Greed and Mendacity: The saga of UAL AA Mechanics

Greed and Mendacity

The saga of UAL and AA mechanics

Stephen P. Prentice
Stephen P. Prentice

Greed seems to be a popular driving trait of many in industry and politics today. Mendacity is a less well-known trait that at its worst means a liar and at best means intentional misleading or falsification of facts.

Those of us who remember the movie "Cat on a Hot Tin Roof" will recall Big Daddy's comment about mendacity being present in his house. He felt that Maggie and Rick lied to him about his health among other things. Many commentators today say that business is chock-full of both greed and mendacity at the corporate level. Criminal indictments and civil lawsuits run throughout the corporate scene today.

Recent egregious examples of course include Enron and others who wove a pattern of deceit and violation of the law much to the detriment of those employed by the various companies. Pension plans and health benefits went south with the criminal and civil violations.

Well, the good news so far is that no company or executives in the air carrier business have been indicted for violation of the law. But, how many have been playing fast and loose with their employees during the present industry downturn?

Both of these air carriers have been in the news for the past two years involved with labor strife in general and with their mechanics in particular. We all should remember the United affair where management stated that if the mechanics did not accept a reduction of pay and benefits the company would be forced to file bankruptcy. Well the mechanics did not bend and the company did file Chapter 11. They are still in bankruptcy court. Even if the mechanics went along with the company it is felt by many that bankruptcy was inevitable anyway. Also, during this time the mechanics were sued by UAL in an attempt to stop communication between the employees. Basically, a stupid legal move on the part of management that completely alienated many mechanics. Not exactly good employee relations!

Similarly, American has been faced with the same problems with a slightly different twist. They said the same thing as UAL. That they would file bankruptcy but the twist here was that the mechanics agreed by a small margin to go along with a reduction in pay and benefits. Many still think bankruptcy may still follow and indeed the company has so stated ad nauseam. Late last month they reported a loss of $1.04 billion for the first quarter of this year!

AA management - what a deal!
The mechanics agreed to go along with the reductions. At the same time the company filed an obscure statement with the SEC stating that about 40 of the top management had a trust set up for them that would protect their retirement payments in the event of the company filing bankruptcy. These trusts were fully funded with current corporate cash while the mechanics and others were being asked to reduce their wages and benefits. The CEO (Don Carty) admitted this oversight and called his lack of communication poor judgment. It was not poor judgment, it was an intentional attempt to slip it by the rank and file hoping nobody would notice and even if they did, the vote would hold. They did and it did!

The CEO believed that if the mechanics had refused to go along with the reduction in their benefits AA would file bankruptcy, or so they said. Bankruptcy can seriously affect the management pocketbook as well as take a lot of company control away. Boeing for example sought a trustee for Hawaiian Airlines. It wanted to take the bankruptcy process away from the management of the airline. Boeing contended that it was self-dealing and had substantial conflicts of interest.

AA's CEO saw that if the mechanics found out about the retirement protection plan for the top 40 executives they most likely would be mad and not go along with their salary and benefit reductions. Hell, they were outraged and should be! How right he was. An astute observer noted the filing with the SEC shortly after the vote and blew the whistle.

What's wrong with this picture? During all the negotiations between the union representatives and management nobody thought to look into this matter? Or at the very least discuss it? I think not! The people in control were afraid of what the rank and file would do if they found out. There were very good reasons for many people to keep the executive retirement trust agreements and the details of the bonus compensation plans under wraps until after the vote and they did.

The apology
The CEO to his credit did say he was sorry for his mistake in not informing the workers of the executive compensation plans (retirement plan, bonus plan, and outrageous salaries). He did apologize for not properly informing employees about these plans. There was no apology for the plans themselves however and they are still in effect! The fact is, the disclosure came out just after the mechanics voted to accept reductions.

It appeared to many that there was an intentional effort to withhold the disclosure until after the vote and this is clearly a violation of the trust placed with the CEO. Again he called it a mistake of communication. Many pundits and reporters called it something much worse. The withholding of the pension plan information was tantamount to undue interference with the vote process and may have been a violation of labor law and the contract. Furthermore, the constant warnings of imminent bankruptcy from management amounted to undue influence on the union members who were voting. Another violation of labor law. The CEO was forced to resign. We should note also that such conduct was with the obvious advice and consent of many of his managers and board members who are still on the payroll.

