Ual's Esop: From Milestone To Millstone?

UAL's employees are rethinking their landmark ESOP

United Airlines Captain James Curtin believes in employee ownership. Back in 1994, he eagerly joined thousands of fellow employees who got their hands on a 55% equity stake in the carrier's parent, UAL Corp., in exchange for steep pay cuts. What he has seen since, Curtin says, has confirmed the wisdom of that record $4.9 billion swap: uninterrupted labor peace, job security, worker clout in the boardroom, an expanding airline that is the world's largest and, often, most profitable, and a retirement nest egg for 80,000 present and past employees. To the 56-year-old Curtin, it's a no-brainer whether to extend the company's employee stock ownership plan (ESOP) when it expires starting in mid-April. "I would like to see ESOP II, Son of ESOP, ESOP Jr., whatever you want to call it," he says.

Surprisingly, whether he will or not is an open question. Most United employees seem to agree with Curtin that the idea has lived up to expectations. But there are many who aren't ready to cough up more bucks to buy stock for a second ESOP, which they would need to do to replace shares employees sell as they retire. They also want liquidity: the ability to sell their shares without retiring, which an ESOP doesn't allow. What's more, many feel no great sense of urgency, because labor's board seats and governance controls will remain intact until the employees' stake falls below 20%--some 15 years from now.

The leaders of United's unions representing pilots and machinists remain committed to the ESOP and want to win over those who are wavering. But they have decided to focus first on getting hefty pay hikes in new labor pacts (the old ones expire on Apr. 12 for the 9,900 pilots and on July 12 for the 48,600 machinists). Only after that will union officials campaign to reinstitute the ESOP. Says International Association of Machinists (IAM) President R. Thomas Buffenbarger: "It's absolutely a good idea to renew the ESOP, but we have a big education job to do to persuade our members."

VANGUARD. United will be following the national trend if it allows its ESOP to expire. Six years ago, the carrier was in the vanguard of a movement that seemed destined to restructure Corporate America. Advocates promoted employee ownership plans as a way to align the interests of workers and their companies to spur productivity--and let employees share in the proceeds. But no mass movement developed to emulate United's bold experiment. Instead, Corporate America has embraced employee ownership through more modest stock purchase and stock option plans, which entail less employee sacrifice. Some 11,500 ESOPs still exist, mostly at small, private companies, but their growth stalled in the 1990s, says the Oakland (Calif.)-based National Center for Employee Ownership.

Just a year ago, United seemed poised to replace its ESOP with a second plan. The unions were still celebrating their boardroom triumph of mid-'98, when employee-directors nixed then-Chairman Gerald Greenwald's choice of a successor. Instead, labor blessed the selection of James E. Goodwin, UAL's president and chief operating officer at the time. The Air Line Pilots Assn. (ALPA) asked the Wall Street financial advisers who designed the original ESOP to work up a new plan that would minimize the price tag for employees and solve the liquidity problem.

Management, too, seemed largely happy with employee ownership, despite occasional spats with labor. The virtues of a collaborative culture were driven home by a 1998 pilot strike at Northwest and last year's pilot sickout at American. United management saw its happy workforce as a competitive advantage, even casting its employee-owners in a series of ads trumpeting what happens when workers become their own masters.

CHANGE OF HEART. What triggered the change of heart? First, two of the biggest champions of employee ownership left. Greenwald, who had been the unions' choice to lead UAL during the 1994 buyout, retired in July after settling on Goodwin as a successor. And while a UAL spokesman says Goodwin would back a renewed ESOP, he doesn't plan to speak publicly for one and declined to be interviewed on the subject.

Then in October, United's ALPA chapter elected a militant, Frederick C. Dubinsky, to replace pro-ESOP Michael Glawe as its chairman. Dubinsky led several of ALPA's early buyout efforts at United but opposed the 1994 ESOP because it didn't give labor more control for its 55% stake. He came to power again by promising to win big pay hikes. After that, the pilots will address "the ESOP perpetuation contingent on the right condition, and that is how much we're paying for the stock" in wage or benefit cuts, says Dubinsky.

Meanwhile, a rival union that has long opposed the ESOP has been making life difficult for the machinists union. In 1998, the IAM scored big time when 20,000 unorganized United reservation and gate agents voted to form an IAM local. But members sympathetic to the rival Aircraft Mechanics Fraternal Assn. (AMFA) quickly used the victory against IAM leaders. The dissidents argue that the IAM is more concerned with helping unskilled employees get a better deal under the ESOP--something a large minority of machinists hated to begin with--than in fighting for higher wages for skilled union mechanics.

AMFA has fueled opposition to an ESOP renewal by pointing out that mechanics' $24-an-hour pay lags that of almost every other major U.S. airline by an average of $3 or so an hour. "We took it in the shorts for six years now," complains Joseph Prisco, a San Francisco-based mechanic and AMFA organizer who maintains a Web site detailing the company's lagging wages. "Now it's payback time."

The wild ride of UAL stock has also helped erode employees' enthusiasm for the ESOP. The company's shares more than quadrupled since the buyout through 1997, handily beating the market. But the stock has plunged by some 45% since April, 1999, as airlines stocks were savaged by high oil prices. And since an ESOP is a retirement plan, employees can't sell until they retire or leave the company. "A lot of guys don't want to take the chance that the stock is going to be valuable when they retire," says George Ramirez, a United pilot since 1988. Agrees one lower-paid baggage handler: "I'd like to invest myself, take my own chances."

United employees also know they won't be giving up much immediately by letting the current ESOP lapse. Even if the unions stop buying stock this year, they are guaranteed three seats on the 12-member UAL board, a 75% vote on shareholder questions, and veto power over such matters as naming a chairman and approving big acquisitions or spin-offs until their collective holdings drop to 20%. Based on anticipated attrition and retirement rates, the unions don't expect to cross that threshold until about 2016. "The question is, what's the present value of something that's not going to happen for 15 or 16 years?" asks one union consultant.

EASIER TO SWALLOW. Buffenbarger and Dubinsky figure the answer will be easier to swallow if employees have big raises in hand. A month before bargaining got under way in February, UAL said it planned to boost payroll spending this year by $780 million to bring salaries back up to industry averages. That alone would swell compensation costs by 14% from 1999, and the unions vow to win even bigger gains.

While the unions bargain for new labor pacts, their financial advisers are noodling on low-cost alternatives to a new ESOP. One is to create a voluntary plan in which the company would match employee contributions with stock. Another is to ask workers to give up a small share of their expected wage gains or to trade work-rule concessions so labor can buy back the shares of retirees. At a minimum, union leaders want to find a way to let newly hired employees buy stock. Otherwise, they would be second-class citizens working side by side with owner-employees.

In the end, the unions probably will make at least some kind of gesture toward renewing the ESOP. But unless employees dig into their pockets to keep their full 55% stake, United's bold experiment in employee ownership will slowly fade into history.

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