Eastern Airlines Faces Bankruptcy Essay, Research Paper

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 surport 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 included 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.