Eastern Files for Bankruptcy, Blames Pilots
Eastern Airlines, virtually grounded by a machinists walkout and the refusal of pilots to cross picket lines, filed for Chapter 11 bankruptcy Thursday in an effort to survive its financial crisis.
The action came on the sixth day of the crippling strike, which was costing the airline an estimated $4 million a day.
“The pilots’ strike has not only paralyzed our operation and severely inconvenienced customers, but has precipitated a looming cash crisis at Eastern that can only be avoided, regrettably, by bankruptcy protection,” said Phil Bakes, airline president and chief executive, at a news conference after the filing of the Eastern petition in U.S. Bankruptcy Court here.
Union to Expand Picketing
The machinists’ union responded to the court action by announcing it would spread its picketing to Continental Airlines, which union officials alleged is doing “struck work” of Eastern employees. Both Eastern and Continental are subsidiaries of Texas Air Corp.
The bankruptcy filing gives Eastern temporary protection from its creditors while it tries to survive the bitter labor dispute.
Since the strike by 8,500 mechanics and baggage handlers began in the face of company attempts to cut wages, Eastern has laid off all but 1,500 non-union employees. The airline employed more than 30,000 people before the strike. Eastern had attempted to have a walkout by pilots declared an illegal separate strike but Tuesday a U.S. District judge ruled against the airline.
The court action was the second time that Frank Lorenzo, chairman of Texas Air Corp., put one of his airlines into bankruptcy proceedings. He employed a similar tactic in 1983 when Continental filed for protection under federal bankruptcy laws. At that time, he used the petition to abrogate union contracts with the carrier’s flight attendants, pilots and machinists.
Continental was reorganized and came out of bankruptcy, paying much lower wages and functioning without union contracts. Unions have since complained that Lorenzo has strapped Eastern by transferring assets to Continental.
Lorenzo’s success in eliminating Continental’s union contracts will be far more difficult to duplicate with Eastern. Faced with outrage from organized labor, Congress altered the bankruptcy code to make it harder for management to use bankruptcy courts to break union agreements. A bankrupt company must convince the court that it needs cuts in wages to function.
Still, some bankruptcy lawyers and analysts speculated that Eastern needs such relief. “When you’ve got hundreds of millions in losses for last year alone, I don’t think Eastern will have a hard time persuading them it’s got to have some adjustment in the labor costs,” said Martin I. Klein, a New York bankruptcy lawyer.
Before the strike, Eastern was losing $1.5 million daily.
Officials of the International Assn. of Machinists condemned the bankruptcy filing. “Frank Lorenzo is taking his final vengeance out on the workers who stood up against his atrocities,” said John Peterpaul, union vice president. “And he did it on pay day in a spiteful attempt to deny Eastern workers their last paycheck earned before the strike.”
Peterpaul said the union is drafting a reorganization plan that it will submit to the bankruptcy court.
The pilots’ union also responded to Bakes’ charges. “All Lorenzo has to do is look in the mirror to see who is responsible for the Chapter 11 filing,” said Ron Cole, a spokesman for the Eastern local of the Air Line Pilots Assn. He said that talks between the pilots and management, which had been scheduled for Thursday, did not take place because “the company was a no-show.”
Capt. Henry A. Duffy, national president of the Air Line Pilots Assn., said in an interview on Cable News Network that “we wish Lorenzo would go away. He is much better at filing for bankruptcy than he is at running an airline.”
Duffy said he hoped that the airline would be sold to “someone who knows how to run an airline” but would not rule out further negotiations with Eastern.
Under Chapter 11, a company reorganizes under a trustee but continues to operate. During this period the company has protection from having to pay creditors. Airline observers expect that the reorganization might take as long as two years and once it is completed, Eastern will probably be a much smaller airline than it is today.
Some analysts expect to see an Eastern in a few months that is concentrated around its key routes and its big-money making lines, such as the Northeast shuttle between Washington, New York and Boston. Daniel A. Hersh, an airline analyst with Bateman Eichler, Hill Richards of Los Angeles, said he expects Eastern to give priority to keeping routes in its home base in Miami and its highly profitable service to South America, which it purchased from Braniff International Airways when that airline went bankrupt some years ago.
A pale and unsmiling Lorenzo, guarded by security men, appeared at the news conference with Bakes.
Although he has been labeled a “robber baron” by the unions, Lorenzo said that “the intensive focus on a single person does a great injustice to the real issues that are at stake in airline deregulation and in our business climate today.”
Both executives said they were saddened by the action they contended they were forced to take. Lorenzo once worked as a financial analyst for Eastern. “When I joined Eastern . . . I never believed I’d be at this press conference today,” he said. “I’m not going to try to kid you by saying the attacks haven’t hurt my family and me.”
Lorenzo vowed that all creditors will be paid in full and that the shareholders will receive full value. He said that the net assets of the airline are “well over $1 billion after meeting all our obligations.” He said that Eastern had $2.5 billion in debt but only about $200 million in cash. Texas Air had another $300 million, said Lorenzo.
The largest Eastern creditors were identified as a consortium of European banks, the European plane manufacturer Airbus Industrie and several engine makers.
The strike has shut down all but 4% of Eastern’s flights. Of those flying, mostly in the Northeast corridor, only a handful of passengers appear to be taking them.
Several passengers arriving at Washington National Airport from New York’s La Guardia Airport cited convenience as the main reason for flying Eastern’s shuttle. Ray Post said he flew on it because it was the first flight to Washington. “It was completely a matter of convenience,” he said.
“It’s the emptiest shuttle flight I’ve ever been on,” said Post, a Washington businessman who has been flying the shuttle for 10 years. Only 15 other passengers flew with Post aboard Eastern Flight 1481.
The passengers interviewed said they enjoyed the relative solitude aboard Eastern’s shuttle. “It was uncrowded and no hassle,” another passenger said. “I knew Pan Am would be crowded and frantic.”
Other passengers said they were not concerned about the airline’s safety. “It was an Eastern pilot, an Eastern flight attendant, and an Eastern shuttle,” said Leland Schwartz, a Washington resident. Schwartz said the only unpleasant aspect of his flight was having to watch angry picketers.
A group of four Eastern pilots supporting machinists spent Thursday in the airport terminal photographing their fellow pilots still working as Eastern flights pulled up to the terminal.
“We want to find out who’s not our friends anymore,” said a pilot armed with a camera with a zoom lens. “We try to talk to them in a friendly manner and try to convince them not to fly,” said the pilot, who declined to be identified.
AFL-CIO President Lane Kirkland showed his support for the strikers by visiting the picket line at Washington National Airport. Kirkland criticized Lorenzo’s “indifference” to Eastern employees and said the bankruptcy was “entirely predictable” because Lorenzo had abused the airline.
Related stories in Business.