Source: Crain's
Author: Paul Merrion

(Crain's) - UAL Corp. Chairman and CEO Glenn Tilton flew into a grim storm of criticism from United Airlines employees Thursday, a fresh reminder of the tough restructuring the firm went through in recent years.

Hundreds of pilots, flight attendants and other union workers picketed outside while Mr. Tilton held his ground at his first annual meeting since the Chicago-based carrier went into bankruptcy five years ago.

"Management feeds from the trough, labor gets the scraps," read the preprinted signs carried by many pilots. "Tilton got his $40 million and I serve passengers on dirty, broken-down planes," read a handwritten sign carried by a flight attendant. One picketer carried perhaps the most poignant message: "No one does better unless we all do better."

But there was little sign of teamwork at the tightly controlled, sparsely attended meeting. 

Most of the questions raised by shareholders came from pilots such as Steve Lynch, who lambasted Mr. Tilton over cuts in pay and benefits absorbed by labor while top management secured robust pay and stock incentive packages upon exit from bankruptcy.

"How much does it take for this to be considered theft?" Mr. Lynch asked.

Mr. Tilton pointed out that most of management's compensation last year was in the form of stock options and other stock-based compensation, replacing similar incentives that had been wiped out during bankruptcy.

"When you're here next year, there will be no such conversation" because pay will be limited to salary and cash bonuses tied to performance, not long-term equity incentives, Mr. Tilton said.

While acknowledging the sensitivity of the pay issue, saying the board of directors had discussed it just 45 minutes before taking a break for the annual meeting, he noted that all of the stock incentives "could be worth nothing if we don't perform."

That doesn't make employees feel any better about their own reduced pay and benefits. As 18-year United veteran Capt. Mary Freeman put it to Mr. Tilton: "Employee morale, and I'm not sure you care about employee morale, is at an all-time low."

Noting that employees are surveyed regularly, morale "is not what we want it to be," Mr. Tilton acknowledged. "We care very much about it, but at the end of the day we also care about making this a sustainable enterprise. I do know one thing: Bankruptcy is bad for morale, and failure is bad for morale."

The press, relegated to the last few rows of the half-full auditorium at the Field Museum, had no opportunity to question Mr. Tilton or other executives afterward. With all of the focus on pay and morale, none of the really important questions facing United was raised, notes George Godlin, a senior airline analyst at Moody's Investors Service in New York.

Since coming out of bankruptcy early last year, United has improved cash flow and reduced debt but still has not been consistently profitable. The carrier had a wider-than-expected net loss of $152 million in the first quarter on revenues of $4.4 billion.

"What I would look at more is, how is United going to cut its costs?" Mr. Godlin said. "United continues to have one of the highest cost structures among the major airlines. It needs to not only maintain its costs but find ways to cut its costs and increase the productivity of workers. But to the extent there is significant, lingering discord, what (labor) can do is work to the exact terms and conditions of their contracts. It puts a real damper on the ability of the airline to operate effectively and efficiently.

"It's very much a Catch-22," Mr. Godlin added. "At this point, Tilton is not about to do any givebacks."