Alitalia Pilots Are Considering Doing Something That Failed at United in 1995

Wandering Aramean writes that in the continuing saga of what happens to Alitalia now that Etihad has cried uncle and decided it’s no longer willing to bleed hundreds of millions of euros a year on the carrier (after past owners in turn had determined the same) apparently there’s an effort at employee ownership.

The latest report out of Rome has a small employee group (possibly just a couple pilots) working to build a coalition to buy the carrier’s assets. The crew would represent somewhere between 10-20% of equity in the new operation should this materialize.

This plan for partial pilot ownership, without other employee groups involved, will fail. That’s not a bold claim since in all likelihood any new plan for Alitalia will almost certainly fail other than breaking up the carrier and buying only a handful of good assets. But we also know a little something about employee ownership by a subset of work groups in the airline industry.

In 1995 United pilots and machinists traded prospective wage increases and benefits for 55% ownership in the airline. Flight attendants opted out of being a part of the deal, not wanting to give up their current wages for equity.

The deal let Gene Hackman tell the world “We don’t just work here” since employees were owners, and the airline’s tag line changed from Come Fly The Friendly Skies to Come Fly Our Friendly Skies.

The challenge of employee ownership is similar to the challenge faced by governments in dealing with public employee unions. Union members vote for or against the politicians determining their compensation. To stay in power in the short term, leadership is incentivized to buy off their voters and that’s a different incentive than paying a market wage. Workers vote for leaders unlikely to take a firm stand against them in contract negotiations. Indeed United’s employees had the power to block the appointment of CEOs who might strongly oppose contract demands, and they exercised that power.

The risk in the model is higher labor costs for the business than you’d otherwise get, and that those dollars trade off with capital investment.

To be fair it’s also a criticism of public companies that they’re too short-term focused on quarterly earnings rather than long-term value creation. Employee ownership isn’t the only form of organization with perverse incentives.

However it’s far better to align compensation with performance and give decision-making authority to employees based on their history of making good decisions for the business than given actual ownership to employees but fail to change their individual incentives or how authorities are assigned. (United did experiment with devolving authority to line workers but this was largely short-lived and not based on skills, training, or a vision for how to use those authorities to improve the business.)


United’s livery of my youth. By Torsten Maiwald, GFDL 1.2, via Wikimedia Commons – This Began to Be Replaced Shortly Before the ESOP By ‘Stephen Wolf’ Blue and Grey’

A unique challenge in the United Airlines employee ownership saga was that the company wasn’t owned by all of its labor groups, flight attendants weren’t in on the deal so you didn’t have the upside of a ‘sense of ownership’ that advocates of the deal argued would change the culture to be more customer-centric. It’s not clear that would have happened anyway, but pitting pilot-owners against flight attendant-workers was itself toxic for labor relations.

Even pilots worked at cross purposes from building the business they owned. The summer of 2000 became known as United’s “Summer From Hell” as pilots engaged in work slowdown and wrote up the smallest of items causing flight cancellations for reasons that under normal circumstances wouldn’t even lead to delays. 25,000 flights were cancelled.

Customers and the airline’s reputation suffered just as the country was about to enter recession and before 9/11 slammed the industry (United’s problems preceded and were greater than these triggering events, however). Pilots resented having given up compensation for their ownership stake and wanted the money back and ownership (at that point pilots owned 25% of the carrier).

United wound up in bankruptcy in 2002, liquidating the employees’ ownership stake. Legacy management emerged from bankruptcy with its own 8% stake in the carrier.

Of course the idea that when you invest in only one stock you might lose everything (let alone fail to outperform the market) isn’t exactly new. It’s simply not good for employees to trade their future compensation for equity in their airline.

  • If they’re going to invest their compensation in equities, they should do so in broad-based low cost index funds.

  • Outside of specific (and difficult to predict in advance) trading windows, airlines tend to underperform the market as a whole.

  • Investing in just one airline is even harder, you’re betting the one you happen to work for will outperform other airlines and the market as a whole.

  • When that one airline is Alitalia it’s truly the definition of insanity.

It’s far better for employees to diversify, even apart from questions of whether having one employee group alone with an ownership stake in the carrier is an effective model.

Here of course employees are going to have to give up jobs or wages (or both) in any scenario that makes the airline even a plausible business. If the only shot at that is employee ownership then the equity is in some sense ‘free’. But employees shouldn’t give up more wages and more benefits than they’d otherwise have to in exchange for equity at the margin, they’re better off taking those wages and investing them in stocks broadly — not in Alitalia.

At United the path to get to the employee ownership deal was a rocky one, involving threats of layoffs that led to employee resentment and a planned secret $2 million payment from the airline to the union lawyer.

If this plan at Alitalia — one of many competing for a piece of a bad investment — comes to fruition it won’t be smooth sailing there either.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I just hope Alitalia doesn’t crash & burn ( financially speaking of course ) before I have to endure my return leg from MEX to CAI in a week or so. The flight over to MEX was world’s worst practice. ( They actually give the US-based carriers a run for their money in terms of how bad things can get ).

    I can see why they are about to go under. The first thing they need to do is fire those lazy-arse flight attendants. For a 14 hour duration flight, apart from the meal service at the beginning, not once were the passengers, in Business , offered anything to eat or drink.They were all too busy enjoying each others company in the galley. Just dreadful.

  2. Employee ownership on a large scale is just not practical in a large business like an international airline that has to compete against global rivals. That said, this change may make it more palatable for the Italian government to again bail the airline out… saying that the needed changes have occured and this is not corporate welfare but rather helping Italian citizens. Then a year from now we can have the whole conversation again.

  3. just wanna comment on that pic : as an av-geek, it’s sad i never had the chance to fly the 747SP, and most likely never will …. but i also can’t stand the good ole’ days when cabins were filled with smoke so it might be a blessing in disguise.

    (smoking vs. non-smoking sections were totally meaningless on planes because the air is still in free flow, and you are in a captive environment so it’s not like you can walk further from that person either)

  4. @Robbo: this has not been my experience on Alitalia — I’ve found the food especially, as well as the current business class seats and amenities and also the service most of the time, to be above most other airlines (except perhaps ANA and Singapore). Leagues above Lufthansa for example.
    Sadly, there are some bad attendants working for the airline (I have experienced some), and the ground operations (particularly in Italy) are disastrous, leading to many delays and chaos.
    It is by no means a great airline, but some things (great food, great style — exactly what you’d expect from an Italian airline actually) they do very well — in business class, that is! Alitalia’s economy class is the pits.

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