Asymmetrical Information

I've always been a big fan of ESOP's ,but I've never understood how they would work in a highly unionized business like an airline. If the primary interest of shareholders is equity value and possibly dividends, and the primary interest of unions and union members is wage stability and job security, arent these two agendas mutually exclusive?

I know of several very successful employee owned companys, I also know several moderately successful companies taht have prominent unions making up a large portion of their staff. But I dont know of any case where you can be both a union member and a shareholder unless you are willing to give up on some of the primary interests of both of those roles.

As far as United goes, and I say this as a 750k lifetime mileage filer, any business that burns 20 million a DAY, and doesnt have plan to get back into the black, needs to go out of business quickly. I knew it was over for them when they came out with the statement last month that "the only way for an airline to stay in business is for the government to take over and nationalize the airlines". That is the death rattle of all over-bloated idiot run companies.

I bought their stock after the market opened after Sept 11th, but I'ts my opinion that even without 9/11, this airline has been going the way of the dodo for quite some time.

I don't know that ESOPs and unions can't mix well. The problem with United is that there are too many unions representing separate employee groups. The pilots, flight attendants, and ground crews all belonged to different unions. While each group, because of the ESOP, benefited if United did well; each group could do better still by raising its pay at the expense of the other unions. This prevented the ESOP from playing its desired role of dampening union demands for increased current compensation at the expense of long-term growth.

To build on what Dave was saying, I'd say that the biggest issue was that the employees didn't act like owners, as this quote illustrates. The head of the pilot's union should be taking some responsibility for the management their board selected.

Of course, there was a lot of that going around in the 90's, and not just in ESOPs.

The Financial Times had an op-ed on this topic a few days ago. The main thrust of the argument there is that United relied for its success in 1995-2000 on concessions from the unions on wages, which allowed it to postpone addressing structural issues affecting the airline industry.

I wonder whether United would have done better if the employees had been the owners of the company, rather than the unions. The unions just added an unnecessary layer of intermediation.

I'm all for employees having a financial stake in their companies; however, we must be realistic about how this really works. Ideally, everyone would see how "doing the right thing" benefits the company and thus themselves, ushering in a new era of employee cooperation, friendly customer service, and Mary-Poppins-Like singing on all occasions. But there are two problems:
1) The employee's equity stake will in general be small compared to his salary. Let's say he gets paid $50K and has an equity stake of $100K. The present value of his salary, over his expected future employment, may well be $500K or more. If it's a question of company profitability vs raise or job retention, it's obvious which way he must lean.
2) In any organization with more than 20 people or so, the impact of any one person on the corporate bottom line is not very visible. This is as true for capitalist as socialist institutions.

Again, employee ownership stakes are a good thing, but need to be supplemented with other motivational tools.

Why didn't the employee-owners not act like better managers? Because they didn't control the company. The structure of the ESOP prevented them from exercising majority control of the board of directors. They had only three members of the board of directors, enough to have a loud voice at times, but not control. The company wouldn't have entered bankrupcty over union objections if the 55% ESOP stake translated into corporate control. That should be obvious.

See here for more on the whole mess and Bush's role.

Nathan,

Why ruin a perfectly good opportunity to bash workers with the facts?

I wasn't bashing the workers. Even if you're a minority shareholder, you need to take some responsibility for ownership. With three board members and the strike potential to excercise considerable leverage, the pilots could have forced out any management they thought was screwing them, particularly under the fiduciary laws.

JFC, are workers ever wrong, or is every dispute automatically between the heroic workers gazing boldly into the brave new future of the Worker's Paradise and the Evil Capitalist Managers out to screw workers just fo rht ehell of it? For someone who worked at MassPIRG, Nathan, you take an awfully funny interest in other people's workers.

Er...has anyone stopped to blame those geniuses over at the TSA who have managed to make the check-in/boarding process about two hours longer than before, and as pleasant as a root canal sans anesthetics? All without making air travel meaningfully safer, I might add? I think there are at least a few people out there who have found this issue to be enough of an impetus on occassion to either stay home or drive. And in a business with 3% profit margins in good years, it doesn't take a lot of them to destroy the financial viability of much of the airline industry.

