"ESOP regrets: Worker ownership was UAL nightmare"

Sunday, July 27, 2003

ESOP regrets
Worker ownership was UAL nightmare
Ex-employees feel sting of costly job-saving initiative
By Chris O'Malley
The Indianapolis (IN) Star


A decade ago, United Airlines employees thought that by becoming owners of
their company they would save their jobs and supplement their retirement.

Instead, the 1,100 mechanics who lost their jobs this year when United
ditched its Indianapolis repair base will get little back on their personal
investment in the airline.

Bankrupt UAL Corp. filed papers this month to terminate its once-promising
employee stock ownership plan, or ESOP. It has given participants until Aug.
18 to elect how they want to receive their distributions, such as in cash or
401(k) rollovers.

But these United employees, who gave up years of pay raises to fly the
prosperous skies of employee ownership in 1994, will receive only pennies on
the dollar thanks to UAL's stock slide.

The case has raised charges that fiduciaries failed to look out for the
interest of workers and highlights the potential dangers of ESOPs,
particularly ones that were created as a bailout for struggling corporations
in the 1980s and 1990s.

The ESOP trustee at Polaroid, which created an ESOP in 1988 to thwart a
hostile takeover, sold shares at pennies on the dollar following the
company's 2001 bankruptcy filing.

Enron's ESOP was rendered worthless, leaving employees holding the bag. And
even the granddaddy of industrial ESOPs -- which saved steelworker jobs at
Weirton Steel years ago -- couldn't stave off the company's bankruptcy
filing this year.

United's mechanics and pilots unions agreed to the ESOP in the early 1990s
when UAL threatened to cut thousands of jobs. Workers accepted pay cuts and
wage freezes in return for an ownership stake that provided struggling
United more than $4 billion.

For a while, the ESOP was lucrative. An employee who had accumulated 1,000
shares at the end of 1999 was sitting on about $90,000, according to an
estimate by the International Association of Machinists and Aerospace
Workers.

But even with the termination that will give participants four shares of UAL
stock for each ESOP share they hold, those 1,000 shares now are worth about
$2,500 -- with UAL's stock price around 63 cents.

"Bankruptcy has rendered the stock virtually worthless," said Machinists
spokesman Frank Larkin. "Many employees had more than $70,000 at the peak of
the valuation."

That's about what former United inspector Bill Austin had accumulated, which
he said amounts to "sweat equity" because he and co-workers had forgone
raises to take what was a 55 percent employee ownership of United.

"They told us we could possibly be millionaires," said Austin, 59, of
Indianapolis. Now Austin figures he would be lucky to squeeze $9,000 out of
his battered shares.

"I'll have nothing by the time they get through the scam they're doing now.
I will have absolutely nothing."

The problem is compounded for many workers who also held large amounts of
UAL stock in their company 401(k) plans. Austin was so hopeful when United
chairman James Goodwin stepped down in late 2001 that he increased holdings
of UAL stock in his 401(k). Back when UAL traded at $32, those holdings were
worth $199,000.

But the trustee of that plan finally dumped the shares when they had fallen
to an alarming $2.02.

"I lost $32 a share. That would have been more than enough money to buy a
house -- in cash. As it is, I'm probably going to have to get a job at some
point," said the retiree Austin, who still has a UAL pension -- albeit one
with a growing shortfall.

While 401(k) plans give employees a degree of control of their holdings --
and some responsibility for the outcome -- ESOPs generally do not.

"The participants in these ESOPs, they're mechanics, they're accountants.
They're ticket-takers. . . . They know jack about (corporate) finance," said
Edward F. Sutkowski, founder and principal of Sutkowski & Rhoads Ltd., a
Peoria, Ill., law firm specializing in ESOPs and other plans.

"ESOPs were touted to union groups: 'If you take a pay cut, we'll give you
an ownership interest.' Well it happened so often in companies that were
financially troubled. So it has left a very sour taste, and rightfully so,
with a lot of the unions. I saw that as a potential for abuse," said E. Van
Olson, an ESOP specialist and attorney at Indianapolis law firm Ice Miller.

A pitch was exactly what Austin and his co-workers got in 1987, when the
airline's pilots union sent them videotapes advocating an ESOP.

He pops the old tape into his videocassette recorder and nods in agreement
with the pilots union's points about how UAL and other carriers of the day
were intoxicated with making acquisitions outside the airline business.

UAL had bought car rental company Hertz, along with hotels and other
ventures, "and then started bleeding the union dry," said the pilots union
announcer.

Indeed, its airline workers were being pressed for concessions. So in 1994
the unions agreed to pay cuts, but with the expectation that UAL would dump
many of those acquisitions and focus on growing United.

