TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/092589/09258900.020

Text File | 1990-09-18 | 9.4 KB | 173 lines

BUSINESS, Page 52

Debt Propelled

The airline-buyout binge raises fears that jet safety will suffer

By John Greenwald


    When an ordinary company takes on a load of debt, the people
who have the most to fear are employees and investors. But when an
airline goes heavily into hock, the worriers are joined by another
group: customers. If an airline is bogged down by debt, they
wonder, would the carrier be tempted to save money by lowering its
standards on maintenance and other safety measures? Everyone from
passengers to politicians has begun to debate that question as
billion-dollar takeover wars sweep the U.S. airline industry. Says
Jerome Lederer, founder of the Virginia-based Flight Safety
Foundation, an aviation-research group: "Buyouts need careful
scrutiny, particularly with regard to maintenance practices. Safety
must be paramount, and safety has suffered when maintenance is
shoddy."

    Such warnings are particularly worrisome at a time when
mechanical failures appear to have replaced the threat of terrorism
as the leading concern of air travelers. A recent spate of engine
explosions, stress cracks and other in-flight mishaps has made
passengers keenly aware of once esoteric matters such as turbine
blades and hydraulic systems. The public's concern is compounded
by the airline industry's frank admission that it cannot find
enough mechanics to do the increasingly complex job of maintaining
its aging planes.

    Some mechanical problems are hard to spot in even the most
thorough of inspections. Case in point: experts suspect that
microscopic cracks on a 300-lb. revolving disk caused the tail
engine on a United Airlines DC-10 to blow apart last July. The
mishap crippled the jet's hydraulic steering system, killing 112
people when the plane crash-landed in Sioux City, Iowa. (McDonnell
Douglas said last week that it would modify its DC-10s to ensure
safe landings even if all hydraulic systems failed.)

    Prodded by rising public anxiety, Congress and federal
regulators have vowed to examine the impact of takeovers on
aircraft upkeep. Says California Democrat Norman Mineta, a member
of the House Aviation Subcommittee: "No one should ever be put in
the position of boarding an aircraft and having to worry if the
plane is safe to fly."

    Amid the growing scrutiny, the takeover whirl accelerated last
week. In Chicago directors of UAL, the parent company of United
Airlines, approved a bid by the carrier's management and pilots'
union to buy out the second largest U.S. carrier for $6.75 billion.
In the highly leveraged deal, employees would own 75% of the
company, top managers would get 10% and investor British Airways
would have 15%. Beverly Hills billionaire Marvin Davis, who had bid
$6.19 billion for UAL, said he would match the management group's
offer if that package were to fail. In Washington a takeover group
headed by Los Angeles investor Alfred Checchi outlined its $3.65
billion purchase of NWA, the parent of Northwest Airlines, in a
voluminous filing with the Department of Transportation, which is
reviewing the deal.

    Problems from earlier takeovers mounted in Houston, where Texas
Air chairman Frank Lorenzo, who has been battling his workers,
confirmed last week that he may sell part or all of Continental
Airlines to raise badly needed cash. Texas Air borrowed heavily for
the 1986 purchase of Continental's sister carrier, Eastern Air
Lines, which is mired in bankruptcy proceedings and a
seven-month-long strike by its mechanics.

    As carriers faced the prospect of mounting debt, an aviation
task force of public and private experts piled new demands on the
industry's maintenance crews. The panel called for a $563 million
overhaul of 1,900 aging McDonnell Douglas jetliners around the
world, including some 900 DC-8s, DC-9s and DC-10s. The
recommendations, which the Federal Aviation Administration is
expected to endorse swiftly for U.S. planes, would range from
replacing rivets to reskinning entire jets.

    The task force was launched last year after a section of
fuselage ripped off an Aloha Airlines 737, sucking a flight
attendant out of the plane. The group's report on McDonnell Douglas
aircraft followed a May FAA order for the overhaul of 1,300 vintage
Boeing aircraft. Taken together, the moves were aimed at
rejuvenating the 3,300-jet U.S. fleet, which averages 13 years of
service per plane and is the oldest in the non-Communist world.

