CHAPTER TWENTY

As I continued developing my timeline concerning the sale to Texas Air, the related, sad saga of what happened to Mort Ehrlich surfaced.

Borman had been President of Eastern Airlines for approximately eleven years, a tumultuous period when the airline lurched from one period of internal strife and crisis to another. But fairly peaceful, brief interludes occasionally ensued, causing employees to ride an emotional roller coaster. Prior to 1984, top management had squeezed concessions from its workers a number of times, mainly through Borman’s threats to file for Chapter Eleven bankruptcy protection. These difficult years were finally followed by the Employee Involvement and stock plans, during which Eastern experienced financial success and outward harmony. It was under what turned out to be a bogus veil of success that, by early 1985, Borman ordained that since he had led Eastern to its now flourishing position, he would step aside, leaving the day-to-day operations of the airline to a new Eastern President. He made it known that his chosen successor was to be Mort Ehrlich.

Ehrlich commenced his employment with Eastern in July of 1968 as the Director of Economic Planning and by 1985 he had been promoted to Senior Vice President in charge of Planning and Government Affairs, where he was either responsible for, or became involved in, virtually all of the airline’s vital marketing and other related decisions.

A native New Yorker, the businesslike Ehrlich fully understood the inner workings and complexity of Eastern, its strengths and weaknesses. With some trepidation, because I didn’t really know him well, I subsequently interviewed him for this book, hoping to perhaps discover why Borman had turned down our offer from a management perspective. During the genial interview he informed me that, although not personally involved in the labor-related crises, he was well aware of the troubles and conflict they created. As perceived Borman disciple, he privately worried about the laBormanagement friction and the toll it had taken, and was happy to experience the harmony that finally arrived in 1984. Although he embraced the Employee Involvement and stock ownership programs, Ehrlich was also aware that Borman had been forced into instituting them. This caused him some anxiety because they were not the result of good faith. Despite the airline’s excellent balance sheet and outward appearance of success, he realized it would be a challenge to smooth over hard feelings engendered by so many years of in-house discord. He was also wary of the private, contradictory signals emanating from Borman about the employee programs. Negative words were dropped here and there, or sarcastic remarks made “in jest.” Ehrlich believed that additional positive changes were needed in management-labor relations. He privately believed Borman should step down from involvement in the day-to-day operations, as he no longer commanded respect among the rank and file employees, something Borman ultimately confirmed.

Borman had hinted throughout the early months of 1985 that Ehrlich would be his choice to become the next Eastern president. Since Borman was also the Chairman of the Board and had filled many of the positions on the Board with his own people, when he personally confirmed to Ehrlich that he was his hand chosen successor, there was no doubt on the part of both Ehrlich and Eastern’s organized labor groups that he would also be the Board’s choice. Ehrlich also believed that expansion was the key to Eastern’s long-term success. So, it was with growth in mind that Ehrlich began making inroads with the various union heads. He held a number of meetings to discuss ways in which labor and management might work in partnership to ensure continued stability and growth, always clearing these meetings in advance with Borman. Knowing Borman’s concern for his public persona, Ehrlich was careful never to blame him for past problems. Ehrlich didn’t want employees to live in the past, but rather to look to a positive future and work with new top management in making Eastern the finest airline in America. He embraced the employee programs and, as the new Eastern president, would also be committed to providing the traveling public with safe and reliable transportation, without neglecting employees’ welfare. He wanted Eastern to flourish and its future success would be his legacy.

The Eastern Board of Directors was scheduled to meet in May of 1985 to select the new president. The day before this meeting, Borman again confirmed to Ehrlich that he was to be his heir, so Ehrlich invited his entire family to Miami for a celebration of this lifelong ambition. His secretaries planned a small office party, including a cake inscribed, “To the New Eastern President.”

Just prior to the Board meeting, however, Borman hinted to Ehrlich that his nomination might be “in trouble,” mentioning that the Board “had reservations” about him. During our interview, Ehrlich informed me, “Only much later, after I privately discussed my promotion with several Board Members, did I discover that Borman had been deceiving me all along.”

When the Board meeting convened, out of protocol as an inside Director and due to his impending nomination, Ehrlich did not attend. He wasn’t elected, however, and Borman didn’t even nominate him! The only position of consequence filled that day was that of Executive Vice President, putting a virtual unknown, Joe Leonard, into it.

Although Ehrlich continued his employment at Eastern until July of 1985, when he officially resigned and went to work at TWA, he never returned to his office after that painful day. His and Borman’s paths subsequently crossed twice, but no explanation of what happened was ever offered nor requested. A short time later, the inexperienced Leonard was appointed president.

