The Department of Transportation gave Texas Air Corp. limited approval yesterday to acquire up to 51 percent of Eastern Airlines stock while the department reviews the proposed merger of the two airline companies.
But DOT said Texas Air may have violated the Federal Aviation Act in acquiring its current 31-percent holding of Eastern's stock without the department's prior approval. That question has been referred to DOT enforcement officials.
A DOT spokesman could not say how the enforcement question could affect the bid for Eastern by Texas Air, which also owns New York Air and Continental.
A Wall Street analyst said yesterday that Texas Air's 31 percent puts it in a commanding position against any other potential bidders for Eastern. Texas Air President Frank Lorenzo "has such a big chunk of Eastern stock it really is difficult to see anyone else coming in," said Candace Browning, an industry analyst with Oppenheimer & Co.
The DOT order, signed by Assistant Secretary Matthew V. Scocozza, came on a controversial procedural step that has put Transportation officials at odds with the Department of Justice's antitrust division.
In deregulating the airlines, Congress temporarily placed DOT in charge of antitrust enforcement of the industry rather than leaving the responsibility, as is customary, in the hands of the antitrust division of the Federal Trade Commission.
The Federal Aviation Act prohibits an airline from acquiring control over another without DOT's prior approval. A central issue in yesterday's ruling was whether Texas Air's purchase of Eastern stock gave it "control" of Eastern.
Justice's antitrust division had urged DOT to limit Texas Air's acquisition of stock while DOT studies the competitive consequences of the merger on the airline industry.
But DOT rejected the Justice Department's argument. "If we disapprove that transaction the proposed merger , Texas Air will have to divest promptly its shares of Eastern stock. We cannot agree with Justice's contention that the divestiture is likely to harm 'the long-term viability' of Eastern," the DOT order said.
The procedural issue in the DOT ruling involved Texas Air's procedure for acquiring Eastern stock. The Houston-based airline company has put its Eastern stock in a so-called voting trust, which is controlled by an independent trustee, MBANK Houston, N. A.
The creation of the voting trust is meant to dispel fears that Texas Air could gain a controlling influence over Eastern before DOT is able to make a final ruling in the merger, which is not expected until months from now.
The antitrust division, however, told DOT that it didn't think that protection was strong enough. "The more Eastern stock that Texas Air is permitted to acquire in this friendly merger, the less incentive each airline has to compete vigorously against each other" while the voting trust exists, said Assistant Attorney General Douglas H. Ginsburg, in a filing with DOT this week.
Yesterday, the antitrust division underscored its position by announcing its opposition to the use of a similar voting trust in the proposed merger of Trans World Airlines and Ozark Airlines.
Airlines should not be permitted to make substantial purchases of a target's stock through voting trusts before the competitive effects of the proposed merger have been studied, Justice contended.
DOT replied that while such a preliminary competitive review "may be useful in some cases, we are not willing here to reverse our past policy on voting trusts." But the voting trust issue in general will be reviewed soon, and DOT will consider the Justice arguements then, Scocozza's order said.
Although DOT will investigate Texas Air's purchase of the 31-percent block of Eastern stock, the existence of the voting trust will "substantially restrict" Texas Air's ability to control Eastern's operations while the merger is under review, Scocozza said.
DOT's position on voting trusts is "that the public interest is best served by allowing market forces to operate without unnecessary regulatory interference," Scocozza said.
He noted that other airlines -- or Eastern's unions -- may be interested in bidding for Eastern.