United''s woes sown in discord of the past (Chicago Tribune)

FA Mikey

Aug 19, 2002
United''s woes sown in discord of the past
ESOP deal, rich contracts go sour
By Rob Kaiser
Tribune staff reporter
Published August 18, 2002
When James Goodwin inked a contract with United Airlines pilots in August 2000, it appeared to end the airline''s summer of discontent.
The pilots'' refusal to work overtime had contributed to a torrent of delays, cancellations and customer angst that placed United last among major airlines for on-time arrivals. Steamed about a bid for US Airways and an employee-ownership plan gone awry, the pilots pressed for and received a rich contract that then-CEO Goodwin hoped would reverse United''s descent.
Instead, "it quickly became apparent that they had dug themselves a deep grave," said Joseph Schwieterman, an aviation expert and the director of the Chaddick Institute for Metropolitan Development at DePaul University.
The pilots'' deal triggered lucrative contracts for mechanics, flight attendants and other workers at United and other airlines, swelling the industry''s costs when it could least afford them. As a result of the subsequent economic downturn, as well as fallout from Sept. 11 that caused a sharp decline in air travel, the industry--and United in particular--hasn''t been able to cover its steep labor costs.
As Jack Creighton, Goodwin''s replacement atop United, raised the specter of bankruptcy last week at the Elk Grove Township-based airline, the deal struck two years ago came back to haunt the company.
"When they signed that, management at every other airline wanted to go strangle Goodwin," said Michael Boyd, president of the Boyd Group, an aviation consulting company.
Bankruptcy has become a hot topic these days in the decimated airline industry, particularly since the nation''s seventh-largest carrier, US Airways, sought protection from its creditors Aug. 11..
Creighton last week repeated his call for employee wage concessions, saying if such agreements aren''t struck in the next 30 days, the airline may have to declare bankruptcy this fall under the weight of $875 million in debt coming due in the fourth quarter.
Although negotiating such concessions is considered necessary for United to get $1.8 billion in critical government loan guarantees, most aviation industry experts don''t expect the airline will be able to restructure its labor deals outside of bankruptcy court.
"The unions are going to flip them off with justification," said Darryl Jenkins, director of the George Washington University aviation institute, who has served as a consultant at United.
Indeed, on Friday the flight attendants union at United called the airline''s bankruptcy warning "premature" and denied that their costs are a problem.
"United management has shown a lack of leadership and vision by making a public circus out of demands for worker wage cuts prior to management showing us a viable plan for fixing our airline," Greg Davidowitch, president of the Master Executive Council at United''s branch of the Association of Flight Attendants, told Reuters.
Much of United''s problems remain rooted in issues that led to the pilots'' revolt in the summer of 2000.
In 1994, after another troubling period for United, the pilots, mechanics and other workers agreed to salary cuts in exchange for a 55 percent ownership stake in the airline. The arrangement also gave United workers greater job security, eliminating the threat of breaking up the airline into smaller, regional carriers.
Flawed ESOP
But industry and employee-ownership officials said the employee stock ownership plan was flawed from the start.
"This is the only ESOP I know that had an end point," said Corey Rosen, executive director of the National Center for Employee Ownership.
In most plans, Rosen explained, employees buy a percentage of the company, and that stake either stays steady or grows. But in United''s plan, after the ownership shares were distributed over five years, the percentage of employee ownership was designed to decline as workers retired or left the company and sold their shares.
Rosen said the message communicated by the plan was that employee-management cooperation was a temporary arrangement, and the groups eventually began butting heads again.
"Those were comfortable roles, and they fell back into them," Rosen said. "It all went back to these awful adversarial relationships that existed before the ESOP."
There were other red flags in United''s employee-ownership plan.
Employees, although they owned the majority of United, didn''t have a substantial say in how the company operated. Also, some groups, including flight attendants, didn''t participate in the plan, creating another imbalance.
Most significant, United workers forfeited an average of 15 percent of their pay to participate in the ESOP. Only 1 percent of all such plans include wage concessions, Rosen said.
When United''s stock price began falling, resentment built.
The bad feelings boiled over in May 2000 when United announced a plan to acquire U.S. Airways.
"Labor groups felt betrayed that the company would push ahead with such a risky endeavor without their blessing," Schwieterman said.
Many industry officials said the acquisition was a flawed strategy, requiring United to take on too much debt without a significant earnings boost.
United pitched the deal as a way to give it a stronghold on the Northeastern section of the country. But, Boyd said, "United was already in the biggest Northeast markets. What the hell did they need Ithaca for?"
Concerned about the company making a bad investment, which could depress their stockholdings, as well as issues such as seniority in an acquisition and a lack of progress in contract talks, the pilots revolted.
"All pretense about the ESOP working came to an end," Jenkins said. "The pilots that summer burned the company down."
When contract negotiations started well before talk of the US Airways acquisition, the pilots were "reasonably reasonable" in their demands, Jenkins said. But after the US Airways announcement and escalation of public pressure for the company to resolve its labor issues, the pilots got raises of up to 28.5 percent.
"They ended up getting more than they ever wanted originally," Jenkins said. "The purpose of it was basically to buy their support for the merger."
United eventually backed away from the US Airways deal, which also was denied by government antitrust officials, and the airline was stuck with the industry''s highest labor costs.
Today, the odds of avoiding bankruptcy look increasingly dim.
Distrust of management
The pilots and other employees say given United management''s history of undelivered promises, they have no incentive to work with it.
"It would be easier to have faith in some people we don''t know," said Herb Hunter, a pilot and 24-year United veteran. "It might be easier to get the employees to play ball."
People inside and outside the company said United needs a new leader quickly, particularly since Creighton, who turns 70 in two weeks, is serving only in an interim role.
Still, Hunter acknowledges that the workers'' stance creates a Catch-22 situation, since the CEO position is unlikely to be filled without concessions from labor.
More important, industry officials say, top candidates are unlikely to take the position unless the airline has filed for bankruptcy protection.
"That''s going to be very embarrassing to a once very great airline, but I don''t see them with any other choice now," Jenkins said.
Another trip down memory lane courtesy of that fine bastion of journalism, the Chicago Tribune. Just once I'd love to see an article on UA that doesn't cover the same ground. How about some fresh reporting from a different angle. Everyone knows about the failures of the ESOP. We all know about the pilot contract and Summer of Love. We all know that UA is currently leaderless with an ineffective and impotent Senior Mgmt team. We all know UA needs a new CEO yesterday! Tell us something we DON'T know, please.
Hi UAL777Flyer--

