Esop’s Fable Forces Airline To The Brink

United’s employee stock ownership plan appeared to be a dream realized. Planes few on time, and the historically discordant ranks were in harmony. It didn’t take long, however for things to fall apart.

By Tribune staff Greg Burn, Susan Chandler, Flynn McRoberts, and Andrew Zajac

Atop a riser inside the union hall, United Chief Executive Gerald Greenwald took a pair of scissors in hand and grabbed Bud Harper’s ponytail.

A veteran United mechanic, Harper had vowed not to cut his hair until he owned an airline. Now, as part of the airline’s leap into employee empowerment, he did.

In three snips, the ponytail was off and Greenwald hoisted it overhead. As his union brother sand sisters hooted, Harper smiled. I hope this works, he thought to himself. This is the last, best chance for United.

No United CEO had ever set foot in the mechanics’ hall in South San Francisco, but Greenwald walked into the cordial embrace of a hundred shop stewards-no small feat at a carrier long plagued by distrust between labor and management.

Greenwald’s man-of-the-people visit marked the dawn of efforts to transform United with its employee stock ownership plan. It was a fitting opening act, capturing the optimism inherent in a historic attempt to give union workers a powerful voice in running their workplace.

Tens of thousands of United employees agreed to roughly $5 billion in pay and benefit cuts to get a majority of the airline’s stock and influential seats in the carrier’s board. But what started as a grand, almost utopian experiment eventually would unravel into recrimination and resentment.

Union leaders and many rank-and-file workers were quick to demand a piece of the airline’s profits once United’s fortunes improved-even if that hurt the carrier’s long-term health. Greenwald, for his part, maintained warm relations with United’s unions but failed to create an airline that could withstand the industry’s volatile economic cycles.

The new ownership plan was suppose to make labor costs competitive for the long term, but Greenwald set the stage for union contracts to swell.

Employee-owners were supposed to find better ways to serve customers, but service improvements were short-lived.

And while everyone from supervisors to mechanics suggested ways to take on low-cost carriers like Southwest Airlines, new ideas sputtered and crashed.

“With the ESOP, we thought the future of United was in our hands. We could make it whatever we wanted it to be, said Nino Diez, a customer service supervisor during the Greenwald era. “But it didn’t work out that way.”

A new era of optimism

Like any big, bold concept, employee ownership at United sharply divided opinion.

Many in the business world were more than a little skeptical. Lee Iacocca, Greenwald’s former boss at Chrysler Corp., express the view of many corporate executives who predicted a fatal conflict between the interests of shareholders and employees. “It can’t work,” he declared. “What do you think will happen when it’s a choice between employee benefits and capital investment?”

But the Clinton administration touted it as a possible model for American business. “Inevitably, other companies will stand up and take notice,” said then Labor secretary Robert Reich. “From here on in, it will be impossible for a board of directors to not consider employee ownership as potential business strategy.”

Many American workers had owned stock in their employers. But none on such a huge scale had paid for that stock with big cuts in pay. Still there was no debate in Greenwald’s mind about whether this could work.

Recruited by United’s pilots, Greenwald replaced then-CEO Stephen Wolf on the day ESOP was approved in July 1994. He had the backing of key unions which now had the power to reject CEO candidates. And, just as important, almost every experience in his personal and professional life made him a true apostle of the ESOP plan.

Greenwald’s father, a Russian immigrant who peddled live poultry and eggs wholesale in St. Louis, was “a Roosevelt liberal who believed in unions,” said Greenwald. At Princeton University, which the younger Greenwald attended on scholarship, he specialized in labor economics.

For his undergraduate thesis, he wrote about the travails of the United Electrical, Radio and Machine Workers of America, a union investigated by Sen. Joseph McCarthy for allegedly being dominated by Communists.

After college, Greenwald wanted to go into labor relations. The garment workers union gave him a summer job, trying to get employees at a non-union company in St. Louis to sign cards asking the National Mediation Board to hold a union election.

“My job was to stand on the stairs to slow them down at the end of their shift so the other guys could sign them up,” said the slightly built Greenwald. “After three weeks, they fire because the thought I was going to get killed.”

At United, Greenwald got another chance to win over the people he so respected: the mechanics who worked through Chicago winters to make sure a jet engine was working just right; the baggage handlers who blew out knees and ruined back trying to connect passengers with their luggage; the gate agents who endured obscenity spewing passengers when flights were delayed or canceled.

