United's bold flight

January 03, 1994|By Robert Kuttner

AFTER several false starts, United Airlines' board of directors approved a deal just before Christmas to sell 53 percent of the largest U.S. airline to its employees. In return, United workers will take pay cuts and work rule concessions that will save the company some $5 billion over the next six years.

Is this a smart deal for United? Will it produce a truly worker-run company?

Clearly, United had to do something. The airline has lost nearly $1 billion over the past three years. As a full-service international airline, with a complex "hub-and-spoke" system of routes, United is a high-cost carrier. It is increasingly vulnerable to competition from cut-rate regional airlines like Southwest, which can skim the cream from United's most profitable routes and challenge its fares.

Earlier this year, United considered a very different strategy. Executives hoped to spin off several low-cost, regional subsidiary airlines and to contract out everything possible. "All that would remain of the old United would be the management, the marketing and the software," said one consultant familiar with the scheme.

This earlier plan was seen by management as a way to turn unwieldy United into several mini-Southwests. In early 1993, United Chairman Steven Wolf was touting the plan to Wall Street analysts as a grand strategy for breaking United's unions, restoring profitability and doubling its stock price.

In the end, Mr. Wolf decided this approach would provoke bitter labor strife, and would be too risky. Instead, he reversed course and sought partnership with the employees.

The deal will allow United to operate a leaner, more efficient airline. But it remains to be seen whether the full promise of worker ownership will be achieved.

Assistant Labor Secretary Martin Manley, who represented the Clinton administration in talks with labor and management, adds, "The test of an employee-owned company is not just the ownership. It's the employee participation, because that's where the value is added."

According to Rutgers University Professor Joseph Blasi, only a handful of the roughly 1,500 U.S. companies that are substantially worker owned have achieved the potential gains to morale and productivity that can come with greater employee participation. It remains to be seen whether one of them will be United.

Pessimists can point to the fact that profitability in the deregulated airline business is a moving target. As United cuts its costs, major competitors Delta and American will not stand still.

In addition, United's labor relations remain turbulent. When buy-out negotiations started, management pledged to make no major changes in company operations while discussions took place. But United went ahead with plans to set up a new flight attendant domicile in Taiwan.

In protest, the flight attendants' union left the bargaining table and still hasn't returned. Since flight attendants are the airline workers closest to the customer, much of the promise of worker ownership will not be realized if they are excluded.

And although they will own more than half the company, United workers will get only three or possibly four seats on a 12-person board. This ratio was intended to reassure Wall Street that United will still be managed in a businesslike way. But it raises the specter of employees of a nominally worker-owned company fighting management and even going on strike against themselves, something that has actually occurred in other firms where employees got ownership but not effective control.

On the plus side, as part of the deal United will get a new chairman, former Chrysler executive Gerald Greenwald. Unlike the present chairman, Mr. Greenwald is trusted by United's unions and is generally enthusiastic about worker participation. Most observers say flight attendants will likely join in the buy-out plan this spring, when Mr. Greenwald succeeds Steven Wolf.

Also encouraging is the fact that United, despite the recent downturn in the airline business, is one of the healthiest companies ever sold to employees. Most analysts of the deal think the company will return to profitability in 1994.

The real question is whether worker participation can succeed in a company with 74,000 employees. A decade ago, a promising experiment in worker ownership and participation at Eastern airlines was achieving hundreds of millions of dollars in cost savings, when industry conditions worsened and the airline eventually went bankrupt.

United is far better positioned than Eastern. But U.S. industry still resists a meaningful culture of employee participation. It is too easy for managers to view a deal like United's as just a way to cut costs, and for workers to see it as one more giveback -- rather than opportunities for collaboration and mutual gain.

It will take more than a transfer of stock certificates to change that mentality in the friendly skies.

Robert Kuttner writes a column on economic matters.

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