#2 Important message to AL AA employees

Bob H

Member
Mar 8, 2003
15
0
As I mentioned a few days ago when I came on board USa.. There is a grass roots effort to have an **ALTERNATIVE** option available for the AA employees IN CASE and after AA files BK.
Captain Bill Haug (SFO) has been very involved with the ESOP/EO (employee ownership) concept for several years.
The following is a recount from Bill regarding a presentation made to the LAX pilots a week ago.
It is rather long but I hope you find it informative and worth the time. I have edited out non-applicable comments.
I hope that I can encourage each of you to seriously consider this as an ALTERNATIVE and AFTER the (potential) AA BK.
If you believe there can be additional interest, please share this info with your fellow employees and let your union leadership know you want this ESOP/EO concept explored so that it CAN be ready to present to the (potential) creditor''s committee, BK judge and AMR BOD.
I remind you that the ESOP/EO we are looking at is NOTHING like the UAL ESOP was.
I will continue to post additional information under this or other similar Information Threads.
Thanks you very much for your time.
Bob H
Captain Bill Haug''s comments follow;

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Here is my version of the LAX presentation by Chris Mackin, founder of Ownership Asscociates (www.ownershipassociates.com), and Dick May, President and founder of Valuemetrics, Chicago. (www.valuemetrics.com).
Our guests were on a tight schedule. They arrived at 10:30 a.m. and went on at 11:00 a.m.
Chris and Dick were accompanied by another of Chris Mackin’s associates, Doug Waterman, and another guest arrived later, Joel Fadem of Potomac Consulting LLC (www.potomacconsulting.com), who is doing some teaching at UCLA in labor relations and has for the past several years helped negotiate union agreements with California public works employees.
One reason our guests were on a tight schedule is that they had a firm appointment early in the afternoon to conduct an informal, preliminary meeting with a financing source interested in an employee buyout of American Airlines. In order to make this appointment on time, they had to leave the LAX union meeting no later than 12:30 p.m. … which they did, literally answering questions as they gathered their stuff and headed out the door. Presentation ran from 11 am to 12 pm, with a half hour of questions and “floor speechesâ€￾.
I started out by quickly introducing Chris and Dick. Their resumes are available at the respective websites, but I will say here that Chris has 25 years of experience in the employee ownership field… which takes him almost all the way back to the original ESOP legislation fathered by Louis Kelso in 1974. Chris was educated at Georgetown and Harvard Universities, with a PhD in 1984 from Harvard. Ownership Associates has been in business for over 15 years, and for 2 years was a consultant to the UAL ESOP.
Dick May founded Valuemetrics in 1981. He has an undergraduate management degree from Purdue University, and a Masters from MIT’s Sloan School of Management. Valuemetrics has done over a hundred deals like the one they propose to do for American Airlines and its employees. A recent one involved the research arm of the Illinois Institute of Technology, which was bought out by its employees and managers with the help of Valuemetrics. This is an enterprise with operations scattered around the world (35 world wide offices
) and $135 Million in revenues. The new company is named Alion. You can read about it at www.alionscience.com. This deal was just recently completed in December 2002.
American Airlines will be reorganized and recapitalized either inside or outside of bankruptcy. The “negotiationsâ€￾ or “collaborative processâ€￾ that labor is undergoing presently with AMR is a first step in that.
Although it is possible that an employee buyout as proposed by Dick May and Chris Mackin could take place prior to bankruptcy, it is much more likely that it would occur after Chapter 11 is declared. This is because AMR management is unlikely to entertain such pre-BK negotiations, and the AMR BOD, though they have a fiduciary responsibility to listen to such offers as part of their duty to maximize shareholder value, would likely be a “tough sellâ€￾
. We would also face time constraints that would not be as severe under the BK process.
So, it is most likely that this proposal of an ESOP at American Airlines represents a “Plan Bâ€￾ … a plan for action when BK occurs that gives the employees of AMR something else to look forward to besides the process that UAL and U employees are enduring.
At the conclusion of my introducing Chris Mackin, I offered this observation
