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TheStreet Open House

American Airlines Bankruptcy Shaped by Eastern Air Lines Strike 25 Years Ago

Stocks in this article: AAL

Miami ( TheStreet) -- Twenty-five years ago, on March 4, 1989, the International Association of Machinists struck Eastern Air Lines. Pilots and flight attendants walked out too. The job actions trapped thousands of passengers at Miami International Airport, sent Eastern into bankruptcy five days later and set the stage for 25 years of transformation in the airline industry.

The alteration in airline bankruptcies, from Eastern's to the just completed case of American Airlines (AAL - Get Report), has been particularly dramatic. In the Eastern case, labor unions opposed nearly everything Eastern management sought to do and were generally a separate voting block on the creditors committee.

In the American case, unions were strategic leaders who worked closely with US Airways to engineer a merger in which US Airways management took over at American. In the American bankruptcy, Laura Glading, president of the Association of Professional Flight Attendants, was a consensus-builder on the creditors committee, which came to back the plan labor preferred.

"In many ways the Eastern struggle set the course for airline labor relations for the decades that followed," said Mark Richard, a Miami labor attorney who represented flight attendants in the Eastern bankruptcy and the Transport Workers Union in the American bankruptcy.

"Aviation economics, negotiations and even bankruptcy proceedings always labored in the context of the lessons of the Eastern battle," Richard said. In the American case, he said, "We were smart, alert and always trying to be strategic."

Ironically, despite labor's successful transformation into drivers of the American merger, Frank Lorenzo -- labor's key adversary at Eastern -- has also benefited from a re-evaluation of his role.

Lorenzo, in fact, may now be viewed as the key architect of the 21st century airline industry. He was the first to use bankruptcy to restructure an airline; now bankruptcies represent a common industry strategy. Combining assets from Eastern and Continental, he started the buildup of the Newark, N.J., hub that became the most profitable hub in the U.S. airline industry. He also redesigned airline fares, introducing both low "peanuts" fares and restrictive, non-refundable fares.

Lorenzo also blazed a path that American CEO Doug Parker followed. Lorenzo started in 1972 at a small, cash-squeezed western airline, Texas International, and 14 years later headed the world's biggest airline holding company.

Similarly, in 2001, Parker took over as CEO of America West, a small, cash-squeezed western airline. It took Parker just 12 years -- two years faster than Lorenzo -- to get to the top of American, the world's largest airline. 

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