What a Pity if the Eastern Deal Collapses
WIt was always a long shot. Peter Ueberroth, the 51-year-old former baseball commissioner, Olympic Games organizer and travel industry entrepreneur, tried to save Eastern Airlines in a deal that may have unraveled Tuesday night. Doing so could have boosted Ueberroth’s reported ambitions to run for public office--governor of California, perhaps, ultimately, even President.
In seeking to buy the bankrupt airline he negotiated a five-year agreement with the unions, who pledged to take big cuts in pay and benefits. And despite Eastern’s past troubles, the unions showed enthusiasm and Ueberroth was confident of making a success of the airline. But at the last minute, the unions, in their way of thinking, chose death before dishonor. By insisting on getting rid of Frank Lorenzo, chairman of Eastern owner Texas Air, before the airline was even sold, they threatened the deal that could have kept Eastern flying.
Meanwhile, Ueberroth’s plan, if it should survive, looks good. The arithmetic and the intangibles favor him and his business associates, who would pay $464 million for an airline that in the opinion of various experts is worth $500 million, or $650 million or maybe even $1 billion.
The property is likely to be sold cheap. After Ueberroth paid $464 million to Texas Air, he could quickly collect $365 million from Donald Trump, the New York real estate developer who has already signed to buy the Eastern Shuttle service.
Ueberroth also would get a 20% interest in a computer reservations system with his purchase--an interest that could be worth $50 million. So, in simple numbers alone, it looks like Ueberroth and associates would be risking $49 million for an airline with assets of roughly $4 billion and liabilities of something over $3 billion.
Others thought the numbers add up. Ueberroth was assured of at least $300 million in financing from Drexel Burnham Lambert. And Ardshiel Inc., a small New York investment bank, proposed to sell 40% ownership in the newly renamed Eastern Airlines Employees and Service Co. to sophisticated private investors. In the final line-up, Ueberroth and associates would own 30% of the company, the unions 30% and Ardshiel’s investors, 40%.
Not a Bust-Up
Their payoff could be in the hundreds of millions. But this was not a bust-up situation--Ueberroth was not going to sell assets. The only reason he was able to make a deal with Eastern’s unions is that he is pledged to try to make a go of the airline.
The unions have agreed to annual wage and benefit concessions amounting to $210 million--almost double the concessions they were willing to give Lorenzo. And that would cut expenses. But labor costs are not Eastern’s main problem. The problem is that through decades of labor strife, the airline acquired a reputation for discourteous service and scruffy aircraft that turned off business travelers. Now if it lives it will still have to attract them, and Ueberroth’s marketing skills--on display when he ran the 1984 Los Angeles Olympics--were the big hope, says analyst Daniel Hersh of Bateman Eichler, Hill Richards.
It won’t be easy for any buyer. While Eastern has been idle, American, Delta and TWA have moved in on its Miami and Caribbean routes. In Eastern’s favor, however, is that increased air travel has produced labor shortages in the airline industry. Mechanics are so scarce that youngsters right out of trade school are snapped up at $40,000 a year, reports Kit Darby, vice president of Atlanta’s Future Aviation Professionals, an employment information service. Thus other airlines can’t easily expand into Eastern’s markets.
But it may have been that very confidence that they could get work in the industry no matter what happened that pushed the unions to be so bitter. Otherwise, the big arguments for Eastern’s successful revival are less tangible. The image of organized labor is on the line, for one thing. AFL-CIO President Lane Kirkland strongly backed the Eastern strike. Having achieved union ownership of a significant stake in the company, labor had a chance to show what it could do.
Also, most of the people involved are not stupid. Minneapolis investor Carl Pohlad, a senior director of Texas Air, originated the deal by approaching Ueberroth when he realized that Lorenzo couldn’t make a go of Eastern. Ueberroth, a self-made millionaire who founded and built his own travel business, is no dummy. He knows how to calculate risk, as does Drexel Burnham, which is eager to provide financing.
What, unfortunately, it all may add up to is a missed opportunity for the unions to show what employee ownership can do and for Peter Ueberroth to add another notch to a winner’s reputation. On the other hand, hold a good thought: the deal may be salvaged this very morning in the judge’s chambers.
