Debt Propelled

By John Greenwald

When an ordinary company takes on a load of debt, the people who have the most to fear are employees and investors. But when an airline goes heavily into hock, the worriers are joined by another group: customers. If an airline is bogged down by debt, they wonder, would the carrier be tempted to save money by lowering its standards on maintenance and other safety measures? Everyone from passengers to politicians has begun to debate that question as billion-dollar takeover wars sweep the U.S. airline industry. Says Jerome Lederer, founder of the Virginia-based Flight Safety Foundation, an aviation- research group: "Buyouts need careful scrutiny, particularly with regard to maintenance practices. Safety must be paramount, and safety has suffered when maintenance is shoddy."

Such warnings are particularly worrisome at a time when mechanical failures appear to have replaced the threat of terrorism as the leading concern of air travelers. A recent spate of engine explosions, stress cracks and other in- flight mishaps has made passengers keenly aware of once esoteric matters such as turbine blades and hydraulic systems. The public's concern is % compounded by the airline industry's frank admission that it cannot find enough mechanics to do the increasingly complex job of maintaining its aging planes.

Some mechanical problems are hard to spot in even the most thorough of inspections. Case in point: experts suspect that microscopic cracks on a 300- lb. revolving disk caused the tail engine on a United Airlines DC-10 to blow apart last July. The mishap crippled the jet's hydraulic steering system, killing 112 people when the plane crash-landed in Sioux City, Iowa. (McDonnell Douglas said last week that it would modify its DC-10s to ensure safe landings even if all hydraulic systems failed.)

Prodded by rising public anxiety, Congress and federal regulators have vowed to examine the impact of takeovers on aircraft upkeep. Says California Democrat Norman Mineta, a member of the House Aviation Subcommittee: "No one should ever be put in the position of boarding an aircraft and having to worry if the plane is safe to fly."

Amid the growing scrutiny, the takeover whirl accelerated last week. In Chicago directors of UAL, the parent company of United Airlines, approved a bid by the carrier's management and pilots' union to buy out the second largest U.S. carrier for $6.75 billion. In the highly leveraged deal, employees would own 75% of the company, top managers would get 10% and investor British Airways would have 15%. Beverly Hills billionaire Marvin Davis, who had bid $6.19 billion for UAL, said he would match the management group's offer if that package were to fail. In Washington a takeover group headed by Los Angeles investor Alfred Checchi outlined its $3.65 billion purchase of NWA, the parent of Northwest Airlines, in a voluminous filing with the Department of Transportation, which is reviewing the deal.

Problems from earlier takeovers mounted in Houston, where Texas Air chairman Frank Lorenzo, who has been battling his workers, confirmed last week that he may sell part or all of Continental Airlines to raise badly needed cash. Texas Air borrowed heavily for the 1986 purchase of Continental's sister carrier, Eastern Air Lines, which is mired in bankruptcy proceedings and a seven-month- long strike by its mechanics.

As carriers faced the prospect of mounting debt, an aviation task force of public and private experts piled new demands on the industry's maintenance crews. The panel called for a $563 million overhaul of 1,900 aging McDonnell Douglas jetliners around the world, including some 900 DC-8s, DC-9s and DC- 10s. The recommendations, which the Federal Aviation Administration is expected to endorse swiftly for U.S. planes, would range from replacing rivets to reskinning entire jets.

The task force was launched last year after a section of fuselage ripped off an Aloha Airlines 737, sucking a flight attendant out of the plane. The group's report on McDonnell Douglas aircraft followed a May FAA order for the overhaul of 1,300 vintage Boeing aircraft. Taken together, the moves were aimed at rejuvenating the 3,300-jet U.S. fleet, which averages 13 years of service per plane and is the oldest in the non-Communist world.

