An old joke in the airline industry asks, "What's the best way to earn a million dollars in the airline industry?" The answer: "Start with a billion."
Sadly, this joke has become a reality. Airlines across America and the rest of the world are losing money quickly - and forming orderly lines, with boarding passes ready, in front of the nearest bankruptcy court.
In fact, many of the airlines Tufts students use on a regular basis are operating under federal guidelines for companies in the red: United Airlines, Delta Air Lines, Northwest Airlines, and US Airways, among others.
While such airlines take great caution to ensure there is no visible disruption to passenger service, there is a great amount of potential unrest bubbling behind the scenes.
In the case of United Airlines (and its parent company UAL), the nearly three-year return from bankruptcy is rife with controversy. Strikingly, the biggest brouhaha is not over the greater-than-$21 billion loss for 2005 (including $20.6 billion in bankruptcy-related costs), but management's plan to reward itself with 15 percent of the company's new common stock.
As is characteristic of a publicly traded company in Chapter 11, all of the company's outstanding common stock was cancelled. This means that if you owned any shares in UAL, you would have to count yourself as just another unsecured creditor who has to eat the loss.
Of course, United management, under the leadership of CEO Glenn Tilton, has done an admirable job of turning one of the largest bankruptcies in American history into a potentially viable company once again. But the reward United management desires to give itself - $285 million in stock - is mighty steep.
To be sure, management typically receives some equity stake in a reorganized company, but not to this degree. This case is especially egregious when one considers that many of the same executives who steered the company into Chapter 11 stand to benefit from their blunders, even after substantial contract givebacks from rank-and-file employees and thousands of layoffs.
Moreover, United was unique in being an airline (and publicly-traded company) that was mostly owned by its employees. The company gave much of its common stock to labor unions as a contract concession in years past.
With the company's new stock, insult is being added to injury. The common flight attendant, gate agent or ground crew member had his or her share in the company cancelled, only to see the new stock headed for management's bank accounts.
The reality of the company and its recent history suggests that United bigwigs are suffering from amnesia. Under the old bankruptcy laws, companies in Chapter 11 have the ability to "abrogate 'executory contracts'" with employees, creditors, lessors or any others who have business with the company. United, like other airlines before and after it, used this government-sanctioned tool to suffocate labor unions and aircraft contracts.
In fact, contract concessions from the employees who were not laid off or furloughed totaled $6.5 billion. On top of that, United defaulted on its pension promises to these same employees - unloading that $8.9 billion burden onto the Pension Benefit Guarantee Corporation (PGBC), which will likely be funded by American taxpayers, since the emergence of so many bankrupt companies are bankrupting the PGBC.
Under this circumstance, federal tax dollars will pay for greatly reduced retirement benefits for the remaining United employees. Talk about a double whammy: reduced benefits for employees shouldered by American taxpayers.
Did executives suffer the same fate? Did they have their entire professional careers wiped out by judicial order? Not at all. Executives like Stephen Wolf, Gerry Greenwald, Jim Goodwin and Jack Creighton, as well as greedy union bosses like Rick Dubinsky, pledged to wring every last penny out of the company. They made off with their shares of the crumbling United pie long before the company went under.
Airline bankruptcies are complicated matters. In a brutal industry with high fixed costs, huge expenses based on a volatile commodity (oil), fierce competition, a commoditized service that many travelers expect to pay mere pennies for, along with high expectations for service by deeply entrenched labor interests, making money is difficult for even the best run airlines. These factors, however, are little excuse for the skullduggery management is trying to pull here.
The company failed with its first bankruptcy plan, sent the company under with a failed merger attempt with US Airways and an ever complicated business model suffocating from brand overload. (Can you keep straight United's four classes of service on some aircrafts along special routes and upgrades such as p.s. service, Ted, Economy Plus and explus?)
Time and time again the management of this storied airline has shown its ineptitude at leading this company aloft once again. Is $285 million really the best way to reward that?
