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The Grinch steals Christmas dividends at Texas Air

This is the season for airlines to be jolly - profits are peaking along with air fares and holiday travel. But for some investors in Texas Air Corporation, this Christmas has brought only a lump of coal. Texas Air, the nation's largest airline, announced last week that it was omitting dividend payments on all categories of its preferred stock. Some analysts describe the move as a sign of financial strain, while holders of Texas Air's ``junk'' bonds are said to be a bit jittery.

``It may make people nervous, but it is clearly a prudent move,'' says Richard Bilotti, a bond analyst with Prudential Bache Securities. Though cutting dividends only saves Texas Air about $5 million, the move is wise, he says, because the ``future financial strain on the company could vary greatly depending on the scenario.''

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One such scenario is a possible strike at Texas Air's Eastern Airlines subsidiary. Texas Air has prepared for Eastern pilots, machinists, and flight attendants to walk off the job. Though Texas Air has a $700 million war chest and hundreds of extra non-union pilots waiting to fly Eastern planes, the company is nevertheless besieged.

On one hand, Eastern and Continental Airlines, another Texas Air subsidiary, are losing huge amounts of money. On the other, Eastern's unions are trying in court to block the sale of the Eastern Shuttle to Donald Trump, the New York developer.

If the court approves the sale of the shuttle to Mr. Trump, Texas Air chairman Frank Lorenzo will have the green light to sell other pieces of Eastern if he so desires. Mr. Lorenzo has said he wants to operate Eastern, if its labor unions will grant concessions. Otherwise he is willing to divide it into chunks and sell them off.

``It's a lose-lose situation until some kind of solution comes out of this,'' says Marc Klee, a senior vice-president with National Aviation and Technology Corporation, a mutual fund based in New York.

Last month Texas Air reported a third-quarter loss of $114.1 million and a total loss of $494.3 million for the first nine months of the year.

No matter what happens in the short term regarding strikes or court actions, analysts say, the long-run viability of Texas Air will depend on the ability of its management to turn things around at Continental and Eastern.

Eastern continues to lose money for Texas Air, draining $112.9 million in the third quarter alone and $233.7 million for the first nine months of the year. Though Texas Air management has long insisted that high employee costs at Eastern have hindered profitability, the holding company has had trouble with its Continental unit.

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Continental, with the lowest labor costs in the industry, has struggled through 1988. In the third quarter, it made a thin profit of $15.2 million, though it lost $216 million through the first nine months.

Continental has remained a cash drain, with about $200 million being spent to finish the important Terminal C in Newark, N.J. Texas Air has spent millions more to upgrade Continental's computer system. But most of the expense has been spread throughout the organization and includes such items as increasing spare-parts inventories.

Still, many analysts had expected Texas Air managers by now to have finished integrating People Express and Frontier Airlines into Continental.

``Continental's performance has been disappointing,'' Mr. Klee says. ``I am disappointed they haven't made money, particularly in light of a reasonably good industry environment.''

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