WASHINGTON — The Transportation Department on Tuesday unexpectedly blocked the proposed $675-million takeover of Eastern Airlines by Texas Air Corp., which already owns Continental Airlines and New York Air.
But the department said it would lift its objections to the creation of the nation's largest airline holding company if Houston-based Texas Air develops an acceptable plan to ensure competition on the heavily traveled Northeast routes from New York's La Guardia Airport to Boston and Washington--routes on which Eastern is now dominant.
"We are absolutely committed to this merger and remain confident it will be approved without unreasonable delays," Texas Air spokesman Bruce Hicks said. "Our commitment has not waned."
Fears Inadequate Competition
Eastern Airlines President Joseph B. Leonard said: "We believe it important to note that the only substantive issue continues to be that of effective competitive service against Eastern's air shuttle, and we expect that to be resolved in a timely manner."
The government refused to approve the Eastern takeover because it believed that Pan American World Airways would not be able to provide adequate competition against Eastern on the Northeast routes with the limited number of landing slots that it has acquired from New York Air to establish its own shuttle service.
"Effective competition requires hourly service at peak hours," the Transportation Department said in its formal order, "and Pan Am would not have enough slots at La Guardia to operate hourly service."
The Transportation Department, in its tentative approval of the airline merger in July, had cautioned that it wanted to be sure that Eastern would not end up with monopolies on shuttle service between La Guardia and Washington's National Airport and on a similar operation between New York and Boston.
Despite the rejection, airline analysts argued that Texas Air's takeover of financially weakened Eastern would eventually go through. "This is probably just a temporary setback," said Louis Marckesano of the Philadelphia investment firm of Janney Montgomery Scott. "They should be able to resolve it very quickly."
Company insiders also believe that the takeover will be completed, probably by the end of the year. But the high-stakes bargaining between Pan Am and Texas Air over landing rights has added a difficult new wrinkle to the final resolution of the problem.
"This has degenerated into a game of chicken," said a member of Eastern's board of directors who spoke only on the condition that he not be identified. "Pan Am did not buy enough of those slots, and now it is trying to blackmail Eastern and Texas Air into handing them over on the cheap." Earlier this year, Pan Am bought a number of airport landing rights from New York Air for $65 million. With the Federal Aviation Administration imposing a strict limit on the number of flights at heavily used airports, the only way to enter the market is by acquiring existing landing rights. In July, New York Air moved its planes to other flights, leaving Eastern--which flies hourly from 8 a.m to 9 p.m.--in control of the popular shuttle market.
Pan Am said it still planned to begin its own air shuttle operation Oct. 1. "This decision does not affect Pan Am's plan," said Merle Richman, the airline's public relations director. "We intend to go forward with our own shuttle service."
But Pan Am recently told the Transportation Department that it could not guarantee hourly service, particularly at peak morning and evening times, raising doubts about whether it could survive the competition for business and government travelers who rely on assured service.
Officials at Eastern, which came close to filing for bankruptcy protection before agreeing to be acquired by Texas Air last February, insisted that the delay in winning government approval does not threaten the airline's operations.
Eastern is locked in a struggle with upstart People Express Airlines, which has also been flirting with financial disaster.
People Express Inc. agreed earlier this year to sell its troubled Frontier Airlines unit to United Airlines but has been unable to complete the deal and shut Frontier down Sunday, arguing that it could no longer afford the $10-million-a-month drain on its resources.
"Obviously, if People Express went belly-up, it would help Eastern," the Eastern director said. "How long we can survive this situation is really up to the tolerance of Eastern's bank group."
Texas Air, while arguing in a statement that the Transportation Department order not only "strains credibility" but is also "inconceivable" and "in error," nonetheless said it is studying "a number of options" to overcome the government's objections to the Eastern takeover.