Effects of Employee Stock Ownership Plans on Employees Since September 11 Term Paper

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Employee Stock Ownership on Employees in the Airlines Industry since September 11th.

Review current materials on the issue.

Airline industry ESOPs tend to be very volatile.

This paper will examine the effects of the September 11th tragedy on employees' employee stock ownership plans in the airlines industry. The following generic information is provided for background before examining the main issue for this paper.

In the United States, the main vehicle for employee ownership in a company is the Employee Stock Ownership Plan (ESOP) which first became a recognized plan in 1974. There are between 17 and 20 million U.S. employees participating in large ESOPs or other contribution plans holding stock. Employees may own stock directly in their companies through stock purchase programs or be members of work cooperatives.

Studies find the employee ownership has a positive impact on performance even in adverse times. September 11th adversely affected the majority of domestic carriers in the United States. Industry revenues dropped drastically and President Bush had to create a Stabilization Act that provided up to $5 billion in cash grants and $10 billion in loan guarantees to compensate for losses resulting from the attacks.

United Airlines, one of the largest employee-owned company in the nation and was part of the megatrend that took place in the airlines industry in the 1990s. Northwest and Continental followed suit and gave their employees the ability to be "owners" of the company. Making owners of employees stimulates interest in productivity and operating efficiency.

Finally, since September 11th and in the face of weaker demand for air service, most carriers announced significant reductions on both markets served and cutbacks on the workforce.

Main Body

September 11th had a dramatic effect on our nations' airline industry, which in negatively impacted the ESOPs for most airline employees. The airline industry have been turbulent for several years and it was the hope for many carriers in the 90s that Employee Stock Ownership Plans (ESOP) would made a marked difference.

Historically, the airlines industry has been losing altitude since deregulation was unleashed in 1978.

Hubs were built, carriers were merged, costs rose, prices fell and profit margins all but collapsed. Most investors and lenders realized this was a losing proposition as the industry lost all the money it made and Wall Street was quick to downgrade its debt to junk. It was almost inevitable that employees would be come the next market for funding.

The airlines industry is as turbulent and tumultuous as ant flight can be. This highly competitive and volatile industry has attracted employee ownership advocates for many years. What better industry, a complete service industry linked to business and pleasure is more apt to improve at the hands of its employees. But many factors that are out of employee control have doomed many airlines and even ESOPs could not save them from their fate. The remainder of this paper will discuss:

Issues affecting the airline industry

The effects of September 11th

Examine 2-3 airlines

What September 11th means for airline ESOPs and the employees

What can be done?

Discussion

Let's face it, for any company that embraces employee ownership, it can be a Godsend or a temporary reprieve from the inevitable. Market forces have long been forcing the industry to face concentration or collapse. Stock shares are not going to replace pay and if the proposition is a losing one, not only the company profitability suffers but the employees as well.

There is not guarantee in the airline industry or any other for that fact. But odds are that after the September 11th attacks, airline stocks were and will continue to be one of the most volatile.

Look at United. Not long after the September 11th tragedy, the investment manager for the company's employee stock ownership plans began selling some stock in parent company UAL as the threat of bankruptcy loomed. State Street Bank and Trust, said in a recent regulatory filing it may sell up to 20% of the plan's UAL shares, while the financial outlook for the airline is so uncertain.

UAL, the parent company is the third largest employee-owned company in the United States. The No. 2 U.S. carrier is 55% owned by pilots, machinists, and salaried and management workers. Each of those groups has a seat on the board of directors. The ownership vehicle comes through retirement plans that hold preferred stock for workers who participated in a 1994 buyout. Although by many accounts a dismal failure, the Employee Stock Ownership Plan was adopted with the idea that employee ownership would foster harmony between labor and management at the huge airline.

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According to Corey Rosen, executive director of the National Center for Employee Ownership, labor saw the ESOP as a way to prevent the company from being broken up under then CEO Stephen Wolf. Management saw it as a way to extract wage concessions. "It's one of the worst ESOPs I've encountered," Rosen said. "I think a large part of that is because... It was a short-term fix for a long-term problem."

If United Airlines defaults on its loans and declares bankruptcy, shares of common and preferred stock are rendered worthless. Generally, ESOP shares are not sold during bankruptcy proceedings but United Airlines is considering that as an option. Since the September 11th attacks the shares of the stock have dropped and lost about 85% of their value.

Airlines have traditionally been the most likely buyers of another airline, but because U.S. airlines posted nearly $10 billion in losses in 2001 after the Sept. 11 attacks, they are not take-over targets. With demand for air travel slashed, the threat of bankruptcy loomed as a reality.

In late September, State Street filed a document with the Securities and Exchange Commission indicating it may sell up to 10.9 million UAL common shares over the next three months.

The common stock is issuable when the ESOP shares are converted and issued to State Street on a private placement basis. The ESOP committee has three members appointed by the pilots unions, two by the machinists' union and one by the company. As of Oct. 24, State Street had converted 2.1 million shares of ESOP preferred stock to an equivalent of 8.4 million common shares and has begun selling some of it on the open market.

In actuality the UAL ESOP worked against its participants because the employee ownership "caused the program participants to be less diversified than most investment advisers would recommend" because they have both their jobs and a large part of their investment portfolio tied up with a single company, said Robert Mann, airline analyst and consultant at R.W. Mann & Co. In Port Washington, N.Y.

Pilots own 25% of the UAL stock, while machinists hold 20% and nonunion salaried and management workers own a combined 9.2%. Those shares were acquired in a 1994 ESOP in which the employees agreed to wage and benefit cuts to help UAL restructure. The ownership plan does not allow an individual worker to sell his/her investments until they retire.

Despite an early boost to employee morale and a temporary reduction in wages, the employee buyout provided UAL with a temporary solution.

Consider the airline industry as a whole. It is highly competitive and susceptible to price discounting.

Profits are extremely sensitive to changes in fuel costs, fare levels and passenger demand. Passenger demand and fare levels are influenced by, among other things, the state of the global economy, domestic and international events, airline capacity and pricing actions taken by carriers. The weak U.S. economy, turbulent international events and extensive price discounting by carriers contributed to unprecedented losses for U.S. airlines from 1990 to 1993. Since September 11, 2001, these same factors, together with the effects of the terrorist attacks and the industry's reduction in capacity, have resulted in dramatic losses for us and the airline industry generally. We cannot predict when conditions will improve.

Continental Airlines also provides its employees with an ESOP that initially turned the company around after it almost went under at the hands of Frank Lornzo. But Continental has fared better than United. The stock is issued as part of an incentive plan with exercise prices equal to the fair market value of the stock on the date of grant, and typically vested over a three to four-year period.

All Continental employees are eligible to participate in the employee stock purchase program under which they may purchase shares of Class B common stock at 85% of the lower of the fair market value on the first day of the option period or the last day of the option period. Employee stock options generally have a five-year term. But like United the stock prices for Continental have been impacted b y September 11th and most employees would not plan to send their kids to college on what they have amassed so far. Although Continental has not generated positive cash flow since September 11th, they have not had to resort to using monies from the ESOP.….....

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