Every airline employee understands the ups and downs of the business. They know service and customer relations are key. Without employee and union support America’s highest flyers could have trouble getting off the ground. In the past, major airlines have felt the brunt of employee anger. That’s one reason why United Airlines sold a 55 per cent controlling stake to 59,000 of its 79,000 employees for wage concessions worth nearly $5 bn. This created the largest Employee Stock Ownership Plan (Esop) in America, and a unique model for IR professionals’ communication with employee shareholders.
Hard-hit in the early 1990s by recession and bargain-basement competitors, US airlines turned to their work forces to shave costs. Some employees lost their jobs; some watched salaries drop; others witnessed their companies going into bankruptcy. Industry leader United was the only one to end up in the hands of its employees and investors are loving it. The stock price has soared in the last 18 months, from $88 to $199 per share; and airline profits have grown more than tenfold to $574 mn.
Since the UAL deal took effect in July 1994 the company has undergone a profound change in corporate culture, to which the IR department has adapted, building communications bridges to both employee and institutional investors.
Today’s UAL IR team operates within a company whose employees could oust their bosses in a proxy fight. So far, the bosses are not worried. Chairman and CEO Gerald Greenwald, a protege of former Chrysler boss Lee Iacocca, earned the title of worker champion when he architected the federal loan guarantee which saved the car maker in the mid-1980s. Now Greenwald is working with employees to cut costs and keep profits aloft during a cyclical lull in airline traffic.
As for employees, they take their stock ownership seriously. A recent survey showed that 85 per cent of them see a link between their contribution and the company’s overall financial performance. And the communications department works to ensure that employees are aware of the necessary balance between the bottom line and customer service.
‘The fascinating thing is that employee ownership used to be a big issue in the minds of public investors,’ notes Lynne Hughitt, manager of IR at UAL’s headquarters in Elk Grove, Illinois. ‘Analysts also questioned the relationship. They wanted to know how this was going to change United’s behaviour. They thought we were going to go out and buy planes to create new jobs. They believed this was the employee-friendly thing to do.’
Last April, the company told external investors that United would buy 113 aircraft over the next five years. Of those, 94 would replace ageing planes. Wall Street jaws dropped and United stock rose 6 1/2 points over two days in a vote of confidence for management. According to Hughitt, ‘It was time for a change in corporate culture and the Esop was a catalyst. Today, we almost never get questions about employee ownership when we go on the road. Basically, employee holders have the same interests as institutional investors.’
‘The evidence points to UAL’s Esop helping shareholder value,’ says Candace Browning, airlines analyst at Merrill Lynch. ‘UAL has turned in a remarkable performance.’ She cites the 19 per cent yearly decline in pilot sick-time, noting that this translates into hiring 19 per cent fewer pilots in future and dramatic savings for the company.
Browning, whose research shows United outperforming the industry, says the introduction of the Esop stunned airline investors. But shareholders had little choice, since the alternative was an all-out labour war. During the aborted USAir merger talks, Browning kept a close eye on employee shareholder sentiment. ‘They were important decision-makers in the process, and analysts had to be aware of their thinking.’
In her search for models to build further confidence in the employee base, Hughitt has considered Japanese corporate culture. ‘It’s not enough to give employees a piece of paper,’ she says. ‘We have to continually communicate what stock ownership means for them and explain to public shareholders how employees are adding value.’ The 150 per cent ascent of United stock is certainly positive reinforcement for employees.
Much of the staff relations burden falls on Donna Sitkiewicz, manager of employee communications. Working with the Esop group in human resources and collaborating with the finance department via Hughitt, she deals with all employees – whether shareholders or not – and strives to avoid alienating either of these groups.
One of the information vehicles is NewsReal, United’s daily employee newsletter with stock price quotes and general interest news. It’s not required reading for analysts but Sitkiewicz says it might as well be. After all, the bottom line incentive is the same for both institutional and employee holders: delivering corporate value. ‘Many companies, even without Esops, believe the future wealth of stockholders and employees are intertwined,’ says Hughitt. ‘For us, the key change in UAL IR has been to communicate more widely. That was proven during our discussions with USAir.’
In October UAL began merger talks with USAir. Unlike the Disney-Capital Cities /ABC merger, when an elite corps of executives disappeared into a Wall Street bunker to come up with a deal over a weekend, the UAL communications process was open. Also unlike Disney, it did not get done.
UAL went public at an early stage. CFO Doug Hacker held a conference call with institutional holders and analysts on the day of the announcement, and NewsReal quickly became a hotbed of shareholder debate. As the talks unfolded, Greenwald called for employee comments. A flood of letters and e-mail messages hit Sitkiewicz’s desk.
After a few weeks of listening to this chatter, Greenwald announced that four criteria had to be met if the company was to pursue the acquisition: support for the deal from both companies’ employees; maintenance of the current 55 per cent Esop level; a resulting increase in UAL’s shareholder value; and the prospect of the company remaining on course for a solid investment-grade credit rating.
‘Against all odds, we said the USAir deal had to be supported by employees of both companies,’ says Hughitt. ‘Past airline mergers sounded great on paper. But when rubber hit the road, they turned to disaster because of culture clashes. Whether you’re an employee or not, shareholders recognise that making the projected numbers a reality meant employee support.’
After a careful, six-week examination by United’s board and discussion with employees from both the airlines, UAL eventually called the deal off. United employees applauded the decision, with many saying they had been worried about taking on USAir’s $13 bn debt load. Interestingly, arch rival American Airlines, which would have joined the bidding for USAir if UAL made an offer, also backed off. USAir returned to its employees, seeking concessions of up to $500 mn to keep afloat.
