Essay/Term paper: Eastern airlines facing bankruptcy

Essay, term paper, research paper:  Economics

Eastern Airlines Facing Bankruptcy


In 1986, Eastern Airlines was in desparate trouble. The fourth
quarter of 1985 had shown a $67.4 million loss, and financially experts
had told Frank Borman, president and chief executive officer, that the
airline had three choices: 1) a 20 percent pay cut for all union and
noncontract employees. 2) Filing for Chapter 11 (bankruptcy) or 3) Selling
the airline. On February 23, 1986, Eastern's board of directors met to decide
the fate of the company.

Frank Borman, quickly left his home in Coral Gables to Building 16
at Miami International Airport that Sunday evening, to discuss plans on saving
the airlines. The board of directors had recessed for dinner following
afternoon session and was scheduled to convene at 7:30 p.m. At the earlier
meeting, Wayne Yeoman, senior vice president for finance, had spent most of
the time outlining the details of Texas Air's offer to buy Eastern. Frank
Lorenzo and Frank Borman had been talking since December originally
about consolidating the computerized reservation systems, then , as
Eastern's problems deepen, about a possible sale.

As Frank entered his office, he found his his loyal excutive assistant;
Wayne Yeoman; and Dick Magurno, Eastern's senior vice president for legal
affairs. For about 20 minutes the three discussed the fourthcoming meeting
and the prospects for saving the airline. Negotiations were going to come
around for ALPA and TWU but no break from the IAM. The IAM would not budge
since Charlie Byran, head of the machinist's union, stood firm against a 20
percent wage cut.

At 7:30 the board meeting began with the discussion of the Texas Air
offer, concentrating on some of the conditions attached to the buying of the
company. More talk and hours dragged on. Finally word got out that ALPA was
nearing an agreement. The meeting recessed for an hour.

During the recess Frank needed to get Charlie's surport on the 20
percent pay cut, otherwise the company was going to sold. He told Charlie to
come up to his office. Frank told Charlie, " we've been at this since 83' and
you have to recognize it can't go on. I have every reason to believe that the
pilots and flight attendants are going to give us what we need. I know it's
more difficult for you because your contract is not open. But I know you
have a sense of history. We have a very good opportunity to cure this airline,
and if you just understand this, in the long run you'll come out a stronger,
more admirable person. Choose the harder right instead of the easier wrong, and
let's go forward." With this Charlie replied, "Frank you don't understand
that you are just trying to run the company down and I can't go along with
that. With this, Frank gave up and told Charlie to wait outside. He tryed
everything he could to get Charlie's support but all attempts failed. This
was going to be the end of Eastern Airlines.

The board meeting finally reconvened at 10:30, an hour an a half away
from the deadline. Word had reached that ALPA reached an agreement and TWU
negotiations were still up in the air. The directors heard analysis of the
Texas Air offer by representatives of Saloman Brothers and Merrill Lynch, at
this point Charlie Bryan finally spoke up. He said, "I've had discussion with
the chairmen of the audit and finance committees, and would like the board to
be informed what we talked about." Two of the directors, Harry Hood Bassett
and Peter Crisp, told Charlie to reconsider in the view of the 57 years of
the airline, and the fact that his decision would impact all the
company's employees. They also reminded him that seemed to be a tragic end
for such fine people. Nineteen pairs of eyes turned towards Bryan. Mr. Bryan
stated that when the IAM amended it's contract on October 17, 1985, they never
complained about the other two unions. The IAM has made
recommendations for cost savings over the past several months, but we were
never given the opportunity to implement them. Frank responded , "That's
nonsense!". He told Charlie if he doesn't co-operate , he'll destroy the
airline, and it's his fault! Byran replied," Year in and out the unions
have been asked to trust management. Each year has been a crisis situation
and unions were told there were still enormous problems. It's time for
management to trust the employees to find ways to improve productivity and
reduce costs." After a half an hour more of discussions, and no agreement,
the board was ready to vote. But then word come around that ALPA agreement was
ready to besigned and TWU was within an inch of reaching an agreement. Also
Texas Air is willing to extend the deadline to 4 a.m. One board member in a
last ditch effort asked Mr. Byan, "are you fully aware that this board is
going to sell the airline? If so, I'd like you to say for the record that you
still refuse to participate." Byan replied, " Although the IAM will not agree to
the company's proposals, we have proved that we are saving labor costs and
improving productivity, and, if the board decides to sell or bankrupt the
company, you can't point to me and say, 'It's your fault.' I am against any
activity tonight to sell Eastern or any decision to file for bankruptcy." At
this point, one of the board directors said, " Mr. Bryan you have said that you
will vote no tonight to the sale, and you indicated to me that there is no
basis whatsoever that you would agree to come along with the other unions to
fix it. It is obvious to me that the responsibility for forcing the board to
sell the company is clearly yours!"

After this there was a brief adjournment, Charlie Byran finally came back
with a proposal to cut the IAM's salary wages to 15 percent since the IAM
had contributed 5 percent through productivity gains. An attached
condition was also proposed that a new chief executive officer to be appointed
within a reasonable time. Frank responded "Any allegation that the IAM has
given 5 percent is nonsense! If the IAM will give 20 percent this evening like
other employees I will submit my resignation this evening. I will not submit
my resignation if the IAM will only give 15 percent, because that supposed
5 percent simply simply doesn't exist!" The time was 2:00 am. The board
believed that it was time to vote on the Texas Air offer.

Frank left the auditorium and told the board that is best that he
abstain from any vote. Outside, one of Byran's lawyers came out to persuade
Frank to resign. He told the lawyer, "like I said, if the IAM takes a 20
percent wage deduction I will gladly resign." After this comment Frank walked
away.

A counter proposal was made by the directors to the appointment
of a vice chairmen to be selected by the board committee if the IAM
takes the 20 percent pay decrease. Charlie went off on a huddle with his
lawyers and returned to reject the proposal.

At 3 a.m. Eastern Airlines sold the company to Texas Air with a vote to
sell was 15 to 4. All four union directors, Byran included were against the
merger.

The major management problem concerned here is that management was
unable to get the IAM union to negotiate proposal in wage deceases which lead
to the selling of the company.