United Airlines’ Unfriendly Skies

Against the Current, No. 102, January/February 2003

Malik Miah and Jennifer Biddle

HOW COULD THE biggest airline in the world, with the most enviable route structure, largest and most diverse fleet, employing over 100,000 workers — an airline that made $8 billion dollars in net profit during the boom years of the `90s — in two years go broke?

This is no Enron. United Airlines made lots of cold, hard cash. Yet on December 9, 2002, United filed for Chapter 11 bankruptcy protection.

United lost its place as the number one airline to American when American bought the remnants of TWA in 2001. Still, it is the oldest commercial airline in the country, a company that survived the Great Depression and several major wars. It is a little piece of Americana.

Given that two of United’s planes were lost in the terrorist attacks on September 11, 2001, it is an irony that the “War on Terrorism” now is the pretext the industry is using to break the backs of its unions.

In an interview with a New York Times reporter on December 10, United’s new CEO and Chairman Glenn Tilton, a former executive at Chevron/Texaco and former chairman of Dynergy (which the Security and Exchange Commission is scrutinizing for securities fraud), had this to say:

“Let me offer you two scenarios. One is the prospect of my vision and my leadership and robust employment and a competitive United. That’s door No. 1. Door No. 2 is Chapter 7.”

Comforting words from a man who secured a $3 million signing bonus, $4.5 million pension trust, and a million dollar salary up front.

Behind Talk of Liquidation

The threat of Chapter 7 liquidation is not simply corporate bluster — although liquidation isn’t as simple as Tilton implies. United now is the second largest airline in the world, with over $22 billion in assets, and a major employer in the United States. Its shutdown would tremendously impact the national economy, financially devastating its 80,000 employees, the communities they live in, and the airports where they work.

United has some 30,000 creditors including large banks, Boeing and Airbus. Air transportation is an integral part of the country’s infrastructure, and the shutdown of a major player like United would require intense planning.

If restructuring does fail, United will have to sell its assets to prepare for final liquidation. Since 1978 when the airline industry deregulated, nearly 200 carriers have gone under. However, the only majors to fail were Pan Am, Eastern, TWA and Braniff. All took years to downsize before their demise. Once the largest U.S. international carrier, Pan Am took nearly ten years to disappear.

Talk of Chapter 7 so early in the process is simply a scare tactic to wring massive concessions from labor.

Anger and Determination

On November 27th, to the shock of union officials, company executives and the media, mechanics voted by fifty-seven percent to reject participation in a $5.2 billion concessionary pact — the only employee group to do so.

Since participation by each employee group hinged on participation by all, the mechanics’ veto meant none of the other agreements were binding. The company and the unions wanted employees to take concessions so United could successfully bid for a $1.8 billion federal loan guarantee.

As it had done at US Airways several months previously when mechanics there initially voted down concessions, then voted them in, the International Association of Machinists (IAM) agreed to have United mechanics vote again on the same proposal.

Perhaps sensing a need for a tactical retreat, the Air Transportation Stabilization Board (ATSB), which oversees the federal loan guarantee program, announced the day before the second vote that United would not get the loan guarantee — for the time being.

In a stinging rebuke of the smoke-and-mirrors business plan, the ATSB laid blame on UAL management, not mechanics, for failure to secure its backing. The Board cited “unreasonably optimistic” revenue projections — especially as low-cost carriers continue to impinge on UAL’s market share — as well as a too-high cost structure even with concessions from labor and an underfunded pension plan.

Rank-and-file IAM members of course were not shocked at all by the mechanics’ rejection. Mechanics understand that the crisis has little to do with wages and benefits, which are on par with the industry standards. Perhaps most onerous to mechanics was the bankruptcy language that would have put us at the mercy of the company in the event of a war with Iraq or a threat of terrorism.

It is a tribute to the militancy of mechanics to have voted down this agreement under the intense pressure of not knowing whether or not the company would really go belly up.