Mmmmm, not so sure. I think those that want to fly will fly. Those that don't, won't. The big issue that forced UAL into bk isn't 9/11. It isn't the TSA. It's the fact that they have the lowest fares among "full service" carriers while having the highest labor costs among all carriers. It doesn't take a real genius to understand that's a bad business model.

I don't necessarily agree that 9/11 wasn't a precipitating event, but UAL has a lot of problems, some of them with management, some of them with labor.

Well, if you're flying from New York to LA for a major convention, that's true. But what if you're going to, say, Cleveland? Or Richmond? I suspect there are a fair number of people that have simply found it better to drive in those circumstances.

Also, it's not just UAL that's ailing. US Airways went under not too long ago. And the cash flow numbers for Delta and AMR don't look too hot either.

Local paper went ESOP, within a couple of years all sold out to national chain.Chain could not hack it.

It's fun to blame the unions, and believe me, I do my fair share of it myself. That being said, my gut feeling is that the bailout board didn't reject UAL's loan guarantee because of the unions. Even if UAL had gotten the mechanics union to go along with pay cuts, UAL's business isn't viable.

UAL simply hasn't appropriately addressed market conditions that have changed -- namely discounting fares and shortening gate times. For those of you out there who are Exec Premiers you think UAL is the greatest airline of all time. For the rest of the world, we couldn't give a hoot about traveling UAL because the service sucks and it is too expensive.

UAL has done an excellent job of segmenting the high end user, but in doing so it should have trimmed the number of flights to reflect the reduced size in market. They can blame 9/11 all they want but the simple truth is not every employer wants to subsidize their employee's miles by paying higher fares.

just more proof that the WORKERS SHOULDN'T OWN THE MEANS OF PRODUCTION!!!

hahahaha

but really it's just the union... companies that i have experience with, ESOP means people work heroic hours and co the impossible, cause they own and will see dividends and capitl appreciation (helps that they buy in at book value of a consulting company that uses only hard physical assets to define book value.. understates by 10 times at least!)

start all companies in right to work state, then have all employment contracts governed under North Carolina, or Virginia law... then everything's ok...

plus the only airlines that matters are maing lots of money.. NetJets and Marquis are great!!!

(fractional aircraft manager and an hourly aircraft renter, Marquis has 25 -50 hour minimums..)

I once worked for a (now bankrupt) company that had an ESOP. ESOP owners did not have the right to vote. We made lots of noises about wanting to vote, and were refused. Employees were beneficiary owners of the ESOP, not voting owners. The fiduciary had the voting rights. We wanted to fire the idiots in charge.

As for United (and the other airlines), the fact that their primary customers hated and mistrusted them for years is a much stronger argument for gross mismanagement. The unions did nothing to help matters, but it was not the unions that made the decisions that the customers hated. The business customers were in massive revolt against all the majors and United is merely one of the least competent managements of the bunch.

I think ESOPs can work really well when the company is small and you have at most one union. Then employees feel that they have a meaningful share to protect, and other employees will enforce social control to increase productivity. I don't think that it matters whether the employees are beneficial or fiduciary owners, as long as the fiduciary owners are sufficiently diverse. In a situation like that, it's actually probably better if they aren't fiduciary owners; the fiduciaries should adequately protect the business, and the employees don't get tempted to vote themselves rich at the expense of the other stockholders and creditors, which is a real issue.

In a company as big as United, with so many unions, I don't see how it could work even in theory. The share of any employee's equity is too small to make a difference, and the temptation to value claim at expense of stockholders and other unions is too large.

Matt---you're absolutely right. Even if the machinists' union had agreed to pay cuts, UAL would still have the highest labor costs in the industry. The problem really did start after the ESOP because the organization negotiating the union labor contracts was (at least partly) the unions themselves.

