BUSINESS

The battle over the size of Eastern

DAVID LINDORFF August 8 1988
BUSINESS

The battle over the size of Eastern

DAVID LINDORFF August 8 1988

The battle over the size of Eastern

Frank Lorenzo, the aggressive entrepreneur who parlayed a $2,000 investment into America’s largest airline holding company, Houston-based Texas Air Corp., has a firm reputation for opposing organized labor. Shortly after he took over Continental Airlines Corp. in 1982, Lorenzo used a novel technique to defeat the company’s unions: after reorganizing his company under the protection of U.S. bankruptcy laws, he fought and won a long court battle that gave him the right to nullify Continental’s union contracts. Lorenzo has also been battling labor at Texas Air’s other major subsidiary, Eastern Air Lines Inc., ever since he took over the company 19 months ago. And last week, labor spokesmen claimed that Lorenzo, known to many of his employees as “Darth Vader” — after the villainous character in the movie Star Wars—was trying to rout Eastern’s unions by laying off 4,000 workers and shutting down Eastern’s Kansas City, Mo., passenger and maintenance terminal.

Eastern president Philip Bakes denied that the cutback was aimed at its union. He said that Eastern had only expanded to Kansas City in 1983, and he added that last week’s cutback amounted to nothing more than “going back to our roots—our traditional route structure.” Indeed, Eastern has

been cutting back constantly since 1985, from a fleet of 262 aircraft with 1,489 flights daily to 202 planes with 1,085 daily flights. During that period, its workforce has dropped to 29,521 from 42,757. By closing its passenger and maintenance terminal in Kansas City,

Eastern will eliminate

4.000 of its more than

32.000 union jobs. It operates 50 flights into Canada daily from the United States, but none from Kansas City.

The Air Line Pilots Association and the International Association of Machinists (IAM) called the shutdown of the passenger and maintenance terminal in Kansas City an assault by Lorenzo on Eastern’s unions, and last week they asked two federal district courts to issue a restraining order to stop the Eastern restructuring. Two years ago, both unions forced Texas Air to drop its attempt to transfer Eastern’s lucrative but unionized New York City-to-Boston shuttle business to nonunion Texas Air. And union leaders say that the closing of Eastern’s Kansas City passenger and maintenance terminal is another attempt to do the same

thing—this time transferring those assets to nonunion Continental Airlines. Eastern spokesmen say that the passenger and maintenance terminal will be closed and no assets will be transferred. But industry analysts are divided over whether the cutbacks will help stem Eastern’s losses, which have soared to $2.8 billion. In 1987 alone, Eastern lost $241 million on revenues of $5.8 billion.

Lorenzo’s latest move is also a concern to the U.S. airline regulatory body, the Federal Aviation Administration. On June 1, following an exhaustive inspection of Texas Air’s entire fleet by the FAA, its adminstrator, Allan McArtor, concluded in a report that, although the holding company’s fleet was mechanically safe, “the discord and complexity of the labor-management issues at Eastern Air Lines are deep and intense.” Indeed, he said that management and Eastern’s 29,521 workers are “at war.” And McArtor added, “In a company so divided, the risk is increased that labor-management discord will, at some time—either through inattention or by design—have an adverse impact on the public safety.”

In June, following McArtor’s report, Eastern and its unions invited former Reagan administration labor secretary William Brock to help improve the labor relations climate at the airline. But Brock had barely begun discussions with management and workers when Eastern announced last week that it was closing its passenger and maintenance facility in Kansas City. Said Texas Air spokesman Bruce Hicks: “There is no relationship between the timing of the Brock negotiations and the Eastern cutbacks. Eastern has lost more than $1 billion over the past decade and it has to stop the losses. Former secretary Brock’s role was not to negotiate economic issues.” Still, company efforts to cut unionized labor costs at Eastern have been largely unsuccessful since Lorenzo acquired the airline. A baggage handler at Eastern earns $18.60 an hour compared with about $6.50 for the same work at other U.S. airlines, and Eastern is demanding that those costs be brought into line. And some analysts say that the latest decision to cut back in Kansas City will send a jolt of fear through labor’s ranks and encourage Eastern’s employees, who have been without a contract since January, to settle for an agreement that would cut their wages and other benefits. If that is the strategy, Eastern could face a long fight. Indeed, last week the company asked the U.S. National Mediation Board to order a 30-day coolingoff period—a prerequisite that will then make a lockout or strike legal and allow the airline to impose a new contract on its workers. But IAM president William Winpisinger has stated pub-

licly that his union is willing to see Eastern go bankrupt before agreeing to pay cuts.

But whether Eastern’s cutbacks in Kansas City will help the company’s bottom line is also open to question. Airline industry analyst Mark Daugherty of New York City-based Dean Witter Reynolds Inc. says that the move to shut down its Kansas City passenger and maintenance terminal may actually backfire. Said Daugherty: “There are a lot more examples of airlines cutting back operations and not regaining profitability than the other way around. Your earnings can actually get worse over the short term.” He said that as soon as flights are cancelled, revenues drop before money that can be saved through the sale of aircraft and employee reductions begins to add up.

However, other analysts say that the move to close Eastern’s Kansas City passenger and maintenance terminal is long overdue. Said New York City-based Paine Webber Inc. analyst Edward Starkman: “This is not simply a case of Texas Air trashing Eastern, or attacking the unions. The Kansas City operation should have been closed long ago.” Starkman argues that the cutback in this case should enhance Eastern’s earnings. “They are not just cutting flights,” he said. “They are actually closing a terminal, so costs will be cut immediately. Most of the planes are owned, and I’m sure they will be selling their least efficient ones, which should also help the company.” And most analysts do not share the unions’ concern that Texas Air is trying to transfer its Kansas City operation to nonunion Continental, because, they say, other airlines will move in to pick up Eastern’s vacated routes and facilities. In fact, just three days after the Texas Air decision, Braniff Inc. of Dallas announced that it would increase the number of flights it makes out of Kansas City along the 14 routes vacated by Eastern. In the meantime, Eastern, once one of the largest airlines in the United States, continues to pare itself back. But whether union and management can agree on how to save what is left of the airline is clearly open to doubt.

— DAVID LINDORFF in New York City