Businessweek Archives

This Give And Take May Actually Fly


Top of the News

THIS GIVE-AND-TAKE MAY ACTUALLY FLY

You can say one thing about United Airlines Inc.'s unions: They don't give up easily. After more than seven years and at least four failed bids, United's pilots and machinists finally persuaded the airline's management to sell them a majority of the company's stock.

The tentative deal, reached on Dec. 15, gives the two unions a minimum of 53% of United's stock, with a possibility of 63% after a year, according to negotiators from both sides. In exchange, union members will extend $5.5 billion in concessions for nearly six years. The unions get one board seat each and effective veto power over most major

decisions.

The agreement also calls for the creation of a new "airline within an airline," which will match the lower pay scales and relaxed work rules of upstart competitors such as Southwest Airlines Co. The unit, dubbed U2, will operate quick turnaround flights of less than 750 miles that use equipment and personnel more efficiently. The unions have agreed that U2 can be expanded to accommodate about 20% of United's current capacity.

The deal between United and its unions still must be approved by United's board, but if it flies, it will force big changes in the airline industry. Other big carriers will have to scramble to match United's lower costs, and some may conclude that they, too, need an employee buyout. "It will be hard for other airlines to escape doing what United has done if they want to have a future," says Joseph R. Blasi, a management professor at Rutgers University.

The United agreement came together after days of nearly around-the-clock talks that began in New York on Dec.10. Previous sessions had broken off in November after United rebuffed the unions' bid of $165 a share for 60% of the company, calling it too low. United then angered unions by selling off its flight kitchens, which employ 5,200 members of the International Association of Machinists. But not long after the break-off, CEO Stephen M. Wolf asked the unions to try again.

What made the deal work this time? The two sides bridged their differences by breaking the buyout into two parts. The unions will get only 53% of the company when the deal closes. But they increased the cash, debt, and preferred shares they had offered from $65 a share to $88. As a result, United shareholders will receive a total package of $173 a share, factoring in the value of the United shares they'll keep. In return, Wolf agreed that the unions' ownership will climb to 63% after a year if United's stock price hits certain targets.

Although the unions will be the majority owners of the country's No.1 airline, they won't be in total control. While employees will hold three board seats, nine other directors will be independent or elected by public shareholders. However, extensive governance provisions give the unions effective veto over most major decisions, including mergers, consolidations, acquisitions, and large asset sales. Wolf and President John Pmpe are expected to leave when the deal formally closes next spring. The unions say Wolf will be replaced as CEO by former Chrysler Corp. Vice-Chairman Gerald Greenwald.

The buyout still faces hurdles, however. In addition to the board, which was scheduled to hear details of the offer on Dec. 16, union members and United shareholders also must approve the deal. Another potential problem: The unions must bring the flight attendants union back into the talks. The attendants had dropped out of the negotiations in October but now want back in. Reaching an accord "is a critical first step, but there's still a long way to go," says Eugene J. Keilin, an investment banker at New York-based Keilin & Bloom who led the talks for the Air Line Pilots Assn.

The question now: How will most of United's rivals ever match the employee-owned carrier's new cost structure? Under the deal, United's labor costs will be slashed by around 15% and will stay at those levels for almost six years. And because employees are the majority shareholders, they will have an incentive to take further cuts to keep competitive. Both American Airlines and Delta Air Lines have been trying to get their employees to lower wages and alter work rules--with little luck so far. Now, they will have to move quickly to avoid being undercut.

The unions' effort at United could have an effect beyond the airline industry as well. The deal "will decisively expand the role of employee ownership in large American corporations," predicts Blasi. For now, though, the main shockwaves will be in the airline industry. And the effects there are going to be plenty explosive.Aaron Bernstein in New York and Kevin Kelly in Chicago


Steve Ballmer, Power Forward
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus