April 13, 2003 - Chicago Sun Times
United Airlines secretly paid $40 million in cash on Nov. 20, 1989, to a
shell corporation run by the leaders of its pilots' union, a payment that
forestalled what would have been a drastic, damaging holiday slowdown of
the airline. If the payment wasn't illegal, it was at least unethical, and
has infected the airline's operations right through the sale of the
airline to its employees in 1994, according to a forthcoming book, The
Shame of the Friendly Skies, by Paul H. Weaver, former assistant managing
editor of Fortune magazine. The Sun-Times is running an excerpt from the
book in two parts; the first part appears today and the second will run in
the Business section on Monday. The book documents a history of
mismanagement, blind greed and hatred that characterized labor and
management during United's history. At one level, the book is the story of
how employee ownership came to a great corporation and union. At another
level, it is the story of a secret process of corruption that wormed its
way inside the United Airlines master executive council of the Air Line
Pilots Association, top management of the company and the cause of
employee ownership itself.
Nowhere was that bitterness and corruption more acute than in the face-
to-face battle between United Capt. Rick Dubinsky, the charismatic and
manic head of the United pilots' union, and Stephen Wolf, the United CEO
who presided over the creation of the Employee Stock Ownership Plan. This
excerpt from Weaver's book begins in June 1987, just after the board fired
CEO Dick Ferris, whose vision of the company as an airline (United),
car-rental outfit (Hertz) and hotel (Hilton and Westin) company went so
awry that it provoked an outside corporate raider to force the sale of the
non-airline operations. Ferris' strategy also annoyed the hot-headed
Dubinsky, because it short-circuited his scheme to buy the airline through
its unions. But only for a few years. How the pilots first tried to seize
control of United Airlines, and how that struggle has tainted the airline
and its unions ever since. In the hours after (former CEO Dick) Ferris'
departure, the disciplined face (pilots union leader Rick) Dubinsky had
shown an often impressed Wall Street seemed to crumble, and an angry,
whining note began to echo in his words and actions. He sounded less like
the thrilled victor in a historic battle against a scary anti-union
offensive, and more like a sore loser for whom corporate ownership itself
and the personal glory, power, or wealth it would bring had been, or
become, the real objectives. Years later, over my tape recorder, Dubinsky
was still furious at the long- gone CEO and still dissatisfied over the
mildness of his fate. Dubinsky: I wish there'd be some way to visit the
pain on [Ferris] that he visited on the pilots.... Humiliation isn't good
enough for him. He should be financially ruined as well. Dubinsky
immediately squared off against interim CEO Frank Olson, too. (In June,
1987), the board officially buried Dubinsky's buyout. It formally rejected
the pilots' proposal as underpriced and unfinanced. It also authorized an
extraordinary dividend of $55 per share, to be funded by selling the
nonairline businesses and by borrowing several hundred million dollars
against the assets of the airline that would remain. In other words, to
appease (disgruntled shareholders who were tempted to ally themselves with
Dubinsky and the pilots' union), the board decided not only to
de-diversify and de-capitalize the airline, but also to load it up with
fresh debt. It thereby sharply reduced the pilots' ability to buy the
airline by leveraging it, buying security from a takeover at the price of
limiting the airline's ability to take on debt to modernize equipment or
expand the route structure. Meanwhile, Dubinsky got to work putting the
heat on--and venting his frustration with--the other two unions (the
flight attendants and machinists, which opposed Dubinsky's takeover bid).
He castigated flight attendant president Pat Friend's opposition to
employee ownership as "cruel stupidity," campaigned against a contract she
had negotiated while it was out for a ratification vote by the flight
attendant rank and file, and expressed a growing personal rage at the
unmovable Friend with epithets and put-downs, of which the following joke
is a mild example: Q. What's the difference between a terrorist and a
flight attendant with PMS? A. You can negotiate with the terrorist.
