TIME: Almanac 1993/TIME Almanac 1993.iso/time/041789/04178900.025

Text File | 1992-09-23 | 10.6 KB | 206 lines

                Cº                                                            BUSINESS, Page 44

The Designated Hero


Peter Ueberroth steps to the plate in a $464 million bid to
save bankrupt Eastern Air Lines, but he'll need union sacrifices
to bring it home

By Janice Castro


    Stepping up to the microphones during a Manhattan press
conference last week, Peter Ueberroth looked every inch the
Designated Hero. Frank Lorenzo, the embattled chairman of Texas
Air, had just announced that an investor group headed by the
boyish-looking former commissioner of major league baseball will
buy strike-bound and bankrupt Eastern Air Lines for $464
million. Celebrating Ueberroth's move in a Miami union hall
where they heard the news, boisterous Eastern machinists began
singing Take Me Out to the Ball Game. The initial response of
striking employees to their prospective new boss held promise
that Ueberroth may be able to get Eastern's fleet back into
service quickly. Ueberroth, though, shrugged off any notion
that he will be a "miracle worker." Said he: "I'm an
implementer. It's a mammoth challenge."

    If anything, Ueberroth, 51, understated the task. To begin
with, he must negotiate a new contract with Eastern's
hard-bargaining machinists. They walked out last month and the
carrier was forced into bankruptcy when the airline's pilots
refused to cross picket lines. Even if Ueberroth wins labor
peace, the Eastern sale must be approved by the federal
bankruptcy court and Eastern's creditors, a process that could
take months. Once he is firmly at the controls, Ueberroth must
struggle to fill his planes with consumers who have switched to
other airlines while most Eastern flights have been grounded. As
Ueberroth put it, "We're going to have to win back every
customer."

    Ueberroth's complex deal to buy the troubled airline has
been hailed by Wall Streeters and airline experts as a
masterpiece of risk sharing that will help make his task more
manageable. The ownership of the restructured airline will be
divided among Ueberroth and his investors, who will get 30% of
the carrier, Eastern's employees (30%) and other new
stockholders (40%). Ueberroth's core group of investors will
put up only $200 million in cash. The new company will cover
the remaining $264 million of the purchase price by forgiving
$185 million in debt that the parent company, Texas Air,
currently owes to Eastern and by handing over to Texas Air $79
million in Eastern assets. Those properties include Eastern's
profitable New York-Montreal route, one airport gate at New
York's La Guardia Airport and eight pairs of takeoff-and-landing
slots at U.S. and Canadian airports.

    While Eastern's employees will become part owners, they will
have to make sacrifices to do so. Under the agreement, Ueberroth
can withdraw from the Eastern deal unless its unions agree to
return to work by early this week. Ueberroth maintains that the
airline's machinists and pilots must give up $210 million in
wage and benefits concessions. That is far more than the $125
million in cutbacks that Lorenzo demanded from the machinists,
who walked out when no compromise could be reached.

    So far, the pilots' union has looked favorably on the deal.
So have rank-and-file machinists, but by week's end machinists'
union officials were criticizing the transaction as a giveaway
to Lorenzo. "I think the deal stinks. They are cutting up
Eastern so that it can't survive," said Wally Haber, senior
general chairman of the airline's machinists' union. "I like to
play baseball, but I like to play on a winning team." Some
labor officials may have been talking tough because they still
had to go to the bargaining table with Ueberroth.

    The unions are likely to give Ueberroth more than they would
concede to Lorenzo partly because he is giving them 30% of the
airline through an employee stock ownership plan, or ESOP.
Ueberroth said the carrier will be renamed the Eastern Airlines
Employees and Service Co. in recognition of the new proprietors.
Observes Julius Maldutis, who follows the airline industry for
Salomon Brothers: "Employee ownership builds employee
commitment. And if there's any one airline that needs employee
commitment, it's Eastern."

    While Ueberroth and his partners will hold a share equal to
the employees' stake, two investment firms -- Drexel Burnham
Lambert and a Manhattan outfit called Ardshiel -- will take the
remaining 40%, which could be sold later to outside investors in
a stock offering. The new owners will inherit an airline deeply
in debt, but as part of the deal they will receive the proceeds
from the sale of Eastern's profitable northeastern Shuttle to
Donald Trump for $365 million. Ueberroth's group has pledged to
invest $100 million in freshly borrowed money to help pay for
the airline's return to full operations.

    Over the long run, another clause in the deal will give
Eastern a crucial tool for rebuilding its market share. Eastern
will own 20% of Texas Air's computerized reservations system,
called System One. The service was set up by Eastern eight
years ago and transferred to the parent firm in 1987. Such
computerized systems, linked to the networks of travel agents
that feed passengers to the carriers, have become vital sales
weapons in the hotly competitive airline industry.

