United Air Lines

Flying the friendly skies of employee ownership

The following is an abridged version of the article originally published in the Winter 1996 issue of Working People.

A Brief History

Competition in the airline industry has always been tough, but particularly so since deregulation in 1978. Remember Eastern? PanAm? Braniff? Once proud airlines that fell behind and disappeared. United, in deep financial trouble in the late 1980s, narrowly escaped the same fate. But a determined effort, not by management, but by the employees, saved the airline and returned it to profitability to the point where it is now an industry leader.

Unitedís roots trace back to 1929 when aircraft designer Bill Boeing and engine designer Fred Rentschler merged their respective companies to form United Aircraft and Transport. The company came to include four small pioneer airlines, which were merged and renamed United Air Lines in 1931, joining Pan Am, TWA and American as a major U.S. airline. United was originally based in New York and was among the first to offer transcontinental flights. In 1934, the headquarters was moved to Chicago, its current base of operations.

In 1961, United purchased Capital Airlines, making it the number one airline in the U.S. In 1970, the company began to diversify and over the next 15 years bought its way into the hotel (Westin and Hilton) and car rental business (Hertz).

But in the late 80s, United, which changed its name to Allegis in 1987, began to run into financial trouble. During that year, the pilots made a $4.5 billion bid for the company. Although the bid fell through, the effort to buy the troubled airline had a significant impact. Later that year, Unitedís chairman resigned and the company sold off its hotel and car rental business and reverted to its old name.

In 1989, the first in a series of union buyout efforts took place. The following year, an employee coalition of pilots, machinists, flight attendants and management employees put in a bid for the company. Because of the Gulf War and financing problems, their bid was ultimately rejected. Not willing to quit, however, the unions persevered. Finally, in 1994, an employee buyout plan was approved, giving the members of the pilots and machinists unions and the salaried/management employees a 55% share of the company (the flight attendants did not participate in the plan).

Since the buyout of United by its pilots, machinists and salaried/management employees, the airline has made a dramatic turnaround in the face of intense competition from upstart airlines such as Southwest and Valujet, as well as its more traditional competitors, primarily American and Delta. In the first year of employee ownership, the UAL stock reached $147 per share, an increase of 67 percent. In 1993, the year before the buyout, United lost $50 million. The 1995 estimate is for a $500 million profit. The buyout, however, was not without its tradeoffs for employees. The employee-ownership plan included reductions in wage rates, benefits packages and changes in work rules in order to realize a savings in operating expenses of $4.9 billion.

What is an ESOP?

The pilots, machinists and salaried/management employees bought majority interest in United under what is called an employee stock ownership plan, or ESOP. Under the plan, employees will own at least 55% of the company. But the stock allocation of that 55% is carried out in phases which began in 1994 and will not be completed until the year 2000. The amount of stock held by each employee group is a function of the amount of money each group is investing [see Table]. The pilots, who are investing the most, will receive nearly half the stock. But in return for that stock, the pilots take a:

∑ 15.7% cut in their wages.

∑ Decrease in the company contribution to their retirement plan.

∑ Reduction in vacation for pilots with less than 10 years of service.

The employees share more than just stock in the company. They are also represented on the board of directors. Under the ESOP, each of the three employee groups have the right to nominate one director to the 12-member United Air Lines Corporation Board of Directors. It is the representation on the board that gives United employees direct input concerning company policies and a say over the strategic direction of the airline.

Employees Flex Their Muscles

Employee representation on the board had a major impact during Unitedís recent flirtation with a possible takover bid for USAir. It was the employees that caused Unitedís CEO, Gerald Greewald, to ultimately abandon the move. Whatís more, the pursuit of a possible takeover, normally done in secret by a companyís officers, was instead done openly because of the need under the ESOP to consult the employees.

With everything going so well at United without a merger, the employees were justifiably hesitant about a possible takeover of USAir. Specifically, the employees expressed concern about the effects of a merger on their seniority, the resulting debt load and the value of their stock. USAir was, at the time, one of the weakest financially of major airlines, having posted losses in excess of $3 billion since 1989, and its costs per seat mile were 25% higher than Unitedís.

There is no doubt that USAirís 35 percent share of the East Coast market would have been a plus for United. But in the end, it is the employees who have the most to gain or lose when a company makes a major strategic move. And United employees, with both their jobs and their investments at stake, chose to say no to what many analysts agreed was a very risky venture. Employee participation in the merger decision was unprecented in the corporate world, but with the number of employee-owned companies continuing to grow, it may be a much more common event in the future.

The Benefits of Employee Ownership

One of the major benefits of employee ownership is that it provides a better balance between the interests of the stockholders on one hand and the employees on the other. In Unitedís explanation of the ESOP to its employees, the company states:

"Employeesí interests sometimes compete with the interests of shareholders. Employees want more pay and benefits; shareholders want a return on their investment. After the investment plan is in place, United employees will become the shareholders, establishing a common ground between the groups. This has a potential to alter employee attitudes significantly because it introduces new incentives for making the company profitable. In addition to the employeesí interest in job security, as shareholders they will have a vested interest in company success and profitability, which can increase the value of their stock."

Intense competition and the sensitivity of the airline industry to the economic conditions of the nation and across the globe preclude any sound predictions for United or any other airline. But initially, at least, Unitedís venture into employee ownership, by any measure, has been a success. And judging by Unitedís proud history and the enthusiasm of its employees, the chances are good that United will be flying high well into the next century.