Eastern Says It May Merge With Texas Air
Eastern Airlines’ board of directors has told unions representing its employees that if they do not accept major reductions in wages and benefits, the financially troubled carrier will be sold to Texas Air owner Frank Lorenzo.
A merger between Eastern and Houston-based Texas Air, which already owns New York Air and Continental Airlines, would create one of the nation’s largest carriers. Eastern flew 33 million revenue passenger miles last year and that accounted for 10% of all U.S. carriers. It ranked third behind American and United Airlines. Continental ranked 8th with 5%.
The Air Line Pilots Association, which currently is negotiating with Eastern management to avoid a walkout of its 4,300 members at midnight Tuesday, said in an announcement that “a purchase offer has been made for Eastern Airlines.” The pilots’ union, which said “the cash portion of the offer is represented to be substantial,” indicated that its representatives had been informed of the offer Saturday by Eastern chairman Frank Borman.”
An informed source with the International Assn. of Machinists confirmed that the potential buyer is Texas Air.
Eastern, whose board of directors met almost the entire weekend, declined to comment on the reports. Its spokesman, Glenn Parsons, said that management had imposed “a news blackout.”
The airline, which was founded in 1927 and which prospered during the quarter of a century that it was headed by famed World War I ace Eddie Rickenbacker, has fallen on hard times in the last few years. In fact, it is in the midst of its most serious crisis in its history.
It has only until the end of the coming week to avert default on its $2.5 billion in debts on which it pays $250 million in interest annually. While the pilots are scheduled to strike Tuesday, a flight attendant walkout is set to begin Friday. Members of the International Assn. of Machinists are working under a contract that extends into next year.
According to the Machinists source, the unions were called last Friday night and told to come to a Saturday afternoon meeting. All three unions were told that they had until midnight Sunday to make major concessions--including a permanate 20% pay cut--or the airline will be sold to Lorenzo’s company.
The attendants and pilots decided to negotiate. Earlier last week, in fact, Henry Duffy, president of the pilots’ union, said it was willing to take a cut if it was temporary and contingent on Eastern’s financial health. Eastern also is asking for substantial benefit and work rule concessions.
The Machinists, however, declined to accept the cuts. “We’ve told the company and the other unions we’ll take our chances with Lorenzo,.” the source said. “At least he wants to make money, something that hasn’t happened around here for a long time.”
According to the Machinists source, his union is unwilling to strike a bargain with Eastern because it has no confidence in the management. “It would probably take them a year or two to fritter it away,” he said referring to the concessions the union would have to give the airline.
“We won’t get stampeded into a terrible deal that will destroy the union and destroy the members,” the source said.
Lorenzo is thoroughly distrusted by most of organized labor. When pilots went on strike at Continental in 1983, Lorenzo filed for Chapter 11 of the bankruptcy code. He was thus able to impose new wage scales and work rules for Continental’s work force. The unions subsequently thwarted Lorenzo’s attempt to acquire Trans World Airlines, but the Machinists source said his union was unwilling to play a similar role in Eastern’s case.
With its lower wage scales and higher productivity, Continental emerged from bankruptcy last September as one of the nation’s most profitable carriers.
John Pinkavage, airline analyst with the New York brokerage firm of Paine, Webber, Jackson & Curtis, said that “it sounds to me as if (Borman) is setting (the unions) up for the lesser of two or three evils. Knowing how much the unions hate Lorenzo...that leaves the choice of Chapter 11 or giving in.”
There is no question that Lorenzo could afford to acquire Eastern, industry observors maintain. Texas Air has $500 million in cash on its balance sheet and Lorenzo just completed $200 million bond sale and is about to launch another in the same amount. “Lorenzo has been building up his buyout fund,” said Pinkavage.
According to the union source, Lorenzo’s motives for the purchase are several:
--He wants to acquire Eastern’s highly automated modern reservation system. It is said to be one of the best in the industry, and airlines have recently discovered that having their own reservatuibs systems is a key to getting business. Continental does not have one.
--Eastern has a highly regarded maintenance facility in Miami.
--The purchase would give him control of Eastern’s profitable east coast shuttle and Latin American routes.
--It would improve his position as a cargo carrier in the lucrative Houston market, where Eastern has been beating Continental.
--People Express has been moving into Lorenzo’s Western territories by taking a position in Denver, and this purchase would give him a way to compete with the bargain carrier along its profitable New York to Florida routes.
The airline, which warned that it would shut down if the pilots walked off their jobs, has said in the past it had talked about mergers with several other companies. These included TWA, Ozark Airlines, Northwest Airlines and US Air. The Associated Press reported that Borman had approached Lorenzo through an intermediary. Texas air officials did not return phone calls late Sunday.
It was deregulation which caused Eastern’s trials. The major problem that Eastern has faced is discount competition especially in one of its biggest markets, the New York to Florida route. The low cost competitors include People Express, Continental and American.
According to Julius Maldutis, a vice president of the New York brokerage firm of Salomon (cq) Brothers Inc. last year 85% of all Americans flying domestically used a discount fare. Last December, alone, only 12% paid full fare. And the average size of the discount, he added, was almost 56% off full fare, compared with 51% in 1984.
Eastern’s banks, located in both this country and abroad, have said the carrier will be in default if it doesn’t get $450 million in annual concessions from its three unions. Two of the unions, which have already offered substantial wage cuts, have called for the ouster of Borman and other members of management. They have also called upon their members to buy Eastern shares. Union members now own about 25% of the outstanding shares and two of union leaders are on the Eastern board.
