Lorenzo Sells Airline Stock to SAS; to Get $31 Million : Finance: Labor celebrates as the man who broke unions agrees to stay out of industry for seven years.

Frank Lorenzo, the man organized labor loved to hate but who changed the travel industry with low fares and tough competition, on Thursday bailed out of the airline business.

Lorenzo announced that he is selling most of his stake in Continental Airlines Holdings, which owns Continental and Eastern airlines, to Scandinavian Airlines System and is quitting as chairman and chief executive.

SAS, which already owns 9.9% of Continental Airlines Holdings (formerly Texas Air Corp.), will pay about $52 million in a two-part transaction and will end up with 18.4% of the voting stock. Lorenzo will get nearly $31 million in salary, severance pay and cash for his stock.

Lorenzo is being replaced by Hollis L. Harris, president of Delta Air Lines and a 36-year veteran of what historically has been one of the most profitable airlines. Jan Carlzon, chief executive of SAS and already a member of Continental’s board, has been asked to become “non-executive chairman” and is considering the offer.

Not surprisingly, unions celebrated the departure of their cost-cutting nemesis. And airline experts agreed that the loss of the 50-year-old Lorenzo is positive for beleaguered Continental Airlines, whose financial condition and service have been improving this year, and for Eastern, which is struggling under bankruptcy court protection and is being run by a trustee.

Lorenzo said he is leaving the company he built and rebuilt because his presence has become too disruptive to its recovery.

“It’s been perfectly obvious to me that I personally have become a lightning rod for many of the attacks that the company has taken in the process of making the changes that have been required,” Lorenzo said at a news conference in New York.

“This transaction allows me to step aside and allows the company to have a new management,” he said.

Lorenzo will remain a director of Continental Airlines Holdings but is forbidden to compete in the airline industry for at least seven years.

When asked about his plans, Lorenzo said he would “take a little time to catch my breath. I haven’t had much time to do that.”

The company that Harris, 58, is joining is “culturally the antithesis” of Delta, which has excellent labor relations, said Morton Beyer, chairman of Avmark, an airline management consulting firm in Arlington, Va. Delta’s labor costs are double those at Continental, he said.

“All the Delta managers are beloved,” Beyer said.

In contrast, “Continental is by all odds the leanest and meanest in the park,” he said. Lorenzo himself was named one of the toughest bosses in America last year by Fortune magazine.

Unions, which were driven out of Continental and are on strike at Eastern, applauded Lorenzo’s departure.

“I think the whole airline industry can breathe a little easier tonight,” said Charlie Bryan, president of the International Assn. of Machinists and Aerospace Workers’ District 100 in Miami. That union’s March, 1989, strike against Eastern, supported by pilots and flight attendants, pushed the airline into Chapter 11 bankruptcy.

A U.S. bankruptcy judge took control of Eastern last April and put it in the hands of a special trustee. Texas Air subsequently changed its name to Continental Holdings but is still liable for a shortage in Eastern’s pension fund--estimated at $400 million to $800 million--and for millions of dollars in disputed costs of certain transactions between Eastern and its affiliates.

Lorenzo, who used bankruptcy courts to break union contracts at Continental in 1983, “is the epitome of what is wrong with corporate America today,” said John Peterpaul, general vice president of the machinists’ union. “Our condolences to whatever industry he stalks next.”

The Air Line Pilots Assn. said that Lorenzo “is not fit to successfully run an airline . . . . We believe that the industry and the traveling public will be better served and safer with him gone.”

Not all assessments of Lorenzo were so harsh.

“When people write the history of deregulation in the airline industry, how will he be viewed?” asked John Pincavage, an analyst with the Transportation Group, a New York-based investment banking firm that specializes in airlines.

“I think he’ll be remembered as a builder and as someone who recognized very early on what elements were needed to make a company survive in (the current) environment,” he said. Those elements are low costs, achieved largely by cutting labor costs; “critical mass” with lots of routes and lots of airplanes, and “he recognized the use of leverage,” funding much of his airlines’ expansions and his many acquisitions with risky junk bonds.

Under the agreement, SAS will buy 2.25 million shares of Continental common stock for $31.5 million, or $14 a share--well above the stock’s current market price. Continental’s stock closed Thursday at $6.25 a share, up $1.75, on the New York Stock Exchange.

SAS will pay an additional $21 million, or about $4.60 a share, for Jet Capital Corp., a private investment firm owned by Lorenzo and others that holds an approximate 30% voting stake in Continental.

But, to keep SAS’s holdings under the 25% limit for foreign ownership of U.S. airlines, Jet Capital’s Class A “super voting” stock will be converted into Class C preferred stock, sharply cutting the voting stake. SAS will then own 16.8% of the equity and 18.4% of the voting stock of the corporation.

SAS, which is part owned by the governments of Denmark, Norway and Sweden, will receive an additional two board seats for a total of three seats on the 15-director board, which will also include Harris. SAS said one of its board members will be a U.S. citizen.

Lorenzo will walk away from the deal with about $17 million in severance payments and stock option buybacks and $2.7 million in salary over three years from Continental, as well as $10.7 million for his Jet Capital stock from SAS. He will retain options to buy 783,333 shares in Continental.

The airline saga of Francisco A. Lorenzo began 18 years ago when Lorenzo moved his Wall Street consulting and investment firm, Jet Capital, to Texas and, with business school classmate Robert J. Carney, purchased 59% of regional Texas International Airlines for about $1 million.

In 1977, Lorenzo earned a reputation as an innovator in the airline business by introducing 50% discount “peanut” fares at Texas International.

In the early 1980s, Lorenzo created New York Air, a non-union, low-cost carrier in the Northeast, and grabbed Texas Air in the nation’s first hostile takeover of an airline.

Later, Texas Air took over ailing Eastern Airlines, creating, for a time, the nation’s largest air carrier. Lorenzo bought financially troubled People Express and Frontier Airlines, eventually folding all his airlines, except Eastern, into Continental.

The transaction with SAS already has been approved by Continental’s board but is subject to a vote by Jet Capital’s shareholders and reviews by the Transportation and Justice departments.

Researcher Melanie Pickett contributed to this story.