United We Sit...And Haggle

It's the deal that won't die. Just two weeks after all sides pronounced the employee bid to buy United Airlines Inc. extinct, the carrier's management and unions met on Nov. 30 to launch yet another round of talks.

What brought them back together? Both realized that the alternatives would leave everyone worse off. The unions stand to lose thousands of jobs if the company turns instead to an ambitious restructuring plan. Better, they figured, to return to the table with new ideas--namely, improving on their $140-a-share offer or taking less than the 60% stake they had insisted on before.

United management had good reason to start talking again, too. Its proposed restructuring plan, which involves spinning off the carrier's short-haul routes into four new companies, is fraught with risk. Indeed, internal company studies obtained by BUSINESS WEEK suggest that the carrier would make less than 2.5% operating profits through 1998. "They could create the next Pan Am," says Michael Boyd, the president of Aviation Systems Research Corp., an industry consultant in Golden, Colo.

STICKING POINT. The two sides still must find a way to close the gap between them. At the Nov. 30 meeting in New York, union officials and United chief labor negotiator Paul George resolved many outstanding issues about proposed new labor pacts and the rules that would govern the board of directors after a buyout. "For the first time, they were really responsive," says a union source.

The next day, United Chairman Stephen M. Wolf and President John C. Pope sat down with union leaders to tackle the central sticking point: price. Company officials say privately that they want close to $180 a share. The International Association of Machinists (IAM) has proposed breaking the logjam by accepting less than 50% for the $5.5 billion in wage and benefit concessions the unions have offered, according to union sources. The pilots, however, insist on a majority shareholding; they say they might cede more concessions in return. The problem is, the machinists, who make less than half what pilots earn, don't want to give up any more.

That's where the flight attendants may help out. They walked away from the buyout on Sept. 30, after United opened a foreign flight-attendant base that deprives U.S. union members of jobs. Now, they want back in. Since the attendants already had agreed to contribute some $600 million in concessions, their participation could allow the unions to raise their bid. If United comes down a little, the two sides might meet somewhere in the middle.

Certainly the company has reason to compromise. Although the internal studies say that a restructured United would be worth at least $183 a share, the studies also indicate that the new core airline likely would fare worse than the spin-offs. The basic restructuring plan, drawn up by United staffers and consultants from Booz Allen & Hamilton Inc., envisions the spin-off of four regional carriers that would operate short-haul flights representing 25% of United's revenues (chart). The spin-offs would rake in operating profits of 13% to 22%, according to Booz Allen.

KITCHEN QUARREL. The study doesn't project what the profits would be at the remaining 75% of the airline, which would consist primarily of transcontinental and international routes. However, it's possible to get a rough estimate of what might happen. A separate analysis by investment bankers First Boston Corp. includes overall operating-profit projections for the combined entities through 1998. Take out the share that Booz Allen attributes to the four spin-offs, and what's left is a company making a mere 2.5% in operating profits. In other words, the core airline would be in the same sorry shape it is today: suffering from low profits and few prospects for growth. United declined to discuss its internal studies.

Despite the incentive for United and labor to cut a deal, the barriers preventing a buyout remain high. The first attempt foundered in part because United carried out its threat to sell its flight kitchens to Dobbs International Services Inc., which will cost the IAM 5,200 jobs. The IAM still insists that the kitchen deal be abrogated, which United could do if it was willing to face a breach-of-contract suit. But the company has made no promises.

Still, the alternative, filled with prospects of labor strife and financial risk, is hardly promising either. Perhaps if the two sides talk long enough, they'll find a way out of the quagmire.

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