United's Unions Would Rather Buy Than StrikeKevin Kelly and Aaron Bernstein
You can say one thing for the 8,300 pilots at UAL Corp.'s United Airlines Inc.: they're no quitters. The pilots' union has led three failed efforts since 1987 to buy the carrier. Now, using new tactics, it's at it again. The past bids essentially were leveraged buyouts that failed when United's three
unions couldn't raise the billions needed. This time, the plan is more like a recapitalization, avoiding the need to borrow.
The motivation has shifted, too. Originally, the pilots hoped a buyout would stave off demands for deep wage cuts like those that led to a 29-day strike in 1985. This time, all three unions--pilots, mechanics, and flight attendants--worry that a new round of restructuring in an industry plagued with excess capacity will lead to large layoffs. To block United's plans to shed assets, labor has offered cuts of 15% for a 60% stake in the carrier. "We are searching for a way to avoid job losses," says one union source at United. "If we can get a significant stake in the company, employees can direct their own future."
The threat to jobs is real enough. Recently, United said that it would sell its flight kitchens, which employ 5,800 members--20% of the local mechanics union. It has discussed having outside companies repair aircraft engines. It plans to base some flight attendants in Taipei, which means hiring foreign workers instead of U.S. ones. And management has threatened to spin off short-haul routes.
The problem for the unions is that United is too healthy to have to deal on their terms. Last year, unions swapped concessions for a 45% stake in Trans World Airlines Inc. This summer, labor groups got 30% of Northwest Airlines Inc. in exchange for pay cuts. But those airlines were on the brink of collapse, and neither had public stockholders to satisfy. United is a public company and in relatively decent shape despite recent large losses. So labor must top the company's stock price, currently $144, which means raising at least $3.5 billion. In 1990, United's board accepted labor's bid, but it couldn't raise the money.
To circumvent this problem, the unions are making an unusual offer. The only cash existing stockholders would get--some $500 million, or $20 a share--would come from United's stash of about $1.9 billion. Stockholders also would keep 40% of the company, worth another $58 a share at the current price. And they would get a new equity issue, probably a convertible preferred series. Its value would be enhanced by the concessions, which would produce a newly competitive cost structure. Union insiders say that the cuts would reduce United's total wage-and-benefit tab--$4.56 billion last year--by 15% vs. what it would otherwise be in five years (table). For instance, pilots would accept an immediate 11.9% cut in pay, forgo a 4.7% wage hike due in October, and allow pension contributions to drop from 8% of pay to 1%.
In return, each union would get stock based on the size of its cuts. Each also would get one of United's 13 board seats, with another going to a representative of United's 25,000 nonunionized employees. While labor wouldn't have actual control over asset sales, it would gain early access to strategic plans. "That would give the unions a preemptive opportunity to come up with alternatives," says Joseph R. Blasi, a management professor at Rutgers University.
RISKY. United is taking the bid seriously. Lawyers and investment bankers from both sides have met in New York to go over details. The major sticking point is likely to be price. The unions want to pay a small premium over the current price, while management wants $180 a share, insiders say. The gap could be bridged by reducing the share labor would own. But the unions say they see no point in doing the deal if labor fails to gain a majority interest.
Union leaders concede that United faces competitive problems even if the buyout goes through. So any stock employees wind up with could be a risky investment. But as employees at TWA and Northwest decided, that may be a better choice than life without a job.