The unions at Eastern Airlines are between a rock and a hard place: Frank Lorenzo vs. bankruptcy. On Sunday night, the beleaguered management of Eastern Airlines announced a tentative agreement to sell the company to Texas Air Corporation, controlled by Mr. Lorenzo.
This comes after a month of wrangling with unions and creditors. Eastern faces technical default on some $2.5 billion in debt on Friday, as well as a strike by the pilots' union Wednesday and a strike by flight attendants on Saturday.
The unions have been trying to pressure management into backing down in its demand for $450 million worth of concessions -- or into resigning. They have been buying up voting stock before the shareholder meeting in April.
But the plan may have backfired. By forcing management to sell the company or file for bankruptcy, these tactics may have put the unions into a more threatening situation.
Texas Air's Mr. Lorenzo is not popular with the airline unions. He took Continental Airlines through Chapter 11 bankruptcy in 1983 and voided labor contracts. When Lorenzo tried to buy TWA last summer, unions agreed to huge financial concessions and made sure the company was sold to takeover specialist Carl Icahn instead.
It's unclear whether Lorenzo could try the same labor-bashing at Eastern as at Continental, says Mark Fagon, a principal at the research firm Temple, Barker & Sloane. The size and militancy of the unions at Eastern are a stronger force than at Continental.
At this writing, the unions had not responded to the announced purchase. Eastern pilots reportedly told management Sunday night that they would accept its position on 20 percent wage cuts if management broke off talks with Texas Air. It's unclear whether the unions will now negotiate with the new management -- assuming the Lorenzo takeover is approved by federal antitrust authorities -- or will walk out.
Mr. Fagon notes that while the unions ``may be concerned by Mr. Lorenzo's management style, the alternative of bankruptcy may be no better.'' The only way Eastern can survive in the long run, he notes, is by bringing down its costs. Eastern's labor costs are significantly above the rest of the industry, and searing competition from the likes of People Express and New York Air (which Texas Air owns) has threatened Eastern's existence.
If Lorenzo succeeds in negotiating with the unions and reducing Eastern's labor costs, he still has a job ahead of him.
Texas Air must change its route structure as it folds Eastern's routes into those of New York Air and Continental. It will have to take a hard look at the most unprofitable routes, presumably the very competitive north-south routes on the Eastern Seaboard and the transcontinental routes, in which Eastern competes with the two biggest carriers, United and American.
The whole process of rationalizing routes will take at least four to eight months, and only then will there be some indication of how good the purchase was.
There is much to gain, however. Eastern has nationwide routes, potentially profitable routes to South America, and good landing slots at airports.
``If Lorenzo is as successful in reducing labor costs at Eastern as at Continental,'' says Mr. Fagon, ``he's made himself a real airline. He's got the mass to play with the big boys.''