Hard Landing (59 page)

There was not much secret in Texas Air’s official agenda at Eastern. Bakes’s mission was to slash the costs of labor, furthering the effort on which Borman had never reached closure. After all those years of BOHICA, Borman had succeeded in reducing Eastern’s labor costs to roughly the industry average. But by Texas Air standards, average was way too high. If Bakes could further gut Eastern’s labor costs, Texas Air would have a new Continental Airlines, this one trimmed in ionosphere blue.

Bakes, however, purposely moderated his cost-cutting rhetoric. Although it was fine to put the unions a little off-balance, Bakes did not want to be seen marching into Building 16 with a club in one hand and a bankruptcy how- to manual in the other. He wanted to develop a full, well-rounded
revitalization plan for Eastern to restore marketing strength, upgrade passenger service, and invigorate management at all levels. “We have to show we’re not a
one-trick pony,” he told Lorenzo.

Lorenzo, though, kept asking, “When are you going to give your proposal to the unions?”

For a brief time Bakes resisted. He took the senior management away for the weekend to the Keys. He met with middle management incessantly. He began showing up for employee meetings—JFK, Atlanta, Miami, everywhere there were big operations—and people actually turned out, in some cases by the thousands. And they were listening! He told and retold the story of Continental’s comeback; it did not hurt his credibility that as he was walking into Eastern, Continental was reporting its highest profits ever.

Eastern’s employee newsletter, the
Falcon
, became Bakes’s
Pravda
. In issue after issue Bakes appeared on the front page, variously looking thoughtful and sympathetic (his hand on his chin, his elbow resting on his knee) or confident and assertive (stabbing his finger in the air, chopping the top of a desk with the side of his hand).

“When are you going to give your proposal to the unions?” Lorenzo kept asking.

Finally, on January 21, 1987, Bakes did. “Our labor cost structure
is
a cancer,” Bakes announced at a press conference. Pilots, despite having given Borman a 20 percent cutback only months earlier, were now asked to give up an additional 27 percent. Flight attendants, also having already cut their wages 20 percent, would now be expected to give up another 31 percent. As for Charlie Bryan’s mechanics and maintenance workers, they had escaped the last round of cuts on the night that Borman had lost Eastern. Now Bakes targeted them for the steepest cuts of all: 47 percent. “The marketplace for people loading and unloading bags is not $43,000 a year on average,” Bakes said.

Charlie Bryan just shrugged. With a full year left to run on the IAM contract, there was nothing to negotiate. “The issue of opening our contract is
a nonissue,” Bryan said. “We negotiate an agreement, and we don’t go back and ask for more.” When Bakes’s aides hosted a meeting with the leaders of the unions, the IAM delegation walked out after 10 minutes, lest anyone interpret their attendance as an admission they were willing to deal.

On another occasion Bryan held an impromptu rally of machinists in an employee parking lot, crying out a passage from Isaiah inscribed on a medallion that his mother had once received from a television evangelist: “
Weapons formed against you will not prosper!” He vowed to fight the new management of Eastern with the principles of passive resistance. “Martin Luther King was truly a great American,” Bryan told the assembly, adding, “I don’t care what your racial feelings might be.” Company supervisors tried to break up the rally. They ordered Bryan to leave the parking lot. He refused. “We’re going to prevail!” he cried to the throng. Five days later Bakes’s aides ordered Bryan stripped of his
company ID badge, banished him from Eastern Air Lines property, and ordered him, in writing, to desist from conducting any further “
public soap operas.”

Bryan befuddled Lorenzo’s people. In a know-thy-enemy measure the Texas Air corporate office commissioned a confidential “
white paper” on the IAM from a consultant (who confided in her cover letter that she had obtained information from union representatives “on
false pretenses.”) Members of the IAM, the report said, were “not overly intelligent.” They were, it went on,

unsophisticated, chauvinistic, patriotic, unadventurous, in search of a secure and comfortable existence for themselves and their families. With little but a time-clock job to aspire to, the Nobility of Work is an important element in their universe.…

The IAM is an insular, somewhat paranoid organization. Business is the enemy. The Employer is always out to rape the worker.… The union also appears to believe that maintaining the largest possible wage for its members for the longest possible time is a greater service than maintaining their jobs.

