United Airlines Deal Gives Workers 55% of Company : Jobs: Largest employee-owned firm gets $5 billion in concessions. Launch of new low-fare carrier is planned.
In a deal that creates the nation’s largest employee-owned company, United Airlines’ shareholders on Tuesday approved the sale of 55% of the giant carrier to workers in return for nearly $5 billion in concessions and the right to create a new low-fare airline.
The controversial agreement involving the country’s No. 2 airline will be scrutinized as the most important test yet of employee ownership. Turning workers into owners has been promoted by the Clinton Administration as an important tool in rejuvenating corporate America and saving jobs.
United’s experience with employee ownership will also be closely watched by rival airlines as they struggle to emerge from a deep industry slump that has resulted in $14 billion in combined losses since 1990. Several other carriers, such as Northwest and Continental, have sold ownership stakes to workers in return for lower wages and higher productivity, but none has gone as far as Chicago-based United.
Many industry observers are skeptical whether United’s new management team will be able to make tough decisions if employees control the company. Former Chrysler Corp. executive Gerald Greenwald, who was selected as chairman by the machinists and pilots unions, must also win over the 17,000 flight attendants who refused to participate in the buyout and the many other workers who opposed the arrangement. United employs about 75,000 workers.
“Everybody is going to be looking at them to see how well it works,” said Harold Sirkin, a transportation specialist at the Boston Consulting Group. “Employee ownership is the first step. What is going to be important is for all the people at United to pull together to make it work and improve overall performance.”
The shareholders’ approval Tuesday came nearly a year after the unions and management began complicated and often contentious negotiations that broke down at several points. Under the agreement, each existing United share will be swapped for $84.81 in cash and half a share in the stock of the new United Airlines.
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In return for the 55% stake in the airline, United’s pilots, machinists, administrative and management employees agreed to pay cuts ranging from 8% to 20% and changes in work rules that will boost productivity. Workers could eventually own up to 63% of United if the company’s stock price rises to $136 a share. Shares of United’s parent company, UAL Corp., closed Tuesday at $128.125 on the New York Stock Exchange, down $1.625.
The agreement will also allow the company to form a low-fare “airline within an airline” called United Shuttle. United Shuttle, which is expected to begin service along the West Coast by October, is designed to permit United to better compete against low-cost competitors--such as Southwest Airlines--that have driven down fares industrywide and won over passengers.
United’s employee buyout is one of the many strategies major airlines have adopted to survive in an era of low fares and slow growth. Delta Air Lines, for example, plans to lay off 15,000 workers in the next few years as part of a plan to reduce operating costs by $2 billion; Continental Airlines is expanding its own low-fare airline operation called Calite; American Airlines has withdrawn from unprofitable destinations and, in California, cut a deal with low-cost newcomer Reno Air to handle some of its routes.
Greenwald, who replaces longtime United Chairman Stephen M. Wolf, supported the strategy crafted by his predecessors.
“No other airline is as well-positioned for takeoff as United: a route system that spans five continents, an excellent fleet of aircraft, a management team that is one of the very best in the business--and a name that is recognized and respected the world over,” Greenwald said Tuesday.
Labor Secretary Robert B. Reich hailed the buyout as a model for other service companies.
“UAL will be the largest employee-owned company in the U.S., and the fact that a healthy company is going into employee ownership is a useful precedent for large service companies in the U.S., whether in the airline industry or telecommunications or other services,” he said.
“Now every board of directors in a large company will have to consider employee ownership as an option when they think about restructuring companies.”
But critics of employee ownership said it will limit Greenwald and his management team in making tough decisions, such as cutting back on money-losing routes, without being stymied by workers. The buyout agreement also protects workers from layoffs for nearly six years.
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Job protection was the main reason United’s 22,000 members of the International Assn. of Machinists supported the buyout, union chief Ken Thiede said.
“We enter it with mixed emotions because we have not been involved in this kind of endeavor before,” Thiede said. But, “we think that management is going to be forced to look for other efficiencies . . . instead of just saying, ‘If we cut some workers, we will be OK.’ ”
But Greenwald and Wolf have told non-employee shareholders that management will run United--not its unions. Employee representatives on United’s board of directors can veto some important company decisions, but they will constitute a minority of the board members.
Greenwald must contend with the large numbers of workers who have opposed the buyout and wage cuts. One of the biggest hurdles will be to persuade the Assn. of Flight Attendants to participate in the buyout. The flight attendants refused to join the buyout because they oppose the company’s plan to establish bases of flight attendants overseas, which they say would threaten union jobs.
Greenwald has said he is committed to forging an agreement with the flight attendants, who reportedly are willing to offer more than $400 million in concessions to join the buyout if their concerns over the foreign bases are resolved.
The employee buyout at United or at any other airline, however, falls short of the major overhaul that is needed, industry consultant Michael Boyd said. Although such buyouts may cut operating costs initially, they do not change the highly bureaucratic and costly policies that were adopted in the less competitive era before deregulation.
“It lowers their labor costs a little bit,” Boyd said of the employee buyout. But “it doesn’t solve the problems that got them into this mess in the first place.”
