Brawl In The Cockpit At Usair

For Seth E. Schofield, the breaking point came on Friday afternoon, July 28, in the windowless eighth-floor boardroom of USAir Group Inc.'s headquarters in Arlington, Va. Months of negotiations with unions to reduce sky-high labor costs were going nowhere. As the chief executive sipped coffee with union representatives while discussing the terms of a new contract with the Air Line Pilots Assn., Schofield's mood suddenly darkened, say sources who attended the meeting. "We are at an impasse," he proclaimed. "We just can't do it."

Five weeks later, on Sept. 6, Schofield abruptly announced his resignation, effective as soon as a successor is installed. His departure shocked the industry: The executive has been widely credited for making USAir profitable despite two fatal air crashes, union strife, and a gloomy forecast of the company's future by its own accountants.

"FRESH LEGS." Under Schofield, 56, the nation's sixth-largest airline has indeed made gains. For USAir's directors, however, "it's only a job half done," says board member John W. Harris, president of a real estate development firm. Soon after the union talks broke down, Schofield and directors agreed that he should step down for the good of the airline. "The highly visible and drawn-out negotiations with the unions just didn't work," says a former board member.

More important, few of USAir's diverse and fractious interests were happy with Schofield's progress. British Airways PLC, with three board seats and 24.6% equity stake, wanted to see a much tougher stance with the company's unions. Investor Warren E. Buffett, forced to write down his Berkshire Hathaway Corp.'s stake in the airline by $270 million, wasn't any more sanguine. Union officials and other sources say theboardroomhad grown tense in recent months.

Schofield declined to discuss his resignation; a USAir spokesman said only that the board wanted "fresh legs." At one time, though, the airline's board appeared to judge Schofield as well up to the task. He came into the job in mid-1992, after 35 years with the carrier, and developed an ambitious plan to cut $1 billion a year from expenses. Progress was slow. Then, earlier this year, Schofield managed to strike tentative pacts with each of the airline's unions. After five straight years of losses, USAir reported a $112.9 million second-quarter profit. It's now poised to make money for the full year.

But the sunny financial outlook only played against Schofield. Union leaders questioned whether they still had to concede work rules and wages for a company that was suddenly profitable. Led by the pilots, they pushed for seats on USAir's board, plus a stake in the company, in exchange for $2.5 billion in givebacks over five years. They pressed, too, for British Air and Buffett to accept lower dividends on their preferred stock.

BUFFETT BEEF. Meanwhile, British Air was angling for an agreement allowing it to strike partnerships with other U.S. airlines, a move Schofield and the unions both opposed. Neither British Air nor Buffett would accept the dividend cuts. And British Air balked at putting workers on the board. "We disagree with it in principle," British Air Chairman Sir Colin Marshall said in May. "But we must wait until we see the deal in full before making any decisions."

Schofield was caught in the middle. It didn't help that Buffett, disenchanted after seeing the value of his USAir stock plunge 75%, announced in March that he and Berkshire Hathaway Vice-Chairman Charles T. Munger would step down from the board in November.

Now, despite USAir's relative financial health, some unionists fear the worst. With Schofield and Buffett leaving, "British Air is the only one left standing," says one negotiator, likely pointing USAir toward more labor war. Indeed, BA's Marshall, who is helping to lead the search for Schofield's replacement, probably will favor someone who will take a hard line in union talks. Two possible successors are former United Airlines chief Stephen M. Wolf or Hollis Harris, who headed Delta Air Lines.

British Air must decide by the end of January whether to extend its option to buy more of USAir's stock. The airline surely could use more capital. But BA has said it won't increase its stake unless the carrier lowers labor costs. And the unions aren't budging. To investors, the scenario must seem depressingly familiar. Schofield's departure, ultimately, may not solve any of USAir's problems.

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