Employee Takeover of United Tests New Style of Labor Relations


After years of aborted takeoffs, United Airlines at last seems cleared for a smooth ascent into employee ownership this summer, but there's no guarantee that will mean friendly skies ahead for the nation's second-largest carrier.

If shareholders approve the $5 billion plan to trade wage and work-rule concessions for equity next month, the airline would become the largest employee-owned company in the United States.

More importantly, the success of this employee buyout could provide a flight plan for a new style of cooperative labor relations that more companies may be pressed to adopt in order to reduce costs and avoid labor strife.

President Clinton supports the effort as a model of what may be needed for other struggling American firms to restructure and compete successfully.

The United proposal would combine majority employee ownership (at least 53 percent) with cooperative managerial teamwork, shedding restrictive union work rules and promoting employee flexibility for the benefit of the corporation -- and for the 80,000 employee-owners.

United has lost well over $1 billion in less than three years, so employee concessions are seen as crucial to the airline's survival. Labor costs typically account for more than one-third of the industry's total expenses.

But other U.S. airlines facing the same challenge have extracted worker givebacks and flexibility from their employees without giving up management or shareholder control.

* Delta will reduce its work force by 20 percent and insist on major wage concessions.

* Continental, emerging from bankruptcy for the second time in a decade, is ending a wage freeze with raises and offering a token 4 percent of stock to employees.

* USAir is uncertain what course to take in wringing concessions from its workers, while cutting employment levels.

The results will be seen over the next few years as the major carriers scramble to match the cost-cutting and productivity of Southwest Airlines, the industry's management leader.

It's not only the philosophy of corporate governance that is at stake, but the very survival of the domestic air industry's largest carriers. Collectively, the airlines lost nearly $13 billion over the past five years, and the bleeding hasn't stopped.

Years of massive borrowing and rapid expansion by airlines have sharply increased U.S. air travel, which has doubled since deregulation in 1978. But the larger market, combined with cutthroat fare competition, failed to yield profits for most carriers, which had built-in high costs and traditional, confining work rules.

Cost-cutting, start-up airlines without those expenses grabbed a sizable chunk of the business, further squeezing prices and earnings for the established carriers. Productivity and key markets now determine profits, not sheer size and market share.

Some carriers already have given employees a share of company ownership to secure concessions. Workers own one-third of the equity in Northwest and Trans World Airlines and held a major stake in America West before it entered bankruptcy.

Even at profitable Southwest, which operates with unions and flexible work rules, the employees hold a 12 percent stake. American Airlines, the world's largest, indicates that it wouldn't be averse to an employee bid.

What United is close to achieving is something broader than a reactive labor accommodation in a troubled industry. Employees would have voting control, as well as economic interest, in the company, which would be run by professional management and independent directors.

It's seen as an experiment in "industrial democracy" by Paul Volcker, ex-chairman of the Federal Reserve Board, who will sit on the new United board. Depending on the stock's future performance, the employee stake could grow to 63 percent.

United would pass Publix Supermarkets, a Florida chain, as the largest employee-held company. Avis, the car-rental firm, and Weirton Steel are among the best known employee-owned firms.

United's labor unions tried for seven years to gain employee control of the carrier while fighting among themselves.

The executive tapped to lead the restructured airline is Gerald Greenwald, former Chrysler Corp. vice chairman who left the automaker in 1990 to lead an earlier United employee buyout attempt that eventually failed.

The last employee buyout offer was rejected in November by United, which then cut 5,200 union food service jobs by selling its flight kitchens. But the employee groups kept at it, eliminating the thorny bank financing that had complicated earlier proposals. The nonunion salaried employees, wary of the unions' power, finally came on board.

Stockholders seem satisfied with the proposal at current market values. United's stock is selling for about $50 less than the $173 per share (in cash, notes and worker concessions) that management says the employee offer is worth.

But the plan still faces considerable employee opposition, even if not enough to kill the deal.

The flight attendants union has not agreed to the plan. Nearly a quarter of the Machinists Union members have signed cards seeking to withdraw from their union because of the plan. Lawyers for other dissident United employees are trying to block or change the deal.

Further worker unhappiness could lie ahead with key elements of the restructured carrier -- a separate low-cost, short-haul unit to compete against Southwest, and lower wages and benefits for new nonunion ground employees.

The wage-benefit concessions of United workers will cut passenger-mile costs by only 4 percent, but that should be enough to bring the carrier close to the industry leader. However, if other airlines make the same adjustments, with or without giving up lots of stock to employees, the competitive advantage will be minimized.

United faces structural problems that won't be solved by employee participation. Its commitment as a major tenant to the long-delayed, hyper-expensive new Denver airport was based on outmoded hub-and-spoke flight schedules, which have been largely superseded by short-haul direct flights, a la Southwest Airlines.

And some investors worry that, down the road, the employee-named directors will face a clear dichotomy of interests; for example, choosing between increasing worker compensation and new investments in equipment. But that has not proven to be a problem elsewhere with employee directors, who have chosen to maintain company health even when it directly affected jobs, as at Weirton Steel. United employees also will be committed to the company's long-term welfare: Their stock must be held until retirement.

The United model could show the way for similar worker buyouts in other unionized industries where competition dictates drastic changes in employment levels and work rules, without resulting labor problems. The large regional telephone companies that split from Ma Bell are seen as one such potential group.

For now, United is flying that route solo. If all goes as planned, it may not be long before passengers hear a new version of the familiar message from the cockpit: "This is your captain and crew, all company owners, welcoming you aboard."

Michael Burns is an editorial writer for The Baltimore Sun.

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