Northwest Airlines: The Turnaround Bill Arrives

An ESOP saved the airline. Now labor wants its due

Northwest Airlines CEO John H. Dasburg has been flying high for the past three years. The carrier has posted record profits, paid down billions in debt, and repaired badly damaged relations with its unions. A strong economy and travel-happy consumers certainly helped. But underpinning the turnaround was a three-year employee stock ownership plan that staved off bankruptcy in 1993 by giving employees a 30% equity stake in exchange for $886 million in concessions.

Now the ESOP is drawing to a close, and Dasburg suddenly is heading into chop. Wages at Northwest Airlines Inc. will "snap back" by 12%, to 1993 levels, while rivals hold theirs steady or reduce them. The added cost will crimp cash flow, constraining Northwest's ability to modernize its aging fleet and pay down the remaining $2.7 billion in debt (table).

OPTIMISTIC. Northwest's harmonious labor relations may be endangered as well. Management is determined to offset any pay hikes with work-rule changes that lift productivity. Yet union leaders want raises on top of the snapbacks already due. Dasburg is optimistic that the problems can be overcome. But management and labor already have begun to clash. "The strong improvement over the past few years will probably be halted," predicts Michael Lowry, publisher of AirWatch Report, a newsletter in Oswego, Ore.

Dasburg's biggest challenge is to establish a new relationship with labor. Northwest's 45,000 employees don't see themselves as worker-owners the way those at majority-owned United Airlines Inc. do. Instead, they view the ESOP as an emergency loan to keep the company afloat. Indeed, the unions have said flatly they don't want to renew the ESOP by taking more pay cuts.

Nor has Dasburg built a culture of worker participation. Aside from a successful employee suggestion program, there are no task teams to reengineer work or efforts to bring workers into decision-making. That's in contrast to United, which has teams tackling everything from cash management to fuel use. While today's cooperative labor relations won't unravel immediately, "the worry is what happens two or three years down the road, when all this employee ownership is forgotten," says Corey Rosen, head of the National Center for Employee Ownership in Oakland, Calif.

The battle over pay is just heating up. The 12% snapbacks began to go into effect on Aug. 1. Because the raises only restore them to 1993 levels, union leaders want added pay hikes in the new contracts. "We've lived through the downside. We also want in on the upside," says Marv Sandrin, president of the Northwest local of the International Association of Machinists.

Dasburg will have a difficult time pleading poverty. In late July, Northwest posted a 94% increase in second-quarter profits, to $203 million. And last year the company earned a record $392 million. Dasburg concedes that the talks are likely to "temporarily damage" management's relationship with employees. That's because he's determined to keep expenses in line with those of rivals. "We will not allow our costs to rise," vows Richard B. Hirst, Northwest's senior vice-president for corporate affairs and top negotiator.

This kind of talk has union leaders edgy. They're not sure how many easy productivity improvements are still available. Even before talks begin, there are signs that labor and management aren't on the same page. Under the 1993 ESOP contract, pilots get up to a 3% raise on top of their snapback, based on a formula tied to average pay hikes at rival airlines. But when Northwest pilots said recently that they expect the extra 3%, Northwest said it wanted the issue arbitrated. "We were dumbfounded," says Paul Omodt, a spokesman for the Air Line Pilots Assn. "It's fairly simple math." Dasburg attributes the dispute to ambiguity in the formula.

Still, there are some signs of cooperation. Management has agreed to keep labor's three board seats for 10 more years, even though the ESOP's equity stake will dwindle as employees retire and cash out. And recently, mechanics at Northwest's maintenance base in Atlanta agreed to work four 10-hour days a week without overtime pay to clear up a backlog of DC-9s that require heavy maintenance. That kind of teamwork helped give Northwest three fat years. The trick will be to keep this soaring airline from losing altitude.

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