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UAL Corp.'s United Airlines isn't looking too united these days. Despite the carrier's record $1.8 billion loss last year, its 13,000 unionized mechanics vetoed a 37% pay hike on Feb. 12, setting the stage for a possible strike a week later.
The setback is bad news for UAL (UAL
), whose stock has been sinking even lower in recent weeks as passengers, worried about a walkout, began booking on other carriers. The last strike at United was in 1985, when the pilots walked out. And the last time the mechanics struck was in 1979.
It's not so much that the members of the International Association of Machinists (IAM) want more. Indeed, the deal they rejected is essentially the same one they demanded before contract talks were disrupted by the September 11 atrocities.
EGGED ON. Instead, when 68% of the IAM's mechanics voted to reject the deal, they were simply venting their anger at a management they had come to distrust long before the terrorist attacks knocked the industry into a tailspin,, union officials say. They're being egged on by a rival labor group, the Aircraft Mechanics Fraternal Assn., that's trying to persuade them to switch unions.
The mechanics' seemingly illogical rejection of a huge pay hike stems from years of frustration about their wages. They and most other employees took 15% pay cuts in 1994 to buy a majority of the company through an employee stock-ownership plan (ESOP). Mechanics' hourly wages then remained stuck at about $25 an hour, while that of their counterparts at carriers such as American climbed to as much as $34.
United agreed only last September to lift their pay by roughly 37% but reneged after the terrorist attacks. Then, to everyone's surprise, a Presidential Emergency Board appointed by the Bush Administration recommended the same deal. Although the mechanics have rejected it, IAM leaders say even small improvements in the offer on the table could bring an agreement by the Feb. 20 strike date. UAL and the IAM will be back at the bargaining table on Friday, Feb. 15.
Hence, the odds are fairly good that the mechanics will come to terms with the company and stave off a walkout. Moreover, once the contract is settled, the IAM and United's other unions are likely to turn around and swallow wage concessions to help the airline return to health.
PAY CUTS NEEDED. Insiders say a financial recovery team headed by Chief Financial Officer Frederic "Jake" Brace has been quietly working with the Air Line Pilots Assn. (ALPA) on a broad program to stabilize the company. United's big problem is that its dependence on business flyers, who have cut back their spending considerably, has left it weaker than rivals. The rescue plan: Raise up to $3 billion in new funds, restructure the airline's debt, and slash operating expenses -- including labor costs.
Wages still account for 40% of United's total costs. The debt restructuring and sourcing of new capital under Brace's plan, which is still being developed, won't be possible unless all 80,000 employees lower their pay again, at least temporarily. "We have to reset out wage rates," Brace told reporters on Feb. 1. "I think labor understands the [current] financial reality."
IAM leaders have been kept informed of the rescue plan's progress and say they will join the process once the mechanics' pact is settled. "When all the labor agreements are resolved, the pain of a recovery plan becomes lot easier to bear," says IAM President Tom Buffenbarger.
CONCERN FOR THE FUTURE. After the settlement, IAM and ALPA leaders both intend to turn to wage concessions. The pilots, who received their own fat post-ESOP pay hikes in 2000, have been working closely with Brace on the restructuring plan. Other union leaders at United are likely to sign on, too. They fear that without wage givebacks, they'll be hit with more job cuts on top of the roughly 20,000 shed since September 11.
They also worry about United's future. If the company can't make it, the ESOP would probably be wiped out, along with labor's three board seats and its veto over big corporate decisions such as mergers.
Both ALPA and IAM experts have concluded that pay cuts of up to 10% may be needed. At the same time, United will try to squeeze its other costs, including airline leases and purchased services. The reduced pay, at least, will then be restored in steps over the next few years as United pulls out of its slump, say officials involved in the talks. This would avoid the anger that built up when pay stagnated after the ESOP. It would also spare the company from abruptly jacking up costs, as it did with the pilots' raise in 2000. "It was too hard to have a full snapback all at once," says a union advisor.
NO OUTSIDE HELP. Plenty of problems could still knock United's recovery plan out of the sky. IAM members may be goaded into a strike by the rival union. The union also represents ticket agents and other passenger-service workers, who must finish their contract negotiations, too.
BusinessWeek Online has learned that UAL management will not ask the White House or Congress to intervene -- all hope is at the bargaining table. Still, United employees are well aware of the carrier's plight. In the end, they're likely to step in to save it.
By Aaron Bernstein in Washington and Michael Arndt in Chicago Edited by Douglas Harbrecht
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Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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