The ESOP meant that most United employees were now owners. Pilots, mechanics and other workers got 55 percent of United’ stock in exchange for pay and benefit cuts ranging from roughly 15 percent for ground workers to as much as 25 percent for pilots.

The ESOP was based on a simple premise: Employees would be more diligent and effective workers because as shareholders they would have the long-term interests of the company in mind. Almost immediately, the workplace changed.

Time clocks were switched off in many areas. Everyone from gate agents to mechanics gained new authority to address customer complaints without consulting their supervisors, who were renamed “team leaders.” Task teams plucked workers from executive offices and shop floors in hopes that those closest to a problem could identify solutions.

Throughout United’s sprawling system, a funny thing started to happen. A workplace infamous for ice relations among different work groups began to thaw.

At the urging of a fuel-consumption task team, pilots chipped in by checking wind conditions and other data to determine the most fuel efficient routes.

The team recommended ways to save even fractions of a pound-removing extra silverware from galleys, cleaning cabin air filters to cut the weight of accumulated dirt and using 1,000 more feet of runway to save fuel and wear on engines.

Greenwald’s approach to employee empowerment began to generate dividends. Sick time dropped by 17 percent in 1995, saving United more than $18 million. Union grievances fell sharply among all employee groups.

Even skeptics became believers. Like many of his fellow mechanics, Lyndall Barwick had felt forced into ESOP because his union leaders told him it was the only way to keep his job.

Then the veteran lead mechanic at O’Hare watched people pulling together. “Some of my best years at United were during the ESOP,” said Barwick, 57. “People were happy to come to work.”

Taking on Southwest

Fixing United’s inner workings was only half the task facing Greenwald, who sought to harness the spirit of the ESOP to confront competitive challenges- in particular, the carrier’s emerging rival Southwest.

When Herb Kelleher and Rollin King founded Southwest in 1971, it flew under the radar of federal regulation because its three jets shuttled only within Texas. Four years after Congress deregulated the industry in 1978, Southwest started a dozen daily nonstop flights from San Diego to Phoenix.

By the early 1990s, the low-fare carrier was gobbling up California routes at an astonishing rate, with more than 400 flights a day in and around the Golden State. That included a growing number out of Oakland that siphoned off passengers from United’s lucrative San Francisco hub.

A task team was formed to figure out how to launch and operate Shuttle by United, the carrier’s low-cost short haul service aimed at beating Southwest and other no-frills airlines.

The Shuttle by United design team included pilots, flight attendants, customer service representatives, baggage handles, finance people from world headquarters, even United meteorologists.

“Departments I’d never even heard of,” recalled Greg Moran, who formerly helped run a leadership training program for United managers.

In October 1994, United launched the Shuttle quickly ramping up the operation to 342 trips among 15 cities.

Initially, the Shuttle operation jolted Southwest. Kelleher, the carrier’s legendary CEO, sounded an apocalyptic warning to rally his employees. “In the 4th quarter of 1994, we will cross the Rubicon River into battle,” he said in an address to workers and shareholders.

“What is this looming threat? It’s called Shuttle by United.”

Indeed, Southwest had reason to be wary. Contract concessions from United’s employee ownership plan allowed it to pay pilots less for Shuttle duty than for assignments elsewhere on the carrier.

The Shuttle’s savings were meant to come from a variety of areas. Like Southwest, the Shuttle would use only one type of aircraft, Boeing 737’s, allowing for lower maintenance costs because the flett required fewer parts than United’s usual broad assortment of jets. Just as important, pilots flew more hours each day, boosting their notoriously low productivity.

Southwest had several built-in advantages that ensured its pilots flew more, mainly its so-called point to point system that moved aircraft and passengers between pairs of cities in the U.S.

United, by contrast, ran an international “hub and spoke” operation that relied on smaller jets feeding wide-body aircraft that had to wait for those feeders to arrive. The resulting lay-overs left flight crews idle but on the company clock.

The Shuttle, in effect, set up a point-to-point within United’s larger network.

Worker power

United’s task teams were only one example of employee empowerment.

Work rules also were overhauled, with mechanics given more authority. They could sign off on repair work that had required an inspector’s signature. They could suggest changes if they determined a better way of fixing an engine part.

And the new way of doing things was paying off. In 1995, United rolled out electronic ticketing without a hitch, beating American Airlines, which had a reputation for being more technologically innovative.

The same year, operating revenue per employee, a key measure of productivity, jumped 10 percent. The company’s profits and stock price were rising.

