TIME: Almanac 1993/TIME Almanac 1993.iso/time/092589/09258900.020

Text File | 1992-09-23 | 9.5 KB | 188 lines

                                                                                BUSINESS, Page 52

Debt Propelled


The airline-buyout binge raises fears that jet safety will
suffer

By John Greenwald


    When an ordinary company takes on a load of debt, the
people who have the most to fear are employees and investors.
But when an airline goes heavily into hock, the worriers are
joined by another group: customers. If an airline is bogged down
by debt, they wonder, would the carrier be tempted to save money
by lowering its standards on maintenance and other safety
measures? Everyone from passengers to politicians has begun to
debate that question as billion-dollar takeover wars sweep the
U.S. airline industry. Says Jerome Lederer, founder of the
Virginia-based Flight Safety Foundation, an aviation-research
group: "Buyouts need careful scrutiny, particularly with regard
to maintenance practices. Safety must be paramount, and safety
has suffered when maintenance is shoddy."

    Such warnings are particularly worrisome at a time when
mechanical failures appear to have replaced the threat of
terrorism as the leading concern of air travelers. A recent
spate of engine explosions, stress cracks and other in-flight
mishaps has made passengers keenly aware of once esoteric
matters such as turbine blades and hydraulic systems. The
public's concern is compounded by the airline industry's frank
admission that it cannot find enough mechanics to do the
increasingly complex job of maintaining its aging planes.

    Some mechanical problems are hard to spot in even the most
thorough of inspections. Case in point: experts suspect that
microscopic cracks on a 300-lb. revolving disk caused the tail
engine on a United Airlines DC-10 to blow apart last July. The
mishap crippled the jet's hydraulic steering system, killing
112 people when the plane crash-landed in Sioux City, Iowa.
(McDonnell Douglas said last week that it would modify its
DC-10s to ensure safe landings even if all hydraulic systems
failed.)

    Prodded by rising public anxiety, Congress and federal
regulators have vowed to examine the impact of takeovers on
aircraft upkeep. Says California Democrat Norman Mineta, a
member of the House Aviation Subcommittee: "No one should ever
be put in the position of boarding an aircraft and having to
worry if the plane is safe to fly."

    Amid the growing scrutiny, the takeover whirl accelerated
last week. In Chicago directors of UAL, the parent company of
United Airlines, approved a bid by the carrier's management and
pilots' union to buy out the second largest U.S. carrier for
$6.75 billion. In the highly leveraged deal, employees would own
75% of the company, top managers would get 10% and investor
British Airways would have 15%. Beverly Hills billionaire Marvin
Davis, who had bid $6.19 billion for UAL, said he would match
the management group's offer if that package were to fail. In
Washington a takeover group headed by Los Angeles investor
Alfred Checchi outlined its $3.65 billion purchase of NWA, the
parent of Northwest Airlines, in a voluminous filing with the
Department of Transportation, which is reviewing the deal.

    Problems from earlier takeovers mounted in Houston, where
Texas Air chairman Frank Lorenzo, who has been battling his
workers, confirmed last week that he may sell part or all of
Continental Airlines to raise badly needed cash. Texas Air
borrowed heavily for the 1986 purchase of Continental's sister
carrier, Eastern Air Lines, which is mired in bankruptcy
proceedings and a seven-month-long strike by its mechanics.

    As carriers faced the prospect of mounting debt, an
aviation task force of public and private experts piled new
demands on the industry's maintenance crews. The panel called
for a $563 million overhaul of 1,900 aging McDonnell Douglas
jetliners around the world, including some 900 DC-8s, DC-9s and
DC-10s. The recommendations, which the Federal Aviation
Administration is expected to endorse swiftly for U.S. planes,
would range from replacing rivets to reskinning entire jets.

    The task force was launched last year after a section of
fuselage ripped off an Aloha Airlines 737, sucking a flight
attendant out of the plane. The group's report on McDonnell
Douglas aircraft followed a May FAA order for the overhaul of
1,300 vintage Boeing aircraft. Taken together, the moves were
aimed at rejuvenating the 3,300-jet U.S. fleet, which averages
13 years of service per plane and is the oldest in the
non-Communist world.