The next big cost-cutting challenge for United will be a new labour contract for some 20,000 flight attendants, a quarter of the company’s work force. They have not been involved in the Esop to date but the staff groups which do participate are hoping the Association of Flight Attendants (AFA) will join them when a crucial contract comes up for review in March. If it does, United would become one big family.
Heated labour negotiations are standard fare at every airline but the imminent bout between United and its flight attendants may pit employee against employee. ‘Our biggest disappointment has been that flight attendants are not owners too,’ laments Hughitt. ‘The upcoming talks will have a unique dynamic: our fiduciary respon-sibility is to balance the demands of the AFA against the interests of shareholders. In this case, many of the shareholders are employees.
Nuts and Bolts
After months of debate, press attention, government filings and missed deadlines, United employees became part of the biggest Esop in US capital market history in July 1994. Pilots, machinists, salaried and management employees ‘invested’ wages, benefits and work rule adjustments valued at $3.3 bn over twelve years, in exchange for 55 per cent of United over that period.
The institutions, over 80 per cent of whom voted for the deal, received $2.1 bn in cash and 45 per cent interest in the new corporation. With the stock at $180 per share, UAL is worth $2.6 bn, up 105 per cent since the Esop’s introduction. Among the three employee groups, pilot job concessions bought 46 per cent of the Esop, machinists 37 per cent, salaried and management employees 17 per cent. This stake is proportional to the money each group invests in the Esop. For its investment, each group nominates one director to the twelve-seat board, with five public directors elected by public shareholders, and four independent directors rounding out the board. For their stake, United’s 8,000 pilots accepted a 15.7 per cent wage cut, lower future plan contributions by the company, less vacation for younger pilots and new work rules and entry-level wages for pilots in United’s short-haul low-cost Shuttle operation.The Esop is technically a retirement plan governed by the Internal Revenue Code. As such, it has a right to an annual contribution from United, which it uses to repay the initial loan from the company. Dividends, which are tax deductible for United and produce tax savings, were fixed when the Esop first came into effect and are paid to employees with Esop stock. As a result, those employees who were Esop participants from the start benefit the most.
A unique feature of the Esop is its guaranteed voting power. Provided at least 20 per cent of the company is still held by the Esop, the participating employee groups will have at least 55 per cent of voting power divided according to their stakes. These stakes remain the same, no matter how many employees are in each group. When employees retire, leave or die, their shares are converted into common stock or cash.
European Esops
News that Deutsche Telekom’s massive privatisation later this year will encompass a novel employee share scheme must be welcomed by those banging the Esop drum across the region.
Telekom’s plan is likely to be Europe’s biggest ever and will be open to all 250,000 employees. Structured by Union Bank of Switzerland, it uses a derivative and trust structure to allow staff to buy five times as many shares as their own funds would allow. The plan is set to run for six years.
There seems to be little downside, either. The plan guarantees that Telekom employees will be paid an amount at least equal to their original investment at the end of the six years and they stand to gain any appreciation in full. Plan members will also have full voting rights for their holdings. Watch other major German companies follow the same route in the near future.
Not that using employee share ownership is a new way of giving large issues a helpful nudge in the right direction. Cary Martin at Dewe Rogerson confirms that virtually every European privatisation has had an employee tranche, including Rhone-Poulenc, INA, IMI, Repsol and KPN. And any structure which helps buoy an issue with some kind of ‘guarantee’ for employee investors is worth looking at. Discounts for staff are fairly common, with some countries setting no limits on the level allowed.
Savings related share option schemes are less common in continental Europe but have thrived at many UK companies since the early 1980s. So why do companies do it? When everything’s ticking along smoothly and the share price is appreciating, the answers are pretty clear. Damian Carnell of New Bridge Street Consultants in London refers to the various schemes as being ‘corporate glue’, adding that the prime drivers from the company’s perspective should be employee motivation and incentives.
Dick Stradwick, group human resources director at Cadbury Schweppes, talks of achieving a congruence between shareholder and employee interests. He says that at Cadbury many of the employees are close to the company in which they work but the group itself may seem remote. Employee share ownership bridges that gap. ‘A surprising number of employees hold onto their shares after exercising their options,’ says Stradwick. ‘The common notion of getting the money and running doesn’t ring true.’
Barclays has run a savings related scheme since 1980. John Cotton, human resources director, says the scheme has been ‘very successful’ with about 75 per cent of eligible staff taking up the plan. ‘It points staff in the right direction,’ he says. ‘They’re wearing two hats and recognise that there’s a shareholder interest behind the company.’
But what if the bottom falls out of the stock? If someone has saved for five years and just before reaping the benefits the stock collapses, does that nullify the whole point of the programme? Stradwick doesn’t think so: ‘It’s not a panacea if it’s a badly run company. But I think the positives outweigh the negatives.’ Peter Styles, group compensation director at Kingfisher, agrees. He says the savings in SAYE schemes are tax free and staff don’t have to take up the share options at the point of maturity. Styles says the biggest negative is that the employees have to be in a position to save the money in the first place in order to join the scheme. For many retail workers that’s a hard task.
But the benefits of employee share ownership depend crucially on a decent communications programme. ‘The success of any human resources policy lies in effective communication,’ says David Craddock, employee benefits manager at Waterford Wedgwood. ‘You can dot the i’s from the legal point of view but without communication it won’t be worth a thing.’
Newsletters are a popular option here, and Stradwick says he’s been to several plants where someone takes the trouble to chalk up the share price every day on the shop floor. For him the positive side of good communication comes from a negative approach. A shop floor employee stopped him on a factory tour to ask why the share price was falling. Was it a currency related fall or due to the company’s fundamentals? Stradwick believes that if employees are encouraged to think that hard about what is happening to the corporate group, there will be benefits for all to enjoy.
