Texas Air Corp., which owns Eastern and Continental Airlines, announced yesterday that it would purchase the profitable Eastern Air Shuttle operation and run it as a separate subsidiary.
The move, which came as Texas Air announced massive fourth-quarter losses of $265.6 million, appeared certain to touch off a major legal battle with Eastern's unions, which are already locked in combat with Texas Air Corp. Chairman Frank Lorenzo. Union officials and analysts said the move appeared to be part of a pattern of removing profitable assets from Eastern.
Texas Air said it would pay Eastern $225 million, including $125 million in cash, for the shuttle. In addition, Texas Air said it would lease aircraft and enter into a marketing agreement with Eastern that would produce an additional $145 million over the terms of the agreement. The company also announced that it was hiring Bruce R. Nobles, who headed Pan Am's recently profitable shuttle operations, to run the subsidiary.
Texas Air spokesman Bruce Hicks said the transaction "provides a strong cash infusion to Eastern." But he added that Eastern "must still grapple with its overall high operating costs in order to assure its own future."
The sale, which requires federal regulatory approval, would not alter the service that Eastern provides but would result in a company renamed The Air-Shuttle. OnePass frequent fliers will continue to earn mileage on the shuttle that may be applied to flights on Eastern and Continental, the airline said.
Airline analysts and union officials said that Texas Air appears intent on spinning off Eastern's most profitable operations.
"First of all, it comes to my mind that what Texas Air is doing here is stripping Eastern of all its good assets and bringing them into the parent corporation," said Paul P. Karos of L.F. Rothschild Inc.
Eastern has already sold its computer reservation system -- widely regarded as the key reason Lorenzo had sought to buy Eastern -- to Texas Air Corp. and has applied for permission for Continental Airlines to operate some of its valuable routes to Latin America.
"It's part of the continuing pressure on the Eastern employees," said Louis A. Marckesano, an analyst with Janney Montgomery Scott Inc. "That's the only reason you could justify it. It would probably be a little too blatant if they just transferred it to Continental, so you create a shuttle subsidiary and transfer it to that."
Both analysts said it is difficult to know if the price is fair, since the shuttle's earnings are not separately reported. The International Association of Machinists estimated that the shuttle made a profit of $16.87 million on revenue of $40.34 million in 1987.
According to Texas Air Corp., the transaction price was approved by a committee of outside directors and by Eastern's board. Eastern has the right of first refusal in the event of a subsequent sale of the shuttle within the next 15 years.
Eastern's unions have challenged the transfer of other assets from the airline, charging that the prices paid for those assets were too low. Jack Bavis, chairman of the pilot's union at Eastern, said yesterday that the sale of the shuttle was an "outrage" and that it would not go unchallenged.
Charles Bryan, head of the Machinists union at the Miami-based airline, said that he had anticipated the announcement. "What they're trying to do is bust up the airline," he said.
The IAM's contract with Eastern expired at midnight Dec. 31, 1987, and the union is in mediation with the company in an effort to resolve contract differences. Eastern has contracted with a cargo airline to provide flight crews in the event of a strike by Eastern machinists that is honored by the pilots and the flight attendants.
Texas Air said it would retain shuttle employees who wished to remain unless another, more senior Eastern employee bid for the job. The shuttle employs about 800 of Eastern's 32,000 workers. Texas Air said it would recognize Eastern's unions as the bargaining representatives of the workers at the new subsidiary, assuming that more than half of the workers in each of the jurisdictions represented by the unions are Eastern employees. The company said it would also honor Eastern's contracts.
Analysts had anticipated that Texas Air would report a loss for the fourth quarter but had underestimated how large it would be. Continental reported a net loss for the fourth quarter of 1987 of $78.8 million on revenue of $1.1 billion, while Eastern reported a net loss of $143.4 million before preferred dividend requirements of $14 million on revenue of $1 billion.
The holding company reported an operating profit of $143.9 million and a consolidated net loss of $466.1 million ($12.58 per share) on revenue of $8.5 billion for the full year.