Mechanics recognize that the financial picture is bleak but feel that the company has no viable business plan to turn the company around and protect their jobs and incomes.

As it turns out, United was losing much more than the $7 million per day it reported when mechanics vetoed the concessionary pact. The first day in bankruptcy court employees learned the company was losing $20-22 million per day. Bankruptcy was all but inevitable.

Bankruptcy and Beyond

United’s fall into bankruptcy was not a surprise by the time it occurred. United’s management had made a series of decisions that compounded a structural problem facing all the mainline carriers: how to increase revenues while competing with lower cost airlines and at the same time remaining profitable.

September 11, 2001 gave the airline industry a golden opportunity to correct its mistakes. Within months the airlines hacked more than 140,000 jobs and parked 577 aircraft in the desert due to overcapacity — too many aircraft and routes carrying passengers buying tickets at an unprofitable rate — in some cases, full planes barely breaking even due to below-cost fares.

But the structural problems and mistakes were evident long before 9/11. United lost $605 million in the first half of 2001 due in large part to bad business deals (e.g. attempt to buy US Airways, purchase of an internet company and creation of a still-born business jet) and a slumping economy.

Even now should the economy pick up, the mainline airlines won’t be able to do profitable business the way they’ve done before. The restructuring at United and the other airlines was and is inevitable. The only question has been: Who will pay for it?

In October 2002, the Air Transport Association (ATA) met to discuss restructuring the industry. The ATA is the trade organization for the airline industry and represents all the major carriers: American, United, Delta, US Airways, Southwest, JetBlue, Continental and fifteen or so others.

In the summary report of their conference, the ATA listed as “Bright Spots” and “Avenues to Profitability:” layoffs, concessions, shifting jobs to low paying regional jet operations, outsourcing work to automation, and the “RLA debate.”

This is a reference to Senator John McCain’s plans to amend the Railway Labor Act (RLA) — under which air transport workers bargain — to prevent airline unions from striking at all.

Workers’ “Outdated” Rights

Of course top management and Wall Street point to high labor costs as the main culprit for the airline crisis. But longtime airline executives, when honest, explain that the crisis is more than that.

Robert Crandall, former CEO of American Airlines and the architect of many of the concessions won from the unions since the 1978 deregulation of the industry, noted in an article in the December 10 Wall Street Journal:

“If the established airlines are going to survive, management and labor must literally start over. `Concessions’ within the framework of contracts derived from another era simply won’t allow the carriers to cut costs enough to compete. Business practices and labor contracts must change sufficiently to reach employee productivity levels comparable with airlines like Southwest, AirTran, Frontier, and JetBlue.”

What are the outdated “business practices”? Crandall targets work rules, high government taxes and most importantly the right of workers to withhold their labor. He favors mandatory arbitration.

The crisis of the major carriers is similar to what other traditional industries faced. It occurred in big steel in the late 1970s and 1980s. The owners and unions both failed to respond to the rise of mini-mills that specialized instead of trying to be full service steel manufacturers.

The mainline airlines are in the same dilemma. Should they continue to serve all clients in all markets or streamline their operations? To do so, does it mean going to war with labor?

In 1978 with the deregulation of the airline industry, the managers mainly feared their known competitors. They didn’t respect the new model as represented by Southwest Airlines, which used one aircraft fleet type (737s) and flew to secondary airports at a low cost.

The old regulations meant United, American, Delta, Eastern and other big airlines had their high fares basically set by the government. The RLA governed labor-management relations. Everyone knew how it worked and accepted it.

There was a Mutual Aid Pact among the airlines that allowed them to work together against the unions if they faced a strike. Contracts never ended but became amendable under the RLA. Sometimes it took more than a year or two to get a new one. But generally union employees got full back pay.

While the employers never cared for unions and the legalities of the RLA, the relationship was understood and they could live with it. Investors made capital gains by buying low and selling high. This is why airlines rarely give dividends or show a profit.

