Owner Role Always Tense for United Employees

By Greg Schneider
Washington Post Staff Writer
Tuesday, December 10, 2002; Page E01

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 many had a personal stake in keeping customers happy.

Yesterday'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 new 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 workforce, 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."

By the early 1990s, United had built up a vast route structure, expanding into new and overseas markets to become the largest airline in the world. But much like today, the airline's costs were dangerously high. It needed to make painful cuts to survive, possibly including breaking up into smaller carriers.

Then-chief executive Steven Wolf took the pilots up on their demands for ownership, and the ESOP went into effect in 1994.

Giuda, who at the time sat on the master executive council of the pilots union, said he was leery of the ownership plan. But given the alternatives, he said, he came to believe it was the best route.

"The debate was furious -- not in the sense that it was angry, but it was continuous, fast-paced. There were legal documents, financial analyses, testing the water with pilots," he said.

Once the ESOP got underway, employees began to feel they were making a difference. "Forming 'cross-functional task teams' was the big buzzword, a way of addressing issues of a strategic and operational nature with employee input that had never been done before. We were helping shape the operation, having input in those decisions by which management would direct the airline," Giuda said.

It was a big change, he added, from the old days where executives took a "you fly, we'll manage" approach.

The airline's mechanics had been more hesitant than the pilots, and tended to view the deal in less high-flown terms. "It just seemed to me that they were doing their best to take my money and I wasn't at all confident that the investment would pay off," said Jay Koreny, a mechanic at Dulles International Airport who has been with United nearly 16 years.

But Koreny and his co-workers began to come around as United's stock price climbed, eventually hitting $100 a share.

"We did have the idea that, well, just maybe this'll work out," Koreny said. That idea got a boost when the mechanics union, the International Association of Machinists, circulated paperwork showing how much the workers could expect per month by the time they retired and cashed out their stock.

"It looked awful good on the paper," he said.

But some of the ways the worker-owners exerted their influence may not have been so good. Critics have blamed the labor leaders for forcing out any top executives who seemed likely to cut jobs, such as Wolf, the CEO who brought in the plan. Without job cuts, United's cost structure began to grow.

At the same time, United's unions -- never cozy with one another -- drifted in different directions. The pilots voted out the union leaders who hatched the ownership plan and brought in replacements who were less enthusiastic about it, said Christopher Mackin, an employee-ownership consultant who advised United from 1995 to 1997.

The mechanics grew estranged from their union leadership. Koreny said he felt the union's board members looked out for their own interest more than that of the membership.

Combined with the changes in top management, United lost sight of the discipline required to make employee ownership and control successful, said both Mackin and the former United executive.

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 ESOP 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 reducing United's bottom line, and then negotiated higher wages. By the time two United jets crashed during the terrorist attacks of Sept. 11, 2001, the airline was on the ropes. With the meltdown in air travel since then, many experts said, bankruptcy was just a matter of time.

For all the bitter feelings stirred by United's financial troubles, many of its worker-owners are not prepared to blame the costly ownership experiment.

"We took a great leap of faith. The issue was trust, the issue was making employees feel relevant," Giuda said.

Whiteford even held out hope that some vestige of the system could survive bankruptcy. "Don't presume labor will not be part of the board in the future," he said. "We haven't had those discussions yet."

Staff writer Don Phillips and researcher Richard Drezen contributed to this report.