    Bringing Eastern back to health under such circumstances is a
tall order, even for a marketing whiz who has made a career of
mastering big challenges. Ueberroth, who worked his way through
San Jose State as a reservations clerk for charter airlines,
started a travel agency that is now the second largest in the
U.S. He took on the task of organizing the 1984 Summer Olympics
in Los Angeles, and negotiated adroitly with corporate sponsors,
choreographed hundreds of events scattered across Southern
California and orchestrated a thumping publicity campaign to
build attendance. Despite a Soviet boycott that threatened to
undercut public enthusiasm, the Games garnered the largest
viewing audience in TV history and rang up record profits of
more than $200 million.

    Ueberroth surprised many observers when he followed that
assignment by accepting the largely symbolic post of baseball
commissioner in 1984. But there was nothing passive about his
approach to the job. Confronted with a strike by professional
umpires the day he started work in October, Ueberroth won points
for helping resolve the walkout in time for the World Series.

    During his five years as commissioner, Ueberroth helped put
the teams on firmer financial footing, bringing his marketing
skills to bear with product-licensing deals and other
money-making schemes for baseball owners. He is credited with
helping clean up baseball's tarnished image by calling for drug
testing of players and restrictions on beer sales at ball
parks. By the time he finished his duties as commissioner last
month, stadium attendance had risen from 45 million to 53
million fans a year.

    No matter how Eastern's employees get along with Ueberroth,
they will no longer have Lorenzo to kick around -- and vice
versa. By selling Eastern, Lorenzo's Texas Air, which also owns
Continental, will give up its status as the largest U.S. airline
company. That distinction will go to Texas rival AMR Corp., the
parent of American Airlines. Lorenzo, long the target of
acrimonious attacks by Eastern's workers, could not resist
remarking bitterly last week that he could have extracted
greater value for Texas Air's shareholders if he had liquidated
the bankrupt Eastern. Perhaps so. But since Lorenzo chose to
taxi Eastern into Chapter 11, he was no longer calling all the
shots. Federal Bankruptcy Judge Burton Lifland, who will
supervise the airline's reorganization, probably would not have
approved the piecemeal sale of Eastern's planes, landing slots,
gates and other assets.

    Lifland has stated bluntly that he wants the airline to
return to full operation as quickly as possible. "I want planes
flying," he said last week. "This grounded airline is a wasting
national asset." To press his plan, Lifland has appointed David
Shapiro, a Washington attorney, as Eastern's bankruptcy
examiner. Under Chapter 11 rules, Shapiro, whose role Lifland
has described as "a head banger," will wield plenty of clout in
resolving Eastern's problems and pushing the airline back onto
the runways.

    Ueberroth's deal could still face resistance in the
bankruptcy court if a higher bid for the airline emerges.
Eastern's creditors have a major stake in any plan to revive
the airline. The most heavily indebted major carrier, Eastern
has $2.3 billion in long-term debt and its liabilities exceed
its assets by more than $1 billion.

    At week's end no serious competition for the Ueberroth bid
had materialized, but Texas Air was accusing TWA Chairman Carl
Icahn of mounting a back-room challenge. Icahn, who in the past
has talked with Eastern's unions about forming an alliance to
buy the airline, indicated publicly that he is not willing to
top Ueberroth's offer. "The airline is just not worth that
price," Icahn told the Wall Street Journal. But in a lawsuit
filed on Friday, Texas Air alleged that Icahn has attempted to
undermine the Ueberroth deal through what Texas Air described as
improper discussions with Eastern's unions. Angry Texas Air
officials speculated that Icahn was trying to set the stage for a
bid of his own. Assuming that his deal flies, Ueberroth will
need to work fast to get Eastern's customers back. While most of
Eastern's 250 planes have been sitting in hangars, Pan Am, TWA
and Delta have moved aggressively to woo its customers by adding
flights on Eastern's dormant routes. American Airlines last week
announced a major new invasion of Eastern's southern turf.
Starting June 1, American will beef up its operations in
Eastern's home base of Miami by adding 600 employees and 24 new
daily flights to Los Angeles, Boston, New York and several
Caribbean islands, which until now have depended on Eastern for
most of their air service.

    During his final months as baseball commissioner, Ueberroth
turned away several gilded job offers, including the
chairmanship of RJR Nabisco. Why take on Eastern's problems?
Ueberroth says he likes a challenge. "I think most people will
bet against us, but I think we can move forward." For all
Ueberroth's canny groundwork, he still faces a long and
tortuous climb before Eastern can clear the tall trees at the
end of the runway. Unlike Lorenzo, though, he has a chance of
taking off with the help of an enthusiastic and committed crew:
his new co-owners.


-- Deborah Fowler/Houston and Thomas McCarroll/New York