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Every Employee an owner (Really?

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The following case situation is excerpted from the article “Every Employee an Owner
(Really)” by Corey Rosen, John Case and Martin Staubus that appeared in the June 2005
issue of Harvard Business Review. Purely for class discussion.

Kindly think through and come up with probable reasons why the ESOPs failed in United
Airlines.

1994:
In United Airlines, unionized pilots, unionized mechanics and non union employees were given
55% of the company’s shares through an ESOP in return for wage concessions. The unions gave
up some $4.8 billion prospective wages and benefits in return for equity. However, the other
major unionized group of flight attendants refused to join the buyout on the grounds that its
members cannot afford to take such large concessions. “You can’t eat stock”, was their
catchphrase. Again, the pilots union voted out the leaders who had supported ESOP only a few
weeks after it was implemented.

1995:
The experiment began in a rosy glow of collaboration. Task groups of employees from all over
the company began attacking workplace problems and figuring out how to cut costs. Employees
took on new responsibilities:

 Everyone from gate agents to mechanics gained new authority to address


customer complaints without consulting supervisors.
 Pilots started checking wind conditions and other data to determine the most fuel-
efficient routes.

The cooperative attitude brought results. By the end of 1995, the first full year after ESOPs,
grievances fell by 74% and sick time by 17%. Revenue per employee, a key measurement in
airlines industry, was up by 10%. On time performance was 81%. Surveys showed that
employees enjoyed working at the “new” United. In 1995, the stock of United outperformed the
Standard & Poor’s 500 index by 67%, and shareholder value increased by more than $4 billion.

Five years later:


 The task groups were long gone; in fact the company disbanded them just a year after
establishing them.
 Gone was the cooperative attitude.
 In summer 2000, peak travel season, pilots were seeking new wage deal and staged a
drastic slowdown. They refused to fly overtime, thus making it impossible for airline to
keep to schedule. They taxied at crawl. They flew low to burn more fuel.
 Performance floundered. On time performance dropped to industry worst of 61%; it was
40% during summer.

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Some other issues:

 The machinists got increasingly distracted by challenges from rival union, who were
opposing the ESOP.
 The “old guard” in the management were openly critical about the original move to
employee ownership; they begun to gain strength.
 The workers who were part of ESOP would get stock only for five years. People who
joined the company after that period would get none at all.
 The five year period was getting over by 2000, and pilots were eager for contract
negotiations.
 The new CEO announced that he had negotiated a merger with US Airways. The
proposed merger did not happen on antitrust grounds.

United Airlines subsequently went bankrupt, and a few commentators were quick to place the
blame squarely on employee ownership.

Question for class discussion: Why did ESOPs fail in United Airlines?