Ruling May End Employee Control of United Airlines

By Keith L. Alexander
Washington Post Staff Writer
Wednesday, March 5, 2003; Page E04

A ruling from the Internal Revenue Service yesterday could end control of United Airlines by its employees after nearly a decade, according to United and its parent, UAL Corp.

Separately, the airline reported in a filing with the Securities and Exchange Commission that it lost $382 million in January. The airline also said it had $1.18 billion in operating revenue and $1.51 billion in operating expenses.

United said the IRS ruled that the trustee for its employee stock ownership plan may sell an additional 3.9 million shares on employees' behalf. If the trustee -- State Street Bank -- sells the shares, employee ownership of the airline could fall below 20 percent, ending the ESOP. United said the change in ownership could occur within the next few weeks.

If employees lose their controlling interest, board representatives of United's pilots and machinists unions would lose their influential voting rights on acquisitions, appointments of chief executives and divestitures.

The IRS ruled that State Street could sell the additional shares without jeopardizing substantial tax benefits, called net operating loss carryforwards, that United feared would be lost if its ownership changed.

For several weeks, United executives have tried in bankruptcy court to block State Street from selling the shares, contending that losing the tax benefits would jeopardize the airline's ability to emerge from bankruptcy. Preserving the carryforwards "should generate substantial tax benefits following UAL's emergence from Chapter 11 protection," the airline said.

United's employee groups gave millions of dollars in concessions in 1994 for 55 percent of the company and two seats on UAL's board of directors. The move was hailed at the time as a bold experiment in labor-management relations.

The company's shares reached a high of $100.75 in 1997. But beginning in 2000, things began to deteriorate. More recently, many of United's workers have wanted to sell their shares as the airline began losing millions of dollars a day. In December, United became the largest airline to file for bankruptcy reorganization. Yesterday, trading in UAL shares was halted briefly. They eventually closed down at 98 cents, down 8 cents, or 7.6 percent.

Darryl Jenkins, head of George Washington University's Aviation Institute said the ESOP was doomed because neither employees nor management made the transition into viewing employees as the owners. Also, trading wages for stock, Jenkins said, is a difficult move when workers rely on their wages to cover their bills.

"This ESOP was a disaster on both sides," Jenkins said.

But in a letter to its members, Scotty Ford and Stephen R. "Randy" Canale, heads of United's machinists unions, hailed the ESOP as the reason behind United's financial strength in the late 1990s before recession and the Sept. 11, 2001, terrorist attacks pummeled the airline and the entire industry.

"This current crisis is certainly not a result of employee-ownership. On the contrary, United thrived through the late 1990s because of the cost savings created by the ESOP," the men wrote.

After a sale, the employee stock ownership plan will hold about 16 million shares. Further sales will not be permitted, the company said.

United's pilots union urged its members not to sell their shares. "We continue to oppose the sale of both the 401(k) and ESOP sales by State Street," union spokesman John Hartz said. "These shares were negotiated in collective bargaining agreements and should not be eradicated by the fiduciary."