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Lorenzo Says Eastern Needs Restructuring But Isn’t for Sale

June 9, 1988

NEW YORK (AP) _ Texas Air Corp. Chairman Frank Lorenzo said Thursday that the company is studying ways to restructure its troubled Eastern Airlines subsidiary but has no plans to sell the operation.

He did not offer any specifics of what changes might be in store for Eastern, which is saddled with bitter labor relations and recently passed a two-month government safety investigation.

Speaking at the company’s annual meeting, Lorenzo told shareholders that despite the persistent labor agitation and financial troubles at the Miami- based airline, ″Eastern Airlines is not for sale.″

But he placed a price tag of sorts on the airline by disclosing that a recent study by Texas Air found Eastern had a net-asset value of $2 billion, or nearly $50 for each Texas Air share.

Net-asset value takes into account debts and liabilities, and includes items such as aircraft and airport terminals.

Several analysts declined to put their own estimates on Eastern’s value, but Timothy Pettee, at the investment firm Bear Stearns & Co., estimated Eastern’s net-asset value at closer to $500 million.

Stock in Texas Air, which also owns Houston-based Continental Airlines, was up 12 1/2 cents to $12 a share on the American Stock Exchange.

Lorenzo, who controls 34 percent of the voting power of Texas Air shares, said management was looking at ways to improve shareholder values but declined to specify any actions under study.

However, the company announced later Thursday that the board had adopted an anti-takeover plan aimed at making a hostile buyout prohibitively expensive. Under the plan, Texas Air stockholders would be able to acquire for half price shares in any company that buys 25 percent or more of Texas Air’s common stock and later acquires Texas Air, or in any company that acquires more than 50 percent of Texas Air’s assets or earnings power.

″The board...has taken this step because, among other things, the common stock of the company is currently selling for a very low price in relation to to per share value of the assets of the company,″ senior vice president Charles T. Goolsbee said in a news release.

Goolsbee said the plan was intended to encourage any bidders that might emerge to negotiate ″a fair price″ with the board.

Together, the Texas Air carriers have a debt of around $5.4 billion. The parent company posted a record after-tax loss of $466 million in 1987.

Lorenzo could be thinking of selling some of Eastern’s aircraft and leasing them back, Pettee suggested. He noted the carrier owns about 70 percent of its fleet - well above the industry average of around 50 percent.

″It’s basically the ace in the hole,″ Pettee said.

Eastern President Phil Bakes told shareholders that ″Eastern must be restructured and positioned for future profitability.″

He said Eastern management had cut about $200 million in annual costs and was ″striving mightily″ to resolve its problems with its unions.

Eastern and Texas Air recently sued the pilots and machinists unions at Eastern for $1.5 billion, accusing them of ″Eastern bashing″ and trying to drive down the value of the company.

Eastern, with a total work force of around 38,000, announced layoffs of 3,500 employees last November.

″There’s no love lost between labor and Frank Lorenzo,″ said Andrew Geller, an airline analyst for Provident National Bank in Philadelphia.

By introducing the $2 billion figure, Geller suggested, the Texas Air chief could have been floating a potential price tag for Eastern as well as warning the carrier’s restive unions that he could sell it.

Lorenzo presided over an often tense but generally controlled meeting, threatening several times to have security guards eject shareholders and union members who continued their questioning after he had asked them to refrain.

A small group of protesters calling themselves Abused Passengers and Employees Against Lorenzo demonstrated outside the meeting at Chase Manhattan Bank’s headquarters.

Lorenzo was flush from a victory earlier this week when a federal appeals court in Washington lifted a ban on the sale of Eastern’s Northeast shuttle operations to another subsidiary of Texas Air.

A few days before that, the Federal Aviation Administration concluded after a two-month investigation of Eastern and Continental that they are safe to fly.

The FAA said, however, that the bitter labor-management war at Eastern raised possible safety risks if allowed to continue. The agency said it would continue its surveillance of Eastern.

Continental President Martin Shugrue said he was ″pleased, but not surprised″ that the FAA had given Continental a clean bill of health on safety.

He said Continental was making substantial investments to improve its financial performance.

″We’ve now completed the most complex integration in the history of the airline industry,″ said Shugrue, a former vice chairman of Pan Am Corp.

In recent years Texas Air has acquired Continental, Eastern, Frontier, People Express and New York Air. The latter three were absorbed into Continental.

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