TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/041789/04178900.025

Text File | 1990-09-17 | 11KB | 188 lines

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