: the entire equity of AMR at this point is only worth about $400 million dollars. (The UAL employees spent $5 Billion for their partial stake, and the currency was givebacks from future wages and benefits … something that poisoned the well).
If AA employees were to purchase all of the equity of AMR today for $10 per share, the total price tag would be $1.5 Billion. Given a total of 94,000 AA and Eagle employees, this represents an “averageâ€￾ investment of $16,000 per employee.
As Chris Mackin said a few moments later, for an investment about the same size as the price of a “bad Chevroletâ€￾, you can own the company and have some influence over your destiny and a return on your investment. That is, if AMR is turned around and becomes profitable again, you will receive a “snapbackâ€￾ … your portion of the 100% employee-allocated net profits of American Airlines.
I introduced Chris Mackin as a great friend of labor, because he is just that. It was obvious from the time we of the ESOP Committee first met Chris at the NCEO Conference (www.nceo.org) in Chicago in April 2000 that he is clearly dedicating his life to the idea that employees in enterprises … the people who actually produce the wealth with their labors … deserve to have a say in how the business is operated. The best and most congruent way to achieve this within our capitalistic system is for those workers to be owners or part owners.
(To get a feel for Chris’ dedication to this ideal, visit http://www.sweatx.coop/stand/index.html.
Chris is currently CEO of this L.A.-based unionized textile company, but continues his Ownership Associates consulting work while serving in this capacity.)
Chris led off with a short discussion of the history of the labor movement in the United States to provide a philosophical underpinning to the presentation. His contention is that the very first labor movements in the 19th century focused on providing ways to make the workers part owners in their enterprises. William Sylvis, a 19th century labor leader who served as President of the pre-AFL-CIO National Labor Union called employee ownership the most practical and desirable alternative to “the wages system.â€￾ The later 20th century movement arose from the first waves of rural people … farmers, craftsmen, artisans … who were offered the first “wageâ€￾ arrangements in the factories of people such as Rockefeller, Ford, and Carnegie.
I will post a published article by Chris, “Employee Ownership in America: A Primer for Industrial Relationsâ€￾, from the December, 2001 issue of Perspectives on Work, a journal of the Industrial Relations Research Association, as the next post in this thread. This will give you a flavor of what Chris talked about before introducing Dick May, plus more background.
Chris spoke in some detail about how the UAL ESOP went bad. His comments here are best summarized in “United it was Notâ€￾.
Chris and Dick both made it very clear from the outset that their entire approach and philosophy stems from the following central idea:
The pilots and other unionized and non-unionized labor groups have the ability to construct and conduct their affairs in a reasonable and rational fashion. They do, indeed, have the ability to sit down around the table as owners and come to reasonable compromises, and to mutually determine the best ways to run the business and their own affairs.
This is the starting point, and nothing can progress any further without believing this and making it work.
Dick May …
Dick presented a PPT which he used selectively (time being somewhat limited)
, and hit the high points of his proposal of the entire employee group (all unions, all non-union employees) purchasing AMR using an ESOP + Subchapter S Corporation structure.
Here, in bullet format, are Dick’s most important points:
1. We CAN do this. He has done it over 100 times already with smaller companies. It will not be without risks, it will not necessarily be easy, but it CAN be done, and the biggest hurdle we face is bringing ourselves to believe this. As with many things in life, the primary obstacle is a mental one.
2. An ESOP + Subchapter S deal is THE best financing that is available to anyone, anywhere … bar none. Since this option is only available to the employees of a company, we the employees of American Airlines have at our disposal something that existing management and shareholders of AMR do NOT have … the cheapest and best financing possible, without question. We can make a much better financing deal coming out of BK than anyone else can possibly offer us. This gives us an indisputable edge.
3. The reasons ESOP + Subchapter S offer the best financing are simple, and have their basis in federal law and federal tax code.