But it was a union that was divisible, the report said, because it bargained at once for so many unskilled trades along with the professionally licensed mechanics who maintained and repaired airplanes. “These are highly skilled workers,” the consultant’s report said, “usually pretty bright guys, rather conservative. They don’t like being associated with the hot-headed bag-busters, [who are] less intelligent, of lemming mentality.” But while the professional plane fixers were the moderates of the IAM, the report said, “the unskilled are the union’s staunchest supporters as well as its biggest group numerically. These are the guys with a psychic need for self-esteem.”

A psychic need for self-esteem. Charlie Bryan could be accused of many things, but pandering to the Freudian vulnerabilities of his membership was probably not among them. Still, some of Lorenzo’s people were convinced that Bryan suffered from a complex of some kind—and where it would lead, they could only fear. Bakes’s aides printed an anthology of Bryan’s outrageous public pronouncements in a booklet called
Charlie Says
. It looked like the
Little Red Book
, by which Mao Zedong had led the mass insanity of the Cultural Revolution.

Though Lorenzo lacked Bob Crandall’s talent for operating detail, he did have a genius for intrigue, as his top computer man, Richard Murray, had observed for years. “He
never tells one person everything about why he’s asking a question,” Murray once commented. “He would tell an individual only enough to make them feel involved. Only he knew the total picture. He was very cryptic in his conversation. He spoke in half-sentences. Conversations were difficult. You were left to try to interpret what he was saying, and if you pressed it, you’d get him perturbed.”

Lorenzo’s oblique communication style was part of his mastery at
preserving options, at imbuing his intentions with ambiguity. There was invariably a secondary level of operation running simultaneously with the primary one. As visible as Continental and Eastern were as airlines, for instance, Texas Air, the parent company, wasn’t even listed on the building directory at its downtown Houston location.

Now Lorenzo would need his discretion more than ever before in his career. Though his control of Texas Air was unassailable, the individual components were full of fences and boundaries. Most of Lorenzo’s companies had been built with publicly raised finances, which imposed a duty on him to manage those companies in the interests of those who had entrusted them with their capital. In Eastern’s case, these investors included the employees. In many cases investors had liens or other security interests in the various assets under Lorenzo’s control, down to the individual airplane. Thus any shuffling of the pieces around Lorenzo’s chessboard had to be done with sensitivity to the other interests with whom he shared title to them. Lorenzo’s companies could certainly conduct transactions with one another, even with Lorenzo calling the shots, so long as the terms were fair and the dealing conducted in the open.

This was where the intrigue came in.

To the extent that Eastern’s employees continued holding out against Lorenzo’s demands, its airplanes could be switched by degrees to Continental, where they would be flown by low-cost, nonunion crews. At one point Eastern’s Toronto station manager returned from a meeting in Miami and wrote a memo explaining his understanding of the new strategy: “
If we can’t cut our costs, our aircraft will go to Continental.” This might seem cold-blooded, the manager from Toronto noted, but it was evident to him that Lorenzo’s people were capable of that. The new people at Eastern, he wrote, had “ice water in their veins.”

In theory the interests of Eastern in such situations would be protected by the airline’s board of directors, whose membership had remained largely intact after the Texas Air takeover (except that Charlie Bryan and the flight attendants’ representative had been thrown off). But board meetings under Lorenzo were not what they had been under Borman. The long, detailed agendas and information packages the directors had once received in advance
simply stopped coming. The voting seemed perfunctory. Two directors
Jack Fallon, the old Kennedy family friend, and Roswell Gilpatric, the former Pentagon official and partner at Cravath, Swaine & Moore in New York—contacted Richard Magurno, the general counsel of Eastern, and asked him to pass along their concerns to Lorenzo. When Magurno did so,
Lorenzo blew up. “They’re going to come to understand that I own the company,” he said. “It’s a subsidiary of
my
company.” Lorenzo then issued Magurno an order: “I don’t want you to talk to the directors anymore.”

