Ueberroth and Lorenzo Agree on Eastern Sale

NEW YORK —  An investment group headed by former Baseball Commissioner Peter V. Ueberroth said Thursday that it would buy strikebound and bankrupt Eastern Airlines in a deal valued at $463.9 million.

The agreement between Ueberroth and Texas Air Corp., which owns Eastern, was reached in a week of negotiations that almost collapsed several times. The deal was not concluded until 45 minutes before a hastily called press conference at which Ueberroth appeared with the embattled chairman of Texas Air, Frank Lorenzo.

Ueberroth said the sale still faces two major hurdles: approval by Eastern’s three labor unions and the approval of U.S. Bankruptcy Judge Burton R. Lifland.

Eastern filed on March 9 for protection from creditors under Chapter 11 of the federal bankruptcy code, just five days after its machinists went on strike. Virtually all of its pilots and flight attendants honored the picket lines, bringing the airline’s operations to a near halt.

“Under this agreement, Eastern can be back flying in very short order,” Lorenzo said Thursday. The airline is prepared to fly a significant number of routes after agreement is reached with the unions, he said.

Has No Specific Plan

Ueberroth said he does not have a specific plan to return Eastern, which has lost more than $500 million in the last two years, to profitability. “Together with the Eastern employees, we will come up with a plan to make ourselves competitive,” he said.

The agreement--under which Ueberroth’s investment group and the unions would each own 30% of Eastern--reportedly hinges on the workers granting an annual $210 million in wage and work-rule concessions. A Ueberroth-controlled Eastern may also end up receiving $365 million from the sale of the airline’s Northeast shuttle to real estate mogul Donald Trump, if that deal is completed as planned.

Although there was a lusty celebration by hundreds of Eastern’s union members in Miami when they heard that Lorenzo would no longer be their boss, union leaders responded publicly with guarded optimism. The pilots, who have supported the Ueberroth bid, were the most enthusiastic.

“We look forward to working with Peter Ueberroth and his team over the coming days to put together all the pieces necessary to get Eastern Airlines back into the air,” said John Bavis, chairman of Eastern’s 3,600-member pilots’ union.

Many analysts have expressed the view that Eastern, standing alone, cannot survive in the rapaciously competitive airline industry. There is speculation that Ueberroth might eventually try to merge Eastern with another carrier.

Viability of Airline an Issue

Farrell Kupersmith, a Miami-based financial adviser to the pilots’ union, said the key issue for the unions in deciding whether to go along with the Ueberroth deal will be whether the newly configured Eastern will be a competitive carrier. “Firming up the employee groups’ support for this transaction requires a positive determination of the viability of the proposal,” he said.

John Peterpaul, vice president of the striking International Assn. of Machinists, was more reserved than the pilots’ Bavis. He said he was “guardedly optimistic” but added that, until the union “has seen, studied and evaluated the impact of these proposals on the IAM work force, we cannot issue a statement as to our intentions.”

Two key union sources said the unions were concerned that the sale to Ueberroth might fall through after they had made concessions and returned to work, leaving them to work for Lorenzo under more adverse conditions.

Under its new ownership, Eastern would officially be called the Eastern Airlines Employees & Service Corp. In addition to the 30% stake held by new management and 30% held by the employees, other investors would own 40% of Eastern. The workers’ share is in exchange for wage and work rule concessions.

The New York investment bank of Drexel Burnham Lambert Inc. has told the Ueberroth group that it “will commit to provide $300 million of debt financing to complete the transaction,” according to a statement released Thursday at the press conference.

A knowledgeable source noted that the wording of the official statement about Drexel’s participation was quite significant. “Drexel is committing itself as a bridge (to provide short-term financing) if it is unable” to quickly complete a sale of bonds, the source said. “It’s like a bank commitment,” the source added.

Stock in the new company will be sold by Ardshiel Inc., a New York investment banking firm with long ties to Ueberroth.

“This is a new concept in aviation, in which over 60% of the company will be owned by people who work for this company,” Ueberroth said. “We think that is what it needs to bring Eastern to where it was and to move forward. The very best service you can get is if someone (who works for a company) owns the business.”

He said that, although he has no specific plan of operation so far, he intends to bring Eastern back to its pre-strike operations of more than 1,000 daily flights. Since March 4, the airline has been able to operate only about 100 flights a day.

Ueberroth, who acknowledged that initial discussions had already been held with the unions, refused to say specifically what concessions would be sought from the labor groups. He said he and J. Thomas Talbot, the former head of Jet America and AirCal, who is his partner in the transaction, would begin immediate talks with the unions.