First, ESOP debt is the only debt that, when paid back, allows for deductibility of principal as well as interest.
Second, federal law says that Sub S companies that are 100% owned by their employees pay no income tax. The benefits of not having to pay any federal income tax at all during profitable years is immense, and cannot be matched by any other more conventional financing.
4. Because of these financing advantages, an employee-owned ESOP + Sub S American Airlines can support much more debt than a conventionally financed one. Or, to put it another way, for a given level of debt and a given assumed return on investment, fewer pay & benefit cuts and furloughs might be required. Or, for a given level of debt, and a given level of cuts, a higher rate of after-tax return is achievable.
This is NOT to say that pain and sacrifice will not be required in the initial years of an ESOP + Sub S buyout. Sacrifices and pain will be necessary, but the eventual returns and profits will accrue to the 100% owner-employees.
5. Did I mention that under an ESOP + Sub S structure, 100% of future American Airlines profits accrue to the employees’ ESOP retirement accounts? This is the “ultimate snapbackâ€￾.
6. The ultimate result of having a corporation that is financed very efficiently through an ESOP and which generates much higher after-tax return on investment than a conventional corporation is a company that in the long run is WORTH MORE. Did I mention that this ultimate value would accrue 100% to the employee owners of American Airlines?
7. It is envisioned that AMR employees would NOT finance the purchase of AMR out of future wages and benefits, as UAL employees did. Instead, an actual securities offering would be conducted, and each individual AMR employee would choose how much of his or her 401k funds or B Plan Funds they would like to invest in “New AAâ€￾ ESOP Stock. Each individual employee would decide how much he or she would like to invest. Dick May pointed out that the 401k and B-Plan assets of AMR employees and pilots dwarfs the total equity value of AMR currently.
AMR’s current stock market equity value is only $400 million, and the B Fund assets alone are over $3 Billion.
8. A minimum total dollar amount of equity investment would be required for the deal to go through. That is, a minimum total equity investment from the employees would be necessary to enable the deal, and would be a precondition for other debt or mezzanine financing sources.
9. Upon completion of the offering and successful accomplishment of the deal, a new Board of Directors of AMR would be constituted, and new management selected. Work would begin on a refined business plan. [Side note: Chris Mackin has already spoken with a former airline top manager who would be interested as a potential CEO of an employee-owned AMR. Some pilots have emailed me privately suggesting Bill Compton, formerly of TWA, as a potential member of “New AAâ€￾ top management.]
10. Governance: 100% employee ownership does not mean that the employees manage the company. It does not mean that employees have a majority vote on the Board of Directors. There are still separate entities of management, labor, and outside director representatives on the BOD. Chris Mackin said governance is a complex issue that is his bailiwick, and he has an entire separate PPT presentation on that issue alone that we did not have time to get into.
11. Dick May stated that if AMR (all or part) is purchased by an outside entity before or during BK, the purchaser will be a “financialâ€￾ one and not a “strategicâ€￾ one. That is, a strategic purchase would involve another airline buying AMR. This is highly unlikely; since AMR is the world’s largest airline a strategic purchase would trigger anti-trust problems. Therefore the purchaser will be a financial entity. Dick’s implication: since The Employees of American Airlines can offer the best financing, why shouldn’t The Employees be the financial purchasers? To this I would add
: since the road to recovery, solvency, and survival BY PRESENT MANAGEMENT
’S ADMISSION goes through the employees of AA, why shouldn’t we just do the deal ourselves? After all, we can obtain better financial terms on our own than Don Carty can. We will be much more amenable, I believe, to the idea of COOPERATING WITH OURSELVES than with the current management team.
There were many questions and comments from the floor. There was one speech from the floor and several private comments to me later, that pilots did not realize that we could do a deal “different from Unitedâ€￾ and that they had not understood exactly how UAL went wrong. They were very positive toward the ideas that Dick May and Chris Mackin presented.
There were one or two negative comments.
