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Is Lorenzo in the Wrong Line of Work?

March 19, 1989|Gregg Easterbrook | Gregg Easterbrook is a contributing editor to Newsweek and the Atlantic

WASHINGTON — Frank Lorenzo, that snarling, vicious capitalist--know what he eats for breakfast?

1) Raw meat torn from a carcass.

2) Unions.

3) Small Children.

4) Fresh fruit and herbal tea.

The correct answer is 4. Lorenzo wears that lean and hungry look because he is unusually lean and in all probability hungry, from a strict personal regimen of diet and distance running--something I learned while spending time with him as long as two years ago. Watching him eat, I had to suppress an urge to say: Frank, have a milkshake. All manner of pop psychology theories spun into my head about compulsion to devour in business what one fails to consume at the table.

I mention this because I sort of like Lorenzo. Don't get me wrong--I'm really glad I don't work for him. But he is taking a worse rap than he deserves during the Eastern Airlines strike--in part because the press and the public paid more attention to his robber-baron image than his real accomplishments. Consider:

It is true that none of the major airlines Lorenzo has acquired, including Eastern, have done well financially. But they were failing when he bought them. The Texas Air empire embraces four of the six major airlines that have had severe problems since deregulation: Continental, Frontier, People Express and Eastern.

When Lorenzo bought Continental it was considered the sickest major U.S. airline; at least give Lorenzo credit for keeping it alive. Frontier's operations were suspended; People Express was avoiding bankruptcy by desperate accounting tricks. When Lorenzo acquired Eastern in 1986, it had shown profits only once in the previous decade. During 1986, major air carriers were on an acquisition binge, but so bleak was Eastern's condition, Lorenzo was the only one to bid.

Why did Lorenzo buy four failing airlines? Simple--he could afford them. He was determined to become a major player in the U.S. airline industry. Some more pop psychology: Lorenzo was born in a modest home in Queens, N.Y., a first-generation son of Spanish immigrants. The house lay under the approach path to LaGuardia Airport. From childhood, Lorenzo was fascinated by flying. By sheer effort, he became the chief executive officer and, in effect, owner of the Western world's largest air transport corporation. He could never have accomplished this by trying to buy healthy airlines. Lorenzo said he was drawn to Eastern "because its condition was so terrible that it was capable of a tremendous turnaround."

For all the "greed" rhetoric surrounding Lorenzo, he is not filthy rich--estimated net worth, $40 million. Not shabby, but far below the Carl C. Icahn class.

Lorenzo isn't filthy rich because Texas Air has never been profitable. Lorenzo's first effort, a regional airline called Texas International, made moderate profits in the 1970s. But since Lorenzo went national by buying Continental, his company has lost money nearly every year and produced at best anemic stock price performance--undermining the value of Lorenzo's own holdings.

Eastern unions are pumping out bluster about Lorenzo "bleeding Eastern for fast profits." Bleeding to where? Eastern's parent company loses money too. Lorenzo has been successful as a takeover specialist; he has never been conspicuously successful at making money. Air Line Pilots Assn. President Henry A. Duffy called Lorenzo "the Gordon Gekko of the airlines," referring to the billionaire villain of the movie "Wall Street." Bad analogy. Gekko deals made money.

Texas Air lost money through the 1980s for two reasons. First, it is based on companies in deep financial trouble when Lorenzo acquired them. Second, Lorenzo held down Texas Air fares, almost single-handedly preventing deregulation from creating monopoly-priced air travel. Texas Air has been the industry's low-price leader. Everybody knows that labor hates Lorenzo. Guess what--management hates him too, management of the other major airlines at least. Without Texas Air, the majors could have had a nice pie-dividing session after deregulation, charged higher prices and cleared higher profits. Any air traveler who pays for his own tickets ought to pray Texas Air does not fold.

Charles E. Bryan, head of the machinists' union that struck Eastern, has in recent months repeatedly said Lorenzo is the problem and that no settlement is possible unless Lorenzo goes.

Bryan said exactly the same of Eastern's previous chairman, Frank Borman. In 1986, elaborate negotiations to prevent Eastern from being sold to Lorenzo collapsed when Bryan demanded that the Eastern board fire Borman. Bryan's rhetoric focused on how Borman was the problem; now, take any recent news story about Eastern, substitute Borman's name for Lorenzo's and you have a story indistinguishable from those of 1986.

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