The DOT Approves the Eastern Takeover

The Department of Transportation gave its approval to the Eastern takeover by Texas Air later that year. That Eastern was a basket case was known, but, like Frontier, it had not been appreciated just how bad the situation was. Phil Bakes had performed well for Lorenzo after the Continental takeover. Under Bakes, Continental had been turned around and was profitable again. Like Continental, the most pressing problem facing Eastern was labor costs. But the labor problems at Eastern could not be handled like they were at Continental four years before by simply filing under Chapter 11, then unilater­ally abrogating the labor contracts in place with the unions. Congress had passed legislation in 1984 that restricted the effect of the holding in Bildisco, so that the debtor in possession (the bankrupt airline) could no longer unilaterally cancel labor agreements.3

Bakes relocated to Miami and took over the helm at Eastern. The magnitude of Eastern’s problems dwarfed those encountered at Conti­nental. The culture was different, the personnel were hostile, and the history of labor relations was dismal. Eastern’s record of labor relations over the years was largely a chronicle of the intransigence of the International Association of Machinists, whose leader was the powerful Charlie Bryan. Without a solution to the labor problem, for starters, there did not appear to be any way to salvage the airline.

Judging by subsequent developments, it appears that Lorenzo also came to that conclusion early; there likely was no way to salvage Eastern. Even as Bakes worked to solve the company’s seemingly insurmountable problems, Lorenzo began the systematic dismantling of Eastern for the benefit of Texas Air and its viable holdings. Eastern’s computer reservation system had been appraised for an amount between $250 million and $450 million, an astonishing fact when it is realized that the entire purchase price for the company was $615 million. Lorenzo had financed the purchase in such a way that less than half of the purchase money came from Texas Air, the rest of the money came from Eastern itself, validating once again the old leveraged buyout strategy that had worked so well. The computer reservation system was sold to Texas Air for the insider bargain price of $100 million, but the terms were even better: Texas Air put up no money, but gave Eastern a promissory note for the purchase price, payable at the end of a

period of 25 years at a severely discounted rate of interest. Texas Air then leased back the system to Eastern for a fee of $ 10 million a month.

w As a businessman, Frank Lorenzo gives capitalism a bad name.»

William F. Buckley

Lorenzo next transferred Eastern’s newest airplanes to Continental, paying Eastern again by promissory note for part of the payment. Conti­nental then sold the airplanes for cash, and at a profit. Continental bought 11 Eastern Air Lines gates at Newark Airport for half price, again paid for by promissory note. The purchasing of fuel was outsourced to a subsidiary of Texas Air at a cost to Eastern of $1 million per month. Eastern paid Continental another $2 million per month for the training of non-employee pilots who, ironi­cally, would be used to replace Eastern’s pilots in case of a labor disruption.

Eastern’s service was also being curtailed for lack of cash flow, and was stopped com­pletely at New Orleans, Seattle, and San Diego. Then came the sell-off of the routes, begin­ning with Eastern’s shuttle, which was sold to Donald Trump. The expected machinist strike came in March 1989, which marked the absolute beginning of the end. Although Eastern imme­diately went into Chapter 11, the reorganization amounted to little more than the gradual selling off of all remaining assets in order to raise oper­ating cash. The bankruptcy court took control of the reorganization from Eastern in April 1990, appointing as Trustee Martin Shugrue, former Continental president. The court used the oppor­tunity to judicially note that Lorenzo’s stew­ardship of Eastern had been a catastrophe. The reorganization was turned into a liquidation of Eastern’s assets and, in 1991, the charade finally ended. Eastern Air Lines was no more. Creditors were left holding the bag to the tune of almost $3 billion, and even the lawyers were shorted their fees, a most uncommon occurrence.

m Pilots are a rare kind of human. They leave the ordinary surface of the world, to purify their soul in the sky, and they come down to earth, only after receiving the communion of the infinite.»

Jose Maria Velasco Ibarra, President of Ecuador

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