The task of maintaining the U.S. commercial fleet has strained the ranks of the 50,000 licensed airline mechanics. Carriers are eager to pay wages that range from about $13.50 an hour for newcomers to $20.50 for journeymen. Says Richard Delaney, president of the International Association of Machinists and Aerospace Workers local at Chicago's O'Hare Airport: "The aging fleets take a lot more maintenance work. You need more people. We are growing, but not at a rate that's going to satisfy demand."

Airlines are scrambling to buy new aircraft, but the huge growth in air travel has forced them to keep many of their older planes in the air even as the modern ones arrive. According to the Future Aviation Professionals of America, an Atlanta-based group, U.S. carriers will need 50,000 new mechanics by 1997 as the airlines take delivery of 3,000 new jets with a value of more than $40 billion.

The workload has become so heavy at United's 140-acre repair center in San Francisco, the largest in the U.S., that the carrier has begun to phase out its lucrative business of providing maintenance for other airlines. Maintenance projects at the base can require up to 100,000 mechanic-hours for the overhaul of a single 747 jumbo jet. "We've added 3,000 people in less than a year," says Joseph O'Gorman, United's senior vice president for maintenance operations, "and we're looking at another 1,000 in the next six months for the care and feeding of older planes." But that is just the beginning. "As our fleet expands and our service to Europe starts up next year, we're going to need another 1,000 to 2,000 more maintenance people each year."

To meet such needs, United and other airlines have begun to consider in- house programs to train their own mechanics. American Airlines, the largest U.S. carrier, has already started such a school. American currently runs 30- sec. TV commercials that stress maintenance and extol the airline's mechanics as "uncompromising professionals dedicated to perfection, flight after flight after flight." Meanwhile, the stock of AMR, American's parent company, jumped 13% in a single day last month on rumors that the firm might become the target of a takeover bid. But like Delta, which put 14% of its stock into an employee stock-ownership plan to thwart raiders in July, American insists that it is not for sale.

Airline executives firmly deny that a debt-heavy buyout would affect their maintenance practices. "There sure as hell won't be any scrimping on maintenance here," says United's O'Gorman. "Our rule is that time and cost are not considerations when maintaining airlines." At Northwest, which paid a $650,000 fine to the FAA last month after a 1988 inspection turned up a list of maintenance problems, officials contend that the carrier has an ample cash flow to repay its debt without lowering its maintenance standards. Wall Street analysts tend to accept such views. Says Julius Maldutis, who follows the industry for Salomon Brothers: "I don't believe that any responsible management would hinder maintenance as a result of leveraged buyouts."

Yet some experts assert that a borrowing binge could slow the upgrading of airline fleets or lead to higher ticket prices. "Debt definitely makes it more difficult to modernize fleets," says Morten Beyer, chairman of Avmark Inc., an aviation consultant in Arlington, Va.

In Europe and Asia, some aviation experts have been critical of U.S. aviation practices. Japan's Ministry of Transport complained last month that mechanical problems had forced too many Northwest flights to return to Tokyo's Narita airport after takeoff, allegedly increasing congestion at the crowded facility. Last May a group of European airlines refused to take delivery of Boeing's new 747-400 jetliners until the company agreed to reinforce the cabin floors.

In Washington politicians have been diligently studying measures to curb airline buyouts. A bipartisan bill drafted by Arizona Republican John McCain and Kentucky Democrat Wendell Ford, who chairs the Senate Aviation Subcommittee, would give the Transportation Department the authority to reject proposed takeovers if they involve too much debt. At the same time, Transportation Secretary Samuel Skinner is devising an Administration policy on how to respond to the takeovers.

Airline executives hope to escape any heavy-handed Government interference in the buying and selling of carriers. But they will first have to allay growing fears that the excess baggage of buyout loans may not be good for air travelers. "Safety is the bottom line, and we know how to achieve it," says Benjamin Cosgrove, a Boeing senior vice president. "The need is for mechanics and inspectors with a real desire for safety." But if the airlines seem unwilling or unable to deliver the level of assurance that passengers want, politicians will rush to do it for them.

With reporting by Lee Griggs/San Francisco and Jerry Hannifin/Washington