IMPACT OF THE UNITED PLAN : Pact Expected to Alter Carriers’ Course : Transportation: Success of Southwest forces fundamental changes in airline industry as United, others attempt to follow suit.
The directors of United Airlines’ parent company Thursday delayed voting on a sweeping plan to sell control of the airline to employees and to create a low-fare subsidiary--a bold restructuring that analysts predict could force the industry to look less like first class and more like coach.
A few details of the proposal dribbled out Thursday. The new board of the company would contain relatively few worker representatives even though the unions would hold majority ownership. The board would contain 12 or 13 directors, five of whom would be outsiders and three or four of whom would be employees, according to a spokesman for the unions.
UAL Chairman Stephen M. Wolf, who reportedly will step aside if a deal is closed, stands to reap millions.
Wolf will get at least $1.73 million thanks to a clause in his employment contract that grants him triple his annual salary of $575,000 if he leaves because of a change in company ownership. On top of that, Wolf owns 182,584 shares of UAL stock, which would be worth at least $16 million based on the estimated $88-per-share value of the cash, preferred stock and senior debt securities involved in the deal.
If his stock options become exercisable upon change of control of the company, that would mean an additional $19.8 million in cash, stock and bonds. In addition, he would get new common stock in UAL, which has not yet been valued.
Meanwhile, investors were unenthusiastic about the proposal, causing UAL’s stock to drop $4.375 to $144.25 per share Thursday in heavy trading on the New York Stock Exchange.
The proposed deal, which was revealed Wednesday, would leave between 53% and 63% of the nation’s largest airline in the hands of most of its union and non-unionized workers in exchange for massive wage concessions and work rule changes. The complicated cash, stock and debt transaction has been valued by some observers at close to $4.6 billion, while others place the figure even higher.
In addition, United would create a low-fare “airline within an airline” that would be designed to compete against Southwest Airlines and other low-cost carriers that have been chipping away at the major airlines’ business on short domestic flights.
The tentative agreement reached between United’s management and its pilots and machinists unions would involve about 60,000 employees, including some non-union ticket agents and clerical workers. The plan requires the approval of the board of UAL, United’s parent company, and of union members and officials. UAL’s board said it will take up the matter again next week.
The flight attendants union, which withdrew from buyout talks earlier this year to protest the opening of an attendants base in Taiwan, met Thursday but reached no decision about rejoining the negotiations.
“The main question we have is, ‘What are we getting ourselves into if we join?’ ” said Kevin Lum, president of the master executive council for the attendants union. “We don’t know what kinds of concessions the other unions made or what they’re getting in return.”
Most airlines said Thursday that it is too early to tell how they might respond to the proposed changes at United or what effect the changes would have on the industry.
“Obviously, we are going to be watching very carefully when there is a change of this magnitude,” said Jacki Pate, a spokeswoman for Atlanta-based Delta Air Lines. Pate said the United deal does not give urgency to Delta’s preliminary discussions of whether to form its own low-cost carrier.
“This would just be one more competitor for us to consider in this area,” she said. Pate said Delta is not considering a similar deal with its unions. “Nothing is under way,” she said.
Al Becker, a spokesman for American Airlines, said the carrier is still interested in talks with its unions about a possible ownership stake. “We have said all along that we would be interested in holding talks about this. But none of the unions have expressed any interest,” he said.
Southwest Airlines had little to say about United’s plan.
“We’re flattered by all the comparisons and the fact that companies are trying to imitate us, but we have no comment on the United deal,” said Ginger Hardage, a Southwest spokeswoman.
The low-fare, low-cost subsidiary envisioned as part of United’s proposed deal is considered by many as the flight path of the future.
“United, just like most of the big guys, has too high of a cost structure,” said Christopher Fotos, editor of an industry newsletter published by Avmark, a Washington- based airline consulting firm. “I hate to utter the word ‘Southwest,’ because everyone is tired of hearing it, but that appears to be the future of the airline industry.”
But with the promise of low fares comes the guarantee of less convenience, Fotos said. Southwest, he pointed out, does not fly to many markets, particularly small, out-of-the-way places; serves no meals; does not pass baggage along to other carriers, and is not part of the airline computer reservation system.
If major airlines follow suit, some travelers may find themselves carrying their bags from airline to airline on long trips that aren’t between major markets, he said.
“It looks like it’s going to be an even cheaper world to fly in, but it will be a less comfortable world,” Fotos said. “You will be more grumpy when you get there, but you will have more money in your pocket.”
Others are skeptical about whether United can pull the deal off. “They are all going to try it, but I’m not convinced it’s possible to maintain two airlines, totally independent from another, within the same company,” one industry watcher said. “I don’t know if you can have it both ways. . . . It’s vital that they try as a way to compete, but I don’t know if it’s feasible.”
Times staff writer James Flanigan contributed to this report.
Competitive Skies
United Airlines’ tentative plan to turn over majority control to employees and form a low-cost subsidiary could help the nation’s No. 1 air carrier compete against such rivals as 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. Here are some comparisons of the two airlines’ costs:
United has higher costs in all areas of operation except fuel...
Here is a breakdown of costs incurred per available seat mile flown in 1992, in cents:
United Southwest Labor & Related 3.62 2.35 Rents & Depreciation 1.31 1.01 Fuel 1.12 1.14 Commissions 0.86 0.50 All other costs 2.03 2.00 Total 8.84 7.00
Average 1992 compensation per employee:
United: $52,300
Southwest: $45,400
Type of aircraft United Southwest Boeing 737 227 156 Boeing 727 99 Boeing 757 88 Boeing 747 59 McDonnell Douglas DC-10 54 Boeing 767 42
Average hours of flight time per aircraft per day in 1992, in hours flown:
United: 9.78
Southwest: 10.68
*
Average flight length in 1992, in miles flown:
United: 964
Southwest: 380
Employee Ownership Trend
Employees began gaining partial ownership of airlines in the 1980s, but most of the plans lasted just two or three years. Northwest and Trans World Airlines instituted employee ownership plans earlier this year.
Airline % Employee owned TWA 45 Northwest 37.5 Western* 33 Eastern* 25 Republic* 15 Pacific Southwest* 15 Pan American* 13 Continental 9
* No longer in business
Source: Airline Economics International Inc., National Center for Employee Ownership, Los Angeles Times reports
Researched by ADAM S. BAUMAN / Los Angeles Times
