Despite Labor Pact, UAL's Future Remains Uncertain

Updated from 9:10 a.m. EST

If at first you don't succeed ... negotiate all night long until something gives.

The tactic paid off for UAL ( UAL), which announced it had reached a new wage-cutting agreement with the International Association of Machinists. IAM rejected a similar proposal last week, raising the specter of bankruptcy for the second-largest carrier and sending its shares plummeting. They rebounded Monday and were recently up 36% to $3.32.

The negotiation breakthrough provides yet another glimmer of hope that the company can survive, although UAL is not out of the woods. On Thursday, the union's rank-and-file will vote whether to accept the agreement, which UAL management desperately needs in order to get a $1.8 billion loan guarantee from the government.

If UAL can't prove it can execute its plan to cut costs by $5.2 billion over the next five-and-a-half years, the Air Transportation Stabilization Board will reject their application for the loan guarantee, and the company will file Chapter 11.

Last week, 57% of machinists rejected the previous proposal because of quality of work-life issues and a dispute over unpaid vacation days. While UAL CEO Glenn Tilton has pledged to improve these issues, the new agreement looks a lot like the old one, keeping the 7% pay cut for machinists intact.

Tilton's words were enough to get IAM's leadership behind the new deal. Scotty Ford, president of District 141-M, which represents the 13,000 machinists, said he agreed to put the offer to a vote after United "addressed the issues expressed by membership."

"The District 141-M Executive Board strongly recommends ratification, as this is the final opportunity to avoid bankruptcy," Ford said.

A Broken Relationship

While union leadership has swung in favor of the UAL proposal, the rank-and-file may not be swayed. Just last week, the IAM's leadership was calling for a management change, with Ford criticizing the company for the way it treats machinists, calling on Tilton to recognize this issue.

Indeed, in private emails and conversations with machinists, the legacy of enmity between machinists and management may be so deep that the relationship could be permanently broken. While the labor disputes go back for decades, the seeds of the current discontent were planted in 1994, when the unions joined the employee stock ownership program and gained a 55% stake in the company.

At the time, hopes were that the ESOP would improve relations between the two sides, with the employee owners having a vested interest in the success of the parent company. It was hailed as a landmark plan that would revolutionize the industry, but it has backfired, largely because UAL's stock has been in a tailspin since 1994.

When business was good and the stock market strong, employees didn't receive raises with company shares rallying. But over the last two years, business has deteriorated to a point where management is again asking for wage concessions -- all while the stock is heading toward zero. As a result, machinists feel about as valuable as the company stock.

"UAL has squandered our ESOP money from 1994 and we feel we shouldn't make the same mistake twice," said one machinist. "After paying nearly $153 per share for ESOP stock in 1994, the stock is less than $3. We have been ripped off by the IAM and UAL after the longest bull market in U.S. history. How does that make you feel when your stock is worthless?"

In short, machinists bristle at the notion of paying for management's mistakes with pay cuts. Employees point to management's disastrous attempt to merge with now-bankrupt US Airways and its plans to launch a private jet unit called Avolar as critical blunders. They claim these moves distracted management from seeing how bad business was and kept them from doing something -- like cut their own pay -- to avert disaster.

A Rock and a Hard Place

In the end, the machinists are stuck choosing between the lesser of two evils. If they reject management's proposal, the company will go bankrupt, which means everything the union has fought for over decades disappears. Labor contracts, including pay scales, will be torn up. That equity stake will vanish. Thousands will lose their jobs. And UAL could very well join Braniff and Eastern on the scrap heap of history.

But if the machinists accept the agreement, they'll be voting in favor of a pay cut, with no guarantee that the company will be able to survive as a going concern. The company owes $375 million by Dec. 16, after factoring in a 10-business-day grace period, and is burning nearly $8 million a day. And the government may not provide the $1.8 billion loan guarantee, even if machinists accept the wage cuts.

Monday's news of a new agreement between the IAM and management may be good news, but it might not be enough to overcome years of bitterness. Some machinists are ready to fight management until the company's death, if only to keep wages intact for machinists at other carriers.

"UAL's operating officers are responsible for their mistakes," said another machinist. "As long as they are exempt from pay cuts and remain in charge, we will reject all concessions. They only undermine the pay structure throughout the entire industry."

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