Deregulation and Industry Turmoil

Deregulation broke the old customs and set labor and management on a twenty-five-year cycle that exposed how weak the unions had become, and how vulnerable workers are in the industry when hit by frontal attacks.

The 1978 law “opening the market” to new competition did ban the Mutual Aid Pact, the only gain for labor.

The rise of Southwest Airlines as a major player today began with deregulation. Southwest’s strategy of putting employees first (at least in its public rhetoric), flying one aircraft type and using secondary airports led to steady profits.

The mainline airlines’ strategy never changed. They continued to seek size and market share as the road to higher revenues, and to beat up on labor costs when faced with losses from competition.

The consumer was the initial winner. Ticket prices came down and many working-class Americans who never flew began traveling by air. This added new pressures on the mainline carriers.

The first response of the traditional airline executives was to try and run the new airlines out of business by taking big losses on common routes. That generally worked as most upstarts failed within a few years. The only exception was Southwest Airlines.

The new carriers kept coming. The all-service carriers’ response to each crisis was to go after the competitors and their own labor. Labor costs could be a one-shot fix for low revenues.

In the early 1980s Crandall’s American Airlines pioneered the “B-scale” two-tier wage system. He threatened the union employees with dire consequences if they didn’t except his terms. The union officials, not prepared to fight back, capitulated to the new system in airline after airline, convincing current employees to accept concessions at the expense of future employees.

This tactic of management wringing “concessions” from labor in every crisis did not begin with deregulation, but it took on a new vengeance with the rise of the unregulated industry.

Changes in Doing Business

Of course labor costs are not the source of the crisis. New technology and equipment made it possible to create new airlines that could charge cheap fares and make a profit. Most are non-union and have low maintenance costs because of outsourcing to non-union shops. Southwest is the major exception.

The unions’ failure to organize these workers is the biggest reason for the wage-and-benefit gap. But their unwillingness to challenge the airlines’ charge that wages are the main reason for the decline of profits is also a factor.

Frank Lorenzo at Continental and Eastern Airlines in the 1980s took the route of bankruptcy court and strikes to impose lower wages and structural changes. At Continental the executives, after Lorenzo’s departure, eventually made it work. At Eastern the workers after making concession after concession finally refused to bend, struck and forced the airline out of business.

Yet what Lorenzo sought has always been the goal of the industry: to drastically lower labor costs in order to raise operating profits. One result of the Eastern debacle was that it convinced union officials to avoid strikes and to shift policy to seek a tighter “partnership” with management.

The ESOP Shell Game

In 1985 United Airlines pilots went on strike. Afterwards, they developed a new strategy to protect their jobs: seeking direct ownership of the company. The Employee Stock Ownership Plan (ESOP) came about because the Air Line Pilots Association (ALPA) believed employee ownership would end their conflicts with management and the workers would have control.

The fallacy of the ESOP is the false belief that Wall Street and banks would finance an “employee ownership” that gave the workers real power. Owning stock is not the same as controlling a corporation.

For the financiers, employee ownership really meant massive tax breaks and concessions from labor in exchange for limited influence on the Board of Directors and with the CEO. ESOPs are really poison pills for big business to keep raiders out.

Signed in 1994, the United ESOP set up by CEO Stephen Wolf (now chairman at US Airways), the pilots and IAM was a six-year, $4.5 billion concessionary pact that gave employees a fifty-five percent stake in the company and a seat on the Board of Directors. Wolf walked away with $37 million.

Why did workers vote for the ESOP? Some believed they would have more of a say in the way the company was run. Most were just scared.

In the prelude to the ESOP, amid tense contract negotiations and an orchestrated work slowdown by the unions, Wolf threatened to dismantle United piece by piece if employees did not agree to concessions.

ALPA saw Wolf’s demands as an opportunity to get their ESOP. The IAM jumped on board, promising workers they would become millionaires with the stock they owned in the company when they retired.

In the end, when Wolf sold the only profitable division at the time, Food Service, 5,000 workers lost their jobs and the fear of insolvency drove those left to agree to massive cuts.

