Eastern Airlines Facing BankruptcyIn 1986, Eastern Airlines was in desparate trouble. The fourthquarter of 1985 had shown a $67.4 million loss, and financially expertshad told Frank Borman, president and chief executive officer, that theairline had three choices: 1) a 20 percent pay cut for all union andnoncontract employees. 2) Filing for Chapter 11 (bankruptcy) or 3) Sellingthe airline. On February 23, 1986, Eastern’s board of directors met to decidethe fate of the company.
Frank Borman, quickly left his home in Coral Gables to Building 16at Miami International Airport that Sunday evening, to discuss plans on savingthe airlines. The board of directors had recessed for dinner followingafternoon session and was scheduled to convene at 7:30 p.m. At the earliermeeting, Wayne Yeoman, senior vice president for finance, had spent most ofthe time outlining the details of Texas Air’s offer to buy Eastern. FrankLorenzo and Frank Borman had been talking since December originallyabout consolidating the computerized reservation systems, then , asEastern’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 legalaffairs. For about 20 minutes the three discussed the fourthcoming meetingand the prospects for saving the airline. Negotiations were going to comearound for ALPA and TWU but no break from the IAM. The IAM would not budgesince Charlie Byran, head of the machinist’s union, stood firm against a 20percent wage cut.
At 7:30 the board meeting began with the discussion of the Texas Airoffer, concentrating on some of the conditions attached to the buying of thecompany. More talk and hours dragged on. Finally word got out that ALPA wasnearing an agreement. The meeting recessed for an hour.
During the recess Frank needed to get Charlie’s surport on the 20percent pay cut, otherwise the company was going to sold. He told Charlie tocome up to his office. Frank told Charlie, ” we’ve been at this since 83′ andyou have to recognize it can’t go on. I have every reason to believe that thepilots and flight attendants are going to give us what we need. I know it’smore difficult for you because your contract is not open. But I know youhave 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, andlet’s go forward.” With this Charlie replied, “Frank you don’t understandthat you are just trying to run the company down and I can’t go along withthat. With this, Frank gave up and told Charlie to wait outside. He tryedeverything he could to get Charlie’s support but all attempts failed. Thiswas going to be the end of Eastern Airlines.
The board meeting finally reconvened at 10:30, an hour an a half awayfrom the deadline. Word had reached that ALPA reached an agreement and TWUnegotiations were still up in the air. The directors heard analysis of theTexas Air offer by representatives of Saloman Brothers and Merrill Lynch, atthis point Charlie Bryan finally spoke up. He said, “I’ve had discussion withthe chairmen of the audit and finance committees, and would like the board tobe informed what we talked about.” Two of the directors, Harry Hood Bassettand Peter Crisp, told Charlie to reconsider in the view of the 57 years ofthe airline, and the fact that his decision would impact all thecompany’s employees. They also reminded him that seemed to be a tragic endfor such fine people. Nineteen pairs of eyes turned towards Bryan. Mr. Bryanstated that when the IAM amended it’s contract on October 17, 1985, they nevercomplained about the other two unions. The IAM has maderecommendations for cost savings over the past several months, but we werenever given the opportunity to implement them. Frank responded , “That’snonsense!”. He told Charlie if he doesn’t co-operate , he’ll destroy theairline, and it’s his fault! Byran replied,” Year in and out the unionshave been asked to trust management. Each year has been a crisis situationand unions were told there were still enormous problems. It’s time formanagement to trust the employees to find ways to improve productivity andreduce 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 wasready to besigned and TWU was within an inch of reaching an agreement. AlsoTexas Air is willing to extend the deadline to 4 a.m. One board member in alast ditch effort asked Mr. Byan, “are you fully aware that this board isgoing to sell the airline? If so, I’d like you to say for the record that youstill refuse to participate.” Byan replied, ” Although the IAM will not agree tothe company’s proposals, we have proved that we are saving labor costs andimproving productivity, and, if the board decides to sell or bankrupt thecompany, you can’t point to me and say, ‘It’s your fault.’ I am against anyactivity tonight to sell Eastern or any decision to file for bankruptcy.” Atthis point, one of the board directors said, ” Mr. Bryan you have said that youwill vote no tonight to the sale, and you indicated to me that there is nobasis whatsoever that you would agree to come along with the other unions tofix it. It is obvious to me that the responsibility for forcing the board tosell the company is clearly yours!”After this there was a brief adjournment, Charlie Byran finally came backwith a proposal to cut the IAM’s salary wages to 15 percent since the IAMhad contributed 5 percent through productivity gains. An attachedcondition was also proposed that a new chief executive officer to be appointedwithin a reasonable time. Frank responded “Any allegation that the IAM hasgiven 5 percent is nonsense! If the IAM will give 20 percent this evening likeother employees I will submit my resignation this evening. I will not submitmy resignation if the IAM will only give 15 percent, because that supposed5 percent simply simply doesn’t exist!” The time was 2:00 am. The boardbelieved that it was time to vote on the Texas Air offer.
Frank left the auditorium and told the board that is best that heabstain from any vote. Outside, one of Byran’s lawyers came out to persuadeFrank to resign. He told the lawyer, “like I said, if the IAM takes a 20percent wage deduction I will gladly resign.” After this comment Frank walkedaway.
A counter proposal was made by the directors to the appointmentof a vice chairmen to be selected by the board committee if the IAMtakes the 20 percent pay decrease. Charlie went off on a huddle with hislawyers and returned to reject the proposal.
At 3 a.m. Eastern Airlines sold the company to Texas Air with a vote tosell was 15 to 4. All four union directors, Byran included were against themerger.
The major management problem concerned here is that management wasunable to get the IAM union to negotiate proposal in wage deceases which leadto the selling of the company.