    The task of maintaining the U.S. commercial fleet has
strained the ranks of the 50,000 licensed airline mechanics.
Carriers are eager to pay wages that range from about $13.50 an
hour for newcomers to $20.50 for journeymen. Says Richard
Delaney, president of the International Association of
Machinists and Aerospace Workers local at Chicago's O'Hare
Airport: "The aging fleets take a lot more maintenance work. You
need more people. We are growing, but not at a rate that's going
to satisfy demand."

    Airlines are scrambling to buy new aircraft, but the huge
growth in air travel has forced them to keep many of their
older planes in the air even as the modern ones arrive.
According to the Future Aviation Professionals of America, an
Atlanta-based group, U.S. carriers will need 50,000 new
mechanics by 1997 as the airlines take delivery of 3,000 new
jets with a value of more than $40 billion.

    The workload has become so heavy at United's 140-acre
repair center in San Francisco, the largest in the U.S., that
the carrier has begun to phase out its lucrative business of
providing maintenance for other airlines. Maintenance projects
at the base can require up to 100,000 mechanic-hours for the
overhaul of a single 747 jumbo jet. "We've added 3,000 people
in less than a year," says Joseph O'Gorman, United's senior vice
president for maintenance operations, "and we're looking at
another 1,000 in the next six months for the care and feeding
of older planes." But that is just the beginning. "As our fleet
expands and our service to Europe starts up next year, we're
going to need another 1,000 to 2,000 more maintenance people
each year."

    To meet such needs, United and other airlines have begun to
consider in-house programs to train their own mechanics.
American Airlines, the largest U.S. carrier, has already started
such a school. American currently runs 30-sec. TV commercials
that stress maintenance and extol the airline's mechanics as
"uncompromising professionals dedicated to perfection, flight
after flight after flight." Meanwhile, the stock of AMR,
American's parent company, jumped 13% in a single day last month
on rumors that the firm might become the target of a takeover
bid. But like Delta, which put 14% of its stock into an employee
stock-ownership plan to thwart raiders in July, American insists
that it is not for sale.

    Airline executives firmly deny that a debt-heavy buyout
would affect their maintenance practices. "There sure as hell
won't be any scrimping on maintenance here," says United's
O'Gorman. "Our rule is that time and cost are not considerations
when maintaining airlines." At Northwest, which paid a $650,000
fine to the FAA last month after a 1988 inspection turned up a
list of maintenance problems, officials contend that the carrier
has an ample cash flow to repay its debt without lowering its
maintenance standards. Wall Street analysts tend to accept such
views. Says Julius Maldutis, who follows the industry for
Salomon Brothers: "I don't believe that any responsible
management would hinder maintenance as a result of leveraged
buyouts."

    Yet some experts assert that a borrowing binge could slow
the upgrading of airline fleets or lead to higher ticket prices.
"Debt definitely makes it more difficult to modernize fleets,"
says Morten Beyer, chairman of Avmark Inc., an aviation
consultant in Arlington, Va.

    In Europe and Asia, some aviation experts have been
critical of U.S. aviation practices. Japan's Ministry of
Transport complained last month that mechanical problems had
forced too many Northwest flights to return to Tokyo's Narita
airport after takeoff, allegedly increasing congestion at the
crowded facility. Last May a group of European airlines refused
to take delivery of Boeing's new 747-400 jetliners until the
company agreed to reinforce the cabin floors.

    In Washington politicians have been diligently studying
measures to curb airline buyouts. A bipartisan bill drafted by
Arizona Republican John McCain and Kentucky Democrat Wendell
Ford, who chairs the Senate Aviation Subcommittee, would give
the Transportation Department the authority to reject proposed
takeovers if they involve too much debt. At the same time,
Transportation Secretary Samuel Skinner is devising an
Administration policy on how to respond to the takeovers.

    Airline executives hope to escape any heavy-handed
Government interference in the buying and selling of carriers.
But they will first have to allay growing fears that the excess
baggage of buyout loans may not be good for air travelers.
"Safety is the bottom line, and we know how to achieve it," says
Benjamin Cosgrove, a Boeing senior vice president. "The need is
for mechanics and inspectors with a real desire for safety." But
if the airlines seem unwilling or unable to deliver the level
of assurance that passengers want, politicians will rush to do
it for them.


-- Lee Griggs/San Francisco and Jerry Hannifin/Washington