Transportation Dept. OKs Texas Air’s Buyout of Eastern

The U.S. Department of Transportation, saying that its earlier objections to the deal had been resolved, on Thursday tentatively approved the acquisition of Eastern Airlines by Texas Air Corp.

Financially ailing Eastern agreed to be purchased by Texas Air on Feb. 24 for $675 million.

The merger of Eastern into Texas Air, a holding company that owns Continental Airlines and New York Air, will create the nation’s largest carrier in terms of annual revenue.

The three carriers had total 1985 revenue of $6.8 billion, compared to United Airlines’ $6 billion in 1985 revenue.

Texas Air Chairman Francisco A. (Frank) Lorenzo also announced earlier this week that his Houston-based company was acquiring People Express, saving that low-cost carrier from certain bankruptcy.

That acquisition includes Frontier Airlines, which was put into Chapter 11 bankruptcy reorganization on Aug. 28 by People Express, its parent company. The Transportation Department said that a revised agreement between Pan American World Airways, Texas Air and Eastern “appears to cure the acquisition’s only competitive problem by enabling Pan Am to operate as effective competition” in the heavily traveled Northeast corridor between New York, Washington and Boston.

The department’s approval of the merger was not unexpected.

Last month, the department blocked the proposed merger. However, it said it would lift its objections if Texas Air developed an acceptable plan to ensure competition on the routes from New York’s La Guardia Airport to Boston and Washington--routes on which Eastern has been dominant.

Then last week, Texas Air amended an agreement that it had earlier reached with Pan Am.

The revised agreement effectively increases the number of Pan Am’s shuttle flights competing with those of the merged airline. Pan Am plans to begin its new service Oct. 1.

The department said the new agreement “meets our requirements that Pan Am be able to operate hourly service throughout the day, especially at peak periods.”

The department said objections to the merger could be filed within seven days.

Bruce Hicks, a spokesman for Texas Air, said the decision “is exactly what we expected. The department has said clearly that the amended agreement with Pan Am removed the competitive questions.”

Separately, Texas Air and People Express Inc., the holding company of People Express Airlines, further detailed their proposed merger, announced Monday, with Texas Air. The companies said plans call for an additional $100 million in working capital--on top of the $49.7 million originally pledged--to be funneled into the cash-strapped People.

In addition, holders of People Express secured equipment certificates will be asked to reduce their annual interest rate on the certificates by 2.25 percentage points.

Such certificates currently pay rates of between 13.5% and 14.75%. The People Express-Texas Air merger requires approval by two-thirds of such debt holders. The companies said $12.6 million annually will be saved by the interest-rate reduction.

Meanwhile, Texas Air said the 34-member Transport Workers Union at Frontier had agreed to waive its claims against Frontier and People Express to permit Texas Air’s acquisition.