Eastern Goes Bust

By Janice Castro

We did not think that Eastern would be any bed of roses when we bought it three years ago," said a haggard-looking Frank Lorenzo. "But I never believed that we would be here today." Thus, six days into a bitter walkout by some 9,000 mechanics, baggage handlers and other members of the International Association of Machinists and Aerospace Workers, Eastern last week became the largest airline in history to go bust. And even as Lorenzo vowed to bring Eastern out of bankruptcy stronger than ever, he conceded that it might be impossible to avoid selling off more of Eastern's already depleted assets.

Rarely had the stakes in a labor strike been higher. After 17 exhausting months of glacial negotiations with management, rank-and-file union members at Eastern decided to strike despite the risk that they might force the 60-year- old carrier to go belly up -- and lose Eastern's 31,200 jobs in the process. For Lorenzo, the intense chairman of Eastern's parent firm, Texas Air, the prospects were no better: the nation's seventh largest airline was clearly in for a bone-jarring ride, huge financial losses and a very uncertain landing.

From the start, Eastern's pilots unflinchingly backed striking mechanics and flight crews by walking off their jobs, and their action grounded all but a handful of the airline's 250 planes. With a dwindling war chest of $200 million, hemorrhaging at a rate of $4 million a day, Eastern was forced to file for protection under the Chapter 11 provisions of the Federal Bankruptcy Code. Lorenzo used the same tactic 5 1/2 years ago to break the unions and reorganize Continental, but this time, under revised bankruptcy laws, he will find the process more arduous.

Charles Bryan, the tough-talking leader of the airline's machinists, who makes no attempt to hide his personal animus toward Lorenzo, responded with characteristic defiance. Said he: "We take no responsibility for the strike. This is a Frank Lorenzo strike." Eastern's differences with its unions had long since deteriorated into a bitter and highly personal feud between the two men. While Eastern insisted that the airline could not survive without substantial wage concessions from the machinists, Bryan maintained that Lorenzo was out to destroy the carrier and sell it off for his own profit. Lorenzo's battle with the machinists, said Bryan, was "the purest case of evil vs. good."

That set the tone for the showdown. U.S. Transportation Secretary Samuel Skinner, announcing that President Bush refused to intervene in the Eastern strike, could not resist a verbal shiv of his own. "Mr. Lorenzo," he said, "has obviously not got the trust and admiration of his employees." As unionists burned an effigy of the Texas Air chairman, their leaders laid ambitious plans to expand the strike through a series of secondary boycotts that would tie up commuter traffic across the country -- a nightmare that was averted when judges in several cities slapped temporary restraining orders on strikes of intercity rail and commuter lines.

Even so, Eastern's determination to keep planes in the air during the strike quickly unraveled as pilots refused to cross picket lines. Since he took over Eastern in 1986, the pilots charged, Lorenzo has systematically stripped the airline of its most valuable assets, leaving it too small and weak to compete.

In the past three years Eastern has sold eleven of its passenger-boarding gates and a choice Miami-to-London route, and has transferred 20 airliners to Continental, another unit of Texas Air. Two years ago, Eastern sold its computerized reservation system to Texas Air for $100 million -- a price most industry experts said was too low. Last October, Eastern agreed to sell its profitable Northeast shuttle to Donald Trump for $365 million. Two days after the bankruptcy notice, Eastern Express, a Florida commuter airline owned by a Texas Air subsidiary, changed its name to Continental Express. Said J.B. Stokes, a spokesman for the Air Line Pilots Association: "It was either make the stand now, while there's still something left to fight for, or do it six months later, when there's nothing left."

Union workers were not the only ones swept up in the battle. As the strike strangled airline operations, 9,500 nonunion secretaries, ticket agents and other workers were laid off. Aside from making a handful of flights between Miami and Latin American cities, the airline concentrated its efforts on keeping the Northeast shuttle flying so that the cash-rich deal with Trump would not fall through. To attract passengers, Eastern offered a temporary fare of $12 for weekend shuttle flights from New York to Washington or Boston, a fraction of its usual rate of $69. The tactic worked: the first flights sold well.

But for most travelers holding Eastern tickets, the week was an exercise in frustration -- and worse. Many passengers arriving at understaffed counters were unable to get on any flight. Hundreds of vacationers missed connections with Florida cruises because flights south were canceled. Hundreds of thousands of airline customers were left holding some $250 million worth of prepaid Eastern tickets. In order to get refunds, those who paid in cash will have to queue up behind Eastern's secured creditors and wait as long as a year.

To improve its precarious cash position, Eastern on the eve of bankruptcy agreed to sell eight boarding gates at the Philadelphia airport to USAir for $70 million. It picked up $15 million more by agreeing to sell its Philadelphia-Toronto and Philadelphia-Montreal routes to USAir. In addition, Eastern leased landing slots on its New York-Miami routes to Continental. Accusations flew that Lorenzo was dismantling the airline even during the strike. Responded Lorenzo angrily: "Had we sold assets quicker, Eastern wouldn't be in bankruptcy today." Along with the shuttle sale to Trump, the deals with USAir will have to be approved by the bankruptcy judge.

Meantime, Eastern's competitors had a field day poaching on the crippled airline's territory. TWA, Delta and Pan Am added flights on Eastern routes to capture its customers. Even Amtrak and Greyhound expanded their service to meet the new demand. TWA Chairman Carl Icahn confirmed that Eastern's unions had asked him to launch a bid for the airline. Icahn briefly considered such a bid last fall. He found the idea interesting, he said, but did not want to interfere in Eastern's collective-bargaining process. Lorenzo was cool to the suggestion. "Our major goal at the moment is coming to an agreement with our unions," he said. "I can't imagine how having someone like Icahn get involved will do anything but interfere with the process."

By choosing bankruptcy, Lorenzo has won some breathing room, but he has also given up considerable power. Under federal law, Eastern management will have 120 days to submit its reorganization plan to the bankruptcy court. In the meantime, the airline can resume normal operations if it reaches an agreement with its unions. But the rules have changed since Lorenzo's previous foray into Chapter 11 with Continental. Management can no longer toss out union contracts under Chapter 11 without the court's approval.

Eastern's unions welcome the prospect of dealing with a judge instead of Lorenzo. But they too will lose clout under Chapter 11. For one thing, the bankruptcy court has the power to set terms for a contract settlement. But the unions will also be able to file a reorganization plan for the airline. Union leaders gave every indication that the strike will continue. At week's end its focus turned to picketing Continental facilities at airports in Miami, Houston, Denver and Newark.

The dramatic events took their toll on Lorenzo. "I'm not going to kid you by saying that some of those efforts haven't hurt my family and me," he said last week. "They have." Lorenzo maintains that he has done everything in his power to prevent Eastern from folding. He recalls the options that former Eastern Chairman Frank Borman described for the airline in 1986: "Fix it, sell it, or tank it." Unable to fix it, Borman sold it. As the bankruptcy court now begins to address the formidable task of putting Eastern back together again, Lorenzo was facing the possibility last week that tanking Eastern may yet turn out to be the only choice left.

With reporting by Gisela Bolte/Washington and Thomas McCarroll/New York