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Gap in Pay Divides Pilots From Other United Unions

By MARY WILLIAMS WALSH

NY Times, December 19, 2002

Associated Press

While the equity held by employees in United Airlines has been wiped out, the pilots have access to a tax-deferred trust fund for their benefit at retirement.

Of all United Airlines' employees, the pilots seem to have lost the most in the airline's bankruptcy filing. Highest paid among United's nonmanagement employees, the pilots pushed worker-ownership the hardest and received the biggest stake in the airline, only to have their equity wiped out.

But United's 8,800 pilots fought for special compensation that no other employee group has and that no creditor can touch as the airline struggles to reorganize.

Starting in April 2000, as the stock of United's parent, the UAL Corporation, was tumbling, the pilots persuaded United to make large contributions to a tax-deferred trust fund for their retirement. The company has contributed hundreds of millions in the last couple of years to the fund, which had swelled to $2.2 billion at the end of 2001, the last public data available. The airline agreed to contribute the equivalent of 11 percent of each pilot's pay, a footnote at the time to headlines about the impressive raises of more than 20 percent depending on a pilot's service.

These days, the pilots' fund looks particularly valuable, as United seeks even deeper cuts from employees than the concessions it had won before filing for bankruptcy protection last week. Salaries and wages will surely be sacrificed in the months ahead, but the trust is the pilots' to keep.

A United spokesman declined to comment on whether the airline had proposed reducing future contributions to the pilots' fund as part of cost-cutting concessions described to its unions on Friday. The unspecified concessions caused an outcry from United's pilots.

But as more information emerges about the fund, it may worsen the already deep divisions between the pilots and the members of other United unions.

"There's a little feeling now that we ought to start rubbing heads with the pilots," said Joe Schwirian, who has worked for 17 years as a United mechanic in San Francisco. But he added that he and other mechanics continue to be "more ticked off with management" than with the pilots.

Relations between United's unions are important because each of the three main groups — representing the pilots, the flight attendants, and the mechanics and other ground workers — has been given a seat on the airline's 13-member creditors' committee. The presence of so many labor representatives has caused concern among some industry experts, who fear that a strong labor voice will make it hard for United to cut costs effectively.

But labor's voice may not be consistent. There are indications of diverging positions among the unions, as illustrated by the gap between the pilots' and the mechanics' compensation packages.

Like the pilots, United's 36,000 mechanics, baggage handlers and customer service employees took pay cuts in exchange for stock in UAL. The ground workers received a 20.4 percent block, the second largest after the pilots' holdings. The decision to do so split their union, the International Association of Machinists and Aerospace Workers.

Now the machinists' equity is worthless, just like the pilots'. But unlike the pilots, the machinists and aerospace workers received no special tax-deferred payments in 2000, when the six-year period of pay cuts for stock ownership ended. The pilots pressed for and ultimately received the deferred-compensation payments, as well as pay increases that year. But the machinists did not even receive a raise.

The machinists finally received raises earlier this year. United agreed at the time to pay an additional $500 million, to make them whole for the time they worked in 2000 and 2001 without a contract. The first of eight $70 million installments was paid on Monday .

Now that United is in bankruptcy, it is unclear whether it will pay the remaining installments.

"It's a great injustice," said Charlie Lincoln, a lead mechanic and shop steward for the machinists in San Francisco. "There's a lot of anger about it."

All four main labor groups — pilots, flight attendants, machinists and nonunion ground workers — have United-sponsored pension plans, together worth about $7.6 billion at the end of 2001, when the last data was issued. Again, the pilots have the most attractive provisions. Even though they make up only 12 percent of those entitled to pensions, they have claims on about half of United's pension assets.

United also offers its flight attendants, machinists and nonunion ground workers the chance to save for their retirement in 401(k) accounts, but those workers contribute their own money. Even before the bankruptcy filing, United offered them no company matching contributions.

The pilots' special trust fund, now called the Pilot Directed Account Plan, existed long before United's current financial troubles began. Before United created its employee-ownership program in 1994, the airline was contributing an amount equal to 9 percent of each pilot's salary to the trust each year. That worked out to about $85 million a year in the early 1990's.

The pilots are required to leave their holdings in the trust until they retire, though they may borrow against the money and may contribute some of their own pay, to reduce the tax bite. The Frank Russell Trust Company is the trustee.

In 1994, when United began its employee-ownership plan, the pilots agreed to pay for their stock with a pay cuts and reduced company contributions to the trust, said Steve Derebey, a United 767 pilot and spokesman for the pilots' union. For six years, United contributed an amount equal to 1 percent of each pilot's salary to the plan, or about $8 million to $10 million a year.

When that period of concessions ended, on April 12, 2000, United tried to revert to the old contribution rate, 9 percent of each pilot's salary. Pilots said that initially they were so eager to restore the deferred compensation contributions that they would have even agreed to lower their demands for higher pay.

But then United announced plans to acquire US Airways, angering the pilots, who feared they would lose seniority when the two groups of pilots were merged. The pilots, already somewhat soured on their status as worker-owners, began to act a lot less like capitalists with equity to protect and a lot more like labor militants.

The pilots "worked to rule" that summer, refusing overtime at the busiest time of year and just as the airline was trying to expand. United's on-time performance plunged to the worst in the industry; delays and cancellations hit record levels. By the end of August, United's management capitulated to the pilots' demands, not only raising their salaries by 21.5 to 28.5 percent, but also increasing contributions to the tax-deferred trust to 11 percent of salaries, retroactive to April 12.

In 2000, United contributed $95.7 million to the pilots' trust. In 2001, it contributed $178.1 million.

The pilots justify the gains by recalling that they went for six years with below-average pay, while they were trading wages for stock.

"We have bills to pay, and our costs are going up just like everybody else's," Mr. Derebey said. "Basically, we were just keeping even with the Joneses."

In fact, the United pilots' contract catapulted them past the Joneses, giving them the richest compensation in the industry that September, when it was ratified. The pilots' achievements also raised the expectations of United's machinists and flight attendants, who were also demanding raises in 2000.

Mr. Derebey said the pilots were disappointed that employee ownership had not worked out as hoped.

"We really made an attempt to change the culture in the organization, to get everybody to sing off the same sheet of music," he said. But from the beginning, he said, the plan was weakened by "pockets of resistance." He cited, for example, United's flight attendants, who did not become employee-owners because their union was unable to agree with the airline on a trade-off of concessions for stock.

"That was the first fatal blow," Mr. Derebey said.

But Mr. Schwirian, the mechanic, found fault with the pilots. The machinists' union supported the pilots' campaign in the summer of 2000 and expected the pilots' union to back them up as well.

"As soon as they got what they wanted, they dropped it," he said. "They didn't back us. They said, `Look, you're on your own.'