Union workers at Chrysler and General Motors (GM) have long lamented that they could run the automakers better than management. Now they'll get their chance—to a degree, at least. But if the experience of workers at other companies— such as United Airlines (UAUA), where employees also made financial concessions in exchange for equity and a larger voice in operations—serve as any guide, auto workers should be careful what they wish for.
Under the terms of the government's bailout of the two troubled automakers, union workers at Chrysler will gain 55% ownership in return for reducing by half the automaker's $10.6 billion obligation to the United Auto Workers' retiree health-care fund. Similarly, UAW members will own 39% of General Motors through a deal that allows GM to use stock instead of cash to fund half of its $20.4 billion obligation to the UAW's retiree health-care fund.
While there are no guarantees that the automakers will survive their current downward spirals, UAW leaders clearly feel they had no good alternatives. "We fought to maintain our wages, our health care, and our jobs," UAW President Ron Gettelfinger said in a letter to workers. "In the face of adversity, we secured new product guarantees and we negotiated new opportunities for UAW involvement in future business decisions."
Can automaker management adapt?
Those very words could have been spoken by union leaders at United Airlines in 1994, when management and workers at the Chicago-based company struck a similar deal to bring the carrier back from the brink of financial crisis. In exchange for $700 million in wage concessions, workers for key union groups received three board seats and a 55% ownership stake in the form of an employee stock ownership plan.
What happened at United over the following decade could provide valuable lessons to the workers at Chrysler and GM. The biggest key? Whether management at the automakers motivates workers to buy in to the turnaround and gets them to act as owners. "If the [companies] see this as just financing engineering and don't adapt their management style, then [unions] are just going to behave the way they always did," says Charles O'Reilly, the Frank E. Buck Professor of Management at Stanford University.
In the first year out of the gate, the new management-labor partnership at United looked like a winner for all parties. The airline made the most of its new ownership structure: United encouraged customers to "fly our friendly skies," and callers to its reservation system were told that "one of our owner-representatives will be with you shortly." But the changes went beyond slogans. The union-influenced board quickly replaced polarizing CEO Stephen Wolf with Gerald Greenwald, a former auto executive who vowed to give workers a greater voice in making decisions. Indeed, workers from across the airline were brought together in new "best of business" teams that generated tens of millions of dollars in cost savings across the system. With United's historically disenfranchised workers suddenly feeling—and acting—like owners, the number of formal grievances dropped by nearly three-quarters, and absenteeism and workers' compensation claims fell as well. Buoyed by the strengthening economy, United's shares more than tripled over the next several years—boosting the value of those ESOP shares by more than $2 billion.
United prospered until business fell
But by the late 1990s, cracks began to form. The ascendancy of new low-cost rivals such as Southwest (LUV) and AirTran (AAI) crimped profits at traditional carriers like United, burdened as they were by the high costs of both maintaining hub-and-spoke networks and having workforces that were older and mostly unionized. But at United, the problems ran even deeper. Despite its special heritage—United claims it was the first airline to offer commercial service—the relationship between management and the unions had been fractious for decades.
So while then-CEO Greenwald was able to bridge the differing interests of both Wall Street and his unionized workforce, the reservoir of goodwill wasn't deep enough to survive the industry's inevitable downturns. What's more, employees at United were divided over the ESOP from the start. The flight attendants declined to participate in it and the vote at the machinists' union was a 52%-to-48% squeaker because many of the company's mechanics felt the pilots were reaping most of the spoils.
These fissures were laid bare for all to see when Greenwald tried to hand the reins to his successor. In 1998, union representatives forced out his first choice, then-President John Edwardson. The job fell to Edwardson's successor as president, James E. Goodwin, a veteran executive. But it quickly became clear that the next generation of managers didn't share Greenwald's reverence for the new ownership structure. United's pilots felt betrayed when Goodwin negotiated a merger—later aborted—with US Airways (LCC) that would have pushed many United pilots down the seniority ranks. They felt even more furious when the new CEO let their contract lapse without negotiating a new deal.
With labor relations poisoned, pilots began staging "sickouts" that, when combined with a stretch of bad weather in the summer of 2000, forced United to cancel 26,000 flights, driving many passengers to other airlines. The cure only made matters worse: To appease the pilots, Goodwin agreed to an expensive new labor contract that sent United's costs through the roof. The problems came to a head when the 2001 terrorist attacks sent passenger traffic plunging. Goodwin resigned in October 2001, and the company filed for bankruptcy the following year. Instead of the untold riches they'd hoped for, United's employees saw the value of their ESOPs become largely worthless. The structure was "fatally flawed," says Rick Dubinsky, a retired United pilot and union leader at the time. "The airline never changed its corporate culture. The business model wasn't modified in many respects and squandered the cost savings from the ESOP."
Needed: "a huge shift in culture"
To be sure, some ESOP experts say that certain of the problems were unique to United and won't necessarily be encountered at GM and Chrysler. For instance, while labor relations at the automakers have long been poor, at United "the union-union relations were terrible, too," notes Corey Rosen, who runs the National Center for Employee Ownership, a nonprofit research and advocacy group.
These experts do say that GM and Chrysler can learn from the United debacle—namely, that labor-as-owner arrangements work only when the management team truly brings workers into decisions and can communicate well about the ongoing trade-offs and sacrifices that owners sometime have to make. "Managers must have an 'open book' policy with high employee involvement," Rosen says. "For most companies, this is a huge shift in culture."
Experts concede that ESOPs work best when a company is thriving; the risks are much larger at companies that are struggling. That's because recriminations between management and workers rise if the turnaround doesn't take hold. "When business is bad and the outlook for the company isn't great, an 'I-told-you-so' attitude starts to form among workers," notes Michael Keeling, president of the ESOP Assn., a Washington-based trade group whose membership consists of companies that have done ESOPs.
Then again, it worked once before in Detroit: As part of the government's 1979 bailout of Chrysler, workers traded concessions for a 15% stake in the company, which paid off handsomely when a turnaround bloomed. But now it's up to the next generation of workers and managers to demonstrate that they can learn from history.