The Designated Hero

By Janice Castro

Stepping up to the microphones during a Manhattan press conference last week, Peter Ueberroth looked every inch the Designated Hero. Frank Lorenzo, the embattled chairman of Texas Air, had just announced that an investor group headed by the boyish-looking former commissioner of major league baseball will buy strike-bound and bankrupt Eastern Air Lines for $464 million. Celebrating Ueberoth's move in a Miami union hall where they heard the news, boisterous Eastern machinists began singing Take Me Out to the Ball Game. The initial response of striking employees to their prospective new boss held promise that Ueberroth may be able to get Eastern's fleet back into service quickly. Ueberroth, though, shrugged off any notion that he will be a "miracle worker." Said he: "I'm an implementer. It's a mammoth challenge."

If anything, Ueberroth, 51, understated the task. To begin with, he must negotiate a new contract with Eastern's hard-bargaining machinists. They walked out last month and the carrier was forced into bankruptcy when the airline's pilots refused to cross picket lines. Even if Ueberroth wins labor peace, the Eastern sale must be approved by the federal bankruptcy court and Eastern's creditors, a process that could take months. Once he is firmly at the controls, Ueberroth must struggle to fill his planes with consumers who have switched to other airlines while most Eastern flights have been grounded. As Ueberroth put it, "We're going to have to win back every customer."

Ueberroth's complex deal to buy the troubled airline has been hailed by Wall Streeters and airline experts as a masterpiece of risk sharing that will help make his task more manageable. The ownership of the restructured airline will be divided among Ueberroth and his investors, who will get 30% of the carrier, Eastern's employees (30%) and other new stockholders (40%). Ueberroth's core group of investors will put up only $200 million in cash. The new company will cover the remaining $264 million of the purchase price by forgiving $185 million in debt that the parent company, Texas Air, currently owes to Eastern and by handing over to Texas Air $79 million in Eastern assets. Those properties include Eastern's profitable New York-Montreal route, one airport gate at New York's La Guardia Airport and eight pairs of takeoff-and-landing slots at U.S. and Canadian airports.

While Eastern's employees will become part owners, they will have to make sacrifices to do so. Under the agreement, Ueberroth can withdraw from the Eastern deal unless its unions agree to return to work by early this week. Ueberroth maintains that the airline's machinists and pilots must give up $210 million in wage and benefits concessions. That is far more than the $125 million in cutbacks that Lorenzo demanded from the machinists, who walked out when no compromise could be reached.

So far, the pilots' union has looked favorably on the deal. So have rank- and-file machinists, but by week's end machinists' union officials were criticizing the transaction as a giveaway to Lorenzo. "I think the deal stinks. They are cutting up Eastern so that it can't survive," said Wally Haber, senior general chairman of the airline's machinists' union. "I like to play baseball, but I like to play on a winning team." Some labor officials may have been talking tough because they still had to go to the bargaining table with Ueberroth.

The unions are likely to give Ueberroth more than they would concede to Lorenzo partly because he is giving them 30% of the airline through an employee stock ownership plan, or ESOP. Ueberroth said the carrier will be renamed the Eastern Airlines Employees and Service Co. in recognition of the new proprietors. Observes Julius Maldutis, who follows the airline industry for Salomon Brothers: "Employee ownership builds employee commitment. And if there's any one airline that needs employee commitment, it's Eastern."

While Ueberroth and his partners will hold a share equal to the employees' stake, two investment firms -- Drexel Burnham Lambert and a Manhattan outfit called Ardshiel -- will take the remaining 40%, which could be sold later to outside investors in a stock offering. The new owners will inherit an airline deeply in debt, but as part of the deal they will receive the proceeds from . the sale of Eastern's profitable northeastern Shuttle to Donald Trump for $365 million. Ueberroth's group has pledged to invest $100 million in freshly borrowed money to help pay for the airline's return to full operations.

Over the long run, another clause in the deal will give Eastern a crucial tool for rebuilding its market share. Eastern will own 20% of Texas Air's computerized reservations system, called System One. The service was set up by Eastern eight years ago and transferred to the parent firm in 1987. Such computerized systems, linked to the networks of travel agents that feed passengers to the carriers, have become vital sales weapons in the hotly competitive airline industry.