When I asked Ehrlich if he knew why Borman had purposely misled him, he replied, “I don’t know for certain, but maybe it was because I had more support from labor than he did? Maybe he thought I would attempt to push him out once I was president? But I would not have. He knew this because I personally told him so.”

I wondered why Borman would deceive Ehrlich into believing that he would be the next president and then pull the rug out from under him. Borman could simply have told him that he wasn’t his choice, unless this was part of some larger scheme designed by Borman to achieve another goal, one that only he had knowledge of. So I asked Ehrlich if he and Borman were friends or ever socialized outside the airline, perhaps with their families, figuring Borman might be more honest with him in an informal setting. He looked at me incredulously and stated, “George, I’m Jewish. Borman would never socialize with a Jew.” Ironically, Borman had previously received a “Flame of Truth Award” from a Jewish charitable fund for higher education. I never realized that Borman apparently carried around with him a well hidden bagful of prejudices, not only against organized labor but others as well.

What did happen was that Eastern’s labor leaders dropped their guard, believing that the trusted and respected Ehrlich would be taking over. It was, however, but a short time after Leonard’s appointment as president that other mysterious and inexplicable events began happening.

My timeline showed that almost simultaneous with Ehrlich’s departure, almost overnight, the airline began bleeding staggering amounts that made all the prior losses look like peanuts—and allegedly no one understood why. By the spring of 1985 all the employee programs were in place and, it would seem, working well. The passenger loads were heavy. There had been no downturn in the economy, and no large up-tick in fuel prices. The few fare wars out there had been started by Eastern, “in order to regain or retain market share.” The airline was providing excellent service and its on-time performance remained top-notch. Yet huge monetary losses suddenly surfaced.

I got a firsthand demonstration of where some of the money was going while flying an Airbus jumbo jet on a New York to Miami flight. We were at the gate at LaGuardia and, due to a heavy passenger load, were running about fifteen minutes behind schedule, time we could easily make up because of favorable tailwinds. Inexplicably, a number of ground supervisors boarded and distributed refund checks to the passengers. In many cases, these checks were for amounts greater than the customers had paid for the ticket! As a result, the passengers wound up getting a free flight to Miami and some even made money in the process. I had heard of main- taining good public relations, but this was ridiculous. I had attempted to determine why this was happening, but when I inquired of the people handing out the checks, they didn’t know, simply stating they were “just following orders.” One flight might not seem like a lot, but if you multiply this by several hundred or thousand per day, over an extended period of time, the numbers would be staggering. During the timeframe coinciding with Ehrlich’s departure and Leonard’s appointment—the last half of 1985—Eastern went from having its most financially successful year, ever, to incurring tremendous losses, supposedly once again teetering on the verge of bankruptcy; this, according to Borman and Leonard.

However, the true reason behind the huge losses was far different. In subsequent, sworn testimony before the United States Senate Committee on Banking, Housing and Urban Affairs, then-IAM leader Bryan described the cause of the bulk of them. Excerpts from his sworn testimony follow:

In the first seven consecutive months of the one-year period preceding the sale of Eastern Air Lines, the company showed remarkable financial results, with operating income of almost $300 million, far exceeding any prior performance by the company. Unfortunately this prosperous period came to an abrupt end as Eastern’s management implemented a plan that led to the demise of Eastern as an independent company, delivering it into the waiting arms of a corporate raider.

Only five months preceding the sale, management, without any explanation, implemented a new operating plan which severely cut back East-em’s utilization of its assets. They reduced their planned block hours of flying by 5 percent and cancelled another 3 percent, which translated into an annualized reduction in revenue of $400 million. This was only one of the many negative actions which led to the immediate hemorrhaging (sic) of the profits produced through the preceding seven months.

Before these negative management decisions were disclosed either to the Board of Directors or the unions, the IAM, in an effort to give East-em an additional competitive edge in the industry, proposed an agreement to reduce the top rates of pay in our contract by 5 percent. The IAM members ratified this 5 percent pay reduction on October 17.

Throughout much of the autumn of 1985, the other Eastern Board members, and Borman, also professed not to understand why the company was losing so much money so quickly. It was not until their October 1985 meeting that Bryan finally discovered the block hours, the total amount of flying performed by the airline, had been secretly cut by eight percent, with Eastern’s gross revenue slashed by an almost comparable amount.

Although there was a tremendous reduction in revenue caused by these block hour cuts, the airline’s fixed costs remained the same, meaning the expenditure to put one seat in the air for one mile, the Available Seat Mile, or ASM cost, was substantially raised. By then, the latest labor crises were beginning to unfold. Just like the bizarre ticket refunding I witnessed, these block-hour reductions in flying translated into huge, intentional losses.