Like their colleagues around the county, some mechanics at United’s jet shop in San Francisco were constantly keeping tabs on the stock.

Harper, the mechanics union’s safety committee representative for the jet shop, would tease them “Have you got your first billion yet?”

With missionary zeal for changing the culture at United, Greenwald began to address even the longstanding resentments of workers who weren’t part of the ESOP.

United’s 20,000 fight attendants- the airline’s most visible face- had refused to participate in the bold experiment in employee ownership, mainly because they couldn’t afford the pay cuts. Greenwald wanted to win them over.

He found an easy target for his charm offensive in the much-hated-weigh-in system for flight attendants.

Veteran flight attendant Pam Waltz considered it humiliating, but she knew how to prepare for the mandatory periodic checks. Unflappable smile. Neatly pressed Uniform. Ex-lax.

Fail to conform to United’s size requirements and you could lose some of you pay. So there was Waltz, stepping onto a doctor’s scale in one of United’s mirror lined “appearance rooms,” where “appearance counselors” instructed flight attendants about ways to improve their looks.

At 5 feet 10 inches and 150 pounds, Waltz hovered close to United’s limit of 154 pounds for a flight attendant her height. To make weight, some of her peers used diet pills or sharply restricted their intake of fluids, dehydrating themselves to drop a pound or two.

“When the time came close, I’d starve myself,” said Waltz, now 48 and flying out of New York City for United. “It was always tough for me, and I’m thin. There were people sticking their fingers down their throats.”

The weigh-ins were still in place in 1994. To Waltz and many of her fellow flight attendants, they were a prime example of United clinging to the outdated image of flight attendants as sex objects.

To Greenwald, the solution was simple: Dump the weigh-ins.

Despite doing so, he never could persuade the flight attendants to join the ESOP. His effort spoke volumes about Greenwald’s commitment, but it also suggested that his idealism was colliding with some harsh realities.

ESOP hits turbulence

A couple of years into the ESOP, United’s employee-led buyout already was showing strains. After the improvements in customer service and other measurements, the carrier’s performance started sinking again.

Its on-time arrival rate peaked at 81 percent the year the ESOP was adopted. By 1997, the number had slipped to 76 percent and would plummet to an industry-worst 61 percent in 2000.

Some of the problems dated to the first days of the ESOP. Shortly after it was approved, Greenwald announced that he would stay for only five years- a self-imposed term limit that he now acknowledges undermined his effectiveness. Capping his own tenure allowed managers who didn’t want to share power with workers to wait him out.

In hindsight, the very structure of the ESOP was obviously flawed.

The plan’s chief authors sought fundamentally different things. Managers expected workers to willingly accept lower pay and heavier workloads because they were, after all, owners.

But many employees were frustrated because they didn’t feel like owners. ESOP stock that couldn’t be touched until retirement was all well and good, pilots union leader Michael Glawe told Greenwald, but pilots need to pay mortgages, children’s college tuition and other immediate expenses. As union leaders often put it, “You can’t eat stock.”

The upshot: Neither side was willing to make sacrifices needed to permanently reshape the workplace.

No on had forgotten the strong-arm tactics United management used to win worker approval of the buy-out- the firing of janitors, then flight kitchen workers and then threats of more lay-offs until the ESOP was approved. This left latent animosity, especially among machinists, who felt that they had to accept the ESOP out of fear of losing their jobs.

“So many people were so bent out of shape about this being forced their throats that they took advantage of it,” said James Goodwin, a top United executive at the time who went on to become its CEO. “People used to leave work early…They did all kinds of things because they felt that they were owed that, because they had to give up something that they didn’t want to.”

Though its impact on the fate of the ESOP wasn’t recognized at the time, employee ownership also suffered serious blow when pilots forced out of the union leaders who had spearheaded the buyout plan.

Roger Hall resigned after disclosure of his attempt to make a secret $2 million payment to the union’s top lawyer, Chuck Goldstein, as a bonus for helping broker the ESOP.

Such an arrangement was not illegal, but it would have violated union rules that prohibited payments beyond regular compensation, according to an investigation by former U.S. Atty Tom Sullivan for the pilots union. The payment was never made.

In Hall’s resignation, the employee buyout had lost its chief evangelist. His departure strengthened the hand of pilot unionists skeptical that the pay cuts for the ESOP were worth it and that the company would really become a better place to work.