One pilot astutely observed that UPS created many many multi-millionaires in the ranks of its employees when it went public, and the same might be possible with a private ESOP-owned AMR if it were to go public again later on.
One question from the floor asked, “Isn’t it too late for us to go down this path? How long does the process take?â€￾ Dick May’s response was that the most time-consuming part of the process is the securities offering to the employees, which takes 60 or 70 days. I queried him if this process could take place DURING bankruptcy, and he said yes.
My take is that it is NOT too late to go down this path.
A few questions I would characterize as a form of “throwing railroad ties in front of the trainâ€￾… “This can’t be done with a company this size.â€￾ “This can’t be done … you’ve never worked with pilots before
.â€￾ “What if ? ….â€￾
I don’t remember the exact words Dick May used to answer these concerns, other than the fact that he said “You CAN do this.â€￾ My own thought is one of my favorite John Wooden maxims: “The more concerned we become over the things we CAN’T control, the less we will do with the things we CAN control.â€￾
I believe this is the crucial realization that we must have as AA pilots … we cannot worry about the things we can’t control. We can’t control the fact that Don Carty is not interested in changing the AA culture. We can’t control the fact that he is not interested in making employees partners and part owners in the enterprise. We can’t control the fact that his attitude seems to be “take it, or I’ll take it from you in bankruptcy.â€￾
American Airlines employees have the ability to control their own destiny in bankruptcy. We can obtain by ourselves, from ourselves (with the aid of advantageous federal law governing employee ownership), the BEST possible financing available for our ailing enterprise. In the process, we can make up for some of the egregious financial and capital allocation errors that Don Carty has made over the past several years, and in the process turn the consequences back on him and on his management team and Board of Directors. Should we desire, should we be willing to dream and try, we can own this company, install our own governance, our own BOD, and a new management team … NOT under our control, but most definitely more amenable to our desires as 100% employee owners.
The time to do this is now. The time to stop worrying about things we cannot control is also now.
I am the “clearing houseâ€￾ for any questions any of you might have for Chris Mackin, Dick May, or Corey Rosen (head of the NCEO, who is helping me with some governance questions).
I welcome all of your questions and comments, either public on this forum, or private via email or telephone 775-827-9144 (home) or 775-250-5970 (cell).
Any misstatements or errors in this post are most certainly mine, and not Dick May’s or Chris Mackin’s.
I will leave you with a couple of thoughts …
1. One Airline is a goal we all desire, if it can be attained in a form acceptable to all parties. Do you think such a goal is more attainable under the structure proposed above, or in negotiations with Don Carty?
2. Draconian cuts will be required to achieve survival and solvency for our company. Would you rather “giveâ€￾ to yourself as a 100% owner of the enterprise, with the prospect of a payback down the road (the “ultimate snapbackâ€￾), or hope for whatever Don Carty will give you at the bargaining table, or the BK court will give to you after imposition of Section 1113?
3. Financing this bloated and debt-laden enterprise will be expensive. Shouldn’t we use the absolutely most efficient form of financing possible, so that cuts ELSEWHERE in the enterprise (labor, wages & benefits, etc.) can be minimized, and/or rate of return maximized?
Final comment …
Cervantes said, “The journey is better than the inn.â€￾ There are very few AA pilots who would admit today that they have been striving for American Airlines for all these years because they enjoy the “journeyâ€￾. I believe all of us know fellow pilots who are “gutting it outâ€￾ just to make it to the “innâ€￾ …
It is time for us to do something about the quality of the journey AND the solvency of the inn. Don Carty compressed a lot of air 5 years ago when he took over American Airlines, talking about “Building a Better Place to Workâ€￾. Instead, American has continued to decline as a place to work, and his disastrous decisions now leave our once-proud company in a terribly imperiled state.
It is time for us to take hold of our destinies, to fix the quality of life and culture problems at American, and to ensure the soundness and integrity of the “innâ€￾ that we hope to inhabit both during and at the ends of our careers.
Regards,
Bill
 
