UNITED AIRLINES
United's bankruptcy could hurt employee ownerships
By Greg Schneider
Washington Post
At first it was just a way to keep the company from breaking up, but over time the employee ownership plan at United Airlines struck pilot Bob Giuda as something more, something noble.
In 1994, pilots, mechanics and other employees sacrificed up to 25 percent of their own wages and pensions to control just over half of the airline's stock, providing $4.9 billion to save the company from financial strife. In return, they got three seats on the 12-member board of directors and a powerful stake in their own futures.
The bold experiment was not only supposed to make them wealthy, it was to set an example for the rest of corporate America about the power of the average worker.
It was even touted as a reason to fly United: the company whose employees would take extra care because each had a personal stake in keeping customers happy.
But last week's decision by United to file for bankruptcy protection brought the big experiment to an ignoble end. The money the employees sank into their company — a typical pilot might have given up $200,000 in wages and pension contributions; a mechanic, roughly $80,000 — is lost.
"I think the (employee ownership plan) was the greatest experiment in the history of relations between airline labor and management," said Giuda, a former leader in the pilots union. "But that entire investment is gone with no chance of ever being recovered. It's over. That's capitalism."
Critics say the very idea of employee control doomed the airline, that having union members on the board of directors prevented management from making tough decisions to cut jobs and hold down salaries. Competing airlines have complained that United, because of its size, set a lax standard for cost control that dragged down everyone else.
But insiders say the airline never really embraced employee ownership as a way of doing business. Like expecting a new paint job to turn a turboprop into a jumbo jet, United never overcame its longstanding history of conflict between labor and management.
Advocates of employee ownership worry that United's spectacular flameout will scare other companies from trying it.
"I'm certain United's experience with this is going to discourage that same model from other large publicly traded companies," said Corey Rosen, executive director of the National Center for Employee Ownership.
But Rosen said there were eccentricities in United's case that made it a poor example to follow, despite the early enthusiasm.
Most companies operating under some degree of employee ownership — and experts say there are some 11,000 of them — are smaller and privately held.
United also was unusual in the degree of control it gave to its employee owners. Not only did they have three seats on the board, they were given veto power over the hiring of top executives and on major decisions such as purchases or sales of assets.
There also was a major rift in United's work force, with key employees left out of the owner class: Flight attendants decided against participating in the plan, reckoning that they could not afford the wage concessions being made by pilots and mechanics.
Pilots were the first, most ardent champions of employee ownership. After a series of painful strikes and poor relations with management during the 1980s, many pilots became convinced that ownership was the only way to achieve control over their destiny.
"They had developed an almost psychotic interest in what they called control," said a former United executive who asked not to be identified. "It never waned. They were not bashful. They talked about it continuously."
Combined with the changes in top management, United lost sight of the discipline required to make employee ownership and control successful, said both the former United executive and Christopher Mackin, an employee-ownership consultant who advised United from 1995 to 1997.
Employee control "requires culture change," said Paul Whiteford, an airline captain who has represented pilots on the board of directors since January. Management has to learn to be open, he said, and employees have to learn that the company's interests have to come first. "Maybe sometimes you can't get a healthier contract if the company is not doing so well," he said.
By early 2000, the dot-com boom that had delivered hordes of free-spending business travelers to United began to dry up. Also that year, the initial term of the employee ownership plan was running out. Pilots wanted wage increases, arguing that they had not expected to continue flying at the reduced wages created by their initial agreement to purchase stock.
Financial pressures were once again mounting on United. And then the airline's executives announced an expensive, unexpected — and ultimately unsuccessful — effort to purchase US Airways.
"Any semblance of trust between management, the board and the pilots went out the window," said Giuda, a 16-year United pilot.
Pilots refused to fly overtime, further sinking United's bottom line, and then negotiated higher wages. By the time two United jets crashed during the Sept. 11 attacks, the airline was on the ropes. With the meltdown in air travel since then, many experts said, bankruptcy was just a matter of time.
