Lost Faith in Borman, Distrusted Lorenzo : Eastern’s Machinists Faced 2 ‘Bad Choices’
When Eastern Airlines mechanics decided to entrust their fate to Texas Air’s Frank Lorenzo, considered one of the country’s most anti-union executives, it was an ironic end to their union’s three-year effort to make the ailing carrier more efficient and the clearest possible statement that they no longer had faith in Eastern’s management, analysts say.
“They don’t like him at all, and they don’t like his history,” said Audrey Freedman, an economist with the Conference Board, a New York-based business research group.
She was referring to Lorenzo’s controversial 1983 decision to halve Continental Airline’s labor costs by filing for bankruptcy court protection from creditors, abrogating the airline’s union contracts, slashing wages and imposing new work rules.
“But, when they looked at what would happen if they didn’t get him,” Freedman added, “they must have thought it would be worse.”
Late Sunday, Charles E. Bryan, head of the airline’s International Assn. of Machinists local and a company director, told Eastern’s board that the union would accept wage cuts only on the condition that Frank Borman step down as company chairman. The board said no and announced that it would sell the company to Texas Air Corp., as it had threatened to do Saturday, if all three unions did not accept major concessions.
Earlier in the evening, Eastern’s flight attendants and pilots had agreed to 20% wage cuts and other concessions. The machinists refused to join them.
“We didn’t choose this course gladly,” said Randy Barber, a financial adviser to the Eastern machinists. “There were two very bad choices. But, if we’d given them the 20% wage reductions and other concessions they wanted, Eastern’s management would have just run the company into the ground.”
Now Eastern’s 12,000 machinists and 29,000 other employees, buffeted by years of labor-management strife, sweeping changes in the once placid airline industry and three threats of bankruptcy in the past three years, face another period of anxiety and uncertainty.
They have given the company a whopping $834 million in concessions during the past decade, according to a study by the Air Line Pilots Assn. And many employees think they’ve gotten little in return.
“There’s been no progress,” said Mike Harder, a veteran flight attendant. Harder and other attendants said they were particularly bitter about the way that Eastern laid off 1,010 of their colleagues in late January.
In the past, when layoffs were necessary, senior attendants were given an opportunity to take leaves, said Nancy Currier, another Eastern attendant.
The union proposed doing that again this year and said the company would have saved more than $1 million because the veteran attendants who would have stopped working are paid more than the junior attendants who were laid off.
Saving a million dollars would not have turned Eastern’s gloomy financial situation around, but management’s handling of the matter indicated just how poor its labor relations had become, said John Simmons, a University of Massachusetts professor who has been studying the company.
The demands for concessions that Eastern’s unions encountered this year were only the most recent of a series that started after the company lost $95.6 million in 1975, Borman’s first year as chairman. Eastern was profitable for the next four years. But it started going downhill again in 1980 as it lost revenue to the new, low-cost carriers that entered the recently deregulated industry.
Eastern has lost nearly $374 million in the past six years, a period in which the company got concessions worth $800 million from its employees. The impact of the employee give-backs was blunted, however, by the company’s mushrooming debt. From 1980 to 1985, Eastern’s long-term debt grew to $2.5 billion from $1.4 billion, due largely to airplane purchases; interest payments alone cost Eastern $220 million last year.
Nonetheless, as recently as last summer, some analysts were saying that Eastern--then reporting record first-half profits--had made a turnaround. Much of the company’s improved picture was attributed to an innovative labor contract that it signed in December, 1983, which led to substantial cost reductions.
In return for 18% to 20% pay cuts, the unions acquired Eastern stock, secured four positions on the company’s board and gained access to its books. The company had $47.2 million in productivity gains during the first year of the agreement, $30 million of them attributable to the machinists, according to a study in the November, 1985, Harvard Business Review.
Variety of Innovations
The machinists introduced a variety of innovations to save the company money in its machine shops and elsewhere. The pilots and flight attendants worked longer hours for less money.
Within a year of the major employee participation agreement, labor’s share of total operating costs declined to 35% from 43%. But that was still almost twice the proportion as at People Express, a non-union carrier that was making considerable inroads into Eastern’s New York-Florida market.
In late 1984, Borman asked for a new round of wage concessions. When the machinists balked, Borman threatened, for the second time in a year, to seek bankruptcy court protection from creditors.
After two tense months, Borman agreed to restore 5% of the wage cuts that employees had granted in December, 1983. He also agreed to a new contract clause that would allow workers to apply cost savings from productivity improvements to wage restoration: For each $4 million in productivity improvements, there would be a wage restoration of about 1%.
Concessions Eroded
Given Eastern’s shaky condition, the agreement was too generous to the employees, said Lou Marckesano, an airline analyst with Janney Montgomery Scott, a Philadelphia securities firm. Salaries started rising last July, eroding the savings that the concessions produced, he said.
Soon thereafter, Eastern suffered a disastrous fourth-quarter loss of $67.4 million, wiping out more than 90% of the profit that it had made in the first nine months of the year. Vicious fare wars, disappointing passenger loads and hundreds of flight cancellations caused by inadequate staffing were key reasons for the downturn.
The company’s disappointing 1985 financial performance brought mounting insistence on long-term cost cuts from another powerful quarter. Eastern’s lenders gave the airline until Feb. 28 to produce agreements with all three of its unions that would ensure $450 million a year in savings; otherwise, the carrier would be in technical default on $2.5 billion in loans and credits.
So, by early February, Borman already had laid off 1,010 attendants and cut the pay of the remaining 6,200. He once again demanded concessions from the pilots and the machinists, who had signed a new three-year contract only four months earlier. And Borman raised the threat of bankruptcy again, further injuring the company’s business.
The unions, frequently at odds in the past, did not come up with a common strategy. In January, Bryan attacked a consultant’s study that Borman had cited in asking for the cuts. The machinists leader maintained that his union did not have to negotiate because it had a valid contract. Bryan’s refusal angered the other unions, according to numerous sources, including Simmons of the University of Massachusetts.
Barber, the adviser to the machinists, acknowledged that there were tensions among the unions but said that was hardly key to the deterioration that led to Eastern’s sale to Lorenzo.
“The fundamental problem was that we told our people starting in late 1983 that things would change, but Eastern was unwilling to change its corporate culture,” Barber said. “Everything we did to get productivity improvements was like pulling teeth from the management. We could have saved them a lot more money if they would have worked with us. We hope Lorenzo will.”
