Experts Say Deep-Rooted Problems Predate Strike : Eastern’s Return to Profitability Held Remote

Eastern Airlines’ troubles predate the current strike and are so entrenched that profitability seems a remote possibility anytime soon even if the strike is settled quickly, industry analysts contend.

The airline’s fortunes began to decline almost 20 years ago, when Eastern’s monopoly on many of its routes seemed to encourage complacency. An activist group called WHEAL, an acronym for We Hate Eastern Airlines, complained that Eastern’s flight attendants were curt, aloof and rude, and customers began choosing other airlines where they competed with Eastern.

Eastern was also painfully slow in acquiring jet aircraft, while its competitors surged fully into the jet age. Eastern kept operating too long with such propeller-driven planes as Lockheed Electras and Constellations.

Debt Soared in Borman Era

When Frank Borman, a former astronaut, took over the helm of Eastern in 1975, he began to invest heavily in new planes and unloaded the older fuel guzzlers. But these efforts to modernize the carrier occurred at a time when the industry was changing dramatically in response to the Airline Deregulation Act, which took effect in 1978. Borman’s catch-up shopping spree increased Eastern’s debt load to about $3 billion.

From 1979 to 1983, Eastern suffered losses of $200 million and had to secure concessions from its creditors and employees to remain in business.

In return for temporary wage concessions, the airline gave its employees 25% of the airline’s stock. But when creditors forced Eastern to reorganize or be acquired by another company, Eastern invited takeover bids.

Enter Frank Lorenzo, who headed a once obscure airline holding company called Texas Air Corp. On Nov. 25, 1986, Eastern’s shareholders approved a $676-million takeover by Texas Air.

But Eastern’s troubles were far from over. Management blames its problems mostly on labor costs, which it says make the airline unprofitable.

Losses Mounting

Eastern, which has lost $1.5 billion and had only one profitable year since deregulation began a decade ago, posted a record loss of $335.4 million in 1988, nearly double the $181.7-million loss of 1987. Texas Air, its parent company, reported a loss of $718 million in 1988, the largest annual loss ever reported by a U.S. airline. Texas Air had lost $455 million the previous year.

Organized labor has considered Lorenzo an archenemy and union buster since 1983. At that time Lorenzo took Continental Airlines--which Texas Air had also taken over--into Chapter 11 bankruptcy proceedings, imposing wage cuts and breaking strikes by pilots and machinists. Continental emerged as a low-cost, profitable carrier within two years.

Lorenzo denies the accusations. But he has also warned that Eastern could not continue in business for any length of time in the event of a successful walkout.

Airline analysts agree. “In terms of cash flow, it is my belief that Eastern will be able to survive a strike of 30 days or less,” said Paul Karos, airline analyst with First Boston Corp., a New York stock brokerage.

Firm Has Ample Cash

Karos said that Eastern currently has $350 million in cash. When it finalizes the sale of its shuttle airline, which operates in New York, Boston and Washington, it will get another $310 million, of which $105 million must be used to make past due payments to its pension funds.

Eastern has been losing $1.5 million a day. But Karos predicts that such deficits would be dramatically increased in a strike. During a walkout, revenue would be drastically reduced while overhead would remain essentially the same.

Despite his statements to the contrary, it is considered doubtful that Lorenzo will put Eastern into bankruptcy because he would then be dragging Texas Air into court as well.

Some analysts predict that Eastern will be sold, either in whole or in part. Financier Carl Icahn, chairman of TWA, reportedly is interested in Eastern.

Lorenzo has already downsized Eastern since acquiring it. He has reduced the size of the fleet, drastically cut the work force, reduced the number of cities Eastern serves and closed its hub at Kansas City.

Reputation Seen Damaged

But even if it continues to operate, Eastern would have a difficult time becoming profitable, analysts believe. Its franchise and reputation have been damaged by the 17-month-old labor dispute, by concerns about its safety record and by its reputation for mediocre service. In recent years, carriers such as American and United have located hubs in the Southeast, grabbing off much of Eastern’s customers.

Tim McCord, a 17-year pilot with Eastern who is now walking a picket line, told the Associated Press Saturday night: “At one time, Eastern was it. It had the best people and the brightest future. I don’t think I have a future with Eastern anymore. I may have flown my last flight as an Eastern pilot.”