To illustrate the actual net effect of these cutbacks, by July of 1985 Eastern had a net income of $168 million thus far for that year. For the remaining five months, with the block hour reductions in place, the projected losses amounted to approximately $165 million. Put another way, the losses from these cancelled hours equated to almost the exact dollar amount of earnings for the entire year. This meant, at best, 1985 would turn out to be a breakeven year for the airline. But the crucial question remained: why was this done?

Bryan’s other comments to the same Senate Committee about the reduction in flying are also pertinent. He quoted a section from a report he had presented to the Eastern Board on October 22, 1985, before anyone, including Bryan, fully grasped what was happening and, more impor-tantly, why.

This report stated in part:

. . . As a member of the Financial Committee, I believe that the Board of Directors has a fiduciary obligation to determine how this impending disaster occurred—especially the conscious planning of significant under-fly during the 4th quarter and all of 1986. I also believe the Board should thoroughly explore the failure of the projection and planning process at Eastern. From what the IAM has been able to learn, it appears that there was a very serious breakdown in communications and coordination within EAL. While the Board never saw Forecast 1*, and has only been presented with Forecast 2* today, we understand that departments within the Company were producing “informal” forecasts which were in substantial variance to the information the Board was being provided with. It seems that there were actually different information projections, depending on the department involved, and that the estimates were not evaluated in a comprehensive manner. They were most certainly not reported to this Board. We must take steps to insure that this kind of “surprise” never occurs again. . .

Bryan then further testified:

. . . As the management-induced [Emphasis added] crisis was unfolding, on December 4, 1985, and again on December 10, Frank Borman, as part of his efforts to find a buyer for EAL, secretly met with Frank Lorenzo . . .

Bryan’s sworn testimony clearly showed the financial crisis which ultimately led to handing the airline over to Lorenzo’s Texas Air had been intentionally created and that Borman had been secretly meeting with Lorenzo months before the culmination of the sale. Bryan had even gone so far as to send a letter to middle-level Eastern managers asking them to support his efforts, “. . . to reverse the suicidal course of action of Easterns current top management.” Unfortunately, Bryan’s pleas fell upon deaf ears and he was once again attacked by Borman.

Despite my limited experience in the area, I felt that cuts of this magnitude would be made only in the event of a severe national economic downturn or curtailments that had been forced on the airline for reasons such as the fuel rationing that took place during the 1970s. Since I’d never held a management position, I asked Mort Ehrlich if this assessment was correct. As the now-former Eastern Senior Vice President of Planning, he would have been the person responsible for scheduling and implementing the total amount of annual block hours scheduled to be flown. This was his area of expertise. He had devised a sophisticated computer-based system to accurately predict levels of flying based upon advanced bookings on selected flight segments. Under Ehrlich’s procedure, predictions could be made far enough in advance to shift different sized aircraft around on various routes, either adding or taking seats away, depending on the projected demand, which was based upon certain key indicators. Since the planning for cuts in service, the magnitude of which took place in mid-1985, would normally be made many months before they were actually implemented, I thought perhaps they were made while he was still in charge of that department.

I first asked Ehrlich why he believed Borman had misled him on his promotion. He slumped a bit in his chair and his reply was slow in coming. “Until this day I don’t fully understand.” I then informed him about the eight-percent cut in the block hour flying. He looked at me incredulously, and confirmed that such draconian cutbacks would only be made in the event of a severe downturn in the economy or a fuel shortage. A pensive Ehrlich next added, “Perhaps now, for the very first time, I grasp why Borman did what he did to me. If I was still working there, I would never have allowed those reductions. In 1985, business was very good and all the indicators pointed to it remaining so. The cuts in flying were tantamount to economic suicide.” After a moment of silence he added, “It’s as though what happened was done to purposely bankrupt the airline. Reductions of this magnitude meant huge losses would be guaranteed,” he confirmed. “Whoever was responsible for this knew full well Eastern would be bankrupt in a very short period, probably within six months, but maybe even sooner. Someone set it up to fail.”

I believe at that point Mort Ehrlich—the honest guy who wanted only to run the best airline in the world, and who could have—understood for the first time why he was lied to and not promoted. Not only had the airline’s collapse been orchestrated, but he had been forced out in order to facilitate that collapse.

As it turned out, from many different perspectives, there were quite compelling reasons for the airline to be disposed of as quickly as possible.

*Note: “Forecast 1” and “Forecast 2” are Eastern’s traditional early and mid-year predictions for the current year’s results.