Failed Deal Further Obscures Eastern’s Future

The collapse of Peter V. Ueberroth’s attempt to acquire Eastern Airlines means more than just a failed opportunity for the former baseball commissioner and Summer Olympics chief to work his magic again.

It also means that Eastern’s prospects for surviving and prospering become even cloudier.

Reviving the battered carrier and making it profitable--a goal that has eluded parent Texas Air Corp. and would have been daunting even for the confident Ueberroth--is becoming increasingly difficult the longer the carrier remains mostly idled with only a fraction of its planes airborne, experts say.

The longer the airline stays mostly grounded, the more inroads that competitors such as American, Delta and USAir will continue to make into Eastern’s prime markets. Meanwhile, Eastern’s already poor public image, particularly among business travelers and travel agents, continues to worsen. And rearing its ugly head is the growing risk of an economic recession--one that Eastern would have had trouble surviving even without its recent difficulties.

“They (Eastern) have already lost market share, and it will be even that much more difficult several months down the road to get it back,” says Daniel A. Hersh, analyst with the Los Angeles brokerage of Bateman Eichler, Hill Richards.

In announcing the collapse of the Ueberroth deal, Eastern President Philip Bakes said Wednesday that the Miami-based airline’s strategy now is to reorganize as a smaller carrier serving roughly 50% to 60% of its pre-strike schedule of 1,040 flights a day and employing some 15,000 to 18,000 people, compared to 31,000 before the strike.

The airline currently is operating about 110 flights a day, mostly in its Northeast shuttle and in Latin America, with about 210 of its 250 aircraft sitting idle.

Such a scaled-down strategy can work if Eastern’s management concentrates on its most profitable routes and sheds the rest, suggests George W. James, president of Airline Economics, a consulting firm based in Washington. In some markets, such as in Washington and New York, competition is limited because of controls on airport landing “slots.” Eastern owns many of these valuable slots, which also can be sold, James notes.

“They are an unprofitable large airline, but they might make it into a profitable small airline,” he says. “But it’s not assured.”

However, others expressed skepticism about how effectively Eastern under current management can pursue that strategy, which the airline has been trying to do anyway. Moreover, such a buildup process could take weeks when Eastern can’t afford the time, some analysts and observers say. Some still believe that selling the airline is a more viable option for Texas Air.

Whatever happens, making the carrier profitable again will be tough under any owner. Even with labor concessions worth about $210 million in annual savings--which Eastern’s key unions agreed to grant Ueberroth in exchange for a 30% ownership stake--the airline would still lose money, based on its 1988 loss of $335.4 million.

Also, the “hub-and-spoke” system used by major airlines requires offering a large number of connecting flights through the same hub airport to remain competitive. Smaller airlines generally have survived by concentrating on only a few markets and serving them well.

Accordingly, some analysts say, the airline’s days as a large, separately managed carrier are numbered. It may have to be acquired by another airline, such as Trans World Airlines and its corporate raider chairman, Carl C. Icahn.

Or it could be bought by a non-airline investment group similar to Ueberroth’s, whose goal may be merely to get Eastern into good enough financial shape so that it can be sold to another carrier, possibly in a year or two. Such troubled carriers as Republic and Western airlines were revived by turnaround artists, only to be sold to Northwest and Delta airlines, respectively.

Back to Full Capacity

“It’s hard to see Eastern surviving long term on its own, it simply doesn’t have the market penetration compared to the mega-carriers,” says Raymond E. Neidl, an analyst who follows Eastern for the New York bond research firm of McCarthy, Crisanti & Maffei.

Any owner’s first step toward that end would be to get Eastern’s flights back up quickly. Time is of the essence because the longer Eastern operates with a limited schedule, the more inroads into its market share can be made by hungry competitors, analysts say.

That was a lesson learned hard by Braniff, which in its prime enjoyed a major share of its chief hub at Dallas-Ft. Worth. But by the time it resumed flights in 1984, months after shutting down and filing for Chapter 11 bankruptcy protection, rivals American and Delta had gained dominant shares of that key market.

The building-up process could take weeks because some idled aircraft must be “de-pickled”--taken out of short-term storage--and moved from Miami hangars to other airports. Also, crew members who have scattered around the country must return to their bases. Some pilots and others may need to be recertified. Laid-off non-union workers must be called back, if available. Marketing programs, reservation systems, fare and flight schedules, in-flight services and fuel contracts and countless other details must be worked out before flights can resume on a large scale.

“When Braniff started flying again, it cost them a lot of money,” notes Dick Warden, an analyst at IDS Financial Services in Minneapolis.

But even if it can get most of its flights restored quickly, Eastern still faces another major challenge: erasing its chronic negative public image, fostered by years of poor service and bitter management-labor relations and aggravated by the recent machinists union strike and subsequent bankruptcy filing.

Shedding that image is critical, analysts say, because to turn itself around Eastern must increase its popularity among business travelers--those passengers willing to pay higher fares in exchange for better service and greater choices of flight times.

Wooing Back Business People

That is because union concessions won’t entirely erase Eastern’s losses, and other costs already have been cut to the bone by Texas Air, analysts say. The difference between profit and loss must come from increased revenues, largely from business passengers, analysts say.

Getting more business travelers won’t be easy because Eastern’s most successful operation to attract business travelers has been its Eastern Shuttle. But Texas Air plans to sell the shuttle to New York real estate developer Donald J. Trump for $365 million.

Eastern’s primarily north-south route system, from the Northeast to Florida, Latin America and the Caribbean, is tourist oriented. For that type of passenger, low fares are the major draw, and Eastern--like many other carriers emerging after crippling strikes--is bound to use bargain-basement pricing at the start to bring back travelers.

On the other hand, boosting business travelers over the long run requires improved service--an elusive goal for Eastern in the past because of poor labor relations and rock-bottom employee morale.

Ueberroth was hoping that his plan to give employees 30% of Eastern’s stock, making it the only major airline to give workers such a large ownership stake, would have caused morale to rise markedly. Another owner may try a similar approach.

“That’s really the wild card,” Bateman Eichler’s Hersh says. “They (Eastern employees) may be so happy to get back to work and be rid of Frank Lorenzo. Quite frankly, we may all underestimate the power of what they can produce.”

Any owner also can be expected to try a myriad of marketing programs to revive Eastern’s popularity among business and vacation travelers. For example, he could add incentives to the firm’s frequent-flier program.

But Eastern’s chief competitors--particularly American, Delta and USAir--are also seeking more business travelers.

Those rivals already have increased flights on many of Eastern’s key routes. American Airlines, for example, announced Friday that it would add 11 flights in Miami, boosting its total to 31, and make that city a hub. Continental Airlines, which enjoys inside knowledge of what Eastern routes are most lucrative through their shared parent, Texas Air, also has been adding capacity.

Threat of Recession

But even if it successfully fends off competitors and boosts business travelers, Eastern faces another potentially crippling threat over which it has no control: that of an economic recession.

Unless new owners have deep pockets, they may not have the financial resources to stomach a sustained decline in passenger traffic likely to accompany a recession, analysts say.

Also, once it emerges from bankruptcy proceedings, Eastern or a new owner will have to resume interest payments on some $3.8 billion of debt, bond analyst Neidl says.

Main Story: Part I, Page 1