Angry Creditors Say They Want Eastern Liquidated
Eastern Airlines’ unsecured creditors, angered that the airline is retreating from an earlier deal with them, have threatened to seek liquidation of the carrier.
Such liquidation would mean shutting down the airline, selling its assets and distributing the proceeds to the creditors.
The creditors made their threat in a session before bankruptcy Judge Burton R. Lifland in response to an announcement earlier this week that the carrier would lose more than twice as much money in 1990 as it had estimated. Eastern said it would not be able to honor the agreement it reached with creditors last month, when it promised to pay 50 cents on the dollar on its $980 million in debt.
Eastern raised its estimate of losses for this year to $330 million, $185 million above an earlier prediction. The airline’s president, Phil Bakes, had said in an interview at the time of the announcement that adverse publicity about its bankruptcy had hurt the airline, especially with the lucrative business traveler market. When Eastern first declared bankruptcy, Frank Lorenzo, its chairman and chairman of Texas Air Corp., its parent, vowed that the creditors would be paid at 100 cents on the dollar.
Sources close to the airline confirmed that the threat was made. But they said the threat might simply be a bargaining position that the creditors were using to prod the airline for a better deal.
The creditors also were said to be seeking appointment of a trustee to take over operation of the airline from management and, ultimately, to liquidate it.
Sources said the unsecured creditors--ranging from airline caterers and fuel firms to engine makers--would also try to block a request by Eastern to get $80 million from its funds held in escrow which it needs for day-to-day operating expenses. The court must approve all such withdrawals.
“If you were given such an extremely distasteful proposal,” said one person close to the situation who declined to be identified, “wouldn’t you come out with both guns blazing, knowing that there will be negotiations?”
The company and creditors were reported to have scheduled a meeting today.
Reached in Los Angeles, David Boies, one of Eastern’s top lawyers, declined to comment on the threat.
Said Eastern spokesman Robin Matell: “We are not commenting on reports of what came out of the talks between Eastern and the creditors. Those talks are supposed to be confidential. But there are always a likelihood of leaks. The unions will leak whatever damages the company.”
Eastern’s machinists have been on strike against the airline for more than a year. They struck five days before the airline filed for Chapter 11 bankruptcy on March 9, 1989.
“Liquidation is not in the best interest of either party,” Matell said. “Historically, the creditors have been constructive and we hope that will be the outcome here, too. Eastern and Texas Air will discuss with responsible parties the manner in which to structure a final agreement.”
Matell stressed that despite the creditors’ threats it is the bankruptcy court that must make any final determination all actions, including liquidation.
The call for liquidation is not the first time it has happened in the Eastern case. Earlier, the airline’s preferred shareholders had urged such action. Bakes said when that happened Eastern’s bookings fell off 50% within days.
Timothy Pettee, airline analyst with the investment house of Merrill Lynch, said that liquidation would badly hurt Texas Air.
He said that Eastern’s pension funds were under-funded by somewhere between $400 million and $1 billion. If Eastern were liquidated, he said, the Pension Benefit Guarantee Corp., a government agency, would go after Texas Air for the delinquent payments. “It would seriously threaten the financial wherewithal of Texas Air,” he said.