    The task of maintaining the U.S. commercial fleet has strained
the ranks of the 50,000 licensed airline mechanics. Carriers are
eager to pay wages that range from about $13.50 an hour for
newcomers to $20.50 for journeymen. Says Richard Delaney, president
of the International Association of Machinists and Aerospace
Workers local at Chicago's O'Hare Airport: "The aging fleets take
a lot more maintenance work. You need more people. We are growing,
but not at a rate that's going to satisfy demand."

    Airlines are scrambling to buy new aircraft, but the huge
growth in air travel has forced them to keep many of their older
planes in the air even as the modern ones arrive. According to the
Future Aviation Professionals of America, an Atlanta-based group,
U.S. carriers will need 50,000 new mechanics by 1997 as the
airlines take delivery of 3,000 new jets with a value of more than
$40 billion.

    The workload has become so heavy at United's 140-acre repair
center in San Francisco, the largest in the U.S., that the carrier
has begun to phase out its lucrative business of providing
maintenance for other airlines. Maintenance projects at the base
can require up to 100,000 mechanic-hours for the overhaul of a
single 747 jumbo jet. "We've added 3,000 people in less than a
year," says Joseph O'Gorman, United's senior vice president for
maintenance operations, "and we're looking at another 1,000 in the
next six months for the care and feeding of older planes." But that
is just the beginning. "As our fleet expands and our service to
Europe starts up next year, we're going to need another 1,000 to
2,000 more maintenance people each year."

    To meet such needs, United and other airlines have begun to
consider in-house programs to train their own mechanics. American
Airlines, the largest U.S. carrier, has already started such a
school. American currently runs 30-sec. TV commercials that stress
maintenance and extol the airline's mechanics as "uncompromising
professionals dedicated to perfection, flight after flight after
flight." Meanwhile, the stock of AMR, American's parent company,
jumped 13% in a single day last month on rumors that the firm might
become the target of a takeover bid. But like Delta, which put 14%
of its stock into an employee stock-ownership plan to thwart
raiders in July, American insists that it is not for sale.

    Airline executives firmly deny that a debt-heavy buyout would
affect their maintenance practices. "There sure as hell won't be
any scrimping on maintenance here," says United's O'Gorman. "Our
rule is that time and cost are not considerations when maintaining
airlines." At Northwest, which paid a $650,000 fine to the FAA last
month after a 1988 inspection turned up a list of maintenance
problems, officials contend that the carrier has an ample cash flow
to repay its debt without lowering its maintenance standards. Wall
Street analysts tend to accept such views. Says Julius Maldutis,
who follows the industry for Salomon Brothers: "I don't believe
that any responsible management would hinder maintenance as a
result of leveraged buyouts."

    Yet some experts assert that a borrowing binge could slow the
upgrading of airline fleets or lead to higher ticket prices. "Debt
definitely makes it more difficult to modernize fleets," says
Morten Beyer, chairman of Avmark Inc., an aviation consultant in
Arlington, Va.

    In Europe and Asia, some aviation experts have been critical
of U.S. aviation practices. Japan's Ministry of Transport
complained last month that mechanical problems had forced too many
Northwest flights to return to Tokyo's Narita airport after
takeoff, allegedly increasing congestion at the crowded facility.
Last May a group of European airlines refused to take delivery of
Boeing's new 747-400 jetliners until the company agreed to
reinforce the cabin floors.

    In Washington politicians have been diligently studying
measures to curb airline buyouts. A bipartisan bill drafted by
Arizona Republican John McCain and Kentucky Democrat Wendell Ford,
who chairs the Senate Aviation Subcommittee, would give the
Transportation Department the authority to reject proposed
takeovers if they involve too much debt. At the same time,
Transportation Secretary Samuel Skinner is devising an
Administration policy on how to respond to the takeovers.

    Airline executives hope to escape any heavy-handed Government
interference in the buying and selling of carriers. But they will
first have to allay growing fears that the excess baggage of buyout
loans may not be good for air travelers. "Safety is the bottom
line, and we know how to achieve it," says Benjamin Cosgrove, a
Boeing senior vice president. "The need is for mechanics and
inspectors with a real desire for safety." But if the airlines seem
unwilling or unable to deliver the level of assurance that
passengers want, politicians will rush to do it for them.


-- Lee Griggs/San Francisco and Jerry Hannifin/Washington