An example: In 2000 the pilots received a 27% pay increase. Ever since then UAL started losing money, posting losses in Q3 and Q4 that same year and ever since. Even if the pilots take a 10% paycut, they won't get back down to the point where the airline was profitable.

Eric---Continental and AMR were lobbying heavily for the ATSB to decline UAL's app for the loan guaranty. The basic reason is that Continental and AMR's cash flow issues stemmed (at least partly) from trying to pay wages competitive with UAL in order to draw workers. With UAL going bk and restructuring their labor contracts, it's possible that Continental and AMR can get theirs inline and start to demonstrate greater profits.

Southwest seems to get much better productivity from employees through profit-sharing, which delivers hard cash into the employees' pockets on a regular basis. Of course, in order for this to be effective, the employees must have some confidence in the prosepect of future profits. All I know is that there are probably not too many United Captains who help clean the plane before a boarding, the way the Southwest Captains do. Ultimately, it is the responsibility of management to foster an ever-more productive workforce, and if they fail to do so, it is time to get different management. If ESOPS foster that process, as they sometimes do,terrific, but it didn't work that way at United.

Southwest seems to get much better productivity from employees through profit-sharing, which delivers hard cash into the employees' pockets on a regular basis. Of course, in order for this to be effective, the employees must have some confidence in the prosepect of future profits. All I know is that there are probably not too many United Captains who help clean the plane before a boarding, the way the Southwest Captains do. Ultimately, it is the responsibility of management to foster an ever-more productive workforce, and if they fail to do so, it is time to get different management. If ESOPS foster that process, as they sometimes do,terrific, but it didn't work that way at United.

Southwest seems to get much better productivity from employees through profit-sharing, which delivers hard cash into the employees' pockets on a regular basis. Of course, in order for this to be effective, the employees must have some confidence in the prosepect of future profits. All I know is that there are probably not too many United Captains who help clean the plane before a boarding, the way the Southwest Captains do. Ultimately, it is the responsibility of management to foster an ever-more productive workforce, and if they fail to do so, it is time to get different management. If ESOPS foster that process, as they sometimes do,terrific, but it didn't work that way at United.

I think people are overestimating the importance of ESOPs and profit sharing. They are like a good paint job on a car. They improve the aesthetics and deal with some kinds of problems (e.g. corrosion). I think all companies should have one or both. Just do not expect them to cure problems that are beyond their scope.

The majors have fundamental mismanagement problems. You will not get good performance, good morale, or good financials if there is decades of evidence that management is incompetent, hostile to employees, and hostile to customers. Employees will do their job, but demand more money to compensate for their unhappiness and will not coorperate with management suggestions. Small changes like ESOP and profit sharing cannot deal with major mismanagement problems.

The fiduciaries might have, but even minor fiduciary involvement in management such as the California Pension involvement is unusual and somewhat controversial. Most fiduciaries only check the quarterly and annual financial reports. They let loss of customers, revenues, and bankruptcy proceedings provide the notification that there is mismanagement. It is only in the last year that most fiduciaries decided that it was appropriate to become sufficiently involved to detect fraudulent financial reports. Fiduciaries dealing with mismanagement remains unusual and controversial.

With three board members and the strike potential to excercise considerable leverage, the pilots could have forced out any management they thought was screwing them, particularly under the fiduciary laws.

I don't think you can force out management with 3 seats of an 11 member board, even with strike power. Also, did the unions each have 1 board member to choose, or did they all vote on each one?

I agree with rjh's assessment, in general.

'Mmmmm, not so sure. I think those that want to fly will fly. Those that don't, won't. The big issue that forced UAL into bk isn't 9/11. It isn't the TSA. It's the fact that they have the lowest fares among "full service" carriers while having the highest labor costs among all carriers. It doesn't take a real genius to understand that's a bad business model.'

That bad business model might have been good enough to survive without 9/11. Plenty of companies go under in recesssions that would have made it just fine in a better business climate.

Well, yes, Jason, but you can't run a business on the assumption that there's never going to be another recession, which is what UAL seemed to be doing.

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