The job of conveying what was expected of employee-owners fell on Greenwald’s shoulders. It was a tricky task: sweet-talking executives, managers and union workers to work together, yet, when needed, disciplining those who failed to get with the program.

“I was saying, “Guys, the difference between then and now is you can’t supervise with a two-by-four anymore,” he said in a recent interview. “You’re more a coach, an adviser. You talk things out.”

Kumbaya culture

Everyone knew that the ESOP had changed the rules of the workplace. They just couldn’t agree on what the new rules were.

Greenwald had changed even the vocabulary at United. Customer service supervisors became “team leaders.” Nino Diez, who attended countless sessions of “cultural leadership training” and collected a wall full of diplomas from training sessions meant to teach bosses how to boss better.

Yet as a team leader, Diez found he couldn’t discipline workers who abused the system. When he sought to punish gate agents who left their posts early, their union objected.

” It was kumbaya culture – let’s hold hands. Everybody be friends,” he said. But, “there was no authority…Some people took empowerment to mean ‘I can do whatever I want.’”

No one had a better view of the breakdown than Gerry Godinez, a veteran baggage handler and customer service representative in Chicago who eventually became a supervisor.

He remembers one gate agent at O’Hare whose father had booked a flight on the internet. It was ultra-cheap about $150 because it involved multiple stops. When the father arrived for his flight, the gate agent upgraded him to a non-stop in first class.

Afterward, Godinez confronted the agent. “I thought it was a good decision,” he said the gate agent told him.

“Yeah, but you upgraded your father , ” Godinez said. “We just lost $800 on a $150 ticket.”

“You gave me the power to make the decision, he recalled the gate agent replying. “Now you’re questioning my decision-making?”

Front-line supervisors like Godinez were caught in the middle, with unions balking at discipline and bosses asking, “Why are you letting them do this?”

“We felt like a ping-pong ball going back and forth between upper management and the union,” Godinez said. “The expectation under empowerment was that you’d make a good business decision. But the guidelines as to what a good business decision was were never really made clear.”

A crucial test

Looking back, Greenwald concedes that his message was misinterpreted by some. “What I should have said more strongly is, ‘You’re still accountable for the results of your group. If some people are performing poorly, you have to fix it.’”

Greenwald’s campaign to change the behavior of United’s new employee-owners faced a crucial test in late 1996 during the first round of pay raise negotiations since the start of the ESOP.

Management’s vision for the talks was clear: Offer pilots and machinists profit sharing but only tiny raises. Just as important, executives did not want to commit to a return to ESOP wages in 2000, when the company would stop handing out stock and would reopen contract negotiations.

The pilots bristled. They were eager to start harvesting some of the wealth of the Internet boom. The tech industry was in full flower and United was in the midst of a third straight year of record profits, far exceeding the most optimistic financial projections. In the first six months of 1996, the company’s profit surged 40 percent, to $382 million.

The pilots reasoned that it was only fair that a generous portion should be diverted to wages.

To Glawe, the pilots union leader, his members’ situation was similar to that of CEO or other senior manager who had steered a firm to a string of highly profitable years. “Would anybody be surprised if he got the max?” he asked. “Of course not.”

In a series of meetings that bounced between Greenwald’s suite at world headquarters in Elk Grove Township and Glawe’s union office nearby, the CEO urged pilots to take the longer view. They were majority owners, and the stock had doubled since the ESOP was adopted in 1994.

Greenwald offered raises of a little more than 2 percent. Pilots were especially angered by the paltry opening proposal because 600 top company executives divided $14 million in bonuses in 1996. Their anger was evident in the outcome: More than 80percent of pilots voted against it.

Splitting up the team

Glawe was in an awkward spot. Using hardball tactics to hurt the airline’s financial performance and inconvenience customers was against his cautious nature. “There has to be a way to solve your problems besides taking the passengers hostage,” he said.

But Glawe couldn’t risk being seen by his rank-and-file as yielding too much to Greenwald.

So he pulled pilots out of task teams, stalling momentum for culture change. It was, Glawe figured, less damaging to the company than having pilots refusing overtime or working to the letter of the contract.

He and Greenwald sidelined their negotiating teams and met face-to-face in an effort to has out a deal.

Greenwald hoped the pilots would accept less of a raise in return for a cut of the company’s profits – not simply stock in a retirement plan. Instead he ended up approving two 5 percent raises over four years because he didn’t want to smother nascent cooperation between labor and management.