The company has stated that these perks for their executives had been around for a long time (how come nobody in the rank and file knew about them?) and that they were common in industry and were needed to keep top executives with the company. Really? Where would they go if they left? There are too many unemployed so-called executives running around now with nothing to do. They call themselves consultants. The company's statement in support of the perks is just hogwash and nothing but greed at the top! If these people are so valuable why is it that the airline is in the tank? Who will miss the CEO? Why should he have his golden parachute for being so careless? If they can't run the airline why not let them go? As we saw, the CEO was forced out for his obvious lack of good common sense. However, he will probably leave with millions of dollars while the mechanics carry on with a mere pittance! After all, he had arranged large bonuses for himself and other top executives in March while the workers were rewarded with pay and benefits reductions!

Shareholder meeting
At the recent shareholders meeting in Fort Worth shareholders, mechanics, and other employees called for more disclosure and more importantly, shareholder approval of compensation and severance packages (golden parachutes) for executives. Interestingly, the new CEO, Gerard Arpey, agreed to forgo his pay raise that should come with his promotion. How magnanimous! Much to his credit, the chairman of the board of directors, Edward Brennan, said that he would decline salary on the board completely. (Brennan formerly ran Sears and Roebuck). How about the rest of the board? Brennan also suggested that the departing CEO might not get his severance pay. We'll see. Why should shareholders permit any executives to collect a windfall when they leave, after presiding over a company with failed policies? Shareholders and employees should have an opportunity to weigh in on this!

The mechanics reductions
Here is what the mechanics at AA got by voting to accept the company reductions in pay and benefits . . .

  • An instant 17.5 percent cash pay cut. (Estimated to be in excess of 20.0 percent as follows).
  • Loss of one weeks vacation.
  • Loss of the accrual of seven sick days; one-half pay for the first two sick days used.
  • Elimination of shift premiums; longevity pay.
  • Elimination of OT for training beyond regular shift.
  • Elimination of paid lunch; penalty hour; and OT meal allowance.
  • Elimination of five holidays with remainder paid at time and one-half.
  • Elimination of the pilot cap on medical benefits.
  • Elimination of $12,500 in the event of layoff.
  • Elimination of 70 days from IOD bank.

These reductions have of course already taken place since the vote. And more importantly if bankruptcy does follow just look where the reductions in bankruptcy will start from.
If the mechanics had not gone along with the reductions this would have been the result . . .

  • The union contract would continue until 2004.
  • If the company did file bankruptcy the company could petition to reject the contract.
  • It would be unlikely that the Court would grant more reductions than what is noted above. So was this a good move for the mechanics? You decide!

The future
The new CEO has moved boldly to restore the company to profit status. For starters he reversed one of the former CEO's signature programs. The extra room in coach pitch. This was designed to lure the business traveler into cheaper coach seats. It really has not worked simply because of the downturn in business travel in general. This was a failed program from the start. Now, the seats are going back in. Some of the fleet will then be used to bring coach fares more in line with the discount carriers. Well, it's about time somebody noticed this and took action to really compete! Replacement of seats should provide additional work for mechanics and that is good. The bottom line will suffer however because it is estimated that it will cost $10 million to complete the changeover. Ten million? Can you believe that?

AA is one of our premier carriers that, alas, has not kept up with the changes in the market. Their management had to have seen the success of the Southwest and Jet Blue model in pulling business away from them. The retail market brought the downfall of Sears Roebuck and Montgomery Ward, former titans. Here are the titans of air carriers falling for the same reasons. They refused to change the way they do business with the changing times. The traveling public just does not have the funds to pay the higher fees for travel and the businessman does not need tax travel expenses if he has reduced taxable income. Deductions do him no good when he is in poor financial condition.

The result - the alienated mechanic
Recently, I had occasion to read about an AA mechanic who spoke before high school students about career choices. He told them he could not recommend their getting into his business. He said that for the past 17 years he has worked for the airline but now his enthusiasm for his job has waned. His pay and benefits have been cut 28 percent. The students were told that it could cost $20,000 to $40,000 to get the certification they need for working as aircraft mechanics. If they were lucky they could start out at $15 to $16 per hour. You can't pay student loans off at that rate. The kids got a real time dose of reality!

He said that the company wanted to get their lost profit back from the employees. He would have to get a second job and that he is waiting to take the tests for the police department.

These airlines have a lot of fence mending to do!

Stephen P. Prentice is an attorney whose practice involves FAA-NTSB issues. He has an Airframe and Powerplant certificate and is an ATP rated pilot. He worked with Western Airlines and the Allison Division of GMC in Latin America, servicing commercial and military overhaul activities and is a USAF veteran. E-mail: