MARCH 1989 - VOLUME 10 - NUMBER 3
C O R P O R A T E P R O F I L E
Bleeding the Assets, Blaming the Unionsby John Summa
In the three years since Texas Air's chairman, Frank Lorenzo, has been at the helm of Eastern Airlines, he has waged war against the carrier's unions. Lorenzo has never disguised his intent to break Eastern's unions, using tactics he mastered in breaking Continental's union three years earlier.
But Lorenzo failed to consider that the unions had also learned from the Continental experience. And Lorenzo's strong-arm tactics with the union may end in a permanent grounding of the entire Eastern fleet.
Pre-Lorenzo, labor relations at Eastern were not always antagonistic. In 1983, Eastern Airlines introduced an innovative plan to restructure labor-management relations: workers at the company were given 25 percent control of the carrier's stock; access to the company's financial records; and a role in corporate planning. In return for these concessions by Eastern's management, Eastern's workers agreed to large wage cuts. For a brief period, cooperation and profits increased and grievances subsided. But this progressive experiment was shortlived.
By 1985, labor-management relations at Eastern began to deteriorate. Despite the earlier wage concessions, Eastern was facing the prospect of bankruptcy and management was asking workers to give up still more of their wages.
In the new age of deregulation, Eastern's management was facing a changing industry. To solve his financial problems, then acting chairman, Frank Borman, announced plans to reduce labor costs by 25 percent. The union, instead, pushed for greater worker ownership as the solution.
Squeezed by creditors and workers, Borman sold Eastern to Lorenzo's Texas Air Corp. The labor conflict, however, was far from over. Lorenzo was given a $20 million bonus as part of the take-over deal and became Eastern's new chairman. Under his management, demands on the workers intensified.
Lorenzo prepared for war against the unions, installing the same executives who had helped him dismantle Continental's unions in his top management positions at Eastern. He unilaterally withdrew the contractual rights that Eastern's unions had won in 1983, including union access to company records and workers' role in management decisions.
Lorenzo's moves sent a new message to workers at Eastern: cooperation is over. Almost immediately following the take-over, he began to transfer or sell Eastern's most lucrative assets. In response to these actions, the International Association of Mechanics and Aerospace Workers (IAM) tried, with outside investors, to organize a take-over of Eastern. "We are in the midst of an all-out war," said IAM's Charles Bryan in September 1986. Subsequent events would bear this out.
A Costly Battle
Lorenzo's war on labor sent Eastern into a financial tailspin. Analysts now doubt that the company will ever recover, even if the labor-management battle subsides. A sharp drop in passenger volume due to safety concerns compounded the labor problems, and the need to reduce operating costs forced further downsizing.
Eastern's operating cash-flow, according to one industry analyst, dropped from over $400 million in 1987 to under $200 million in early 1989. Eastern incurred a deficit of over $450 million last year and had racked up $2.5 billion in debt even before the current strike began. Interest rates have remained high, making the large debt even more onerous. This has led to still more downsizing and borrowing to cover operating costs.
At the same time, however, Lorenzo has developed Eastern's parent company, Texas Air Corp., into a veritable air transport empire; but not without both racking up huge debts and alienating mechanics, flight attendants, pilots and other workers. Texas Air Corp. now comprises Continental, Eastern, Frontier Airline, New York Air and People's Express, along with its holdings in real estate. By 1986, the company had amassed just under $5 billion in long-term debt, representing an alarming 90 percent of its total capital.
in 1987, Eastern Airlines Inc. scheduled air service between 77 metropolitan areas in the United States and Canada, to 20 cities in the Caribbean, and 16 cities in Central and South America. The company's primary airport operations are in Atlanta, New York, Miami, Kansas City, Philadelphia and San Juan, Puerto Rico. Its market share in terms of passengers in 1988 stood at 34 percent in Miami, 27 percent in New York (La Guardia) and 32 percent in Atlanta. Even before the strike brought its operations to a virtual stand-still, Eastern had reduced its total number of flights by more than 20 percent in the last year. In 1988, the company carried between 80,000 and 100,000 passengers a day to 113 cities and, was still the largest carrier serving New York's La Guardia, Boston's Logan and Miami's International Airports.
At the end of 1987, Eastern had a fleet of planes made up of 53 widebody and 231 narrowbody aircraft. By early 1989, however, Eastern had sold 34 of those planes, al-most 12 percent of the total. Even before the announced sale of the Eastern Shuttle, pilots were protesting the proposed sale of 43 aircraft. Knowing that fewer planes and fewer flights translate to fewer jobs, the pilots are pushing Lorenzo to guarantee the size of Eastern's fleet. The company had 32,481 employees as of December 31, 1987. The number had fallen, even pre-strike, as many left in frustration or were fired; and on March 6, 1989, Eastern fired 5,000 more workers, citing the strike as the cause.
The current dispute is one between the machinists, who are represented by the IAM, and Lorenzo. The IAM represents about 8,500 employees at Eastern. Pilots and flight attendants are represented by other unions. The current strike is over Lorenzo's demands for deep wage cuts. Initially Lorenzo proposed cuts as high as 60 percent but he has since reduced the proposal to a 40 percent cut, which would save the company $125 million a year.
Eastern wants to bring wages in line with its non-union carrier, Continental. It claims it has been losing $70 million a year during the 1980s and that workers and pilots need to make major pay concessions to salvage the company. In 1987, Eastern's president, Phil Bakes, said that labor costs had to be cut by $490 million in that year alone to make the company profitable. He wanted $265 million in cuts to come from workers represented by the IAM and $114 million from the pilots. President Bakes warned that further downsizing would occur if the workers and pilots did not make the concessions.
Lack of safety procedures and the continual demands for deeper pay cuts have forced many pilots to leave in disgust. Since the Texas Air takeover, more than 750 pilots have resigned from Eastern. According to the IAM, 500 left in one year alone.
Lorenzo initially proposed a 12 percent pay cut for the pilots. He later modified this stance, partially due to the exodus of pilots. His hope was that by settling with the Airline Pilots Association (ALPA), he would be able to use them as a wedge against a strike by the machinists. Two years ago the unions agreed to a 20 percent wage cut. But the company's financial health has continued to decline. Workers say further wage cuts will not get at the heart of the carrier's problem, which they say has much more to do with management than labor.
The union believes that Lorenzo has slowly under-mined their bargaining position by transferring the carrier's most lucrative assets to non-union airlines. He authorized the sale of Eastern's System One Direct Access Inc. (SODA) to Texas Air in April 1987. The SODA system provides reservation services to the travel industry. Be-fore selling SODA, Eastern reaped the profits from this growing system, and now Texas Air enjoys this revenue. Texas Air also now charges Eastern for the use of the system. According to Jim Conley of the IAM, the system, which was sold for $100 million, had a market value two and a half to five times greater than the price paid. Conley points out that Eastern now puts $130 million a year into "the coffers of Texas Air" to pay for its use of the SODA system that it formerly owned.
He says that Lorenzo has also transferred air gates and many other assets to Texas Air in his struggle to de-unionize Eastern and pay off debts. IAM blocked the transfer of 6,000 ramp service positions to a subsidiary of Texas Air. That transfer would have allowed Lorenzo to use more non-union labor.
When Eastern sells or transfers planes to Texas Air, Continental or another one of its subsidiaries, union labor gets replaced by lower paid non-union labor. Pilots cite the transfer of Eastern's London and Mexico City flights to Continental as a case in point. And many such transfers have been attempted: Texas Air has petitioned the Department of Transportation to transfer routes to Continental that Eastern acquired in 1986.
According to Moodys Transportation Manual, Lorenzo has been building liquidity to protect Eastern in the event of a strike. In March 1988, for instance, the company issued $200 million worth of notes to increase liquidity and generate cash. Management hoped, says Moodys, that such financial liquidity would "enable it to continue operations during a strike or other job actions." The planned sale of the Eastern Shuttle was also generally viewed as an attempt to generate cash reserves to pay creditors and maintain profitability in the event of a strike. When Eastern's pilots decided to honor and join the mechanics' picket lines, they effectively crushed such hopes.
In addition to the transfers and sales of assets within his empire to raise cash-flow, Lorenzo has attempted to sell some of Eastern's assets to buyers outside of Texas Air Corp. Last year, Eastern announced the proposed sale of its shuttle to Donald Trump, for a price of $365 million. The deal will not be final, however, until it has been approved by government regulators, and Trump has expressed reservations about consummating the deal before the labor dispute is resolved. The airline's unions had blocked earlier attempts to sell the shuttle. According to the IAM, the attempts were a part of management's effort to wring greater concessions from the unions.
It is not just the unions who see such transfers as threats to worker strength and union operations. Aviation Week & Space Technology, an industry trade publication, noted last year that "each step taken by the Texas Air parent toward the reduction of Eastern's size and scope has put increasing pressures on the subsidiary's unions to agree to cost concessions."
While the company cites high labor costs as the motivation for down-sizing, others see it differently. Greg Tarpinian, director of the Labor Research Association based in New York City, says that wages at Eastern are lower than those at other carriers. Remarkably few news accounts make this point, says IAM's Conley. The leading daily newspapers in the United States have editorialized against the union position, but often state it incorrectly. Conley says that "all major airlines made record profits last year except Eastern and Continental. So it is clear that it is not a workforce problem, but a management one."
Tarpinian says that Lorenzo turned the company into a "cash cow" which he would milk of all its profits. He says Lorenzo "bought Eastern to dismantle it" and thereby eliminate the competition that Eastern presented to his Texas Air Corp. Another of Lorenzo's goals, according to Tarpinian, was to force the IAM into wildcat strikes in order to eventually overturn the Railway Labor Act, which permits secondary boycotts in the transportation sector. Reagan and Bush have both sought the elimination of this secondary boycott provision in labor law. And, in the face of recent threats from the IAM, the Bush administration has publicly stated that it will seek prohibitive legislation if the union tries to enact secondary boycotts.
In the two years before the strike, Lorenzo fired over 900 workers including shop stewards and union officers, says Tarpinian. "He has instituted terror on the job. There is horror story after horror story," says Conley of the machinists. It was never Lorenzo's intention, he adds, to build a company. "Lorenzo has transferred assets, liter-ally stolen them [referring to selling them at wildly under-valued prices to Texas Air or other subsidiaries]. It is bankruptcy by design."