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United experiment CHICAGO >> United Airlines' bold experiment in employee ownership was a shotgun marriage that worked -- for a while.
falters
The airline's turmoil paints a
picture of an employee-owner
plan gone "topsy-turvy"By Dave Carpenter
Associated PressMorale was high, profits soared and a sense of partnership prevailed between newly hitched workers and management. For at least a couple of years after the plan was launched in 1994, giving employees stock and boardroom clout, it appeared to be a model for other large corporations.
No longer. United has been flying from one labor dispute to the next, its stock has plummeted and its once-promising ESOP -- employee stock ownership plan -- is a four-letter word to many workers.
"In the early stages, this place was running like a well-oiled machine," said mechanic Tim Gillespie. Today, he said, the overriding sentiment of worker-owners is "just bitterness."
While saving jobs at the outset, the eight-year-old plan has shown giving employees seats on a board of directors doesn't mean they have the influence they want -- and it doesn't give them a deep feeling of ownership that could promote worker unity and labor peace.
Even one of the concept's biggest champions, former CEO Gerald Greenwald, concedes the experiment has "gone topsy-turvy."
"I still think there's real merit in it," said Greenwald, the first chief executive under the plan. But right now, he acknowledged, "employees' views tend to be, 'Who needs it?' "
Observers say there were problems from the plan's inception that burdened it with dismal labor-management rela- tions. Labor agreed to the plan under duress -- United parent UAL Corp. had suffered huge losses and chairman and CEO Stephen Wolf was threatening to cut thousands of jobs if workers didn't go along.
Three big employee groups -- the flight attendants were the notable exception -- agreed to substantial wage cuts and work rule changes in exchange for a $4.9 billion loan to buy 55 percent of UAL's stock, distributed to workers' retirement plans from 1994-2000. In return, pilots, machinists and nonunion salaried employees each got a seat on the 12-member board. They also won veto power over such issues as naming a chairman and approving mergers and acquisitions.
For a while, it worked smoothly. Greenwald introduced task force teams and invited pilots and mechanics into strategy sessions to help cut costs. UAL's stock price more than quadrupled by late 1997.
"People really felt part of the process," said Gillespie.
But solidarity faded. Unable to profit from their stock until they quit or retired, workers remained resentful about the pay cuts. Labor relations soured badly under Greenwald's successor, James Goodwin, whom the unions helped select in 1999, then erupted in turmoil in 2000 after UAL launched an ill-fated attempt to buy US Airways. The proposed deal outraged employees who were awaiting promised raises and prompted a pilot-led slowdown and more than 20,000 flight cancellations that summer.
Considerable anger lingers as mechanics vote today on whether to ratify a tentative contract agreement or strike.
United's troubles go far beyond the ESOP, multiplied by the falloff in business travel, recession, terrorist attacks and an alarming decline in its revenues and stock price.
But Corey Rosen, executive director of the National Center for Employee Ownership in Oakland, Calif., calls the airline's plan a virtual case study of how not to do it. Among the plan's weaknesses: excluding flight attendants, who rejected the terms, and requiring pay cuts -- something 99 percent of the nation's 11,000 employee ownership plans don't do.
The fatal flaw, Rosen said, was that "nobody took it seriously after the first year."
"United was already a dysfunctional company to begin with, and to turn it around would have required a tremendous amount of effort by both management and employees to change the adversarial relationship they've had for a long time there," he said.
Steve Derebey of the pilots' union admits the ESOP has been a disappointment, in part because it hasn't established an "ownership culture" among employees. Who's at fault depends on whom you ask. With two contracts still to be finalized before CEO Jack Creighton's plan to seek wage cuts can proceed, finger-pointing continues.
Tom Reardon, assistant general chairman of the International Association of Machinists and Aerospace Workers, which represents close to half of United's employees, accuses UAL's leadership of reverting back to a "medieval command-and-control style of management." But he concedes both sides had unrealistic expectations going into the ESOP -- a view shared by management.
"It was really born out of conflict, stress, pressure, mixed expectations and no clear path for how they were really going to change the organization," said Bill Hobgood, Creighton's senior labor adviser.
Analysts cite shortcomings on all sides -- management for poor judgment and strategy and the unions for overplaying a strong hand.
"Blame is a two-way street," said Ray Neidl of ABN Amro. While management erred on the merger bid and elsewhere, he said, employees "seem intent on destroying their investment by uneconomical wage agreements, disruptions in service that drive away customers and picking public fights with management that scare away customers and investors."
Unless United files for bankruptcy, the ESOP will live on for years. Employees retain their ownership rights until their stake, currently 53 percent, falls beneath 20 percent -- sometime around 2017.
Union leaders would like to see it renewed in some form, at least so new employees could get stock. In the meantime, they are drafting shareholder resolutions and trying to take a more active role in an effort to salvage this shaky marriage.