Texas Air's bold move to be nation's No. 1. Frank Lorenzo adds struggling People Express to his empire
Boston — In his bid to buy People Express and create the nation's largest airline, Texas Air Corporation chairman Frank Lorenzo is walking right on the fine line that can mark the difference between success and failure. With the announcement yesterday that Texas Air would buy People Express, Mr. Lorenzo now has two mergers under consideration by the federal government, both with anticompetitive question marks. He also gains the mountain of debt People has built up.
But uncertainty and pressure are nothing new for Lorenzo. Considered perhaps the toughest of the tough-guy managers who now abound in the competitive whirlpool of the US airline industry, Lorenzo's tenacity and acuity for making deals are legendary.
Texas Air's bid for Eastern Airlines was turned down last month for anticompetitive reasons, but approval is expected eventually. When he finally does get to take control of Eastern, Lorenzo will also have to go head to head with tough labor unions to get lower wages to make the carrier competitive.
Several analysts question whether the Lorenzo's purchase of People Express will be approved by the Transportation Department. Eastern competes directly with People on the East Coast and in the New York-to-Washington and New York-to-Florida routes.
``There's definitely anticompetitive problems,'' says Robert Joedicke, airline analyst for Shearson Lehman Brothers in New York. ``The question is whether the Transportation Department and Justice will turn their backs to [prevent] a bankruptcy.''
Other problems abound. Texas Air, a Houston-based holding company that already owns Continental Airlines and New York Air, will trade $125 million in stock for People. Nevertheless, People is up to its neck in debt that would add about a half-billion dollars to Texas Air's already burdgeoning debt level.
Adding to the uncertainty are the unsettled legal and financial questions of People's bankrupt Frontier subsidiary in Denver. But Texas Air might be vulnerable to adverse decisions by a bankruptcy judge.
``There are all sorts of little things below the surface of this deal,'' Mr. Joedicke says. ``Texas Air may be buying itself an open-ended situation that becomes a bottomless pit.''
Still, analysts say the same man who flew Continental Airlines into the netherworld of bankruptcy to void high-cost union contracts is unlikely to lose any sleep over the crucial deals pending and other uncertainties.
In fact, Lorenzo probably will sleep a lot better now that he has finally outmaneuvered his former employee and rival, Donald C. Burr of People Express. Mr. Burr has been a thorn in Lorenzo's side ever since they fought for, and Burr won the battle for, control of Frontier Airlines last year.
Both men are Harvard Business School graduates. Burr worked for Lorenzo at Texas International airlines before quitting to form his ``reinvented'' People Express under an unorthodox management style that made each employee a ``manager'' and ``owner'' of the airline.
Lorenzo, on the other hand, has remained a classic hard-nosed manager, beginning his entrepreneurship by returning to profitability a tiny, struggling Trans Texas Airlines that some patrons dubbed ``Tree Top Airlines.''
Texas Air would buy People Express for securities worth about $125 million and supply a cash loan to keep the struggling carrier flying.
That merger, if approved by the Department of Transportation, would create the nation's largest airline. It also brings to an official end the grand experiment that People Express, as a no-frills airline, represented.
Will the Department of Transportation (DOT) allow the merger despite competitive problems? Barry Gordon, an analyst with the National Aviation and Technology Corporation, a New York-base mutual fund, points out that DOT has allowed both the Northwest-Republic and TWA-Ozark mergers, despite objections on anticompetitive grounds by the Justice Department.
There are some alternatives, though not pretty ones, Mr. Gordon says. ``If People Express goes under, then somebody else has the freedom to pick up those [gates and landing] slots in New York rather than simply giving them to Texas Air.''
But other analysts say it's easy to see how the DOT would approve the merger.
``It would be a good deal for Lorenzo if he can pull it off,'' says David J. Smith, an industry analyst with Sanford C. Bernstein & Co. ``I don't think the Transportation Department is going to have any trouble with this [People Express merger].''