The deal calls for an agreement with the unions by midnight next Tuesday--a very short time for such a monumental decision by the labor groups. Sources said the unions will be asked to make the $210-million-a-year worth of wage and work rules concessions for the next five years.

“We are going to ask them--but not through you (the media),” Ueberroth said.

Pledges to Pay Creditors

Lorenzo said it is Texas Air’s intention to file a reorganization plan with the bankruptcy court and that the airline’s creditors will be paid “100 cents on the dollar.” Lorenzo’s Texas Air purchased Eastern in February, 1986, and he and the airline’s unions have been antagonistic ever since then as he tried to cut costs at the money-losing carrier.

“This is a day of mixed feelings,” he said when asked how he felt about selling Eastern. “Clearly, selling the company is not our preferred course,” Lorenzo said. However, he looked considerably more relaxed Thursday than he did a month ago, when he took Eastern into bankruptcy court.

He said that liquidating Eastern would have produced a greater return for Texas Air’s shareholders but added that the sale and resumption of operations are consistent with the company’s obligations to creditors and shareholders.

In an interview after the news conference, Lorenzo was asked if Texas Air had profited or lost from its three-year ownership of the Miami-based carrier. “We would have done better investing in government bonds,” he asserted. “We barely made back our initial investment.” Union sources scoffed when that statement was reported to them.

Calls Self Scapegoat

Lorenzo contended that he had been unable to come to any terms with the unions because he had become a scapegoat for their troubles. “Labor has found a convenient person out of whom to make a symbol,” he said.

He contended that the unions did not realize that the new owners will demand wage concessions as great or even greater than the $150 million a year that Eastern’s management had sought in negotiations before the strike.

But sources at all three unions have been saying for weeks that they understood fully that substantial concessions would have to be granted to a new owner. They have said for some time that there was no point to giving further concessions to Lorenzo because he wanted to run Eastern into the ground with the goal of helping non-union Continental Airlines, also owned by Texas Air.

Ueberroth said he would put more than than $2 million of his own money into the purchase of Eastern, but he refused to say precisely how much. His group will provide $200 million in cash to Texas Air, according to the letter of intention to purchase that was signed Thursday. The letter was signed only after Ueberroth and Lorenzo met together for two hours at the Board Room, a private luncheon club on top of the Bankers Trust building on Park Avenue here.

In addition, Eastern’s new owners will forgive debts of about $185 million owed to Eastern by its parent company, and Texas Air will receive about $79 million worth of the airline’s assets. Those include Eastern’s New York-to-Montreal route, one gate at New York’s La Guardia Airport and eight landing slots there.

On the other hand, Eastern will regain the Miami-London route it surrendered to Continental after Texas Air purchased Eastern in 1986.

Also as part of the deal, the Ueberroth group will get a 19.9% ownership of SystemOne, the Texas Air computer reservations system. It had been Eastern’s reservations system and was purchased by Texas Air for $100 million, considerably less than it was worth, according to independent analysts. The unions cited that transaction as a prime example of their charge that Lorenzo was stripping Eastern of its assets.

In an interview after the news conference, Talbot, who lives in Newport Beach, Calif., said that, after purchasing the system for $100 million, Texas Air had made $140-million worth of improvements. Thus, he said, the replacement value of SystemOne would be $250 million. “You could arguably say that our portion would be worth $50 million.”

Eastern’s new owners will pay a monthly service fee to Texas Air to use the reservations system, according to a knowledgeable source. Talbot said the new investment group would also attempt to retain other relationships with Texas Air, including some kitchens, ticket counters, gates and other joint space.

He said Continental and Eastern will continue to jointly operate OnePass, their frequent flyer program.

The Ueberroth group will receive the proceeds of a sale of Eastern’s Northeast shuttle to Donald Trump for $365 million if that deal is consummated, or it will obtain ownership of the shuttle, according to a source close to Ueberroth.

Some financial analysts praised the sale. “It is a very good deal for everybody concerned,” said Julius Maldutis, airline analyst for Salomon Bros., a New York investment firm. “It is good for the employees, the majority of whom will have their jobs back, and it is good for the traveling public . . . . And the stockholders of Texas Air will benefit, also.”

On the other hand, Louis Marckesano, an airline analyst with the financial firm of Janney, Montgomery, Scott in Philadelphia, said Ueberroth faces a considerable challenge in trying to cure Eastern, which he called “a sick cow.”

But Amy Quinn, who worked with Ueberroth when he ran the 1984 Olympic Games in Los Angeles, said that is just the kind of challenge her former boss relishes.

“When you tell Peter Ueberroth something can’t be done, that’s when you really get his interest,” she said. “He’s always wanted to run an airline.”

Henry Weinstein reported from Los Angeles and Robert E. Dallos from New York.