Musical Chairs in the Skies

By Barbara Rudolph.

People in the airline business are well accustomed to turbulence, but last week they fastened their seat belts and reached for the air-sickness pills. In the wake of the proposed Texas Air-Eastern and TWA-Ozark mergers, everyone from chief executives to flight attendants was wondering nervously just how much those megadeals would shake up the industry. The already fierce competition in the skies is sure to become even more cutthroat. Many airlines may find it increasingly hard to turn a profit, and union members will face new threats to their high salaries. But air travelers, faced with the prospect of more and bigger fare bargains, stand to come out ahead.

The most stunning development was Texas Air's agreement to buy Eastern Airlines for about $600 million. For Eastern Chairman Frank Borman, the deal was an unfortunate, but unavoidable act of a company close to bankruptcy; for many of the employees it was a shameful sellout; and for the rest of the industry it was a shocker. If the merger goes through, it will create the largest U.S. airline, flying some 55 million passengers annually and serving 212 domestic and 71 overseas destinations. United would drop to second.

Running the biggest airline would be a dream come true at last for Frank Lorenzo, Texas Air's ambitious chairman, who failed in earlier efforts to buy Trans World Airlines and then Frontier Airlines. But a Texas Air-Eastern combination would be a nightmare for other airlines. Lorenzo has made Houston- based Texas Air, which owns Continental Airlines and New York Air, highly successful by paying relatively low wages and offering passengers cut-rate prices. As head of Texas Air and Eastern, he could easily trigger the most vicious fare wars that the industry has ever known.

As dramatic as the Eastern deal was, it was only the first installment of the one-two punch that rocked the airline business in a single week. Four days later TWA Chairman Carl Icahn said the carrier would buy St. Louis-based Ozark Air Lines for $225 million. That union would increase TWA's annual traffic by 30%, to some 27 million passengers, and strengthen its position as the fourth- largest U.S. airline. The merger would be a coup for Icahn, a New York financier who gained control of TWA only seven months ago. Though a TWA-Ozark deal was already in the works, he rushed to complete the negotiations after the Eastern deal was announced. Icahn realized that in the increasingly competitive skies, only the big and strong are sure to survive. Said he: "Texas Air-Eastern is telling you a story, and anybody who doesn't read it is a fool."

But several obstacles still stand in the way of a successful Texas Air- Eastern merger. For one thing, Lorenzo, who has long been viewed as a foe of organized labor, could have trouble making peace with Eastern's unions. The airline narrowly averted threatened strikes last week by the pilots and flight attendants, but the uncertainty surrounding the carrier has made many passengers wary of flying Eastern.

Another potential problem is that the Government could challenge the merger on antitrust grounds. New York Air and Eastern are currently direct competitors on heavily traveled routes from New York to Boston, Washington, and Florida cities. While the Justice Department is studying the deal, other airlines could come forward to top Texas Air's bid. Says Robert Joedicke, an airline analyst for the Shearson Lehman Bros. investment firm: "The merger is not a fait accompli yet. A lot of things can happen."

For Eastern, the sellout is a rough landing after years of financial turbulence. The airline expanded too aggressively in the 1970s, taking on a crippling debt load to buy new aircraft. In the 1980s, fare wars slashed revenues while labor costs had got out of control. The carrier's pilots now , make an average of $112,535 a year, almost twice what Texas Air skippers receive. Eastern has slipped repeatedly into the red, and its comebacks never seem to last. After managing a $73 million profit for the first nine months of last year, the airline lost $67 million in the final quarter. Many employees fault Borman, the former Apollo astronaut who became chairman in 1976; they feel that he has never earned his wings as a successful business executive.

By last month Eastern was $2.5 billion in debt and its bankers were threatening to call in some of the loans if the airline's unions did not agree to make $450 million worth of wage concessions. Eastern was perilously near bankruptcy. Said Borman: "It was either fix it, sell it or merge it."

Enter Lorenzo with an offer to buy Eastern. Borman was by then negotiating night and day with the airline's unions. He delivered an ultimatum: accept 20% wage cuts or the airline would either sell out or go under. The pilots agreed to Borman's terms, and the flight attendants tentatively accepted a pact, but the machinists' union balked. That led to a confrontation between Borman and Charles Bryan, a 30-year company veteran who has led the machinists since 1979 and been an Eastern board member since 1983. Known as Chairman Charlie because of his power in the company, Bryan declared that his union would accept 15% wage cuts, but only on one condition: Borman would have to resign as chairman.

It was a bold and risky ploy. Bryan apparently assumed that Borman would resign rather than agree to sell Eastern. Borman, for his part, calculated that the labor leader would never allow a takeover by Lorenzo. Reason: Lorenzo had enraged virtually every card-carrying union member in 1983, when his Continental Airlines filed for bankruptcy and abrogated the airline's union contracts. Lorenzo laid off the firm's 12,000 employees and offered them their jobs back at about half salary.

During a seven-hour board meeting at Eastern's Miami headquarters that culminated in the decision to sell, the atmosphere was tense. Before the vote was taken, Borman shouted at Bryan, "I'm going to tell the 41,000 employees that you destroyed this airline." Bryan's retort: "I'll tell them that you did it." To outside observers, it was no way to make a rational business decision. Says John Simmons, an Amherst, Mass.-based management consultant: "It didn't have to end in a shoot-out at the OK Corral."

As Lorenzo savored his success last week, he sounded alternately conciliatory and pugnacious toward Eastern's employees. "We're not union busters, we're airline builders," he said at one point. Later, though, Lorenzo took the offensive, declaring that it was essential that he receive wage concessions from the machinists' union. Said he: "There is no Santa Claus."

Eastern's unions met last week to discuss what Lorenzo might do as head of Eastern. They are plainly suspicious of their new boss. Said John Mazur, spokesman for the pilots' union: "Everyone knows what Frank Lorenzo is and what he does."

Many industry experts expect Lorenzo to re-create Eastern in the image of cut-rate Continental and New York Air. If that happens, few airlines will escape the fallout. Atlanta-based Delta is probably the most vulnerable, since it now competes with Eastern on 80% of its domestic flights.

The industry did not wait for Lorenzo to make the first move in a new bout of price slashing. American Airlines last week announced its "Spring for Less" fares, offering discounts of up to 75% on some seats on flights to 117 U.S. cities. The offer is good from April 1 through May 22. United, Delta, Republic and Eastern quickly unveiled their own discounts.

Fare battles will put new strain on an already beleaguered industry. The twelve major U.S. airlines suffered operating losses of $158 million during the final quarter of 1985, compared with a profit of $347 million during the last three months of 1984.

One of the shakiest airlines is TWA, which expects to lose $125 million during the first three months of 1986. Buying Ozark Air Lines is part of an aggressive plan to stanch that red ink. The merger could make TWA, which is best known as an overseas carrier, stronger domestically.

The Eastern-Texas Air and TWA-Ozark deals merely accelerate a merger binge that was already well under way. In the past four months, People Express has acquired Frontier, and Northwest has agreed to buy Republic. Says Louis Marckesano, who follows the industry for the Janney Montgomery Scott investment firm: "At this rate, in five to ten years the American airline industry will look like the U.S. auto industry, with three or four megacarriers covering the globe." If that happens, Texas Air and TWA are determined to be among the survivors.

With reporting by Marcia Gauger/Miami and Thomas McCarroll/New York