Dubinsky also put the screws to the machinists with tactics ranging from a
polite invitation to join the pilots' buyout at a meeting in August, to an
extortionate threat that the pilots, once in power, would sell the huge
San Francisco jet maintenance base, which employed about a third of the
union's membership at UAL, if John Peterpaul, international vice president
of the International Association of Machinists, didn't hurry up and become
a member in good standing of the pilots' new company ownership club. The
formidable Peterpaul, whose Lodge 141 was the largest and oldest labor
group at UAL with roughly 30,000 members, told Dubinsky to get lost. At
the same time the board drove a stake through the heart of the pilots'
buyout ambitions, however, it also gave Dubinsky new hope for a buyout by
appointing Stephen M. Wolf to take over from Olson as United's permanent
CEO. For Rick Dubinsky, the arrival at United of a new boss who had made
his name by selling airlines to pilots (Republic Airlines and Flying
Tigers Airlines) was a godsend. It meant that, potentially at least, the
United pilots' buyout crusade had a powerful new ally at the top. It
offered new hope that the board's bitter opposition to pilot ownership
might fade or be overcome. The stage was set for a friendly meeting that
could mark the beginning of a beautiful friendship. (No such luck. At
their first meeting in Chicago, Dubinsky felt insulted when Wolf failed to
greet him as "Captain Dubinsky," but he invited Wolf to address the Master
Executive Council of the pilots' union in Kona, Hawaii, a few weeks later.
Wolf felt Dubinsky mocked him at that meeting in a variety of petty ways,
such as providing a microphone stand that was too short for Wolf's tall
frame so he looked stooped. But he also met privately with Dubinsky, who
asserted the pilots would work with Wolf to take control of the airline.)
After Kona, the pattern of public abuse and private courting continued.
The pilots continued to put Wolf down. There was word-of-mouth slander--
Wolf was ashamed of his height, pilot leaders said, he always seemed to
stand bent over. Wolf must have a bad body image, they observed; why else
would the man constantly fiddle with his clothes? Wolf was light in the
loafers, they sniggered; they heard from their spies that the guy had a
barber chair in his bedroom. Wolf didn't really care about his job, they
buzzed; he had no intention of staying with the airline for the long haul.
Not that he was much of an executive in the first place, they hinted. Any
monkey could do what Wolf is doing, Dubinsky once scoffed into the union's
dial-up codaphone message service for the rank and file. The comments were
offensive, Wolf conceded in our interviews. He seemed particularly steamed
at the any-monkey-could-do-it crack. But Wolf held his tongue, turned the
other cheek, and continued to meet with Dubinsky to discuss the company's
lack of interest in a transaction and the latest twists in the pilots'
pursuit of one. A few months after the Kona meeting, Wolf attended a
top-secret get- together with Dubinsky in a Chicago hotel in which
Dubinsky formally invited Wolf to join the pilots in a leveraged buyout of
the airline. After the deal was consummated, he added, Wolf would be
welcome to stay on as CEO. William R. Howard, the former chief executive
of Piedmont Airlines, whom Dubinsky had hired as chairman of Airline
Acquisition Corp., the pilots' takeover vehicle, to give the pilots'
ambitions credibility, would be let go. Wolf, still not fully accustomed
to the game in which Dubinsky in public insults the CEO whom in private he
is wooing to sell the pilots the airline, had a momentary lapse from his
policy of being realistic and turning the other cheek and doing the more
productive thing. "How do you comport this request with what you said
yesterday?" he asked. "What's that?" Dubinsky asked. "Yesterday's
codaphone." "I didn't record the codaphone," Dubinsky retorted. "Rick,
stop, stop. You're the chairman of the union, you're running the union,
you know what the codaphone says, and if you didn't draft it or say it,
it's certainly with your concurrence. And your own words are less than
pleasant, most assuredly. I'm not trying to suggest why or trying to cause
you to change. I'm merely asking, how do you comport your request that I
run the business with your full support and concurrence while you are
maligning me on a daily basis in such a malicious fashion? I mean, what do
you do about the pilots?" "Oh, we can fix that instantly," Dubinsky said
breezily. "We just turn it off and send out a new message, and in a couple
of days it will have been corrected." In time Wolf accepted the pattern.
The trashing was not meant personally, he told himself. Personally,
privately, the pilots knew that Wolf was an excellent executive doing a
fine job, growing the airline and speeding the rate at which pilots moved
up the title-and-pay hierarchy. But they had to say bad things about him
in public to make the adversarial politics inside the union that would get
the deal done. (Although Dubinsky's scheme to buy the airline in 1989 was
scuttled when the board fired Dick Ferris and loaded up the company with
debt), it so happened that the just-exploded deal left Dubinsky holding a
killer hand. As an earnest expression of its good faith the previous
month, the pilots union had given the company two interim contract
concessions effective upon the signing of the deal: **An increase in the
ceiling on an individual pilot's flying time from 81 hours per month to 84
hours. * A (two-tier) wage schedule to enable the company to fly its
growing new fleet of 747-400s with union pilots. The terms went on to
provide, however, that should the deal fail to close, these interim
concessions would "snap back" to the original levels on 30 days' notice.
