A case of change of owners at United

The early 1990s witnessed a starting new trend among businesses: mass layoffs. Numerous headlines told of once great companies such as IBM that were having to institute tremendous labor cuts to become more competitive. More and more companies decided to downsize. Widespread layoffs, however, resulted in decreased worker productivity and poorer job performance. Fear of job loss caused employees to take less initiative and offer fewer suggestions. In the meantime, employee-ownership emerged as an alternative to massive corporate downsizing. It enables companies to reduce costs and increase productivity without having to resort to layoffs. Between 1979 and 1994, the number of employee-owned companies sky rocketed from less than 1,000 to more than 11,000.

United Airlines was one company that chose employee ownership. In December 1993, United Airlines Chairman Stephen M Wolf struck a deal with union leaders to sell control of the $14 billion airline to its employees in exchange for more than $5 billion in wages and benefit reductions and work concessions. According to the agreement, almost all of United’s 80,000 employees would experience a wage reduction and would accept longer work hours and an unpaid lunch break. In return, employees were to receive job security and stock worth between $40,000 and $72,434 (depending upon United’s fate in the stock market) per member. Most importantly however, the employees would collectively own 53 percent of United’s common stock. In effect, they would control the company. Assuming the details could be worked out. United would become the largest and most complex employee owned company.

A variety of factors led to this agreement. Between 1991 and 1993 United lost $1.3 billion, even though the airline was carrying more people to more places than ever before. United’s market share was climbing and the number of empty seats was falling, but the company’s profitability was nevertheless suffering. United’s future seemed bleak, if it could not find a way to reduce costs drastically. We slashed and burned and did everything we could said J C Pope, president of United. It wasn’t enough.

Actually, United was suffering from the same problems that almost all major carriers had been dealing with since the 1978 deregulation of the airline industry, which permitted competition between the large established carriers and the low cost budget airlines. The American consumer wants safe, reliable transportation but they want low fares. There is certain prudence in the American consumer whether you are wealthy or not so wealthy. That is, I just want to go somewhere… Why do I want a lot of money just getting from here to there? In fact, in the 15 years following deregulation no airline had been able to reduce labor costs without resorting to threats of downsizing or bankruptcy protection. In some cases the cost did not go down until the threats turned into reality.

In addition, severe labor-management relation problems had been dogging the airline. During the mid-1980s, United’s pilots instituted a massive strike that ultimately resulted in Richard Ferris being ousted as chairman of UAL Corp., United’s parent company. In December 1993, immediately prior to the agreement to transfer company ownership to United’s employees, mechanics at the San Francisco airport carried a coffin with Wolf’s name on it across the tarmac.

In fact the union had decided that Wolf was going to have to go. His mind set does not fit into employee ownership explained Roger Hall, head of the Hall, head of the United pilots union. Wolf is someone who is in control and wants to direct. He doesn’t seem so interested in input from the employees.

In light of this, Wolf made a decision The only way to gain union support of his cost reduction plan was to offer employee ownership to United’s workers, and the only way to achieve employee ownership was for him to leave. He realized that the changes necessary for United’s survival would not come about if he remained as CEO. He thus left the company in order to save it. The only way for Wolf to succeed as manager was to leave. He had the insight but it was up to others to carry out his plans.

Wolf placed great confidence in the idea of employee ownership and the concept of empowerment. When employees have a vested interest in the company, they work harder, smarter and enjoy work more. The associated benefits of employee owner ship are truly significant. It takes away labor animus. You are now owners of the company. You understand the reality of stock going up and what it means for yourself. That is how United survived.