From the Wall Street Journal:
To Save United, Pull the Plug
On Employee Ownership
Kudos to members of the International Association of Machinists, the mechanics and cleaners union at United Airlines. Their vote last week, which effectively torpedoed the airline's application for a federal loan guarantee, was a triumph of truth over blather.
Now let's hope the rank and file stick to their guns in tomorrow's Florida-style revote, despite heavy pressure to buy into a bailout that supposedly would save the airline from Chapter 11.
Fans of employee ownership are shaking their heads in disappointment, but the machinists were not voting against saving the airline so much as against the union leaders who sold them a pig in a poke in 1994. That's when machinists, pilots and other employees were cajoled into trading wage concessions for a 55% stake in the carrier, along with three seats on the company's board and an effective labor veto over the choice of CEO.
The deal played in the press as a triumph of enlightened capitalism but proved a lousy bargain for the airline, the industry and the country. The sooner it's unraveled -- as it would be in a bankruptcy -- the better for all concerned.
Because employees weren't allowed to sell their shares except on retirement or quitting, they became what nobody on Wall Street in their right mind wants to be: a long-term investor in the airline business. That was the plan's fatal flaw. There's a reason shares in the major network carriers are dubbed, in Street parlance, trading vehicles. Ask Warren Buffett, who lost a bundle after buying a 10.5% stake in USAir around the same time the United employees were jumping off a similar cliff.
What their wage give-ups ended up buying was a position of untold perks for the union chiefs, who became United board members with unique power to make or break the company's chief executive. The rank and file soon came to regret their concessions, though, as their shares, bought at an average price of $45, plummeted toward single digits. To woo members back, union bosses competed to use their places on both sides of the bargaining table to extract the costliest labor agreements the industry had ever seen, precipitating United's spiral even before Sept. 11.
This is the travesty that last week's vote finally exposed. So inherently compromised are the union leaders that they were recently caught haranguing the trustee of the employee stock fund to stop prudent sales of United shares even as their own union members were fixing to vote effectively to put the company in Chapter 11 (which would reduce the value of United shares to zero).
Indeed, it's hard to see how bankruptcy would be any worse than the deal the machinists rejected. Yes, labor contracts would likely be rewritten in Chapter 11 too, but United would have been saddled with an extra $2 billion in government-guaranteed debt, the servicing of which would soak up resources that might go to wages. Concessions to keep the airline out of bankruptcy would seem mainly to benefit United's existing creditors and Wall Street arbitrageurs who hold the stock as a bet on a government bailout. Oh yes, and the pilots' union, whose members might otherwise lose seniority rights that entitle them to $200,000 a year for working 80 hours a month.
Notice, too, the ferocious lobbying of other carriers against a United bailout, violating an unspoken ethic that companies in the same industry don't embarrass each other in Washington. But a bankruptcy that wiped out United's experiment in labor-management collusion would be a salve for the entire industry. United's management could go back to managing. Labor could go back to trying to protect its members' interests in arm's length bargaining with the front office. And the airline business would no longer have its salary scales distorted by United's misbegotten experiment in worker ownership.
The 1994 deal was supposed to make employees think like owners, but employees quickly understood that you don't really own what you can't sell. In part, the deal was also doomed because large network carriers like United simply make lousy investments. Their hub-and-spoke systems are wonders for moving people efficiently around a big country, but they can't be scaled down quickly and cheaply when traffic declines. Hence the industry's alarming habit since deregulation of losing more money in downturns than it makes in boom periods.
Nothing about United's proposal to the bailout board, or the legislation that established the board, nor anything else coming out of Washington can fix this problem. Any bailout now is likely only to beget more bailouts in the future.
In a better world, waiving some of our antitrust superstitions might help, allowing airline operators to talk to each other about how they might eliminate uneconomic capacity overlap in a downturn. In fact, the airline industry is now stumbling toward just this accommodation with reality in the form of code-sharing agreements, though these must still pass muster in Washington.
Let us recall that Congress created the bailout fund to help airlines damaged by Sept. 11, not to prop up those brought low by their own perverse and suicidal corporate governance structures.
The bailout board, run jointly by the Fed, Transportation Department and Treasury, would be an idiot now to use taxpayer loans to prolong a disastrous experiment in labor-management collusion that can only land the airline back in the same swamp in the near future. No matter what the machinists decide in tomorrow's do-over vote, the board's answer should be no.
If Washington wants to exude constructive concern for the airline business, Lord knows the think tanks overfloweth with sensible reforms long overdue and endorsed by administrations of both parties. Liberating the air-traffic-control system from the congressional budget morass (ideally, by privatizing it) would be an excellent place to start.