This latter provision had been suggested by Gene Keilin, the pilot's
hand-picked investment banker at Lazard Freres on Wall Street. The
company's schedulers immediately incorporated the changes into the
airline's operating plans, beginning with the October schedule. UAL
thereby received an instant boost in productivity, but put itself at risk
for the month that followed. November is the industry's peak traffic
period, containing both the massively busy Wednesday before Thanksgiving
and the travel- saturated Sunday after Thanksgiving, when capacity at
every airline is stretched to the limit and virtually every able-bodied
pilot and serviceable airplane is hard at work. The fact that the
airline's resources are stretched tight in the last days of November,
combined with the pilots' ability to trigger the snap-back on 30 days'
notice, gave Dubinsky a weapon of enormous power, and he now proceeded to
fire it. Ten days after the 1989 deal cratered, Dubinsky notified Wolf of
the pilots' intent to cancel both concessions effective Wednesday, Nov.
22, the day before Thanksgiving. The sudden disappearance of the extra
flying hours during Thanksgiving week and toward the end of the month
meant that on Nov. 22, some pilots, having already flown 81 hours, would
immediately "go illegal"--that is, have the right under the contract to
refuse any further flying for the rest of the month. The airline, having
scheduled itself to the max, would have no extra personnel to assign in
their place. With each passing day the manpower crunch would worsen. By
the Sunday after Thanksgiving, a significant part of UAL figured to be
shut down. Dubinsky proceeded to make United an offer it couldn't refuse.
He proposed to buy the company at a lower price the banks could finance.
Under the terms of this proposal, Wolf would be replaced with a new CEO of
the pilots' choosing when the new owners took over. In addition,
management would negotiate an immediate amendment to the pilots' contract
giving the pilots a bonus of $54 million. Last but not least, the company
would pay $47 million to Airline Acquisition Corp., the pilots'
acquisition vehicle, as compensation for damages suffered when an earlier
buyout proposal it had made had failed as a result of some anti-takeover
provisions in United's contract with the International Association of
Machinists. If the company accepted the pilots' terms by 4 p.m. on Monday,
Nov. 20, Dubinsky informed Wolf, the union would waive its right to cancel
the 84- hour ceiling, and UAL would be able to fly Thanksgiving week as
scheduled. If, however, the pilots' demands were not met, Dubinsky would
send the pilots a mailgram announcing that the cap on flying time would
revert to 81 hours as of 12:01 a.m., Wednesday, Nov. 22. The Thanksgiving
schedule would be devastated. The board of directors was aghast. What
Dubinsky was talking about was blackmail--it was extortion--in fact, some
of it might very well be a crime. The owners and officers of Airline
Acquisition were members of the pilots union leadership, and company
payments to union leaders are a felony under federal law. The directors
might be opening themselves up to prosecution if they did what the pilot
leader proposed. But Dubinsky had the company over a barrel, and everyone
knew it. Wolf and the board promptly--and in the case of the board, at
least, reluctantly--caved in.
April 14, 2003 - Chicago Sun-Times
United Airlines secretly paid $40 million in cash on Nov. 20, 1989, to a
shell corporation run by the leaders of its pilots' union, a payment that
forestalled what would have been a drastic, damaging holiday slowdown of
the airline. If the payment wasn't illegal, it was at least unethical, and
has infected the airline's operations right through the sale of the
airline to its employees in 1994, according to a forthcoming book, The
Shame of the Friendly Skies, by Paul H. Weaver, former assistant managing
editor of Fortune magazine. The Sun-Times is running an excerpt from the
book in two parts; the first part ran Sunday and the second part appears
today. The book documents a history of mismanagement, blind greed and
hatred that characterized labor and management during United's history. At
one level, the book is the story of how employee ownership came to a great
corporation and union. At another level, it is the story of a secret
process of corruption that wormed its way inside the United Airlines
master executive council of the Air Line Pilots Association, top
management of the company and the cause of employee ownership itself.
Nowhere was that bitterness and corruption more acute than in the face-
to-face battle between United Capt. Rick Dubinsky, the charismatic and
manic head of the United pilots' union, and Stephen Wolf, the United CEO
who presided over the creation of the Employee Stock Ownership Plan. This
excerpt ,which began in the Sunday Sun-Times, starts in June 1987, just
after the board fired CEO Dick Ferris, whose vision of the company as an
airline (United), car-rental outfit (Hertz) and hotel (Hilton and Westin)
company went so awry that it provoked an outside corporate raider to force
the sale of the non-airline operations. Ferris' strategy also annoyed the
hot-headed Dubinsky, because it short-circuited his scheme to buy the
airline through its unions. But only for a few years. How the pilots first
tried to seize control of United Airlines, and how that struggle has
tainted the airline and its unions ever since BY PAUL H. WEAVER Lawyers on
both sides scrambled to make the huge payoff legal. Initially they
accomplished this transformation primarily by defining the payment as
damages suffered by Airline Acquisition Corp., the pilots' acquisition
vehicle, when their 1988 buyout proposal failed as a result of the "poison
pill" provision in the machinists' labor contract. They would make the
company's check payable to the order of Gene Keilin, the pilots'
investment banker and adviser. Formerly with Lazard Freres, Keilin started
his own investment banking firm, Keilin & Bloom, after the 1989 blowup.
