Texas Air Corp. to Purchase Troubled People Express
Texas Air Corp. said Monday that it will buy financially ailing People Express Inc. for about $125 million worth of securities in the latest act of what has become a frenzy of airline consolidation.
The announcement spelled the apparent end of a remarkable story of success and failure growing out of the Airline Deregulation Act of 1978.
The deal was announced at a joint news conference held here by Donald C. Burr, founder, chairman and chief executive of 5-year-old People Express, and Texas Air Chairman Francisco A. (Frank) Lorenzo, who in a few years has built an empire that is on its way to becoming the nation’s largest air carrier.
Texas Air agreed also to acquire the assets of Denver’s Frontier Airlines, a People Express subsidiary that filed for Chapter 11 bankruptcy last month, for an additional $25 million in cash and $151 million in notes. Lorenzo said Texas Air will try to find work for all of the Frontier employees who lost their jobs.
Texas Air, a Houston-based holding company, owns Continental Airlines and New York Airlines and is in the process of taking over Eastern Airlines. Lorenzo said that People Express would be operated independently for about a year but would then be merged into one of his other carriers, losing its identity.
During the summer, People Express, which owns regional carriers Britt Airways and Provincetown-Boston Airline as well as Frontier, had said that it wanted to sell all or part of itself. Subsequently, Texas Air made a $238.5-million takeover bid that was rejected.
By Monday, however, the value of Burr’s airline had fallen drastically and it was clear that he had agreed to let it be taken over under the pressure of lack of operating capital. Some obse1920361842its kitty to last only 30 days.
United Air Lines agreed late last year to buy Frontier if it could reach agreement with Frontier’s labor unions. However, no agreement could be reached with the pilots’ union, and the deal fell through.
Burr, who said he will stay on as head of People Express and had received from Lorenzo a contract of “a couple of years,” added that his sentiments about the sellout were “bittersweet.”
But “the sweetness is greater than the bitterness,” he said, “because the merger will enable us to take care of our customers, allow us to give a return to our stockholders, repay our debts and to continue providing low-cost service in the Northeast.” He said the merger was required because “the headstrong, headlong fat cats are out there competing--the Uniteds and the Americans. We would have liked to, but we could not continue separately.”
Fell on Hard Times
Burr founded People Express in 1981 at a time when the deregulation act was allowing airlines for the first time to start operations with little red tape or regulatory control. He quickly built it into a major force in the industry, generating annual revenues of more than $1 billion, by offering no-frills, low-fare flights to an ever-growing number of cities. In recent years, however, as major competitors cut fares to match People Express, the airline fell on hard times.
When asked by a reporter just how long People Express could have held on, Burr first jokingly took out his wallet, counted his cash and said he had enough. Then he said that People Express has sufficient cash for “the present and for the foreseeable future.”
However, apparently as evidence of just how cash-short People Express was, Lorenzo said that Texas Air on Monday made an immediate infusion of $10 million into the Newark, N.J.-based carrier. All told, $49.7 million will eventually be provided to People Express by Texas Air.
Lorenzo, asked if he foresees any antitrust problems in the path of the merger, said he is confident that the merger will be approved by the Department of Transportation. “I don’t see any antitrust obstacles,” he said. “There is no shortage of competition both before and after this transaction.”
Fares, he said, will continue to be kept low because “the public wants good value.” But he added that his airline company will continue to “emphasize profitability.” Lorenzo said the management of People Express had done a “tremendous job but, in this environment, you’ve got to be big.”
Indeed, the merger would create a huge enterprise.
“If a Texas Air-People Express merger is approved, it would result in a giant full-service, low-fare airline,” said Edward Starkman, who follows airlines for Paine Webber, a New York stock brokerage firm. “It would be the biggest by most measures: revenue passenger miles, revenues and number of planes.
“It would have a presence in just about every place in the nation. It would have major hubs in Atlanta, Houston, Denver, Newark and secondary hubs in Miami and Washington-Dulles Airport. All the other airlines are sitting with their legal staffs writing their objections. I think they are going to file detailed arguments (with the Department of Transportation) against it.”
However, spokesmen for American and United said their companies have no plans to oppose the merger. A Western Airlines executive said he did not know what Western would do. A spokesman for the Department of Transportation refused to comment on what decision the department is likely to reach or what the timetable will be.
But, despite Lorenzo’s optimism, some observers said antitrust concerns might prevent the consolidation. The proposed marriage would result, for instance, in Texas Air subsidiaries having 78% of the passenger traffic in Newark because Eastern has a major presence there.
And, even though Lorenzo and Burr denied it, some observers said they think that the consolidation will cause fares to go up. “It’s good for the industry,” said David Sylvester, airline analyst for the San Francisco brokerage firm of Montgomery Securities. “We won’t see all of those irrational (low) fares.”
If the merger is completed, Texas Air would be the largest airline company in the industry, if 1985 revenues are used as the basis for comparison, with sales of $7.8 billion. Following would be United Airlines, with $6 billion, Delta Airlines, which is awaiting approval of its proposed merger with Western, with $5.9 billion, and Northwest Airlines, which recently dropped the “Orient” from its name and merged with Republic Airlines, $4.4 billion.
The Texas Air behemoth would have more than 500 planes, more than any other airline. People Express has 72 airliners.
Under terms of the agreement, Texas Air will buy each of People Express’ 25.7 million shares of common stock outstanding for $2.25 worth of Texas Air common stock and $2.50 of Texas Air preferred stock.
Analysts say fares are unlikely to change much. Details in Business.
