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United Continental Holdings: A must-know company overview

Part 9
United Continental Holdings: A must-know company overview (Part 9 of 14)

Labor issues in the airline industry that investors should know

Objectives behind employee ownership grants

The airline industry has had a history of problems due to labor unions. Employee stock option plans (ESOPs) were used in the airline industry to overcome the adverse effects of unions (table below shows wage premiums for union employees versus non-union employees).

Analysts have identified two distinctive uses of employee ownership.

  1. Transactional use of employee ownership: The primary objective is to reduce the adverse impact of increasing wage rates due to union contract negotiations. Companies provided ESOPs in exchange for wage concessions to reduce costs and link employee compensation with company performance.
  2. Relational use of employee ownership: The primary objective is to build a long-term, strong, and efficient relationship between employees and management rather than focusing on reducing costs.

Wage premium for union employees_27June14Enlarge Graph

The importance of a healthy labor-management relationship

In 1994, United Airlines’ pilots and machinists were granted ESOPs, which offered ownership stakes as high as 55% of company stock in exchange for pay cuts of 12% to 15% and other concessions. Even though employees were involved in key decisions after this, there was no significant improvement in labor relations with management. United therefore had labor union issues, which led to disruptions in operations due to disputes and strikes over pay cuts and concessions despite offering ownership stakes. High labor costs, along with a downturn in the airline industry after the September 11 terrorist attack, had even led the company to bankruptcy in 2002. After that, the ESOP was terminated. UAL hasn’t granted any stock options since 2010.

On the contrary, Southwest has a very co-operative labor force, though 83% of its employees belong to unions. Management ensured that the union and company’s objectives were aligned and also kept the union representatives well informed of new developments. Southwest’s employee ownership culture built on trust has been successful. Management recently announced a $228 million profit sharing payout (30% of its profit), which is double the $121 million it paid last year.

So a well-balanced labor relation with both transactional and relational benefits is key to achieving the desired result of improved labor relations and reduced costs.

In 2013, 80% of United’s (UAL) 87,000 employees, 83% of Southwest’s (LUV) 44,831 employees, and 73% of American Airlines’ (AAL) 110,400 employees belonged to unions. Only a small portion of Delta’s (DAL) employees (18%) belong to unions. JetBlue (JBLU), however, is one of the few companies that has a non-unionized workforce, comprising 12,647 employees.

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