OP
B

Bob H

Member
Mar 8, 2003
15
0
The following contains specific info on the failed UAL ESOP that you may not have had insight to.

Bob H

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United It Was Not

by Christopher Mackin

The filing for bankruptcy of United Airlines ranks 8th out of the top ten bankruptcies on record since April of 1987. United's filing lacks the audacity of WorldCom (# 1) and the mendacity of Enron (# 2). It is not however without its own distinct charms.

Perhaps the most talked about distinction of the United Airlines story is the fact that it took place at a company that was ostensibly owned by its workers through an ESOP, or Employee Stock Ownership Plan. So instead of revelations about expensive shower curtains or images of finely dressed executives in handcuffs doing the "perp" walk for the television cameras, the opinion pages have been filled with admonitions concerning the grave error that United symbolizes. This is what happens, we are told, when one lets the "hired help" inside the Boardroom.

United Airlines is thoroughly unlike most of the 11,000 ESOP companies that dot the landscape of Middle America. There is nevertheless a cautionary tale to be told about how employee ownership was mismanaged at United Airlines. It is a story that could prove useful, not only for other worthwhile efforts at workplace participation but also for similar efforts that may materialize sooner than might be expected in the airline industry. Back during its salad days in the mid 1990s my consulting firm played a modest role in stoking the ownership fires at United. As will become clear, this was an assignment that lacked a crucial ingredient – an interested customer.

If proportionality matters, it must be stated at the outset that the story of United's failure relies as much, if not more, upon a generic set of flawed business assumptions shared by each of the major airlines than it does upon the alleged foibles of employee ownership. Those flaws that spill over the headlines today left these airlines vulnerable to competition from upstart low cost airlines. They began to suffer as far back as early 2000 from a weakening economy and a gradual loss of high-end business travelers seduced by lower fares. Those factors were compounded by the effect September 11 had on air travel in general. As a result, each of the major airlines has been stripped of their respective fig leaves. It just so happens that United has an unusual leaf.

The official public launch of the United ESOP in July of 1994 was an event almost as newsworthy as recent reporting has been about its demise. Television ads urged the public to "Fly Our Friendly Skies." The image portrayed was that of 85,000 conscientious employee-owners who had thought it over and decided to throw their lot in with the ranks of America's self-made entrepreneurial heroes. The truth, as we shall see, was a bit more complex.

Early commentators were predictably divided. Lee Iacooca, a prime beneficiary while at the helm of Chrysler Motors when it received one of the largest government bailouts in history that happened to include a substantial ESOP stake for union workers, as well as a Board seat, was dismissive. He told the Los Angeles Times that "it would never work." Speaking for a hopeful Clinton administration, then Secretary of Labor Robert Reich hailed the news of the buy-out as an "historic" event. Somewhat surprisingly, the Dean of American anti-utopian thinking, George Will, weighed in on the side of the United employee buy-out. He wrote that the United experiment heralded "a promising new chapter in the history of capitalism [that could] diminish some of the forms of social strife that have fueled modern liberalism.


Behind the hoopla and early opinion however, was a challenging set of facts. In 1994 when the United ESOP deal was launched, union and non-union employees sacrificed a combined $4.88 Billion dollars of their compensation and benefits to "purchase" a majority stake at United. They did so "voluntarily" – the unions voted for it – but under duress. In the early 1990s Southwest Airlines, the first of the low cost innovators, had begun the revolution that they and their imitators have continued to successfully wage to this day. United was the first major airline that was forced to meet this model head on in the marketplace. It had to adapt, particularly on the West coast, or face ruin.

Though the competitive facts were clear, the United "solution" was surprising. Perhaps most surprising of all was where it originated. Though most commentators mistake this important fact, the employee ownership solution at United did not originate with management. It was conceived in the late 1980s under different economic circumstances by the pilots union, the Air Line Pilots Association (ALPA). It was finally implemented in 1994 at a time when there was an indisputable need for a restructuring of its labor contracts. Rather than have that difficult fate shoved down their throats, the pilots, and eventually the machinists union, the International Association of Machinists (IAM), decided to take the initiative. Employee ownership was the tool they chose to secure something material – in this case a 55% equity stake -- in return for their dramatic sacrifices.

Employee ownership at United was never, however, solely about economics. It was also about voice. The idea of employee ownership at the airline first arose in the wake of the 1985 pilots union strike. Once that strike was settled, the pilots union leadership began to take a longer view. An early inspiration for that view came from none other than F. Lee Bailey, the famed defense lawyer, amateur pilot and, at least in this case, union sympathizer. During the strike Bailey had occasionally been invited to address nationwide teleconference gatherings of rank and file pilots to help maintain morale.

