<http://www.nytimes.com/2001/03/14/business/14AIR.html?pagewanted=all> March 14, 2001
Management: Employee-Ownership Experiment Unravels at United
By LAURENCE ZUCKERMAN
It was trumpeted on the cover of Business Week as a beacon for corporate America and hailed by none other than the conservative columnist George F. Will as "a promising new chapter in the history of capitalism." After workers bought a majority stake in United Airlines in the summer of 1994, creating the world's biggest employee-owned company, managers began referring to them as "owners" and the airline changed its motto to "fly our friendly skies."
But as anyone who has flown United recently can attest, something has gone terribly wrong.
Last summer, United's pilots, which own the single largest stake in its parent, the UAL Corporation, staged a thinly veiled work slowdown during contract negotiations; United was forced to cancel thousands of flights. By fall, the machinists, the other big group of employee owners, followed suit. The airline took the machinists to court, accusing them of conducting an illegal job action. Their union is threatening to strike. The turmoil inconvenienced tens of thousands of customers, placed the airline at the bottom of industry on-time rankings, caused it to rack up huge losses and sent its stock, which is mostly held by the same frustrated employees, tumbling.
What happened?
In retrospect, it seems obvious: while everybody agreed to call workers "owners," they did not act like owners, and management did not treat them like owners.
If the two sides had worked hard to create a true ownership culture throughout the company, the experiment might have succeeded, industry analysts say. Instead, labor and management displayed a lack of commitment from the start.
Such irresolution is hardly a formula for success in any endeavor. For the most ambitious employee-ownership project ever, it spelled trouble.
Employee ownership has not been a complete failure. United executives and labor leaders said it had accomplished its most important goal by saving the airline from a major restructuring in the mid- 1990's, a move that would have cost thousands of jobs. But they also acknowledge that the opportunity to create a new breed of worker-owner who would propel the company into an era of corporate collaboration, a vision that seemed within reach seven years ago, has been squandered.
"One of the greatest opportunities we did not take advantage of was sitting down and agreeing on a joint vision of where we wanted to go," said James E. Goodwin, UAL's chief executive.
Rick Dubinsky, the head of the pilots union at United, described employee ownership as a big red box tied with a bright bow that is sitting in the middle of an arena filled with United workers and managers.
"I think the present is still inside but nobody knows how to open up the box," Mr. Dubinsky said. "Neither side really attempted to work out what it was going to take to make it work. Everybody kind of took it for granted."
Which was a big mistake for such a monumental venture. Most of the 11,000 employee-owned companies in the United States have fewer than 500 workers, and only 5 percent are unionized. United had 75,500 employees in 1994 and was, and remains, highly unionized. As a measure of the difficulty of the task, the few other high-profile experiments in employee ownership, like the Weirton Steel Corporation, have quietly moved away from the concept.
Researchers say employee ownership can give companies a competitive edge, but only if workers believe they are helping to call the shots.
"People bring all sorts of expectations and imaginations to this idea that we are owners of the company," said Christopher Mackin, president of Ownership Associates Inc., a consultant in Cambridge, Mass., who has worked for United. "You have to go through this interpretive process of what you mean by ownership."
But United's unions did not set out to change capitalism or make history. They set out to save jobs in perhaps the worst crisis the airline industry has endured since it was deregulated in 1978.
United lost nearly $1 billion in 1992, and Stephen M. Wolf, then its chief executive, threatened to sell assets and lay off workers unless they made wage and productivity concessions.
Some union leaders had dreamed of controlling United. They had tried and failed once, in 1989, to buy the airline. Now, they seized on the financial problems and tried again. And Mr. Wolf, who stood to make millions on his stock options, went along.
Here is how the agreement worked: The two biggest unions — the Air Line Pilots Association and the International Association of Machinists and Aerospace Workers — and a group of nonunion salaried employees agreed to wage cuts and work rule changes in exchange for a $4.9 billion loan to buy 55 percent of UAL's stock. The stock would be distributed to the employees in their retirement accounts over seven years. The two unions and the salaried workers received 3 of the 12 seats on the board.
But the plan carried seeds of discontent. For starters, United's 18,000 flight attendants declined to participate, leaving the carrier's single biggest group of front-line employees out of the ownership equation.
Moreover, many workers resented having to take pay cuts. The machinists accepted the plan by a slim margin. Worse, the leaders of the pilots union did not even submit the agreement to a vote, even though their members absorbed the biggest cuts. For that and other reasons, Mr. Dubinsky of the pilots union, was voted out of office.
For all the discord bubbling underneath the surface, employee ownership appeared to be a huge success at first. Gerald Greenwald, the former vice chairman of the Chrysler Corporation who was picked by the unions to be UAL's chief executive, introduced task force teams, enabling workers to help streamline United's operations and cut costs.
And on the surface, solidarity seemed to prevail as Mr. Greenwald made the rounds, glad-handing workers and making symbolic gestures like eliminating weight requirements for flight attendants.
The economy also helped, fueling a recovery in the industry. United posted record profits in 1995, 1996, 1997 and 1999, ordered planes and went on a hiring binge. (It now has more than 100,000 employees.) Workers watched as the stock soared; employee ownership seemed to be working. In reality, the turn in fortunes eliminated any incentive to try to create an ownership culture of partnership and mutual sacrifice.
Mr. Greenwald turned a deaf ear to the rumblings of middle managers who were opposed to the idea of worker ownership. And the unions failed to forge a common front.
"You really had a union that had a leadership that wasn't part of the building of this thing," said Mr. Dubinsky, who was re-elected to lead the pilots in January, "and a management that was eager to take the path of least resistance."
Many workers, whose stock was locked away in retirement accounts and who felt their sacrifice was responsible for the turnaround, began clamoring for raises.
Mr. Goodwin, who became chief executive in 1999 after the unions vetoed Mr. Greenwald's chosen successor, proceeded to upset the pilots by failing to deliver on a promise to negotiate a new contract by April of that year. He then infuriated them by announcing a $4.3 billion agreement to buy US Airways.
The US Airways deal revealed the cracks in worker solidarity. The two union board members could have joined forces to block it, but the director representing the machinists gave his assent, leaving Mr. Dubinsky as the lone dissenter.
Last week the machinists reversed their approval of the merger and threatened to strike. But that is unlikely to block the deal, which is still being scrutinized by the Justice Department. Meantime, the union representing flight attendants is demanding a large raise in exchange for its approval of the takeover and has threatened to strike.
United workers will continue to own a majority of the company for at least another 15 years, but there seems little enthusiasm for the concept these days. Mr. Goodwin said he remained committed to employee ownership, though he offered no particular vision.
Mr. Dubinsky, returned from exile, said: "We now have six or seven years of this particular environment where people think this is what employee ownership means. It's going to be hard to turn that ship around."
But he insisted that he had not given up. "I'm just saying it is going to be more difficult," he said. "We paid $5 billion for this box. Somebody has to unwrap it."