Deal Reached for Unions to Buy United Airlines
In a groundbreaking deal, United Airlines has reached a tentative agreement with two of its major unions to sell a majority stake in the carrier to 60,000 of its employees, labor and company officials announced late Wednesday.
The proposed deal, which would make United the country’s biggest employee-controlled business, calls for workers at the nation’s No. 1 air carrier to acquire from 53% to 63% of the company in exchange for sweeping wage concessions and work rule changes. A source close to the agreement said it is a complicated arrangement involving cash, stock and debt valued at close to $4.6 billion.
Another key element of the pact provides for United to operate an “airline within an airline” that would be designed to compete against such low-cost carriers as Southwest Airlines on short domestic flights.
Airline experts termed the agreement a watershed that could shake up the competitive balance of the airline industry, freeing United to cut its costs dramatically and reduce its fares. Other industry giants, particularly American and Delta, could be forced to respond with reorganizations of their own and possibly lower air fares.
Labor Secretary Robert B. Reich--who along with Transportation Secretary Federico Pena was briefed Wednesday by United Chairman Stephen M. Wolf--said the United sale would “serve as a very important model” for all industries.
The agreement will be closely watched by executives and union leaders in other industries because United, while struggling to cope with intensified competition, is still a financially healthy company. Therefore, the deal could provide a fair test of employee ownership, unlike earlier acquisitions involving troubled air carriers and other financially weak companies. Those deals met with mixed results.
Details of the deal between United and the Air Line Pilots Assn. and the International Assn. of Machinists were sketchy Wednesday evening. But the designation “airline within an airline” signals that the heart of the agreement is the launch of a no-frills operation with lower rates of pay and different work rules for some United flights, said Robert Mann, an independent airline consultant who often advises the pilots union.
The proposed deal--capping seven years of on-again, off-again negotiations between the company and its unions--still requires approval of union members and officials. It also requires approval by the company’s board, which is scheduled to meet today but is not expected to make a final decision.
Labor leaders are certain to make a strong push for the rank-and-file approval, citing United’s previous proposal to break up the company if buyout talks failed. They also portrayed it as a historic opportunity for unionized workers to rejuvenate a storied company.
Wolf and United Vice Chairman John C. Pope, sources said, would step aside and let the unions bring in a new management team for the airline if the deal is approved.
Roger D. Hall, chairman of the Master Executive Council of the pilots union at United, said in a news release that “we are all aware of the competitive challenges facing our industry and we have long believed that employee ownership is good for our company and the country.
“Anchored by an unprecedented alliance between management and employee shareholders, we feel like pioneers in a high-tech industrial revolution,” Hall said.
Ken Thiede, president and general chairman of the machinists union, added that United’s workers “are engaging themselves in a venture that will demonstrate to the business community that job security and corporate profits are not mutually exclusive.”
United’s union leaders have tried several times in the past seven years to buy all or part of the company, only to meet resistance from the rank-and-file. In 1989, a group led by United’s pilots, top management and British Airways attempted a United takeover valued at nearly $7 billion. But a lack of financing led to the deal’s collapse and touched off a 190-point fall in the stock market in October of that year.
Last month, buyout talks broke down after United rejected as too low a union offer of reportedly $5.5 billion for a 60% stake in the company. In addition, the machinists union was angered after the airline sold off its flight kitchen division, which employs more than 5,000 union members.
United’s flight attendants union, with 18,000 members, withdrew from the talks earlier this year to protest the opening of a flight attendants base in Taiwan. The flight attendants have not been involved in the latest talks, but in their joint statement on Wednesday, the leaders of the pilots and machinists unions said they would welcome the flight attendants’ “re-entry into the transaction.”
The 60,000 employees involved in the agreement include non-union ticket agents and clerical workers as well as the unionized pilots and machinists. Under the proposed terms, employees initially would receive a 53% stake in the company. That stake could grow to 63% if the company’s stock price were to reach certain levels.
The current proposal comes against a backdrop of United and other major carriers struggling to compete profitably against fast-growing, low-cost carriers like Southwest Airlines. Southwest’s lower costs and more productive work force permit it to offer fares 25% below United’s and still make a profit, according to a report issued earlier this year by Merrill Lynch Research.
UAL, the parent company of United Airlines, posted an overall profit of $15 million through the first three quarters of 1993, but the company has lost more than $1.2 billion since 1991. United, along with other major airlines, has suffered in recent years from traffic slowdowns, fare wars and bloated costs.
Earlier this year, United explored the possibility of creating a low-cost, non-union subsidiary to fly its short-haul routes where smaller airlines have been successful. But that proposal met with stiff opposition from union leaders, who later in July indicated their willingness to trade concessions for a piece of the company.
The proposed deal would rank as the biggest employee buyout ever in terms of revenue. Unions at Northwest Airlines and Trans World Airlines also recently accepted concessions in return for large ownership stakes. At Northwest, workers agreed in July to nearly $900 million in concessions in return for up to 37.5% of the company, which was threatening to file for Chapter 11 bankruptcy protection.
TWA emerged from bankruptcy court last month after unions received a 45% share in the company for $600 million in labor savings as part of a reorganization plan.
American Airlines said it remains interested in exploring a buyout by its unions, but no serious discussions have ever taken place. Last month, American’s operations were virtually paralyzed by striking flight attendants, who opposed the company’s demands for concessions and efforts to boost productivity.
While some companies in other industries, such as Avis, have been revived by employee buyouts, others have foundered under heavy debt loads and management problems.
In trading Wednesday on the New York Stock Exchange, UAL shares closed down 25 cents per share at $148.625. The agreement was reached after the close of trading.
Times staff writer Jesus Sanchez contributed to this story.
