Is This Any Way to Run an Airline?

By Gordon Bock

Outside the Eastern Airlines compound that sits along the northeast perimeter of Miami International Airport, the temperature was a pleasant 75 degrees and palm trees swayed in a gentle breeze. But inside a first-floor conference room in Eastern's boxlike concrete-and-glass headquarters, the scene was stormy. Under the harsh glare of a battery of television lights, executives of the 60- year-old airline last week announced the layoff of more than 3,500 employees, or 9% of the work force, sparing only pilots and flight attendants. Said Luz Gomez, 26, a laid-off clerical worker: "I don't know how they are going to do without us."

Gomez is not the only one wondering what is going on in the sprawling, demoralized empire controlled by Eastern's corporate parent, Texas Air. Over the past two years Chairman Frank Lorenzo has fashioned a ragtag collection of disparate and sometimes dying carriers into the largest U.S. airline company (1986 revenues: $4.4 billion). Besides Eastern, Texas Air runs Continental, which has absorbed New York Air, Frontier and People Express. All told, Lorenzo and his lieutenants oversee 628 jets and 72,500 employees, ferrying 94 million passengers (roughly the combined populations of France and Spain) on more than 1 million flights each year.

But as velvet-voiced airline captains say in their understated way, Texas Air is experiencing some turbulence. Acquisitiveness has bred turmoil: growing labor unrest, flagging employee spirit and complaints alleging poor service and aircraft maintenance. Wall Street analysts wonder if the company expanded too much and too fast. They question whether Lorenzo, a whiz at financing and acquisitions, has the attention span needed for the details of running a huge airline. In an industry where service is crucial, employees and top management at Eastern and Continental seem too busy warring with each other to satisfy customers' needs.

That perception has propelled some passengers toward rival ticket counters. Texas Air has suffered three consecutive quarterly losses exceeding $200 million, is expected to lose an additional $50 million by year's end, and could fare far worse if a recession comes along. Lorenzo concedes that the merger of four major airlines has produced more lapses in service than he anticipated. Says he: "There is no sugar-coating. We did not do a good job."

Lorenzo, an avid runner, has been racing to improve his airlines' mediocre performance, and there were signs last week that he has achieved some success. A study released by the Department of Transportation showed Eastern and Continental outperforming the industry average in two areas: making sure that flights arrive within 15 minutes of schedule and keeping baggage from getting lost. But agency critics question DOT's reliance on airline-supplied figures for the report, which marks the first Government effort to quantify the service of U.S. carriers.

Assuming the airlines are reporting statistics accurately, Texas Air still has a way to go. Only Northwest generated more complaints (18 per 100,000 passengers) than Continental (15 per 100,000) and Eastern (13 per 100,000) on such matters as reservations, ticketing and refunds. Among major carriers, American came out best in the survey, achieving the highest percentage of on- time flights (84.5%) and the lowest incidence of customers being bumped from planes because of overbooking (.6 per 100,000 passengers). Northwest and Pan Am fared worst among the big carriers. Besides having the highest level of customer complaints, Northwest seems to lose baggage more often than other airlines. Pan Am had the highest rates of passenger bumpings and chronically late flights.

Eastern is easily Lorenzo's most troubled carrier. It accounted for $67.4 million of Texas Air's latest $72.8 million quarterly loss, and the chairman has grumbled about the airline's costs. Eastern spends $1.7 billion a year, or $42,300 per employee, on labor alone. The average at Continental: $28,200. The disparity has prompted Lorenzo to seek wage cuts averaging 40% in current contract talks with the union representing Eastern's 13,000 machinists, baggage handlers, stock clerks and maintenance workers. But as a Dec. 31 deadline looms, the union is seeking 20% hikes. The machinists charge that last week's layoffs are an attempt to bully the union into accepting pay cuts. Lorenzo, who argues that Eastern's survival is at stake, will meet further resistance in 1988 when he goes after concessions from the 3,800 pilots and 47,500 flight attendants. Says Louis Marckesano, an analyst at Janney Montgomery Scott: "It's like two giant locomotives heading toward each other at full speed."

