Eastern’s Workers in Bankruptcy Web

Thousands of Eastern Airlines’ workers are entangled in a financial web being woven by Frank Lorenzo, the chairman of Eastern’s parent, Texas Air Corp., with the help of a compliant federal bankruptcy judge and his equally accommodating examiner.

Tragically ignored, however, are nearly 20,000 Eastern workers who have been on strike for nearly a year out of fear that Lorenzo would strip Eastern of its assets to benefit his debt-plagued Texas Air.

Judge Burton Lifland says he isn’t unfairly siding with Lorenzo because, as a debtor’s judge, his main job is to get the debtor, Eastern, out of bankruptcy and keep it flying. His examiner, David Shapiro, echoes that view.

But in his actions and in the steps that he has allowed Lorenzo to take thus far in the bankruptcy, the judge appears to have in mind only the interests of Lorenzo and his companies.

Lifland and Shapiro have been giving Lorenzo almost everything that he wanted to “restructure” (read: dismantle) Eastern, thereby eliminating thousands of jobs. Prime examples were the court’s approval of the sales of Eastern’s profitable Air Shuttle and some of its Latin American routes.

So it came as a shock last week when Shapiro issued a report that seemed to say the unions that Lorenzo is so furiously trying to break were right all along.

Shapiro’s report appeared to charge not only that Lorenzo siphoned off as much as $400 million from Eastern but that in doing so he also may have pushed the company into bankruptcy. Shapiro threatened to kick Lorenzo out of Eastern if Texas Air didn’t repay Eastern for some of its assets that he had taken.

Tough-sounding talk from a man who until then had acted like Lorenzo’s ally.

So Lorenzo yelled foul, saying Eastern had been adequately compensated for assets that he took from it, such as some of Eastern’s airport gates and its valuable computerized reservation system, which he sold to Texas Air.

Apparently startled by Lorenzo’s criticism, Shapiro quickly backpedaled, explaining that he was only trying to say there might be legal grounds for Eastern’s many creditors or the unions to claim in court that Lorenzo had looted Eastern, not that such claims would be upheld.

Nevertheless, angry as Lorenzo seemed to be about Shapiro’s “unfair” report, he still urged the judge to quickly accept the agreement that he reached with Shapiro under which Texas Air would repay Eastern only $280 million of what may have been up to $400 million drained from the beleaguered Eastern.

But look more closely. According to Shapiro’s recommendation, only $132 million would be in cash. The rest is to be paid by giving Eastern some notes and some good deals, such as selling it some planes at low prices and giving it back a share in the computer reservation system.

But, according to at least one observer, the payment to Eastern will end up being considerably less than the $280 million, according to Robert Clayman, a member of the creditors committee representing the unions. Clayman put the amount of the cash payment at $50 million.

Lorenzo provided a glimpse of his real strategy in an intriguing, if confusing, press release issued after the Shapiro report. Although he was agreeing to make the payments to Eastern, he insisted on casting the transaction as an infusion of money to help Eastern survive rather than as reparation payments for Texas Air’s rip-off of its subsidiary.

Why should Lorenzo care whether the payment is seen as a penalty or a cash infusion?

Texas Air owns Eastern and Lorenzo knows that under our complex bankruptcy laws he could retain full control of Eastern if Texas Air gives it some survival money, bankruptcy analysts said. Odd, but that seems to be the strange way that the bankruptcy law works.

And why in all this tricky web weaving don’t Lorenzo’s creditors complain about the continuing asset sales and the size of Texas Air’s cash payment to Eastern? After all, Lorenzo now says he may pay only 50 cents on the dollar, not the full amount that he promised several months ago.

For one thing, some creditors think that their best chance of getting at least something would be for Lorenzo to be allowed to fly a whittled-down Eastern or to dismantle it entirely and sell the pieces.

Other creditors believe that they will do best if Lorenzo has the money-eating Eastern gobbled up by his other loser, Continental Airlines, which is now non-union because he destroyed the unions there through another Chapter 11 bankruptcy ploy in 1983.

And several of Eastern’s principal creditors are manufacturers that are continuing to take multibillion dollar orders from Texas Air for new planes and engines. Why make more trouble for that financially teetering customer and increase the risk of losing those orders?

Left out in the cold by the corporate web weaving are Eastern’s workers, who have already given up hundreds of millions of dollars in wages and other concessions to help Eastern survive and who Lorenzo pushed out on strike a year ago when he demanded that they give up millions more.

They and the creditors might be helped if the bankruptcy judge realizes that Lorenzo is primarily interested in destroying the unions and selling off Eastern bit by bit until nothing remains.

The court should name independent administrators truly interested in Eastern’s future to run the airline. With the court’s help, these administrators might collect more money from Texas Air for its alleged looting of Eastern and revitalize it by a merger with another airline.

Freed of Lorenzo’s grip, a new Eastern might finally help the thousands of workers being so badly hurt by Lorenzo and his allies, those both inside and outside of the bankruptcy court.