You need nerves of steel to invest in airline stocks these days. Or you need to be an airline employee. Despite the spectacular failure of worker ownership at United Airlines Inc. (UAL
), where the recent bankruptcy has all but wiped out labor's 55% stake, its unions and those of other carriers are demanding fresh equity in their companies.
Of course, employees' investments don't spring from an abiding faith in the industry. Rather, they want something in exchange for the billions they're being forced to hand over to keep carriers afloat. "We're investing $650 million a year in pay cuts, and this way, we'll have something to show for it -- unless we go bankrupt again," says Roy Freundlich, a spokesman for the Air Line Pilots Assn. at US Airways Group Inc. ALPA won restricted stock worth 19% of the company, plus a board seat, when US Airways emerged from bankruptcy on Mar. 31.
True, airline employees have embraced ownership again under duress. But the emerging model of variable pay -- pegging pay gains to corporate performance -- may help the industry achieve some desperately needed stability. In good times, such as the late 1990s, the heavily unionized workforce has been able to win fat contracts and cushy work rules. But when the industry slumps, as it has since high tech collapsed and September 11 chilled air travel, union members are slow to part with their hard-won gains. So carriers bleed oceans of red ink, driving many to the brink of bankruptcy or even into it, as happened at US Air and United.
At the same time, many employee-owners were locked into an inflexible system. At United in 1994, the unions took their 55% through an employee stock ownership plan (ESOP), which gave them the tax advantages of a retirement plan. But that scheme prevented employees from selling their shares when the company's stock price quadrupled in the first few years. And it blocked them from cashing out as the stock crashed.
Now, labor has an opportunity to craft a smarter strategy. If workers take their new ownership as straight equity grants or stock options, forgoing the retirement tax break, they could see modest profits in the next upturn. They would thus make back at least some of what they're giving up. And they would do so without having to demand large fixed-wage hikes, which would only set the industry up for yet another meltdown in the next downturn. The issue is "how we can adjust our fixed costs in a variable-revenue environment," says one airline executive.
Employees at American Airlines Inc. (AMR
) have done something along these lines. On Mar. 31, the major unions agreed to swap $1.6 billion in annual cuts for a 21% stake. (Nonunion workers and managers get an additional 4%.) Employees also get 15% of pretax operating profits above $500 million. But they have taken the equity in the form of stock options. So if the stock ever bounces back to anywhere near its 2001 peak of 44, employees could make about $1.5 billion, plus $100 million or so more a year in profit-sharing. The deal "provides employees the appropriate upside," says American spokesman Bruce Hicks. Until now, "our [labor] contracts always seemed to be out of sync with the economy."
US Air employees are still debating whether to shelter their equity in a retirement plan such as a 401(k) or an ESOP. The pilots won a 19% stake; other unionized workers got a total of 10%. But they haven't resolved the merits of funneling them through a tax-qualified plan, vs. a taxable one that would allow members to sell right away. Forgoing the tax break would mean lower gains. But in the long run, employees would do better by treating equity as pay, not savings. The biggest payoff? Their employers might avoid those cyclical nosedives in the future.
By Aaron Bernstein
With Michael Arndt in Chicago and Wendy Zellner in Dallas
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