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Judge's ruling puts Lorenzo's game plan for Eastern in check

By Staff writer of The Christian Science Monitor / September 1, 1988



Boston

The courts have not been kind to Frank Lorenzo, the grand chess master of the airline industry who this week found his strategy stymied once again by a federal judge. In a 50-page ruling Tuesday, federal district judge Barrington Parker permitted Mr. Lorenzo's Eastern Airlines to eliminate its hub in Kansas City, Mo., and end service to 14 other cities, as had been planned.

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But the judge said it was illegal to fire the 4,000 employees, many of them union members, who worked at these centers.

``Obviously we're very happy,'' said James Linsey, legal counsel to the Air Line Pilots Association. ``It's a brilliant decision. It protects employees' rights without disturbing legitimate business decisions of Eastern's management.''

Eastern officials, however, are hardly joyous over the judge's ruling. Even though it will permit savings by cutting routes, Eastern is now stuck with employees it must pay but does not need.

Still, it could have been worse for management. There was speculation Judge Parker might not permit a cutback in service at all. That would have cost millions and thrown the airline into turmoil, possibly into bankruptcy. Eastern is now expected to save about $50 million by cutting 140 of its 1,225 daily flights.

Phil Bakes, Eastern's president and long one of Mr. Lorenzo's chief lieutenants, called Mr. Parker's decision ``gravely wrong.'' Company officials say they will appeal the decision.

``Eastern, like any American business, must be allowed to prune money-losing operations,'' Mr. Bakes said in a statement after the ruling. ``We must be able to take prudent, although sometimes painful, measures in the best interests of the company and our employees.''

Parker, however, questioned the origins and veracity of Eastern's ongoing ``financial crisis,'' saying in his ruling that Eastern had been used ``as a lending institution to meet the needs of Texas Air and Continental'' ever since Texas Air purchased the airline in 1986.

Industry analysts such as Robert Joedicke of Shearson Lehman Hutton say the overlapping of many of Eastern's routes and the selling off of Eastern assets, like its reservation system, to Continental Airlines has allowed Lorenzo to put pressure on Eastern's unions by showing he is prepared for a strike.

``Continental now serves many Eastern routes,'' Mr. Joedicke says. ``Lorenzo is hopeful he can shift a lot of traffic from Eastern to Continental if there is a strike.''

``Eastern's management has contributed to Eastern's financial instability,'' Parker's ruling said. ``Through a series of business decisions, management has led the company into a number of questionable loans and questionable ventures which have drained off cash reserves and other assets.''

Parker based his ruling on the Railway Labor Act of 1926, which was later amended to include airlines. The act has historically favored employers by preventing unions from striking airlines and railroads. But the unions were able to use it to their advantage this time.

An expert in transportation and labor issues says Lorenzo's game plan of creating options to deal with the unions may have backfired. Frank Cassell, professor emeritus at Northwestern University's department of transportation, says Lorenzo created a holding company (Texas Air) to shuttle assets and funds among Continental and Eastern.

``Lorenzo may have built a trap for himself on this, simply by creating the entity whereby Eastern and Continental were subsidiaries,'' Mr. Cassell says. ``No matter how you look at his efforts to sell Eastern's shuttle or its reservation system, you can make inferences about his motives, which is exactly what the judge did.''