“What do I do if they call me?” Magurno asked.

“Tell them you can’t talk to them.”

The Eastern directors left little record of any dissent, however, even when Lorenzo asked them to vote for measures that were
arguably more in the interests of Texas Air than of Eastern itself. They approved the payment to Texas Air of a $6-million-a-year “management fee.” Eastern soon began buying its fuel through a Texas Air brokerage subsidiary, paying a fee of a penny on every gallon—quite a sum over the course of a hundred
million or so gallons a month. (The money raked in from Eastern—and Continental as well—was used among other things for trading in the
commodity markets.) Eastern’s large crew of salespeople were merged into Continental’s much smaller sales organization, with the result that Continental enjoyed a vastly expanded sales presence while Eastern’s was diluted.

Eastern became a kind of financial junkyard for Texas Air. In taking over People Express, Lorenzo had purchased a pile of
People Express notes on the open market. A short time later Texas Air sold the same notes to Eastern at a profit of $4.4 million. This extraction of cash from cash-short Eastern, one of Lorenzo’s top people explained, was simply a way of
repaying Texas Air for having wiped out People Express as a competitor in Eastern’s markets.

Lorenzo bought Texas Air a dozen gates at Newark from Eastern at $1 million each; the gates had been appraised at $2 million each. Texas Air switched a half-dozen widebody Airbus jets from Eastern to Continental, which turned around and sold them at a huge profit. Texas Air gave many reasons for the plane switch, but as one of Continental’s top people later explained, “The thing that really
flipped it was the message it would send to labor, especially the pilots.” Some of Eastern’s routes were also transferred to Continental—Miami-London, for instance.

And then there was System One, the jewel buried inside Eastern, the antidote to the unfair competition that American and United, in Lorenzo’s view, had so long inflicted against him. By removing System One from Eastern, Continental could at last share in the passenger-gathering power of a reservations network. Meanwhile Eastern, which had received a fee for every reservation that System One processed for another airline, would now have to pay a fee, to Texas Air, for every one of
its
bookings made through System One.

Though System One had recently been appraised at $250 million by Merrill Lynch, Texas Air gave Eastern
only $100 million for the network, none of it in cash. For the heart of Eastern Air Lines, Texas Air paid a note bearing a meager 6 percent interest rate.

On the more ambitious agenda of turning Eastern into another Continental, Texas Air was encountering nothing but frustration, not only because of union resistance, which Lorenzo had expected, but because of government inertia, which he had not. Phil Bakes and his associates might have deregulated the airline industry, but they had done nothing to deregulate an obscure agency in Washington called the National Mediation Board, which controlled the timetable for showdowns between labor and management. Established in 1926 after a crippling series of
rail strikes, the Mediation Board administered a series of laborious and complex rules intended to keep the trains rolling and the planes flying amid labor strife.

The guiding principle was delay. To begin with, airline workers could not lawfully strike at the moment their wage agreements had expired, but neither could employers alter wages or working conditions. Both sides were required to honor the status quo and to bargain earnestly toward a settlement. Once the Mediation Board judged the situation to be hopeless, it started a 30-day clock ticking—a “cooling off” period during which, in reality, people tended to get hotter than ever. At the end of the 30 days management was at last free to impose new wages and working conditions on the employees. The workers for their part were free to walk off the job. In doing so, however, they faced the risk that management would replace them with strikebreakers to keep the planes aloft.

There was a certain historical beauty in the fact that the first contract expiring at Eastern under the Lorenzo-Bakes regime was the machinists’. It was the machinists, after all, who had walked off the
job after Lorenzo had taken control of Continental in 1983. That strike had turned out to be the first step in creating the New Continental. Perhaps now a machinists’ strike could become the first step in a turnaround at Eastern as well.

Bakes went out of his way to hasten the declaration of an impasse, busily revising his proposals, importuning Bryan to the bargaining table—even at one point offering to retrain those $40,000 baggage handlers so that they would one day make $40,000 as licensed mechanics. Bakes figured that if anything ever landed him on the
cover of
Business Week
, it would be his retraining proposal.