On October 8, 2012, Bill Saporito writes in the print edition of Time Magazine:
Don’t even think that you have a more difficult job than Tom Horton. Although some airline bosses can still seem besotted with this once glamorous business, at ground level it’s an industry that has lost more than $60 billion in the past decade, erasing every penny earned in its 80-year existence. An industry whose combined market value, below $30 billion, is less than that of Starbucks, one of its vendors. One with irrational competition, uncontrollable fuel costs, a feckless regulator, and jets and airports filled with people who don’t like you–and not just the passengers but your employees too. Beyond that, well, who’d want to run a major airline that just went bankrupt, sending its former CEO fleeing from the building?
Horton does. He runs American Airlines, which is running for its independence in bankruptcy court in New York City. American lost $10 billion in the past decade and $2 billion last year alone. Last November, when other carriers made money, American was filing for Chapter 11. Things have gotten tougher. Recently the carrier had to cancel hundreds of flights, and its on-time rate plunged below 50% because of an unofficial showdown with and slowdown by its 10,000 pilots, whose contract was chucked out by the bankruptcy court earlier this year. American hastily summoned Allied Pilots Association (APA) president Keith Wilson to Dallas from Washington for peace talks.
Horton is hanging tough; he knows that bankruptcy will allow American to slash operating costs, and he says a revitalized fleet will regain passengers lost after years of underinvestment and deteriorating service. He has reason to hope. In its most recent quarter, American earned a $95 million profit before restructuring costs, an operating-profit turnaround of at least $381 million over the previous year. The company has more than $13 billion in financing to buy 550 new jets to replace its ancient fleet of MD-80s, 767s and 757s and promises upgraded services and amenities. “Our people are doing a really good job. They are standing tall and doing a great job for our customers,” Horton told Bloomberg Television in July after the sparkling quarterly numbers came in.
Customers might beg to differ. But one thing is sure: after a dismal decade of bankruptcies that has made air travel as much fun as a high-altitude nosebleed, airlines have finally figured out how to make money. The mergers of Delta and Northwest and of United and Continental have removed billions of available seat miles (ASMs) from the system as the combined companies rationalize routes. That’s why planes are 80% filled (and overhead space is overfilled). The carriers now charge a basic price for a seat and offer a menu of fee-based options–for roomier seats, for boarding early, for meals–to generate more revenue.
Beset by bankruptcy, balky unions and an unwanted suitor, American Airlines has an opportunity to transform into a fully vested employee-owned company in which the full voting rights and full-dividend profit rewards are vested with ALL the company’s employees.
As with the auto industry, which was “saved” but not structured as employee-owned, American Airlines and other airlines across that industry can be saved and revitalized as employee-owned with EVERY employee empowered to acquire ownership through a buy-out arrangement and investment in future capital growth paid for out of the FUTURE earnings of the company.
For example, United Airlines, a subsidiary of United Continental Holdings, Inc. (formerly UAL Corporation) is an employee-owned company with approximately 53 percent of the company stock owned by employees through an Employee Stock Ownership Plan (ESOP) trust. United, however, is not an ideal ESOP as not all of its 85,000 plus employees are vested in the ESOP and do not have full voting or full-dividend benefits; United’s flight attendants and its nonunion employees were never even part of the plan. Nor has the company addressed the need to create an OWNERSHIP CULTURE in which each employee understands the significance of ownership and positive attitude toward the company. As a result, United Airlines never has operated in the manner that a properly structured ESOP can and should––whereby the employees act as owners and management runs the company as if the employee-owners also had a say.
The Airline Deregulation Act of 1978 ended the airlines’ status as a government-protected cartel. This forced the airlines into fierce competition with each other and a flock of startups.
United Airlines became the first and largest majority employee-owned carrier in 1994. Still, minority employee-ownership had become common in airlines prior with at least 11 organized in one manner or another, including ESOPs. For example, California-based Southwest has made efforts to increase employee participation, responsibility, and ownership.
In United Airlines case, various groups of employees––most represented by unions––purchased 53 percent of its stock in exchange for various concessions. But unfortunately, each had a different idea about what “employee ownership” meant. Thus, rather than approach the employee purchase paid for from FUTURE profits resulting from efficiency improvements and growth, the employees were required to accept substantial pay cuts and work rule concessions, necessary to maintain UAL’s viability. In return the employee owners received the 53 percent stake in the airline’s common stock and guaranteed seats on the board of directors. While UAL’s pilots, machinists, and salaried workers became majority shareholders of the firm, full voting and full-dividend benefits were not universally extended.
As for American Airlines, on November 29, 2011 AMR Corporation, the incorporated ownership entity, filed for Chapter 11 bankruptcy protection. A series of announced resulted in a degradation of operations. AMR has since been engaged in merger talks with various competitors some for whom AMR owed money. On August 31, 2012, US Airways announced that American Airlines and US Airways had signed a nondisclosure agreement, in which the airlines would discuss their financials and a possible merger. On September 18, 2012, American Airlines announced it has notified more than 11,000 workers of possible job loss as part of its bankruptcy reorganization and reduced flight service. On October 25, 2012, CEO Tom Horton (addressed in the Time Magazine article) announced that American would hire 2,500 pilots over the next two years to staff new international and domestic routes. About 1,500 of the new hires would replace retiring pilots. American has about 7,500 active pilots today.