The lawyers reasoned that whereas a payment directly to Acquisition, owned
by the pilot leadership, might well cross the law's bright line, no one
was going to make a fuss over a fee paid to Acquisition's banker, even one
who had just had a sudden and obscure parting of the ways with his
distinguished employer. (United pilots union leader Rick) Dubinsky
designated Chuck Goldstein, the United pilots' staff attorney, to take
possession of the checks if and when they arrived at the pilots' offices
by the 4 p.m. deadline. Joining Goldstein at the office that day was union
vice chairman Steve Smith, whom Dubinsky put in charge of sending the
mailgram which would be sent to pilots instructing them to refuse to fly
beyond their contractual hours. The plan was that the two of them would be
in phone contact with Dubinsky throughout the day. When the money
arrived--or at 4 p.m. if it had not materialized by then--Goldstein would
relay the fact to Dubinsky, and depending on what had transpired, the
master chairman would give Smith the word to send or withhold the
mailgram. Dubinsky himself would be ostentatiously Elsewhere, establishing
a presumption that he was Doing Other Things. Should he ever be faced with
embarrassing questions about the secret payoff, being absent from the
office and having delegated Goldstein and Smith to deal with the checks
and mailgram would give him a record of action tending to support a
recollection that he was completely uninvolved in the money side of
things. A few minutes before 4 o'clock, the money still had not arrived.
"What happens now?" Smith asked Goldstein. "It's three minutes to four.
I'm all set to launch the telegram." Just then Paul George, United's
senior vice president for labor relations, entered the office and sat
down, briefcase in hand. "I've got the checks," he said. "But there are
some things we have to understand." "Rick is going to call me in two
minutes," Goldstein said. "If I don't say I have the checks in my hands,
he's going to say, 'Send the mailgram.'" George opened his briefcase, took
out two checks, and handed them to Goldstein. One of the checks was in the
amount of $16 million and made payable to the United Pilots' ESOP
Initiative Fund. Provided for in the public documentation of the deal,
this was money Dubinsky had demanded while negotiating the transaction to
replenish the $14 million fund nearly exhausted by more than two years of
campaigning for a buyout. The other check, for $47 million, was payable to
Gene Keilin. Goldstein looked the checks over carefully. They were drawn
on a North Carolina bank and signed by an appropriate corporate official.
The correct amounts and payees were entered in the correct spaces.
Everything appeared to be in order. Dubinsky's call rang through while
Goldstein was studying the documents. Goldstein put him on the speaker
phone. "Yes or no?" Dubinsky asked. "Yes," Goldstein answered. "Paul's
here." Dubinsky and George exchanged greetings. Then Dubinsky told
Goldstein that inasmuch as everything seemed to be in order, he could tell
Smith not to send the mailgram. The senior staff attorney acknowledged,
and hung up. Immediately George leaned over and grabbed the checks out of
Goldstein's fingers and laid them on the coffee table. "There are some
things we have to understand first," he said. But the conditions were no
problem. George merely wanted Goldstein's personal word in addition to the
assurances he had already received that in exchange for the payments, the
pilots were indeed going to fly airplanes on Wednesday. The banks were
already closed, so Goldstein took the checks home with him that night. The
next day he deposited the smaller of the two to the account of the ESOP
Initiative Fund. The other he surrendered to Gene Keilin in person. Within
days, the pilots were enjoying a $54 million bonus, and Dubinsky's
representatives were negotiating a new agreement to buy the airline at a
lower price. The pilots were soon joined by the other two unions at
United, the machinists and flight attendants, in organizing a new buyout
vehicle, named the United Employees Acquisition Corp. In April, 1990 UAL
and UAEC executed the documentation for a buyout at $208 a share. At the
urging of the company's lawyers, the secret payment to Acquisition's
banker was scaled back to $40 million, and redefined as a "topping fee" in
the documentation of this new agreement. In the lexicon of investment
banking, a topping fee is a fee paid to a losing bidder whose losing bid
prompted another bidder to make a higher, winning bid; it compensates the
losing bidder for the value he has created for the company and its
shareholders in raising the transaction price. As applied to the secret
$40 million payoff, the use of the term was a stretch, since the
three-union deal was done at a price below what Acquisition had been
slated to pay. But as a new terminological fig leaf drawn over what
remained an intrinsically dubious action, it was arguably an improvement.