At one such meeting after the strike was settled, Bailey issued a challenge to the pilots. The complaints he had heard during the strike and since the settlement had a common source – mistrust of United's management team. Unlike other groups of unionized employees, Bailey argued that well-compensated pilots had it within their power to take charge of their work lives. If during future negotiations pilots were willing to part with a percentage of their compensation and benefits, those "concessions" could be traded for stock in United. Sufficiently large concessions could translate into a majority stake. Majority shareholders would be represented on the corporation's Board of Directors and would have the power to replace management.

Sitting in the audience during Bailey's speech was the chairman of the ALPA Strike Committee, Captain Rick Dubinsky. It was Dubinsky and his allies who took the ownership idea to heart and set off on a seven-year quest to implement it. The 1994 ESOP was actually the fourth attempt to bring employee ownership to United. As indicated, the immediate circumstances surrounding the purchase were not propitious. There was little doubt that, with the shadow of Southwest Airlines looming, dramatic wage concessions were going to be necessary. The question quickly became, what kinds of conditions and what kinds of new powers would the unions exact in return for those concessions?

Meanwhile a relatively new and equally unpopular management team lead by Stephen Wolf sent an unambiguous message by firing 5,000 machinist union members with the stroke of a pen. Until that point in time the machinists union had been critics of an ownership strategy. With 5,000 members now lost, the machinists became converts. The traditional tools of collective bargaining were not going to get those jobs back. Nor could the traditional tools of collective bargaining deter management from carrying out its radical downsizing agenda. After a period of negotiation with the pilots the machinists signed on to the ownership plan.

United's flight attendants union, the Association of Flight Attendants (AFA), was also an early participant in ownership discussions. The flight attendants union withdrawal from the plan was later widely cited as a fatal flaw obstructing efforts to create a new ownership culture at United. Flight attendants' objections to participating in the ownership plan revolved around two issues. First, they believed that, as a group, relatively low paid flight attendants were least able to afford the kinds of concessions that would be necessary for them to join the party.

Second, they were discouraged when the union selected management team in waiting, Jerry Greenwald and John Edwardson, sent signals that they would not accede to the flight attendants' position in a long brewing controversy concerning seniority and the company's requirement that overseas flights be staffed with more foreign language speaking cabin crews. Unhappy with the position of the new management team, seeing that the pilots and machinists were likely to go forward without them and that the concessions made by those groups could help stabilize the company, the flight attendants withdrew from the talks. Their contract would remain in place, undisturbed.

Indeed the $4.88 Billion in concessions offered by the pilots and machinists unions alone was enough to persuade United's existing shareholders to part with 55% of their equity. The managerial coup d'etat that would accompany the transition was deliberately downplayed so as not to excite the stock market or the public. Stephen Wolf exited quietly with a handsome severance package. Messr's. Greenwald and Edwardson took center stage. For the first time in the history of American industrial relations, labor had bought the rights to install a new management team at a major U.S. corporation.

Stepping out into the early years of (what turned out to be) a record setting decade long economic expansion in 1994, buoyed by the ESOP induced lower labor costs and the beginning of a bull market on Wall Street, the United model looked promising. Stock prices grew steadily, turnover was down and so was absenteeism. In early 1996 a beaming Jerry Greenwald looked out at the world from the cover of Business Week under the title "United We Own." He was surrounded by a group of happy workers. All seemed well.

What would only become clear two to three years later, however, was the degree to which employee ownership had become an empty slogan at United with little if any policy substance to back it up. Though other, larger factors eventually contributed more to United's plight than the neglect of employee ownership, three related factors can be identified that undermined a notion that once held such promise:

**First, the "owners" fired their architect. The Master Executive Council of the Air Line Pilots Association, the de-facto Board of Directors of the pilots union at United, did what unions often do. They voted out their leaders. Only a few weeks into the life of the United ESOP, the plan's visionary founders, Roger Hall and Rick Dubinsky were sent packing. Interpretations as to why vary. It is safe to say however that the 1994 vote within the pilot group to approve the 24% wage and benefit concessions that it cost to adopt the ESOP was a close and controversial one.

