Political Heat Singes Wings of Texas Air Chief
The story behind the government’s investigation of Texas Air Corp., parent company of Eastern Airlines and Continental Airlines, is not really about safety. The company’s airplanes are safe, as Transportation Secretary James Burnley IV pointed out last week--otherwise they wouldn’t be allowed to continue flying.
The real story is about finance and politics and the curious case of the man who overplayed his hand, Frank Lorenzo, chairman of Texas Air.
Lorenzo, 47, has built the nation’s largest airline during the past 17 years by taking over failing or troubled companies, ruthlessly cutting their costs--particularly labor costs--and offering low fares to attract passengers.
The son of Spanish immigrants who owned a beauty parlor in Queens, N. Y., Lorenzo has always said he was building an airline to reflect the new economics of air travel--low cost, mass market, deregulated and competitive, as opposed to regulated and expensive.
He was a new kind of entrepreneur in a business built by aviation pioneers such as C. R Smith of American Airlines, Juan Trippe of Pan Am, Eddie Rickenbacker of Eastern and Howard Hughes of TWA. Lorenzo, a Harvard MBA, was quieter than they, smarter about finance than about flying.
But he was given the benefit of his vision. He got no serious political opposition when he threw Continental Airlines into bankruptcy in 1983 to break its unions. His acquisitions of Frontier Airlines and People Express were not opposed--and Texas Air was welcomed as a savior for Eastern, which was torn by labor strife.
But once Lorenzo brought Eastern into Texas Air in February, 1986--under terms requiring him to clear some moves with Eastern’s union shareholders--he seemed to embark on a program to impoverish the acquired company. Eastern routes became Continental routes; Eastern paid fees to Texas Air while increasing its borrowings.
Texas Air took away Eastern’s computerized reservation system, paying the subsidiary half the price such a system might bring in the open market. Then Texas Air tried to take the profitable Eastern shuttle. But it was blocked by a federal court, responding to a lawsuit by Eastern’s unions, backed by some of Eastern’s bondholders, who saw underlying values eroding.
Why did Lorenzo do it? One reason is that he was trying to make a national airline by melding Eastern’s north-south routes with Continental’s east-west system.
But the fact that a shrunken Eastern would weaken the unions played a part. Lorenzo has never been shy about saying that wages must fall in the new environment.
Options May Be Limited
But suspicions arose that Eastern was being stripped to support Texas Air, which lost $466 million last year. It was noted that Lorenzo himself was not at risk--that his ownership of Texas Air, through still another holding company called Jet Capital, gave him the chance to become very rich but not to lose very much if the company collapsed. He began to look like so many U.S. financiers who have preached austerity to working people while lining their own pockets.
So opposition grew; 150 members of Congress recently called for a government review of Texas Air. And last week the Transportation Department launched an investigation to see if Texas Air is “fit” to run a commercial airline.
Will DOT close Lorenzo down? Almost certainly not, says analyst Jeffrey Perry of the C. J. Lawrence brokerage house. But political opposition could limit his options.
Lorenzo, according to people who heard him speak last week, says there are three things you can do with Eastern Airlines: “Fix it, sell it or can it.” And he plans to “fix it”--run it as part of Texas Air.
However, if the political heat forces him to sell, Eastern will probably be bought by its employees with the help of a foreign airline--which would see Eastern as an entree to the U.S. market.
In that case, Lorenzo’s plan for a new era airline might fade. Continental has heavy debt payments coming due in the early 1990s--and it’s not doing well at present. Passenger traffic is down this year.
Lorenzo can still pull victory from defeat if he wins the confidence of politicians, employees and passengers. But so far he’s proved smarter at finance than diplomacy.
