It's really tempting to beat up on Frank Lorenzo now that Continental Airlines Holdings, his old Texas Air Corp., has gone belly up. But I'll resist. The collapse of his empire, which was inevitable given the state it was in when he bailed out in September, says more about him than I ever could.
And anyway, I had two good years of writing about Lorenzo's various unsavory activities, such as lining his own pockets while leaving financial rubble and shattered careers behind.
Forget Lorenzo. The fall of Continental Holdings and its Continental Airlines subsidiary, which both filed for Chapter 11 bankruptcy protection last week, is more than just another story of a 1980s' company that was built on sand, junk bonds and too much borrowed money. It's a story about how real life keeps interfering with strategic planning.
In a wonderful irony, the deal that set Continental on the road to bankruptcy was the very deal for which Lorenzo was acclaimed as a business genius: the 1986 takeover of Eastern Air Lines. That deal, which Lorenzo accomplished by buying Eastern with its own assets, turned Continental Holdings, then Texas Air, into the world's second-largest airline, at least for a while.
But there was a fatal flaw: The deal obligated Continental to pay for the shortfall in Eastern's pension plans if Eastern collapsed. That shortfall, which the government now puts at $700 million, didn't show up on the books, but lurked below the surface.
Why worry about it? Because, thanks to a little-noticed change in the law that covers such things, Eastern's shortfall became a so-called "joint and several" liability of the rest of the empire. This meant that when Lorenzo, whose union-busting tactics and general unpleasantness had made him the Darth Vader of American capitalism, put Eastern into Chapter 11 in 1989 after fomenting a strike, his other companies couldn't walk away from Eastern's pension obligation. Instead, the obligation, like the Death Star, took aim at the rest of the empire and blew it up, thanks to an obscure federal agency called the Pension Benefit Guaranty Corp.
The PBGC, which insures pensions, has come out of nowhere to turn into an effective player in the games involving bankrupt and near-bankrupt companies. (I know this from personal experience. The PBGC's successes in the LTV bankruptcy have sliced more than $10,000 of market value from bonds that my wife and I own, which is a major loss for us.)
Even though Lorenzo hired the best-regarded bankruptcy lawyers in the country to represent Continental in the Eastern bankruptcy, the PBGC had a very strong hand going in, and it cleaned his clock.
To make a long story short, the PBGC got Continental Holdings and Continental Airlines to agree to make up the Eastern shortfall over a 12-year period. This was designed to shove the PBGC ahead of other Continental creditors if the company went in the tank. You can argue that a government agency shouldn't do this kind of thing, but it does save taxpayers money -- which the PBGC's chief negotiator, Diane Burkley, says she considers her job.
Continental had to make a deal with the PBGC because Lorenzo wanted out and Scandinavian Airlines Systems wanted in. SAS wasn't silly enough to fork over cold cash until an agreement had been made with the PBGC for payments that SAS thought Continental could afford.
SAS, which had put $50 million into Continental in 1988 to help form a "strategic relationship," was ready to spend a similar amount to get rid of Lorenzo. On Sept. 13, by which time it was already clear that jet fuel prices were going up and staying up because of Saddam Hussein's invasion of Kuwait, SAS paid up. "We could have done a better job on the second stage," an SAS spokesman in Stockholm said wryly during a phone interview. Because of the Continental bankruptcy, he conceded, "Our stockholders are sore as hell right now." Continental, as always, wouldn't talk.
The high-interest bills Lorenzo left behind plus rising jet-fuel bills were squeezing Continental. Then news leaked out -- apparently from executives Lorenzo left to the mercies of the new regime -- that Continental had considered going Chapter 11 in October. Advance ticket sales dried up, as did credit from suppliers.
So the PBGC-Continental deal never got done, because Continental wanted to raise cash by selling or mortgaging the assets that the PBGC wanted as collateral. The agreement finally lapsed at 12:01 a.m. Saturday, Dec. 1, and Continental hotfooted it into bankruptcy court the following Monday to stop the PBGC from putting liens on its assets.
The Continental bankruptcy promises to be a circus that puts the Eastern bankruptcy to shame. Continental and Eastern have claims on each other. Continental, if only for appearances, will go after Lorenzo to recover some $17 million it paid him in September. SAS, to keep its stockholders happy, may go after him, too. Solvent airlines may try to tear off choice Continental pieces for themselves.
If I hadn't promised not to write about Lorenzo, I would tell you that he's making speeches blaming Continental's bankruptcy on the government for not getting fuel prices down. And that he forgot to mention his part in it. Oops. I'm writing about Lorenzo again. Sorry. I can't help myself.
Allan Sloan is a columnist for Newsday in New York.