Commentary: At Northwest, An Esop In Name Only

When Northwest Airlines Inc. staved off bankruptcy in 1993 by selling a third of the company to employees, both sides hailed the pact as the start of a new relationship between workers and managers. "Airline historians," predicted Northwest's top spokesman, "will probably record the events of the last year as the metamorphosis of a company and perhaps an industry."

Well, not quite. Today, Northwest's labor relations are the industry's worst. Its pilots struck on Aug. 29, and neither side seems in a hurry to settle. Even if they do soon, the unrest is likely to spread to the mechanics, who rejected a tentative pact on Aug. 19. Flight attendants may not be far behind.

Still, don't blame employee stock ownership plans for Northwest's woes. Northwest's experience shows, by conspicuous absence, what ESOPs need to be successful: genuine employee input into corporate decisions. Only by coupling a financial stake with worker involvement can employee ownership deliver on its promise. "An ESOP raises expectations that need to be met," says Corey Rosen, executive director at the National Center for Employee Ownership. Otherwise, "you can cause the company to perform worse because people feel manipulated."

SHORTCHANGED. Where did Northwest's ESOP go wrong? For starters, the stakes of many of its employees don't vary with the stock price. Northwest was a private company in 1993, and the $900 million that 39,000 employees gave in concessions was as much a loan as a true piece of the company. Only the pilots--whose large salaries allow them to take more risk--converted their take to common stock when Northwest went public in 1994. Most flight attendants and machinists didn't follow suit. They can still do so--but at a conversion rate 50% below the pilots'. The rest will be paid back their concessions in 2003. Their prospects remain the same whether Northwest stock trades at $60, as it did in March, or at today's $28.

Even the pilots feel shortchanged. Sure, they have sold 40%of their stock so far at a gain of $117 million. But that goes into their retirement accounts, while top Northwest executives were able to cash in millions of dollars worth of stock while it was near its peak. When the company then took out TV ads calling pilots greedy, many were outraged.

Northwest and its workers also failed to change how the company is run. Yes, three union representatives joined the board and the company asked them to stay on after the givebacks ended in 1996. But at the airport and in the sky, little changed. "We still have some of the employee committees," says pilot spokesman Paul Omodt, "but obviously they're not listening to us."

Compare that with UAL Corp.'s United Airlines Inc., whose employees bought 55% of the company in 1994. At United, the workers' share came in stock, and ticker-watching is now a daily ritual among employees. Moreover, the two sides set up procedures so that employees have a say in running the place; workers vetoed a proposed merger with U.S. Airways in 1995. The two sides also use mediation more often to resolve such issues as retiree benefits. United pilots hope to reach a new contract before the current one expires in April of 2000--a rare feat in the industry.

Of course, United has its own labor troubles, but even those reflect the holes in its ESOP. Last spring, the airline and the International Association of Machinists & Aerospace Workers traded angry words when the IAM tried to sign up ticket agents. The union succeeded, largely because agents felt excluded by the 1994 ESOP. Still, United's culture helped to prevent outright warfare. Says United CEO Gerald Greenwald: "To me, the test is whether we are able to talk our way through the tough issues."

That's a test Northwest and its unions have failed miserably. Pilots and executives are staring each other down while planes sit idle and other workers mull their own strikes. The question now is whether managers and employees can patch up their differences and get off the ground. If they wait too long, they risk a fate similar to that of Eastern Air Lines Inc. or Pan American Airways Inc.--carriers that set up ESOPs in the 1980s without really changing relations with employees. Just look in the corporate obituaries to see what happened to them.

Before it's here, it's on the Bloomberg Terminal.