In addition to slashing Eastern's work force, Lorenzo is making another move to shrink the airline. Eastern officials disclosed last week that the popular Northeastern shuttle serving Washington, New York and Boston is being split off as a separate division of Texas Air. That may enable Lorenzo to use low-cost, nonunion labor on the shuttle.

One of the most contentious issues facing Eastern is the charge by employees that the airline skimps on maintenance. On many occasions this year, pilots have refused to fly planes that they said had problems ranging from broken fuel gauges to faulty navigational equipment. Lorenzo counters that Eastern has raised its maintenance budget by 10% in 1987, to $500 million, even though the carrier flies 7% fewer planes than last year. The pilots, he says, are using imaginary safety concerns to conduct a work slowdown and put economic pressure on the company.

Nonetheless, the employees' unhappiness is real. More than 96% of Eastern pilots surveyed earlier this year by Virginia Tech researchers voiced dissatisfaction with their jobs. Company insiders say pilots are quitting at the rate of one a day. "We've always run a quality airline, among the best in the world," sighs Co-Pilot Glenn Rutland, 42, an 18-year veteran. "Now we are the world's worst."

A similar malaise afflicts some workers at Continental. Employees still resent the way Lorenzo busted the pilots' union during its two-year strike that ended in 1985; the walkout began when he put Continental into bankruptcy proceedings and forced workers to accept 50% pay cuts. Some employees contend that Continental too is sloppy about maintenance. In October, one pilot says, he was told to fly a jetliner with a broken radar device into an area that was being buffeted by thunderstorms. When he refused, supervisors had the balking captain switch planes with another pilot, who agreed to fly the aircraft with the radar problem. Fed up with such episodes, the captain forsakes discounts of nearly 100% to buy his 16-year-old daughter full-fare tickets on competing airlines. Says he: "I won't have her fly on Continental."

Lorenzo dismisses such worries as ridiculous. "Continental is the safest airline in the sky," he asserts. "Nothing has a higher priority." He attributes much of the grousing to propaganda emanating from the Air Line Pilots Association as it tries to reorganize Continental's 3,500 pilots. So far, ALPA claims, 35% of the line's pilots have shown interest in joining up. An election could be held next year.

While sparring with the union, Continental executives have launched an all- out campaign to win back customers. The airline has begun keeping on call at the Newark, Denver and Houston airports "hot spares" -- fueled-up planes with standby crews ready to step in if another jet develops difficulties that prevent its takeoff. The airline is spending $60 million this year on employee training. Customers receive cash rebates of $10 to $50 for filling out "report cards" grading the carrier's performance. Capping these efforts is an advertising blitz featuring full-page confessionals in major publications. "We grew so fast that we made mistakes," concede the ads, which promise an "intensified commitment to quality."

The ads were signed by Lorenzo, who critics suggest is responsible for many of Texas Air's woes. Few airline executives elicit as much personal enmity from the troops as he does. And high-level subordinates have not found it easy to deal with the workaholic chairman, who often telephones them late at night with probing questions. Tom Volz, a former Continental senior vice president who now runs Las Vegas-based Sunworld Airways, says Lorenzo is "more interested in new deals than food quality and cleaner planes."

He may have to focus on the economy. Some analysts think that Texas Air's enormous $4.5 billion debt would make the company vulnerable in a recession. But Lorenzo notes that Texas Air has $1.2 billion in cash. And, he says, Continental's low costs and fares would make the company more able than most competitors to weather an economic downturn. Says Lorenzo: "We're putting a lot of blood, sweat and tears into a company that has the attributes to be successful." Maybe so, but the fastest way to make customer confidence take off might be to turn a divided work force into one that is pulling together.

With reporting by Rodman Griffin/Miami and Richard Woodbury/Houston