TIME: Almanac 1993/TIME Almanac 1993.iso/time/032089/03208900.017

Text File | 1992-09-23 | 8.6 KB | 168 lines

                                                                                BUSINESS, Page 52

Eastern Goes Bust


Crippled by a walkout, Lorenzo throws the airline into
bankruptcy

By Janice Castro


    We did not think that Eastern would be any bed of roses
when we bought it three years ago," said a haggard-looking
Frank Lorenzo. "But I never believed that we would be here
today." Thus, six days into a bitter walkout by some 9,000
mechanics, baggage handlers and other members of the
International Association of Machinists and Aerospace Workers,
Eastern last week became the largest airline in history to go
bust. And even as Lorenzo vowed to bring Eastern out of
bankruptcy stronger than ever, he conceded that it might be
impossible to avoid selling off more of Eastern's already
depleted assets.

    Rarely had the stakes in a labor strike been higher. After
17 exhausting months of glacial negotiations with management,
rank-and-file union members at Eastern decided to strike
despite the risk that they might force the 60-year-old carrier
to go belly up -- and lose Eastern's 31,200 jobs in the process.
For Lorenzo, the intense chairman of Eastern's parent firm,
Texas Air, the prospects were no better: the nation's seventh
largest airline was clearly in for a bone-jarring ride, huge
financial losses and a very uncertain landing.

    From the start, Eastern's pilots unflinchingly backed
striking mechanics and flight crews by walking off their jobs,
and their action grounded all but a handful of the airline's 250
planes. With a dwindling war chest of $200 million, hemorrhaging
at a rate of $4 million a day, Eastern was forced to file for
protection under the Chapter 11 provisions of the Federal
Bankruptcy Code. Lorenzo used the same tactic 5 1/2 years ago
to break the unions and reorganize Continental, but this time,
under revised bankruptcy laws, he will find the process more
arduous.

    Charles Bryan, the tough-talking leader of the airline's
machinists, who makes no attempt to hide his personal animus
toward Lorenzo, responded with characteristic defiance. Said he:
"We take no responsibility for the strike. This is a Frank
Lorenzo strike." Eastern's differences with its unions had long
since deteriorated into a bitter and highly personal feud
between the two men. While Eastern insisted that the airline
could not survive without substantial wage concessions from the
machinists, Bryan maintained that Lorenzo was out to destroy the
carrier and sell it off for his own profit. Lorenzo's battle
with the machinists, said Bryan, was "the purest case of evil
vs. good."

    That set the tone for the showdown. U.S. Transportation
Secretary Samuel Skinner, announcing that President Bush
refused to intervene in the Eastern strike, could not resist a
verbal shiv of his own. "Mr. Lorenzo," he said, "has obviously
not got the trust and admiration of his employees." As unionists
burned an effigy of the Texas Air chairman, their leaders laid
ambitious plans to expand the strike through a series of
secondary boycotts that would tie up commuter traffic across the
country -- a nightmare that was averted when judges in several
cities slapped temporary restraining orders on strikes of
intercity rail and commuter lines.

    Even so, Eastern's determination to keep planes in the air
during the strike quickly unraveled as pilots refused to cross
picket lines. Since he took over Eastern in 1986, the pilots
charged, Lorenzo has systematically stripped the airline of its
most valuable assets, leaving it too small and weak to compete.

    In the past three years Eastern has sold eleven of its
passenger-boarding gates and a choice Miami-to-London route,
and has transferred 20 airliners to Continental, another unit
of Texas Air. Two years ago, Eastern sold its computerized
reservation system to Texas Air for $100 million -- a price most
industry experts said was too low. Last October, Eastern agreed
to sell its profitable Northeast shuttle to Donald Trump for
$365 million. Two days after the bankruptcy notice, Eastern
Express, a Florida commuter airline owned by a Texas Air
subsidiary, changed its name to Continental Express. Said J.B.
Stokes, a spokesman for the Air Line Pilots Association: "It was
either make the stand now, while there's still something left
to fight for, or do it six months later, when there's nothing
left."