But even with pilots and machinists on the reconstituted airline's board,
management returned to its spree of acquisitions.

"The whole purpose of us buying into the ESOP was to save United Airlines,
not buying a bunch of damned subsidiaries," Austin said.

He and another member of Machinists Local 2294 even traveled to San
Francisco to urge the resignation of the union officer who served on the
ESOP committee.

Some workers grew frustrated about not being able to influence decisions,
including UAL's costly and failed attempt to merge with US Airways. "No
matter how much we were against something, they went ahead and did it
anyway," Austin said.

While workers fire off numerous such examples, most stinging now is the
diminished value of their ESOP holdings.

Why, they ask, did the ESOP's trustees wait so long to liquidate employee
holdings as UAL's stock spiraled in bankruptcy?

A suit filed earlier this year against the airline's ESOP plan and its
trustees alleges they failed to move the holdings to less risky investments.

United "was in deep financial difficulty well before the Sept. 11 attack,
and the plan trustees ignored the warning signs, including grim forecasts by
the UAL leadership," states the suit filed by Seattle law firm Hagens
Berman.

It cites a statement by former chief executive Goodwin about two years ago
that United was "hemorrhaging" money. "Clearly, this bleeding has to be
stopped, and soon, or United will perish sometime next year," Goodwin said.

It was not until several months later that plan trustees tapped State Street
Bank to provide independent recommendations. Last September, the bank began
selling battered United shares in the plan. But the delay cost ESOP
participants billions of dollars, the suit alleges.

In hindsight, some ESOPs should never have been formed in the first place.
One common reason for failure is a poor business plan. Companies that
operate in environments where regulation and market forces can change
swiftly and precipitously can see business "go to hell tomorrow," Sutkowski
said.

ESOPs often are best suited to companies heavily secured by assets, such as
in manufacturing or distribution.

Today, ESOPs most commonly are formed with private companies rather than
publicly traded giants.

One of the hottest uses of ESOPs now is in closely held businesses, to help
transfer ownership from the current owners to the next generation of family
and employees, said Olson.

Had such a company not turned to employee ownership, it eventually might
have sold out to another company, including those out-of-state, that may
have slashed overlapping jobs. "It helps keep local business local," Olson
said. "There's an awful lot of plusses to these ESOPs that are not being
recognized."

But for former employee-owners such as Austin, who gets around these days in
a Ford F-250 with more than 200,000 miles on the odometer, the ESOP is a
scam.

"The $4.7 billion we bought to bail out United was just given to UAL. It was
money we were conned out of."

ESOP primer

   . An Employee Stock Ownership Plan, or ESOP, makes workers owners of
stock in the company that employs them. 
   . ESOPs sometimes are used by closely held companies to transfer
ownership to workers. That can be preferable to selling the firm to
competitors, which could result in consolidation and job losses. 
   . An employer with an ESOP sets up a trust to which it makes annual
contributions. The amount each employee receives depends on such things as
pay level and years of service. 
   . Employees receive the vested portion of their accounts at termination,
disability, death or retirement. 

ESOP facts

   . About 10,000 U.S. plans, covering 8 million employees or 8 percent of
the private sector work force. 
   . Employees in these plans draw more than 3 percent of total compensation
from ESOP contributions. 
   . Only about 10 percent of ESOPs are in publicly traded companies. 
   . A total of $20 billion in cash or stock was contributed to ESOPS in
2000. 
   . About 2,500 companies are majority-owned by the ESOP. 
   . More than 25 percent of ESOPs are in the manufacturing sector. 

The fall of United Airlines

   . March 1994: United unveils its Indianapolis Maintenance Center. 
   . August 1998: United plans to add about 50 engineers this year and 460
mechanics over the next two or three years. The base now employs 2,600. When
the plan was conceived, officials envisioned a fleet of 950 aircraft, but
it's closer to 650. 
   . November 2000: United shifts some repair work from the Indianapolis
maintenance base to an outside contractor, citing a work slowdown by
mechanics. Mechanics, who deny there's a slowdown, have been without a
contract for 11 months. 
   . September 2001: United announces 20,000 layoffs in wake of terrorist
attacks. 
   . February 2002: United announces a $2.1 billion loss for 2001, a record
for any airline. 
   . October 2002: 325 United workers in Indianapolis, 250 of them
mechanics, are given layoff notices. 
   . December 2002: United files for bankruptcy protection. 
   . March 2003: United puts all 1,100 mechanics at the Indianapolis base on
temporary leave; facility closes in April. 

Attached Photo:

Bill Austin stands on the grounds of the former United Airlines Indianapolis
Maintenance Center, where he worked until January. Like many ESOP members,
Austin saw the value of his United shares tumble to pennies on the dollar.

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