The 1994 ESOP, which now faces elimination under bankruptcy, was sold to the workers as the economy was a few months away from a mini-boom. We took massive wage reductions for stock that we could not sell unless we quit or retired. We could not invest in our 401 (K) and did not return to our 1994 wages until 2000. Only the Association of Flight Attendants (AFA) refused to join.

Worse, the IAM and ALPA began to see this new partnership as equivalent to real control of the company. They invited the CEO and other executives to union meetings and functions. The IAM even gave them space in union publications.

But more destructive was the collaboration between union leadership and management. When then-United CEO James Goodwin proposed buying US Airways for an outrageous price in 2000, sought to invest in an Internet company and other dubious business ventures that eventually failed, the IAM representative on the Board acted against the interests of the rank and file and rubber-stamped whatever UAL management put before him.

The balance sheet of the ESOP is betrayal and failure. Yet IAM officials and ALPA leaders still defend the ESOP. In 1993, the Wall Street Journal called the ESOP “progressive and idealistic.” In an editorial shortly before United filed for bankruptcy, the Journal heralded its probable demise in Chapter 11 by calling the mechanics at UAL “brave” for voting concessions down.

While union leaders may still have illusions in “employee ownership,” clearly Wall Street and United do not.

Resistance No Option?

In a “bankruptcy Q and A” on the IAM’s website, union officers write that should a judge abrogate our contract, “The employees are given a choice to continue to work under the company’s new wages, benefits and working conditions established after the contract is thrown out or to quit and seek other employment.”

The idea of resisting, working to rule or even striking (“No Contract, No Work”) is not a consideration for the IAM officials.

To enhance the fear factor, after filing for bankruptcy the company immediately informed salaried and management employees of wage cuts beginning mid-December.

On December 14, the IAM posted the company’s first concessionary request to the bankruptcy judge. The new terms for mechanics if accepted would include a reduction in pay and benefits equaling $161,000 over the term of the agreement — including a twenty percent cut in health care coverage and unfettered ability for the airline to outsource maintenance.

United has 83,000 employees. Eighty five percent are in unions. Wages and benefits are not out of whack as charged by management, the media and financial analysts. Mechanics are paid comparably to the only profitable major carrier, Southwest Airlines, and less than UPS mechanics.

Flight attendants are mid-range. Pilots are at top scale. Ramp, customer service and cleaners are paid decent wages for their crafts. When management and financial analysts refer to “high labor costs,” they are primarily targeting the pilots’ wages and work rules. A 747 captain makes well over $200,000.

Mechanics Take the Lead

With unions capitulating every step of the way and the attack by the airline industry intensifying what can workers do? Who represents the interests of the rank and file and how can we make our voices heard?

The mechanics’ vote saved the wages and benefits of all union employees for a while. We sent a message to the union bosses and management that we will not surrender our hard-earned wages, benefits and work rules so easily. The judge now knows that too.

A new proposal must be offered and if it is voted down, only the court can modify or abrogate the collective bargaining agreement. If the latter occurs, it would mean all-out confrontation between management and workers who repair the aircraft according to government-mandated regulations that the public depends on.

Such a confrontational course is not likely to be seriously pursued by management if the rank and file again says no to concessions. Tilton’s threat of Chapter 7 has one purpose: to help the union bosses convince the rank and file to take bigger concessions and not resist.

US Airways Template

United mechanics saw the writing on the wall at US Airways when mechanics rejected their concession pact, before being told to revote because IAM officials said they had been “confused” about what bankruptcy meant. The second time around, US Airways mechanics voted in favor of concessions.

Three months have passed and now US Airways management is demanding more concessions after promising they would not. Why?

David G. Bronner, head of the Retirement Systems of Alabama — the company’s largest “debtor in possession” (DIP) financier — has said that if employees do not comply, US Airways will go out of business, to be liquidated in bankruptcy court.

