Fly It? They Own It

By Janice Castro

In the hours following the news that United Airlines employees had bought a controlling share (55%) of their own company, solidarity was breaking out everywhere. If the scenes were not made for commercials, they sure looked like it: outside United headquarters near Chicago's O'Hare Airport, senior UAL executives were grilling burgers on portable barbecues for mechanics and pilots, while many at the gathering sported buttons that read ASK ME, I'M THE OWNER. Meanwhile, newly anointed chairman Gerald Greenwald, a former vice chairman of Chrysler, was flying coach from New York City's La Guardia to O'Hare and on to LAX and Denver to introduce himself to his new employers. And Mary Beth Andrews, who has worked at United since John F. Kennedy was President, was sharing pizza with co-workers in her balloon-filled Chicago ticket office and delaying her decision to retire. "We don't need champagne," she insisted. "We're giddy enough."

But now that they are in charge, the 54,000 new owners of the world's largest airline must earn their keep and pay their bills. First off, there is the tough new challenge from the king of discounters, Southwest Airlines, coming just when United's profits are starting to rebound after three years of heavy losses. (Last year's hit: $50 million.) All of which raises this question: Can United's new owners stand to fire themselves?

Until he was ousted last week, chairman Stephen Wolf was arguing that layoffs would be required to help put the carrier firmly in the black. Wolf's track record makes his prognosis hard to ignore. He strengthened the airline considerably during his six years at the helm, aggressively expanding United's worldwide route system, adding key gateways like Chicago-Tokyo -- now the airline's most profitable route -- all the while cutting costs by about $1 billion annually over the past three years. Wolf's determination to demand deep new pay cuts and layoffs, which might have triggered a bitter and costly strike, helped bring about the current deal when UAL's board decided to buy labor peace by accepting the employee bid. Under the buyout terms, employees will select three of the 12 UAL directors, who together will possess veto power over certain issues such as asset sales and acquisitions. In exchange, the employees will put up $4.9 billion in wage and benefit concessions over 51(R)2 years, ranging from 8.25% in givebacks for nonunion officeworkers and ticket agents to 14.7% for ground crews and 15.7% for pilots. The whole package will reduce United's labor costs 14%.

As United's new crew takes over, though, it is facing a ferocious fare battle with Southwest. The fight escalated just as summer began when United announced plans to launch a new service: United Shuttle. Called U2 by employees, it would be a low-cost subsidiary carrier that would go up against Southwest on many of its short-haul routes in the West. In response, Southwest's feisty Herb Kelleher announced he was ordering new airliners so he could compete directly against United on more of its longer legs. "We've got to price against the market," says Greenwald. "We can't sit and let them pick our markets away." But as U2 struggles to match Southwest's low fares, it will still feature the traditional passenger perks such as advance seat assignments and generous snacks that Southwest thriftily avoids. "It's going to be a lot easier for Herb to scale up than for United to scale down," says ! Edmund Greenslet, an industry analyst and vice chairman of Florida-based Airline Capital Associates. "United does not know how to operate a discount airline. Southwest does."

Unfortunately, it has taken seven long years for United to get to this point. Since 1987, its employees have fought bitterly with management and one another over the terms they could accept as part of a buyout. Buying a chunk of the financially pressed company meant giving up substantial pay and benefits. But what seemed reasonable at times to the handsomely paid pilots (top salary: $200,000) was often outrageous to flight attendants, machinists and ticket agents. (When the deal went through last week, in fact, United's flight attendants were still refusing to take part.)

As the employees feuded, the airline flailed: from 1991 through the end of last year, United lost a total of $1.3 billion. That performance was characteristic of an industry whose nine major airlines collectively lost more than $12 billion, as they engaged in ruinous price wars and spent money to expand into each other's markets. Now, after a year of encouraging traffic growth, the majors are expecting to eke out profits in 1994. UAL is projecting net income this year of some $94 million.

In the deal, UAL's employees got a boss that, at the moment at least, they seem to like. Wolf had not endeared himself to his workers: United flight attendants claim that on one 12-hour flight to Asia, he said not a word to the cabin crew. The more gregarious Greenwald is expected to help build the esprit de corps the company will need in the months ahead. Said a Chicago investment adviser close to the deal: "There are going to be extra hours, and some people are going to see $160 less in their paychecks. I wonder if these people understand what they've done."

With reporting by Wendy Cole/Chicago and William A. McWhirter/Detroit