To Save United, Pull the Plug
On Employee Ownership
Kudos to members of the International Association of Machinists, the mechanics and cleaners union at United Airlines. Their vote last week, which effectively torpedoed the airline's application for a federal loan guarantee, was a triumph of truth over blather.
Now let's hope the rank and file stick to their guns in tomorrow's Florida-style revote, despite heavy pressure to buy into a bailout that supposedly would save the airline from Chapter 11.
Fans of employee ownership are shaking their heads in disappointment, but the machinists were not voting against saving the airline so much as against the union leaders who sold them a pig in a poke in 1994. That's when machinists, pilots and other employees were cajoled into trading wage concessions for a 55% stake in the carrier, along with three seats on the company's board and an effective labor veto over the choice of CEO.
The deal played in the press as a triumph of enlightened capitalism but proved a lousy bargain for the airline, the industry and the country. The sooner it's unraveled -- as it would be in a bankruptcy -- the better for all concerned.
Because employees weren't allowed to sell their shares except on retirement or quitting, they became what nobody on Wall Street in their right mind wants to be: a long-term investor in the airline business. That was the plan's fatal flaw. There's a reason shares in the major network carriers are dubbed, in Street parlance, trading vehicles. Ask Warren Buffett, who lost a bundle after buying a 10.5% stake in USAir around the same time the United employees were jumping off a similar cliff.
What their wage give-ups ended up buying was a position of untold perks for the union chiefs, who became United board members with unique power to make or break the company's chief executive. The rank and file soon came to regret their concessions, though, as their shares, bought at an average price of $45, plummeted toward single digits. To woo members back, union bosses competed to use their places on both sides of the bargaining table to extract the costliest labor agreements the industry had ever seen, precipitating United's spiral even before Sept. 11.
This is the travesty that last week's vote finally exposed. So inherently compromised are the union leaders that they were recently caught haranguing the trustee of the employee stock fund to stop prudent sales of United shares even as their own union members were fixing to vote effectively to put the company in Chapter 11 (which would reduce the value of United shares to zero).
Indeed, it's hard to see how bankruptcy would be any worse than the deal the machinists rejected. Yes, labor contracts would likely be rewritten in Chapter 11 too, but United would have been saddled with an extra $2 billion in government-guaranteed debt, the servicing of which would soak up resources that might go to wages. Concessions to keep the airline out of bankruptcy would seem mainly to benefit United's existing creditors and Wall Street arbitrageurs who hold the stock as a bet on a government bailout. Oh yes, and the pilots' union, whose members might otherwise lose seniority rights that entitle them to $200,000 a year for working 80 hours a month.
Notice, too, the ferocious lobbying of other carriers against a United bailout, violating an unspoken ethic that companies in the same industry don't embarrass each other in Washington. But a bankruptcy that wiped out United's experiment in labor-management collusion would be a salve for the entire industry. United's management could go back to managing. Labor could go back to trying to protect its members' interests in arm's length bargaining with the front office. And the airline business would no longer have its salary scales distorted by United's misbegotten experiment in worker ownership.
The 1994 deal was supposed to make employees think like owners, but employees quickly understood that you don't really own what you can't sell. In part, the deal was also doomed because large network carriers like United simply make lousy investments. Their hub-and-spoke systems are wonders for moving people efficiently around a big country, but they can't be scaled down quickly and cheaply when traffic declines. Hence the industry's alarming habit since deregulation of losing more money in downturns than it makes in boom periods.
Nothing about United's proposal to the bailout board, or the legislation that established the board, nor anything else coming out of Washington can fix this problem. Any bailout now is likely only to beget more bailouts in the future.
In a better world, waiving some of our antitrust superstitions might help, allowing airline operators to talk to each other about how they might eliminate uneconomic capacity overlap in a downturn. In fact, the airline industry is now stumbling toward just this accommodation with reality in the form of code-sharing agreements, though these must still pass muster in Washington.
Let us recall that Congress created the bailout fund to help airlines damaged by Sept. 11, not to prop up those brought low by their own perverse and suicidal corporate governance structures.
The bailout board, run jointly by the Fed, Transportation Department and Treasury, would be an idiot now to use taxpayer loans to prolong a disastrous experiment in labor-management collusion that can only land the airline back in the same swamp in the near future. No matter what the machinists decide in tomorrow's do-over vote, the board's answer should be no.
If Washington wants to exude constructive concern for the airline business, Lord knows the think tanks overfloweth with sensible reforms long overdue and endorsed by administrations of both parties. Liberating the air-traffic-control system from the congressional budget morass (ideally, by privatizing it) would be an excellent place to start.
