What's Your Story Idea April 29, 2009, 12:01AM EST

Autoworkers at the Top of Automakers: What's Next?

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United prospered until business fell

But by the late 1990s, cracks began to form. The ascendancy of new low-cost rivals such as Southwest (LUV) and AirTran (AAI) crimped profits at traditional carriers like United, burdened as they were by the high costs of both maintaining hub-and-spoke networks and having workforces that were older and mostly unionized. But at United, the problems ran even deeper. Despite its special heritage—United claims it was the first airline to offer commercial service—the relationship between management and the unions had been fractious for decades.

So while then-CEO Greenwald was able to bridge the differing interests of both Wall Street and his unionized workforce, the reservoir of goodwill wasn't deep enough to survive the industry's inevitable downturns. What's more, employees at United were divided over the ESOP from the start. The flight attendants declined to participate in it and the vote at the machinists' union was a 52%-to-48% squeaker because many of the company's mechanics felt the pilots were reaping most of the spoils.

These fissures were laid bare for all to see when Greenwald tried to hand the reins to his successor. In 1998, union representatives forced out his first choice, then-President John Edwardson. The job fell to Edwardson's successor as president, James E. Goodwin, a veteran executive. But it quickly became clear that the next generation of managers didn't share Greenwald's reverence for the new ownership structure. United's pilots felt betrayed when Goodwin negotiated a merger—later aborted—with US Airways (LCC) that would have pushed many United pilots down the seniority ranks. They felt even more furious when the new CEO let their contract lapse without negotiating a new deal.

With labor relations poisoned, pilots began staging "sickouts" that, when combined with a stretch of bad weather in the summer of 2000, forced United to cancel 26,000 flights, driving many passengers to other airlines. The cure only made matters worse: To appease the pilots, Goodwin agreed to an expensive new labor contract that sent United's costs through the roof. The problems came to a head when the 2001 terrorist attacks sent passenger traffic plunging. Goodwin resigned in October 2001, and the company filed for bankruptcy the following year. Instead of the untold riches they'd hoped for, United's employees saw the value of their ESOPs become largely worthless. The structure was "fatally flawed," says Rick Dubinsky, a retired United pilot and union leader at the time. "The airline never changed its corporate culture. The business model wasn't modified in many respects and squandered the cost savings from the ESOP."

Needed: "a huge shift in culture"

To be sure, some ESOP experts say that certain of the problems were unique to United and won't necessarily be encountered at GM and Chrysler. For instance, while labor relations at the automakers have long been poor, at United "the union-union relations were terrible, too," notes Corey Rosen, who runs the National Center for Employee Ownership, a nonprofit research and advocacy group.

These experts do say that GM and Chrysler can learn from the United debacle—namely, that labor-as-owner arrangements work only when the management team truly brings workers into decisions and can communicate well about the ongoing trade-offs and sacrifices that owners sometime have to make. "Managers must have an 'open book' policy with high employee involvement," Rosen says. "For most companies, this is a huge shift in culture."

Experts concede that ESOPs work best when a company is thriving; the risks are much larger at companies that are struggling. That's because recriminations between management and workers rise if the turnaround doesn't take hold. "When business is bad and the outlook for the company isn't great, an 'I-told-you-so' attitude starts to form among workers," notes Michael Keeling, president of the ESOP Assn., a Washington-based trade group whose membership consists of companies that have done ESOPs.

Then again, it worked once before in Detroit: As part of the government's 1979 bailout of Chrysler, workers traded concessions for a 15% stake in the company, which paid off handsomely when a turnaround bloomed. But now it's up to the next generation of workers and managers to demonstrate that they can learn from history.

Return to the Auto Bailout Special Report Table of Contents

With Brian Burnsed in Atlanta