Texas Air's cash losses prompt safety scrutiny. As money goes, so goes airline operation

The United States government's concern about how Frank Lorenzo and others are running the Texas Air Corporation suggests to aviation experts that the Department of Transportation is finally recognizing the existence of a direct connection between how an airline is run and how safely it operates. ``It's an acknowledgment that there is a relationship between the financial condition of an airline and its ability to operate safely,'' says John O'Brien, a safety expert with the Air Line Pilots Association.

``We believe safety is being compromised by the same managers who don't even know how to spell the word safety,'' contends John Galipault of the Aviation Safety Institute.

While studies on these correlations are inconclusive, says Kenneth Mead, associate director of the General Accounting Office, ``financial troubles are often a precursor to more serious problems.''

In fact, what prompted the investigations by the Transportation Department and the Federal Aviation Administration, besides an organized campaign on behalf of the airline's unions, were the disturbing contents of recent reports filed with the Securities and Exchange Commission by Texas Air and its subsidiaries Continental Airlines, Eastern Airlines, and the remnants of People Express.

Those reports included pressure from a congressional resolution and its 130 sponsors demanding a federal investigation of Texas Air's financial affairs; six pages of litigation; and evidence that Texas Air, which once had huge cash reserves, lost $466 million last year, its biggest loss so far.

Now, as FAA inspectors examine each of Eastern's 267 planes, as well as Continental's 352 aircraft, the DOT inspectors will be combing through Texas Air's financial records.

It looks as if Texas Air ``is in trouble,'' a future passenger quipped to her travel agent when booking a flight the other day, even though she didn't say she would not fly with it.

While the complete ``ramp'' inspections are an infrequent safety checkup, they are considered fairly routine. So is the FAA's $863,000 fine on the carrier for violation of safety rules, an FAA spokeswoman says.

But the DOT's 30-day fitness exam - the first on a major airline since the FAA looked at Pan American World Airways 14 years ago - is not routine. And the scope of the dual investigation - involving the entire holding company as well as its two largest subsidiaries - is unprecedented, according to Transportation Secretary James Burnley. Furthermore, Mr. Burnley announced Sunday, a safety scrutiny would now be done on Continental, after the FAA came up with nearly $1 million of proposed fines on the carrier for safety violations.

Burnley said his department is attempting to determine ``whether [Texas Air and its management] remain fit to provide air transportation.''

``It's very unusual to go after the people that run the company,'' Mr. Galipault says.

Texas Air claims that the investigation is ``founded in an old-fashioned labor dispute,'' adding, however, that it would cooperate fully.

One of the reasons for the Transportation Department action, in fact, was a plan by Texas Air chairman Lorenzo to shift ownership of Eastern's shuttle carrier to a new Texas Air subsidiary. This plan so angered the company's largest union - the 12,000-member International Association of Machinists and Aerospace Workers - that it filed suit against Eastern and Texas Air, alleging the companies' activities violated labor and securities laws. A federal judge then halted Lorenzo's plan on grounds that it violated Eastern's labor agreements.

Burnley wrote in the investigation order that Texas Air's ``financial transactions ... raise questions concerning whether substantial funds and other resources are being diverted from the air carrier subsidiaries. These transactions run the risk of weakening the airline subsidiaries, and might therefore place in question Texas Air's commitment to ensuring that its carriers will retain the financial resources necessary for assuring safe and adequate air transportation.'' Grounding planes unlikely

At worst, the Transportation Department could declare Texas Air's management unfit to run an airline and suspend the company's operating certificate until a major change is made.

But grounding what Lorenzo has built into the biggest airline company outside the noncommunist world would halt too much traffic, analysts say. In addition to Eastern, Continental, and People Express, Texas Air owns Frontier Airlines and several commuter carriers.

That adds up to about 20 percent of the nation's air traffic. Aviation experts believe the US will do whatever it can to avoid cutting off this much service, and use the grounding threat as a negotiating stick instead.

A shutdown ``is very, very, very unlikely,'' agrees Richard Bilotti, a corporate bond analyst at Prudential-Bache Securities.

This could also, however, provide Lorenzo with his own negotiating weapon, analysts acknowledge. But they point out that not only does Lorenzo face pressure from the regulators, Congress, and his employees, he must pay attention to his investors and the public as well.

``Unless something is done to improve the profitability [of its subsidiaries], the flow of investor capital will stop,'' Mr. Bilotti says.

Of these subsidiaries, Continental is particularly weak, having lost half its cash reserves since the beginning of last year. And Eastern, mired in a continuing and bitter labor struggle, has foregone a substantial amount of its liquidity. Altogether, the subsidiaries are in debt about $5.4 billion.

It's not because the carriers themselves don't make money.

``The investigation implies that what Lorenzo is doing is siphoning assets and earnings up into the holding company, and isolating them,'' says Robert Joedicke, an airline analyst at Shearson Lehman Brothers.

At least $50 million a year flows up into Texas Air from its subsidiaries, and last year the company garnered more than $150 million this way.

Mounting pressure from the flying public could prompt changes from Lorenzo as well.

``So many things go wrong on their flights,'' says a travel agent at a large Washington agency; ``70 percent of our business customers will not even fly Continental or Eastern,'' she says.

While Burnley and FAA administrator Allan McArtor stressed that they would have pulled Eastern's flying certificate if they thought its planes unsafe, neither the inspections nor the financial exam will help improve the airlines' sagging reputations, Mr. Joedicke says.

In some cases, people already booked on an Eastern or Continental flight have called to request that their flights be changed. Yet many more, usually frequent fliers, continue to flock to the gates despite the investigations.