THE EASTERN BANKRUPTCY : Analysis : Lorenzo Failed to Mine Airline’s Best Asset: Routes

Times Business Columnist

Eastern Airlines, a company that has thrown away some of the finest advantages in commercial aviation, sought protection from creditors under Chapter 11 on Thursday. But its president, Phil Bakes, told a press conference that 60-year-old Eastern would emerge from bankruptcy “smaller” but successful.

Maybe it will, but it better get moving. Bankruptcy isn’t nap time. Eastern’s competitors have been taking away the airline’s customers since it was hit by a strike on March 4. Now they’re expanding into its traditional markets. Delta Airlines announced on Thursday that it was inaugurating service to Florida from Buffalo and other Upstate New York cities. TWA is adding flights on the New York-Miami run.

Eastern needs to get pilots back to work or there may not be a business to come back to.


But bankruptcy isn’t a time for fast moves either. Bakes and his boss Frank Lorenzo, chairman of Texas Air Corp., which owns Eastern, won’t be the only ones deciding the shape of the new airline. In Chapter 11 proceedings, the bankruptcy judge will have to approve company actions. And lawyers for creditors and union employees--who are both creditors and preferred shareholders of the airline--will have a lot to say.

So what is likely to happen to Eastern? Furthermore, why has an airline that historically had routes up and down the populous East Coast become such a shambles? And what does its failure tell us about the airline business in the United States?

What’s likely to happen is that parts of Eastern will be sold. Talk of selling the airline to Carl C. Icahn seems pointless at the moment. If Lorenzo were going to sell it whole, he wouldn’t have put in it into bankruptcy.

What isn’t sold will be operated as a “smaller” Eastern Airlines. Investment analysts are busy calculating Eastern’s possibilities--and they’re substantial.

Eastern has valuable landing rights at New York’s La Guardia and Washington’s National airports. It is the dominant carrier at Miami airport, its headquarters and the hub of its routes to Latin America. It has an enormous section of gates at Atlanta’s Hartsfield airport, and it has a good business to San Juan, Puerto Rico and the Caribbean.

If it’s looking for a base to build on, suggests analyst Daniel Hersh of Bateman Eichler, Hill Richards, a Los Angeles brokerage house, “it should use Miami and the Northeast routes into and out of LaGuardia and National. Eastern doesn’t face so much competition there because new landing rights are not being created.”


Other airline experts suggest that Eastern’s gate system in Atlanta will be sold to United Airlines, which is big enough to compete at Delta’s headquarters location, and that the Caribbean routes could be sold for a good price because they provide attractive winter business.

Why should such assets be sold? Because as a business Eastern is a shambles. It has lost money every year but one in this decade and has been in and out of red ink for the past 20 years. One of Eastern’s mistakes has been to roam far afield when it might have cultivated its natural East Coast market. In the late 1960s, it bought 747 jets, then applied for a route to Hawaii to use the planes; it failed to get the route and sold the planes at a loss. Blessed with Florida, Eastern lost money trying to fly to California.

Lack of Understanding

Recalcitrant unions were matched by poor managers. Frank Borman gave in too easily to union demands, but tough Frank Lorenzo has been so calculating that he’s lost the trust of his own work force.

What would Eastern need for success? It would need concessions on restrictive work rules, and good faith instead of rhetoric from its unions. The issue is not simply wages, but a complex question of pay differentials for skilled and unskilled workers. Overall, Eastern’s wages are not excessive. Delta pays high wages and succeeds, so does American. But they understand the airline business today while, surprisingly, Frank Lorenzo may not.

Lorenzo was the man who above all understood how to expand air travel by cutting prices in the post-deregulation environment of the 1980s. But about a year ago, the business began to shift as airlines learned how to use their computer systems to cope with differential pricing for individual passengers. As the Americans and Deltas learned how to give service to the full-fare business traveler, while also matching Lorenzo’s low fares for the budget traveler, his El Cheapo approach became less successful.

So if Eastern is to come back, it will need not only reform of the unions, but a change in Lorenzo. The owner would have to step into the background and yield management to somebody more attuned to the airline business today--which sounds drastic, but not half as drastic as bankruptcy.

WHO EASTERN OWES Eastern Airlines’ 15 largest unsecured creditors, excluding insiders, through Jan. 31.

Creditor Amt. Owed in millions Bank of New York* $149.9 Airbus Industrie 95.9 General Electric 75.4 Boeing 53.9 U.S. Trust Co. of New York** 30.2 U.S. Trust Co. of New York** 28.5 UT Credit 22.3 IBJ Schroder Bank** 19.5 American National Bank & Trust of Chicago** 12.7 Rolls-Royce Credit 5.8 Puerto Rico 2.3 Pratt & Whitney 1.6 IBM 1.1 Telex Computer 1.1 Marriott 1.0

* Bank of New York on Thursday denied it is an unsecured creditor, saying it is a trustee for Eastern under a $150-million bond issue but does not have “direct liability” to honor the bonds.

** Trustee on bond offering.

Source: U.S. Bankruptcy Court