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Eastern Pleads For Life, Gets Reprieve in Bankruptcy Court

November 15, 1990

NEW YORK (AP) _ A federal bankruptcy judge kept Eastern Airlines alive Wednesday night by allowing the carrier to withdraw $15 million from an escrow fund.

The judge, however, expressed doubts the struggling carrier’s recovery plans will work.

Eastern’s trustee, Martin R. Shugrue Jr., asked U.S. Bankruptcy Judge Burton R. Lifland to let the airline tap $30 million out of an escrow account immediately. Shugrue also said Eastern will need to get another $40 million in late December and $10 million in early January. The account presently has $273.6 million, he said.

The $30 million, Shugrue said, would keep the carrier running through December. But a committee of the Miami-based airline’s 12 largest unsecured creditors objected to the bailout.

The creditors said Eastern should be closed and its assets sold off because it has no realistic chance at becoming a viable stand-alone airline. Tapping into the escrow fund to subsidize future losses will leave Eastern without enough money to carry out an orderly shutdown, the creditors argued.

The judge agreed to give Eastern $15 million immediately and said the airline can get another $15 million later if it meets its cash projections.

Lifland said the cash projections can be modified because of a wave of adverse publicity surrounding the creditors’ objection to Eastern’s request for the money.

Shugrue was not sure how long the cash will keep Eastern alive, saying, ″We don’t put deadlines on this.″

″It gives us the cash we need to operate,″ he said.

It is too early to measure the damage from the publicity surrounding the creditors’ request to close Eastern, Shugrue said. But he said the creditors had not persuaded him that his plans for Eastern won’t revive the carrier.

″I did not hear one scintilla of analysis from the creditors that would sway my opinion,″ Shugrue said.

Alan S. Boyd, chairman of the creditors’ committee and chairman of Airbus Industrie Holdings of North America, stopped short of saying the judge’s ruling will delay the inevitable.

″How this process will work out, God only knows,″ Boyd said, speaking to reporters outside the courthouse.

In issuing his ruling after a hearing that lasted about nine hours and went late into the night, Lifland said Shugrue had shown reasonable business judgment in asking for the additional money.

″I’m not sure the creditors’ committee has exercised business judgment superior to that of the trustee,″ Lifland said. The judge criticized lawyers for the creditors’ committee for including in their objection to Eastern’s request newspaper articles showing oil prices rising while excluding stories showing oil prices falling.

The creditors’ committee, in saying it doubts Eastern can survive, cited jet fuel costs that have skyrocketed since Iraq invaded Kuwait in August.

Lifland agreed with Eastern’s contention that its business could be hurt by intense publicity of the creditors’ request that the airline be grounded.

He also said he was puzzled to see the creditors ″choose this as the opportune time to get into World War III. I find that a little disconcerting.″

The judge said nonetheless that the creditors have a valid claim to Eastern’s remaining assets, so he did not want to give Eastern the $30 million without requiring evidence of improvement.

The hearing coincided with the release of Eastern’s earnings statement for the third quarter of 1990, which showed the airline lost $252.8 million, bringing its total loss for the year to $424.9 million.

Shugrue, a veteran airline executive who was named by the court to run Eastern seven months ago, has sought to woo travelers with an aggressive marketing campaign that includes heavily discounted seats for vacationers and first-class upgrades for anyone paying full coach fare.

Eastern’s traffic figures show more passengers are flying the airline, but it’s still confronting enormous obstacles besides angry creditors. Just the unsecured creditors alone are owed more than $1 billion and an Eastern spokeswoman said Eastern is $1.6 billion in debt. Some estimates have put the carrier’s total indebtedness at $2.5 billion.

Perhaps the most critical immediate problem is fuel expenses, which have nearly doubled since the Iraqi invasion. Because Eastern is so weak financially, the impact of that unforeseen cost increase has hurt Eastern more severely than many of its rivals.

As Eastern’s fate was being determined in Lifland’s court, travel agents expressed mixed views on the wisdom of purchasing its tickets. Some were advising customers that it might be better to make reservations with other carriers.

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