We all may know that stuff, but most of the readers of the Chicago Tribune probably don't. And since UAL is based in Chicago, they probably felt these details would be of interest to many of their readers, and they're probably right.

I would say that at least they got the bulk of the story accurately, unlike some publications.

Since you live in Chicago you can always send them a letter to the editor, but ask them to withold your name to protect from company retribution.[;)] Didn't some chick at Delta just get canned for a letter to the editor?


Trust me when I tell you that the Tribune has already beaten that horse to death. Their article contained nothing that hasn't been written in their past articles on UA. Writing a letter to the editor to complain is about as worthwhile as writing your Congressman. The press loves to "pile it on". It just gets tiring reading the same drivel that covers no new ground.
Hello, friends![:devil:]
This article is so full of aviation experts, it makes one wonder what exactly the term means! I guess if you are a liberal arts professor in the Chicago Metropolitan Area, or ANY Metro Area with a big airport, you qualify.

As for Flyer's contention that the Trib cannot do enough damage to UAL, I think it is more about damaging labor than anything else. Some of you may remember the long, drawn-out labor strife at the Tribune in years gone by. The Trib is a favorite of the "wingtip shoe crowd" in Chicago, and plays to its core supporters, while bashing labor at every turn. However, that being said, the article did mention a few of the management mistakes of the recent past. Too bad they did not put the $4 BILLION price tag on the USAir merger debacle that mgmt did on their recent conference call. I am sure THAT little piece of information will not see the printed page any time soon!


P.S. Is it me, or did someone move my computer screen across the room while I was out?[8)]
I can see why they write about what is happening at this time and how it has gotten to this point. Lets give them something new, and they will write about it.
Maybe they could write an uplifting and inspirational story about airlines that were saved by employee concessions, kind of a roadmap of how UAL can find their way out of the current mess they are in.
On 8/25/2002 9:00:09 AM

Maybe they could write an uplifting and inspirational story about airlines that were saved by employee concessions, kind of a roadmap of how UAL can find their way out of the current mess they are in.

Northwest Airlines comes to mind. 15% wage and workrules concessions
from ALL employee groups as well as banks, aircraft manufacturers, and
even KLM.