As a result, alternative leaders were standing at the ready. Subsequent pilot union regimes chose not to be openly hostile toward the ESOP. Nor, however, did they exert much effort to
"unpack" the potential of the ownership idea. Like all new political administrations they had their own priorities. Instead of employee ownership, the next new big thing for them would be
"interest-based bargaining" -- a high-minded approach to contract negotiations where participants talk together before they bargain, revealing the interests underlying their respective bargaining positions. Like some kind of fateful intra-Christian rivalry, the insurgent, interest-based pilot leaders, metaphorically clothed as Franciscans, trumped Dubinsky's ESOP Jesuits.

Meanwhile, the management team of Greenwald and Edwardson waited patiently for their labor patrons to weigh in on how to follow through on the ESOP dream. No sound would be forthcoming. The chief institutional sponsors of the ownership idea, the pilots, had moved on. The machinists, who in the late 1990s actually began to step up to the plate with their own rank and file inspired "active ownership committee," were distracted in those early, formative years by the threat of a raid from a rival union. Even though they were founding partners of the United ESOP, they contributed little to the early discussion of what to make of employee ownership. The flight attendants, by their own choice, watched from the sidelines.

**Second, over time ESOP critics in management prospered. Then CEO Jerry Greenwald and President John Edwardson at first gamely addressed the vacuum in leadership caused by the ouster of the pilots union's ESOP visionaries. An early spurt of energy involving cross-functional "task teams" brought pilots, machinists, non-union managers and even "non-owner" flight attendants into new conversations about how to solve business problems. The idea of employee ownership was used to help motivate these conversations . Still, the idea of employee ownership lacked a strong institutional constituency.

Meanwhile, a cluster of "old guard" management officials who openly criticized the original move to employee ownership gained strength. Marketing was the first casualty of these politics. The Chicago based Leo Burnett advertising agency, whose original television ads featured the Fly Our Friendly Skies message, was replaced by a Minneapolis agency that counseled against stressing ownership in favor of an obtuse, trance-inducing campaign called
"United Rising." To say that this new ad campaign was a failure in the marketplace would be an understatement. Even more significant was the early selection of the new Vice President of
"People," once known as the Vice President of Human Resources.

By virtue of their role on the United Board of Directors, labor, in particular the pilots union, exercised extraordinary influence over this pick. Their choice, to no ones surprise, was a champion, in fact the "guru" of the then ascendant theology of interest-based bargaining . In a meeting in his office a few months after his appointment, this new official congratulated this author on his work assisting with the spread of the ownership idea at United. He then proceeded to advise me that he personally was not enthusiastic about employee ownership. He recommended an article on the topic he had authored while teaching at Baylor University. I sat across from the newly installed Vice President of the People Division of the largest employee-owned company in history who, incredibly, was making no secret of his antipathy toward employee ownership. Not a good omen. I wondered what kind of meal might be served on the flight home.

**Third, occupational silos defeated dreams of ownership induced harmony. There are not many industries that are more occupationally segregated than the airline industry. Pilots, mechanics, ground personnel and flight attendants, over 85,000 in total at United, travel in parallel universes loyal primarily to their individual craft. The fact that United's flight attendants withdrew from the ESOP at its inception was a huge setback to the idea of employee ownership at the airline. As the employee group with the greatest exposure to customers, flight attendants could have helped rally the traveling public to a new message of service from an airline with a difference -- employees with an ownership stake. It did not happen. United did not "rise." Solidarity among the airline's three major union groups was lacking from the start. Had further efforts been made early on to institutionalize a "coalition" among those groups, a solution may have presented itself to get the flight attendants on board. Three union representatives on the Board of Directors would have encouraged unity. Instead there was dissension.