“What’s their alternative?” he asked rhetorically. “If they don’t want to do this, we’ll Chapter 7 it.”

Donald J. Carty, the chairman and chief executive of American Airlines, has told his employees he wants them to forgo wage increases in 2003 and make work rule changes. Even British Airways is using the United bankruptcy to pressure its employees to accept less as it implements its own restructuring plan.

While the DIP (Debtor-In-Possession) funding of $1.5 billion for United is by four big banks, it is likely that an outside investor group will come into the picture when the ATSB agrees to back future loans.

The DIP creditors are meeting with management monthly and pushing for immediate implementation of other savings before allowing UAL access to its full credit line. Some 560 mechanics received layoff notices on December 16 and there are expectations that a real “bloodbath” is coming in early January, the “low-season” in the aviation business cycle.

The fact that the three major unions are on the Creditor Committee is not a good sign for rank-and-file workers. Union leaders have all made clear that they are willing to give concessions to “save” the company.

A New Course

To slow down the attack will require taking steps outside the RLA provisions and the business-as-usual approach of the official labor movement. While mechanics have taken the lead in attempting to slow down the worst aspects of the company’s restructuring plans, it will take independent, rank-and-file initiative from all airline employees to win.

Organized resistance can nfluence bankruptcy courts and judges. Laid-off Enron employees who had no union were able to get their bankruptcy court to force Enron to pay them a severance package after the company filed for Chapter 11 protection.

Working people face big challenges in the next few years. We at United along with our fellow workers at US Airways are in the frontlines to protect hard-won wages, benefits and working conditions that are now under attack.

All employees are aware that some concessions are likely but have come to the conclusion that there will be no blank check for management. We will be fighting our union leadership, our employer and the government. Chapter 11 simply represents a new stage in the battle.

In this kind of climate transparency and full union democracy, to involve the membership on what to do and how to resist, are key to defending the employees’ interests. The old model of union-management partnership and secrecy from the membership by the officialdom will not deliver even modest crumbs.

Militancy requires democracy first and foremost. Solidarity among workers will require a radical break from the business philosophy of the labor movement: Workers must begin to decide on their own how to act.

This is why militant mechanics at United don’t see the IAM as their union and want a change in representation. In the case of mechanics we have an alternative in the wings — the Aircraft Mechanics Fraternal Association (AMFA).

The leaders of the “No” vote were supporters of this rival group. AMFA supporters initiated a broader committee against concessions. This committee organized small anti-concession pickets at airports a week before the vote despite threats by the company and the union for taking such action.

AMFA’s militancy and openness have helped mechanics at other airlines. The year before our contract expired, AMFA-represented mechanics at Northwest won an industry-leading contract. This led management at American and Delta to match their gains.

When our contract expired in 2000, management refused to give us the “seamless” contract promised during the ESOP.

In the spring of this year the Bush-appointed Presidential Emergency Board (PEB) granted us an industry-leading contract — in large part due to the improvements won at Northwest and other airlines. Our gains came even though United argued that the airline was losing more $10 million per day.

AMFA is now close to filing for a representational election with the National Mediation Board at United.

AMFA would give mechanics and cleaners (who are part of our bargaining unit) the best chance to pressure Tilton and the court. AMFA’s rejection of secret negotiations and support for full disclosure and democratic function is needed more than ever.

Currently AMFA at Alaska Airlines is in contract negotiations where members can observe the process as provided by the constitution of the union. Compare that to United where workers are denied information by the IAM and must rely on company spin, newspaper reports or rumors to find out what’s going on.

Independent democratic unions are the best defense workers have today. When union officials tell workers to let them handle it, that’s a signal that action is necessary.

While a war in Iraq could lead to more bankruptcy filings in the industry, and demands for more drastic cuts, a “no concession” stand is still valid.

The principled stand for labor is to protect the wages and benefits of current employees so future workers have them. Our fight is not just for today but for tomorrow.

ATC 102, January-February 2003