He also committed his successor in April 2000 to restoring wages to their pre-1994 levels. Just as important, Greenwald gave the unions incentive to drag out negotiations because he guaranteed them back pay no matter when they struck a deal.

Some United executives and union leaders involved in the negotiations contend that Greenwald did all he could at a time when record profits made people think the economy was riding a never-ending wave of growth.

After the midterm negotiation was settled, United still had record earnings for two years. It controlled more than half the traffic at its San Francisco hub – a gateway to Silicone Valley at a time when dot-com entrepreneurs thought nothing of walking up and paying thousands of dollars for an immediate flight to New York.

“Things were going along pretty well in those years,” said Ken Thiede, a longtime machinists union leader who negotiated the midterm contract. “I don’t know if anyone had a crystal ball to see what was coming.”

The record profits seemed to have blinded Greenwald and union leaders to one of the truisms of their industry: What goes up invariably comes down.

To some observers, Greenwald had undercut the very nature of the ESOP’s marketplace advantage. His predecessor, Wolf, had sold the ESOP to Wall Street back in 1994 as a way to permanently lower United’s labor costs; now, Greenwald was undermining that advantage.

Within the union ranks, pilots remembered not the smooth ending to the midterm talks but their acrimonious beginning. “It gave the first traction to the militants,” Glawe said.

At the same time, Greenwald was starting to feel frustrated by the slow pace of change and the deeply embedded animosities at the carrier. “The pilots and machinists had not truly crossed over as owner,” her said. “They were halfway there.”

Betrayal in the ranks

At O’Hare, time-clock abuses worsened, with some workers leaving up to an hour early. Instead of punishing the relatively small number of offenders, managers revoked the no-swipe policy – a powerful symbol that the Greenwald era was coming to an end.

Many employees came to see the much-vaunted culture change as a sham, while supervisors felt threatened by their diminished authority.

One veteran mechanic heard it often. “You’d be talking to a foreman, and somebody would say something about being an owner – the way things had changed. And [the foreman] would come back with ‘You’re not an owner.’”

A sense of betrayal took hold. “They promised you so much. They were going to change the culture,” the mechanic said. “People feel it was stolen from them.”

In some cases, the task teams had the opposite of their intended effect. Rather than the slackers being shamed into working harder, more-diligent employees felt foolish.

“You had a guy who wants to work. All he wants to do is show up, put in his 40 hours and go home,” Harper said. “Well, then you put him on a team, and he finds out he’s working four times as hard as one of his colleagues. Human nature takes over and he says, ‘What am I doing?’”

Amid the growing cynicism at United, Southwest was beating back the Shuttle by adding flights and cutting fares.

United executives insisted on using San Francisco’s often fogged-in airport instead of nearby Oakland – prompting major delays that rippled throughout the rest of United’s network.

Beyond operational glitches, however, the Shuttle fell victim to the ESOP’s inability to change the airline’s culture. Top managers in the mainline division wanted the scores of Shuttle flights back under their control. And the pilots union hated having Shuttle pilots work under a separate pay scale.

Eventually, after Greenwald’s departure, the old-liners would successfully claw the Shuttle back into the main carrier.

Successor sidetracked

But Greenwald had bigger problems than the Shuttle. His handpicked successor, John Edwardson, was losing the support of the union leaders Greenwald had so assiduously courted.

Edwardson, who now heads computer seller CDW Corp., was known for his intelligence and straight talk, but he had a brusque, even arrogant, side. And at the new United, alienating union leaders carried a high price.

John Peterpaul, a longtime machinists negotiator who sat on United’s board from the ESOP’s inception until 2002, visited Edwardson after hearing about a particularly angry meeting between Edwardson and union leaders.

“John, let me tell you something,” he said. “You’re looking for my support to replace Jerry Greenwald. This is not how you’re going to get it. You need to spend some time mending some fences with the workers.”

When the subject of Edwardson’s ascension later came up at a United board meeting, Glawe and Peterpaul made it clear: He had lost their support. And Greenwald did little to help Edwardson once he fell out of favor with the unions.

Without any backing, Edwardson’s chances of succeeding Greenwald were shot. Under the rules of the ESOP, if the pilots and machinists combined their two board votes, they could veto a CEO candidate.

To some, Edwardson’s rejection was at least partly abou the union leaders demonstrating their power in order to enhance their standing among their members.

For the second time in less than five years, they had used the authority granted them by the ESOP to reject an executive they didn’t like. What they couldn’t have known was that Stephen Wolf, the man they had ditched years before, would soon come back to haunt them.