TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/032089/03208900.017

Text File | 1990-09-17 | 9KB | 151 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.