ESOP regrets - Worker ownership was UAL nightmare

ESOP regrets - Worker ownership was UAL nightmare
Ex-employees feel sting of costly job-saving initiative

By Chris O’Malley

July 27, 2003, The Indianapolis Star

http://www.indystar.com/print/articles/4/060908-9694-031.html

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. aOc 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. aOc 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. aOc Employees receive the vested portion of their accounts at
termination, disability, death or retirement.

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

The fall of United Airlines aOc March 1994: United unveils its
Indianapolis Maintenance Center. aOc 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.
aOc 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. aOc September 2001: United
announces 20,000 layoffs in wake of terrorist attacks. aOc February
2002: United announces a $2.1 billion loss for 2001, a record for any
airline. aOc October 2002: 325 United workers in Indianapolis, 250 of
them mechanics, are given layoff notices. aOc December 2002: United
files for bankruptcy protection. aOc March 2003: United puts all 1,100
mechanics at the Indianapolis base on temporary leave; facility closes
in April.