Bringing Eastern back to health under such circumstances is a tall order, even for a marketing whiz who has made a career of mastering big challenges. Ueberroth, who worked his way through San Jose State as a reservations clerk for charter airlines, started a travel agency that is now the second largest in the U.S. He took on the task of organizing the 1984 Summer Olympics in Los Angeles, and negotiated adroitly with corporate sponsors, choreographed hundreds of events scattered across Southern California and orchestrated a thumping publicity campaign to build attendance. Despite a Soviet boycott that threatened to undercut public enthusiasm, the Games garnered the largest viewing audience in TV history and rang up record profits of more than $200 million.

Ueberroth surprised many observers when he followed that assignment by accepting the largely symbolic post of baseball commissioner in 1984. But there was nothing passive about his approach to the job. Confronted with a strike by professional umpires the day he started work in October, Ueberroth won points for helping resolve the walkout in time for the World Series.

During his five years as commissioner, Ueberroth helped put the teams on firmer financial footing, bringing his marketing skills to bear with product- licensing deals and other money-making schemes for baseball owners. He is credited with helping clean up baseball's tarnished image by calling for drug testing of players and restrictions on beer sales at ball parks. By the time he finished his duties as commissioner last month, stadium attendance had risen from 45 million to 53 million fans a year.

No matter how Eastern's employees get along with Ueberroth, they will no longer have Lorenzo to kick around -- and vice versa. By selling Eastern, $ Lorenzo's Texas Air, which also owns Continental, will give up its status as the largest U.S. airline company. That distinction will go to Texas rival AMR Corp., the parent of American Airlines. Lorenzo, long the target of acrimonious attacks by Eastern's workers, could not resist remarking bitterly last week that he could have extracted greater value for Texas Air's shareholders if he had liquidated the bankrupt Eastern. Perhaps so. But since Lorenzo chose to taxi Eastern into Chapter 11, he was no longer calling all the shots. Federal Bankruptcy Judge Burton Lifland, who will supervise the airline's reorganization, probably would not have approved the piecemeal sale of Eastern's planes, landing slots, gates and other assets.

Lifland has stated bluntly that he wants the airline to return to full operation as quickly as possible. "I want planes flying," he said last week. "This grounded airline is a wasting national asset." To press his plan, Lifland has appointed David Shapiro, a Washington attorney, as Eastern's bankruptcy examiner. Under Chapter 11 rules, Shapiro, whose role Lifland has described as "a head banger," will wield plenty of clout in resolving Eastern's problems and pushing the airline back onto the runways.

Ueberroth's deal could still face resistance in the bankruptcy court if a higher bid for the airline emerges. Eastern's creditors have a major stake in any plan to revive the airline. The most heavily indebted major carrier, Eastern has $2.3 billion in long-term debt and its liabilities exceed its assets by more than $1 billion.

At week's end no serious competition for the Ueberroth bid had materialized, but Texas Air was accusing TWA Chairman Carl Icahn of mounting a back-room challenge. Icahn, who in the past has talked with Eastern's unions about forming an alliance to buy the airline, indicated publicly that he is not willing to top Ueberroth's offer. "The airline is just not worth that price," Icahn told the Wall Street Journal. But in a lawsuit filed on Friday, Texas Air alleged that Icahn has attempted to undermine the Ueberroth deal through what Texas Air described as improper discussions with Eastern's unions. Angry Texas Air officials speculated that Icahn was trying to set the stage for a bid of his own.

Assuming that his deal flies, Ueberroth will need to work fast to get Eastern's customers back. While most of Eastern's 250 planes have been sitting in hangars, Pan Am, TWA and Delta have moved aggressively to woo its customers ! by adding flights on Eastern's dormant routes. American Airlines last week announced a major new invasion of Eastern's southern turf. Starting June 1, American will beef up its operations in Eastern's home base of Miami by adding 600 employees and 24 new daily flights to Los Angeles, Boston, New York and several Caribbean islands, which until now have depended on Eastern for most of their air service.

During his final months as baseball commissioner, Ueberroth turned away several gilded job offers, including the chairmanship of RJR Nabisco. Why take on Eastern's problems? Ueberroth says he likes a challenge. "I think most people will bet against us, but I think we can move forward." For all Ueberroth's canny groundwork, he still faces a long and tortuous climb before Eastern can clear the tall trees at the end of the runway. Unlike Lorenzo, though, he has a chance of taking off with the help of an enthusiastic and committed crew: his new co-owners.

With reporting by Deborah Fowler/Houston and Thomas McCarroll/New York