Where the old theory had represented the payoff as something United owed
to a company owned and run by pilot union leaders, the new one drew
attention instead to the machinations that led to the three-union buyout
of UAL Inc. So where did the $40 million go? Who got it? Where is the
money today? I do not know. The official parties to the huge payoff
refused my requests for interviews and information on the subject. I was
able to gain access to none of the confidential legal, company, union,
financial, and tax records that would cast light on the question. But
although I cannot state with certain knowledge who got the money, it is
nevertheless possible to say something meaningful about what probably
happened on the basis of the familiar courtroom tests of opportunity,
means, and motive. There are two possibilities here: * Keilin kept all the
money himself. * He shared it with others. If he shared it, he could have
done so with people who had a legitimate claim to a share (as Lazard
Freres might have), or he could have shared with people without a lawful
claim, such as the pilot leaders. This last scenario is obviously the
important one, for circumstantial evidence and common sense suggest that
the pilot leadership may very well have forced Keilin to share the $40
million. Dubinsky and his associates had the means to force Keilin to kick
back by making the kickback a condition of his receiving the company's
payment in the first place. If Keilin refused the request, Dubinsky could
prevent him from getting so much as dime one of the $40 million simply by
telling (CEO Stephen) Wolf he no longer insisted on the payment after all,
or by telling Goldstein not to pass the company's check on to Keilin. In
the second place, Dubinsky and his associates had the motive to demand a
kickback--a desire for material gain. The national union, which had made a
point of positioning itself as the venture investor and as such was
presumably entitled to the lion's share of any money generated by the
takeover campaign, was in dire financial straits in the mid- to
late-1980s. As for the United pilot leaders personally, the key figures
appear to have had a lively personal interest in amassing material wealth.
(Dubinsky's very substantial net worth already has been considered.) Roger
Hall at age 50, according to filings in the Hall v. Hall divorce case of
1990, had a family net worth of $2.5 million, or $1 million above and
beyond the Hall's residence and pension assets. Third, Dubinsky's
personality was consistent with the act of demanding a kickback. It is
hard to imagine an ambitious, domineering man like him, having already
authorized a $22 million banking fee for Keilin, going to the trouble, and
putting himself and the union at legal risk, to force UAL Inc. to pay
Keilin an additional $40 million without arranging for some of the benefit
to be shared with the union and/or others. Indeed, it is hard to imagine
any rational person of almost any personality makeup exerting himself and
taking risks to force a payment that he or his organization will receive
no share of. Even if Keilin kept all the money and kicked back none of it
in any form, the secret $40 million payoff is still a critical event in
the history of the pilot buyout at United Airlines. For one thing, it
demarcates a subtle but crucial turning point in the pilots' crusade for
employee ownership of the friendly skies. Previously, the buyout had been
driven primarily by the drive for self-preservation in the face of Richard
Ferris' sophisticated, potentially lethal threat to the union's power and
existence. That purpose faded into irrelevance after Ferris was fired, the
diversification strategy was dismantled, and Wolf was brought on to run
United. And whatever remained of it was obliterated by the events of 1989,
when UAL buried the pilots' buyout scheme under a load of new debt. The
payoff marks the point at which the buyout ceased being driven by union
leaders standing and defending their core mission, and started being
pushed forward by middleman avid for the huge fees available, managers
lured by the goal of lowering labor costs, and both corporate executives
and union leaders attracted by the personal advantages that could be
derived. In the year that followed, the pilots union seemed to close out
the books on the employee ownership project. It ratified a new contract,
featuring a 31 percent raise, which was generous, but still only brought
the United pilots' compensation up to the level at other major airlines.
In the summer of 1991 the (master executive council of the union) narrowly
failed to muster the two-thirds majority required to relax the
constitutional provision that prohibited Dubinsky from running for re-
election in the fall, as he wanted to. In October, with an angry Dubinsky
throwing the votes he controlled to his old ally Roger Hall, Hall by a
one-vote margin regained the master chairmanship. Dubinsky stepped down,
and Hall returned amid the widespread expectation that the pilots and
United were at last heading into a period of smooth sailing and easy
living.