Independently, the Allied Pilots Association, the in-house union which represents the 12,000 American Airlines pilots, have been looking to merge with another airline.
So the situation is dubious.
A well orchestrated and optimally structured ESOP as envisioned by its architect, binary economist Louis Kelso, could be the solution.
Few question that overall employee ownership is a positive solution, though success depends on proper structuring and worker education. According to the ESOP Association, more than 11,000 companies in America, covering 8 percent of all employees, have ESOPs. In more than half of those firms, employees own enough equity to be a “major factor in the corporation’s strategy and culture,” the group says.
The 11,000 plus U.S. companies, who have adopted some form of employee ownership, employ more than 11 million workers. Company employees now own stock in nearly one-third of the Fortune Industrial 500 and one-fifth of the Fortune Service 500. The dismal past performance of the United States airline industry highlights the significance of the introduction of large-scale employee-ownership of airlines: U.S. airlines lost $ 12.7 billion between 1990 and 1993; more than 170 airlines failed in the 1980s; and several carriers are currently on the brink of bankruptcy or liquidation. But then similar scenarios are the reality for companies who are non-employee owned. So the blame for business failure cannot duly be pointed at employee ownership. Other factors are at play.
The success of employee ownership, while not necessarily structured as an ESOP, demonstrates that broadened ownership is a viable and rewarding strategy to share equity and profits with employees. According to the 2006 General Social Survey, between one third and one half of all employees participate directly in company performance through various combinations of employee ownership, stock options, profit sharing and gainsharing. Among the hundreds of highly successful public companies with some form of employee ownership are Apple, Google, Procter & Gamble, PepsiCo, and Starbucks. Employee-owned companies also feature prominently on Fortune magazine’s annual list of the 100 Best Companies to Work for in America.
While it is common sense to perceive the inherent benefits of employee-owned companies where company and employee incentives are aligned together, why not make viable employee ownership part of the solution to our troubled nation and economy? Employee ownership creates company unity and when optimally structured improves company-wide performance. When company management shows appreciation to employees through a meaningful form of employee ownership, the opportunity exists to build an OWNERSHIP CULTURE.
The purpose of an OWNERSHIP CULTURE is to instill in each employee a clear understanding of how the company makes money and of his or her role in generating profits. This mutual respect contributes to the company’s ongoing performance and fosters all employees to contribute ideas and feedback. Such contributions result in a company’s ongoing profitability and spurs internal entrepreneurship.
At the time of United Airlines transformation to majority employee ownership, Robert Reich, Bill Clinton’s first labor secretary and a key supporter of the United plan, and presently a professor at the University of California, Berkeley, told The New York Times: “Inevitably, other companies will stand up and take notice. From here on in, it will be impossible for a board of directors to not consider employee ownership as one potential business strategy.”
Corey Rosen, who co-founded the nonprofit National Center for Employee Ownership (www.nceo.org) says that employee-owned companies operate successfully when management makes employees feel as though they have a say in what their company does, and when employees feel as though they’re working alongside managers rather than against them. Within such an OWNERSHIP CULTURE, companies work better.
While employee ownership is a path to creating stronger individuals and financial self-sufficiency, employee ownership works to increase productivity, decrease production costs, and reduce the waste that comes with a poor or bad labor-management environment. As the corporate world grasps the benefits for the bottom line and the creation of more “customers with money,” we should see more business corporations accountable to their workers and to the world we live in. Income inequality would decline as CEOs and management salaries are more equitably aligned with that of the wages of the average worker and unions would have less power to make untenable demands of their companies. By changing the “culture” of a company that becomes employee owned we can disabuse workers of the notion they are “wage slaves” and persuade them to value their company and work together to succeed.
But most importantly, we, as a nation, could optimize the innovation and invention of new technologies and apply the productive capital that results to increasing more efficient production of products and delivery of services while reducing the gap between America’s rich and poor, creating a balance between production and consumption. As for ordinary Americans employee ownership and other forms of broadening private, individual ownership in FUTURE productive capital growth means that they can accumulate over time a viable income-producing capital estate for greater financial security in old age.
My mentor, binary economist Louis Kelso told 6o Minutes in 1975: “Americans are a nation of industrial sharecroppers who work for somebody else and have no other source of income. If a man owns something that will produce a second income he’ll be a better customer for the things that American industry produces. But the problem is how to get the working man that second income.”
Walter Reuther, President of the United Auto Workers, expressed his open-mindedness to the goal of democratic worker ownership in his 1967 testimony to the Joint Economic Committee of Congress as a strategy for saving manufacturing jobs in America from being outcompeted by Japan and eventual outsourcing to other Asian countries with far lower wage costs:
“Profit sharing in the form of stock distributions to workers would help to democratize the ownership of America’s vast corporate wealth, which is today appallingly undemocratic and unhealthy. “If workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm’s products, profit sharing [through wider share ownership] cannot be said to have any inflationary impact on costs and prices.”
Own or Be Owned!
http://www.time.com/time/subscriber/article/0,33009,2125494,00.html
