are coming from Japan or Korea. And sooner or later, some part of your life is going to be internationalized. You need to take control of that. You need to have the opportunity to expand. The program that we have created is a great way to distinguish a Stanford Law grad.

MAGILL: This has been a really special pleasure for me. I learned a bunch of things about you that I didn’t know, Bill. Just hearing your thinking about your career and what excited you and kept you interested has been a great hour for me. I really appreciate it. Thank you so much.

FRANKE: You’re welcome.