Most of the other 11,000 ESOP owned companies in the United States have it easy by comparison to United. Ownership through ESOPs most often takes place as part of a slow, deliberate march of succession from the owners of small to mid-sized privately held companies to their employees. Typically employees do not give up any pay or part with any at-risk cash to make this happen. Employers get a tax break for selling to their employees and employees get a piece of the action in return. United was an exception to this mainstream story, but a big and bold enough exception to raise hopes and expectations across the land.

Because the United ESOP was a new idea and because it arrived
"wrapped in the bad news" of concessions it was a difficult message for union leaders to embrace. Difficult, but not impossible. Just as the paint was really beginning to peel in early 2001, Captain Rick Dubinsky, newly re-installed by a fickle rank and file as Chair of the pilots union at United, gave a speech that summarized the United ESOP experience to date. In the speech, he made use of a rich metaphor. He referred to the United ESOP as an oversized $4.88 Billion dollar gift, fitted with a red ribbon, that had been sitting in the center of an extremely large stadium surrounded by 85,000 participants. In the seven years that had passed since he and his colleague Roger Hall had delivered it to the stadium, no one had figured out how to untie the ribbon and open the box.

Without leadership from both the unions and management, the United ESOP was fated to become what it is now--an oversized target for organizational cynics who wish to return to the glory days when workers, unions in particular, stayed out of management's hair. Gordon Bethune, the class-conscious CEO of Continental Airlines, spoke well for this school of thought when he recently described United as an airline where "the inmates were running the asylum."

Bethune's comment is particularly interesting given the fact that during one of the previously uncompleted ESOP attempts at United in 1990, an attempt that was designed to produce 100% employee ownership, he had apparently dropped by the "asylum" himself. Union leaders were glad to explore Bethune's serious interest at that time in filling the second highest management post at United. Unfortunately the financing required for that deal evaporated during the weekend after Iraq invaded Kuwait and the specter of sky-high oil prices scared away potential lenders. Gordon was forced back into the shadows.

Cynics notwithstanding, the airline industry is not likely to have seen the last of employee ownership or ESOPs. Indeed, it is a little known fact is that Southwest Airlines, the poster child for successful airline operations in the current era, relies heavily on stock options as a means of compensation for its heavily unionized workforce. Ownership has worked for employees at Southwest as a compensation strategy. It is unclear whether it has been accompanied by the kind of corporate governance voice that was a distinguishing characteristic of the United model. Whatever their differences, United, Southwest and cases that preceded them in the steel industry and elsewhere have shepherded in a new awareness of risk and reward in the union world. Ask a union worker to take a pay cut when his company is under duress and it is only the most accommodating or clueless among them who will not ask for equity in exchange.

Away from the klieg lights, in the American heartland employee ownership has made steady and sure progress. Research shows that ESOPs with active internal employee communications and culture change efforts outperform their competition as much as 8-11% in sales. If employee ownership is to blame in the United case, as its critics claim, is it not equally legitimate to accuse the conventional model – investor ownership – for the failure of other airlines? Continental has failed twice under that model, US Airways once and TWA, Pan American, Eastern, Branniff and a host of other once proud airlines are gone entirely. The fact that US Airways is about to emerge from bankruptcy with four union seats on the company's Board of Directors is a signal that, United notwithstanding, it will apparently not be easy to push the
"hired help" out of the Boardroom.

In an era chock full of unprecedented evidence of corruption and swashbuckling bankruptcies that put United to shame, it is surely a relevant question to ask who should own American corporations and who should hold them accountable. One voice tells us to trust no one but the experts. Let the mutual fund managers and Wall Street analysts make the tough calls. Another voice, weaker now, tells us to look past the excesses of the Kenneth Lays and Dennis Kozlowskis of the world and trust senior management to do the right thing. A third direction however is to go where United ultimately decided not to go – internally to the employees whose wisdom or folly can truly make a difference.

Unless we have arrived at the end of history in our thinking about corporations, these remain unsettled questions. It is likely that the contest concerning the nature and structure of the American corporation will carry on. Employee ownership will continue to be a contestant.


Christopher Mackin is the President of Ownership Associates of Cambridge, MA. From 1994 to 1996, Ownership Associates advised United Airlines on the implementation of its employee ownership plan.