March 1989 - VOLUME 10 - NUMBER 3
E D I T O R I A L
The battle between Frank Lorenzo, chairman of Eastern Airlines, and the International Association of Machinists and Aerospace Workers (IAM) is focusing national attention on the Fortune 500 strategy of concession through financial manipulation. When Lorenzo acquired Eastern in 1986, he pushed to cut Eastern's labor costs. In 1987, Eastern's management announced that it would have to cut that year's labor costs by as much as $490 million to make the company profitable. Eastern wanted to trim $265 million from the wages of the machinists and baggage handlers who make up the membership of the IAM.
According to the IAM, Eastern's mechanics are already receiving an hourly wage that is lower than mechanics' wages at all of the airlines with union labor. A mechanic working at Eastern makes $18.83 per hour; at Continental, Lorenzo's non-union carrier, a mechanic earns only $16 per hour; but at USAir, United, Northwest and Delta, mechanics are paid more than $20 per hour. Jim Ashlock, a spokesman for Eastern, concedes that even if the mechanics had given in to the $150 million wage decrease that Lorenzo demanded at the start of the current dispute, Eastern would still be in the red.
Eastern claims that the union is trying to break the company. Eastern's managers say that by refusing to face up to the company's financial reality and to accept cuts in wages, the machinists are preventing Eastern from operating at a profit. The unions' "objective is simply to destroy this company as some kind of vengeance against Frank Lorenzo," Ashlock said.
The IAM counters that Lorenzo "never intended to make [Eastern] a viable airline." Lorenzo likes to describe himself as an airline builder but Captain J. Randolph Babbitt of the Air Line Pilots Association, speaking on ABC's "Nightline," calls that "flowery rhetoric." Babbitt noted that under Lorenzo's management the number of employees at Eastern has dropped by more than 15,000 and Eastern's profits have dropped by $1.5 billion. Lorenzo has also stripped Eastern of 12 percent of its airfleet and many of its other money-making holdings. Before the strike, the company was $2.5 billion in debt and was losing $1 million a day; since the strike, Eastern reports daily losses between $2 million and $3 million.
Jim Conley, spokesman for the IAM, says Lorenzo "has skimmed off of Eastern probably two or three times what he actually paid for it. He laid out only $350 million for it. He sold the shuttle for $350 million, [that's just] one little piece of [the carrier]."
In order to hold on to the value of the Eastern property while still showing the carrier to be a failing enterprise, Lorenzo has transferred many of Eastern's assets to Continental and to other subsidiaries of his Texas Air Corp. Texas Air buys Eastern's properties at greatly devalued prices so Eastern has taken substantial losses on the most lucrative parts of its operations. The transfers have included planes, air gates and routes.
The bankruptcy laws have changed since 1983 when Lorenzo used a declaration of bankruptcy to break the labor contracts and make drastic wage cuts at Continental. Now Lorenzo must submit a petition to the bankruptcy judge, asking for permission to back out of his commitments to the unions. Bankruptcy, however, still buys him time and stops the interest from accumulating on Eastern's unsecured debts.
The union hopes that the bankruptcy court will allow it to do what it says Lorenzo never tried: to run Eastern as a profit- making, competitive airline. According to the IAM, the mechanics, pilots and flight attendants will file a re- organization plan on behalf of the employees. Under this plan, the three unions will purchase the airline. Conley asserts that all Eastern needs to become a rofitable carrier is "a new boss." He says, Eastern "certainly can become a profitable enterprise with the proper management. Not with the management it's got."
Regardless what the outcome of the strike and the bankruptcy proceeding may be, the IAM, by taking a strong stand against forced concessions, has succeeded in exposing a despicable corporate subterfuge.