Eastern Airlines Facing 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 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.