    Union workers were not the only ones swept up in the
battle. As the strike strangled airline operations, 9,500
nonunion secretaries, ticket agents and other workers were laid
off. Aside from making a handful of flights between Miami and
Latin American cities, the airline concentrated its efforts on
keeping the Northeast shuttle flying so that the cash-rich deal
with Trump would not fall through. To attract passengers,
Eastern offered a temporary fare of $12 for weekend shuttle
flights from New York to Washington or Boston, a fraction of its
usual rate of $69. The tactic worked: the first flights sold
well.

    But for most travelers holding Eastern tickets, the week
was an exercise in frustration -- and worse. Many passengers
arriving at understaffed counters were unable to get on any
flight. Hundreds of vacationers missed connections with Florida
cruises because flights south were canceled. Hundreds of
thousands of airline customers were left holding some $250
million worth of prepaid Eastern tickets. In order to get
refunds, those who paid in cash will have to queue up behind
Eastern's secured creditors and wait as long as a year.

    To improve its precarious cash position, Eastern on the eve
of bankruptcy agreed to sell eight boarding gates at the
Philadelphia airport to USAir for $70 million. It picked up $15
million more by agreeing to sell its Philadelphia-Toronto and
Philadelphia-Montreal routes to USAir. In addition, Eastern
leased landing slots on its New York-Miami routes to
Continental. Accusations flew that Lorenzo was dismantling the
airline even during the strike. Responded Lorenzo angrily: "Had
we sold assets quicker, Eastern wouldn't be in bankruptcy
today." Along with the shuttle sale to Trump, the deals with
USAir will have to be approved by the bankruptcy judge.

    Meantime, Eastern's competitors had a field day poaching on
the crippled airline's territory. TWA, Delta and Pan Am added
flights on Eastern routes to capture its customers. Even Amtrak
and Greyhound expanded their service to meet the new demand.
TWA Chairman Carl Icahn confirmed that Eastern's unions had
asked him to launch a bid for the airline. Icahn briefly
considered such a bid last fall. He found the idea interesting,
he said, but did not want to interfere in Eastern's
collective-bargaining process. Lorenzo was cool to the
suggestion. "Our major goal at the moment is coming to an
agreement with our unions," he said. "I can't imagine how having
someone like Icahn get involved will do anything but interfere
with the process."

    By choosing bankruptcy, Lorenzo has won some breathing
room, but he has also given up considerable power. Under federal
law, Eastern management will have 120 days to submit its
reorganization plan to the bankruptcy court. In the meantime,
the airline can resume normal operations if it reaches an
agreement with its unions. But the rules have changed since
Lorenzo's previous foray into Chapter 11 with Continental.
Management can no longer toss out union contracts under Chapter
11 without the court's approval.

    Eastern's unions welcome the prospect of dealing with a
judge instead of Lorenzo. But they too will lose clout under
Chapter 11. For one thing, the bankruptcy court has the power
to set terms for a contract settlement. But the unions will also
be able to file a reorganization plan for the airline. Union
leaders gave every indication that the strike will continue. At
week's end its focus turned to picketing Continental facilities
at airports in Miami, Houston, Denver and Newark.

    The dramatic events took their toll on Lorenzo. "I'm not
going to kid you by saying that some of those efforts haven't
hurt my family and me," he said last week. "They have." Lorenzo
maintains that he has done everything in his power to prevent
Eastern from folding. He recalls the options that former Eastern
Chairman Frank Borman described for the airline in 1986: "Fix
it, sell it, or tank it." Unable to fix it, Borman sold it. As
the bankruptcy court now begins to address the formidable task
of putting Eastern back together again, Lorenzo was facing the
possibility last week that tanking Eastern may yet turn out to
be the only choice left.