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Unite or Die

January 30, 2003
Related Topics: Corporate Culture, Reengineering, Labor Relations, Featured Article, Recruitment, Staffing Management
It's tough to be upbeat, personable, and focused when your recently bankruptcompany is losing up to $22 million a day and fighting for survival. But GlennF. Tilton, chairman, president, and chief executive of UAL Corporation, theparent company of United Airlines, did an admirable job of it. It was earlyDecember, and Tilton--barely two months into his tenure--worked his way througha roomful of airline mechanics at San Francisco International Airport, shakinghands all around. Without retreating behind a podium, he fielded questions on adifficult subject: what United could do to survive and to re-emerge as a viableairline-industry player. As reported by the San Jose Mercury News, Tilton said, "Theissue is not how many jobs we lose, but how we are going to compete in a marketthat's changed dramatically."

It was one of many such meetings with employees that Tilton would conduct infive cities over a three-day period. By several accounts, he received ravereviews from his workforce. One union officer described him as a "straightshooter," while a pilot noted that "every time he opens his mouth, he seems tosay the right thing."

"Theissue is not how many jobs we lose, but how we are going to compete in a marketthat's changed dramatically."
--Glenn F. Tilton

The United CEO also earned plaudits from human resources experts, who said itwas exactly the right tactic for a leader trying to turn around a sinking,strife-filled organization--one that must cut $2.4 billion a year from its laborcosts to stay in business. "Tilton's interaction with front-line employees is akey success factor for United right now," says Jody Hoffer Gittell, an assistantprofessor at Brandeis University's Heller School for Social Policy andManagement and an expert on using human resources to boost performance atairlines. She says the face-to-face reassurance from Tilton was an importantfirst step toward building "a reputation of credibility and caring." She seesthat as an essential for rallying the Elk Grove, Illinois-based airline'sworkers--about 78,000 full and part-timers in late January--to persevere throughwage cuts and other austerity measures.

Tilton must do more than cut expenses, say academics and businessconsultants. In the short run, United's management must gain the workforce'sconfidence and cooperation simply to keep the airline running. But over thelonger term, Tilton will have to overhaul an ailing corporate culture longplagued by tension between management and unions, divisions among the workersthemselves, miscommunication, and resistance to change. He must replace it witha new model that emphasizes flexibility, cooperation, teamwork, and commitment.For inspiration, industry experts point to the successful human resourcesstrategies of some of United's competitors: Southwest, whose vaunted efficiencystems in large part from management's ability to get along with and motivate itsunionized workers; low-cost upstart JetBlue, with its streamlined bureaucracyand effective two-way internal communication; and bankruptcy survivorContinental, which reinvented its dysfunctional culture in the mid-1990s byreplacing ineffective managers and giving workers a voice in shaping itscomeback strategy.

Whether Tilton will be able to accomplish such a transformation at Unitedremains unclear. Previous chief executives have also tried to alter theairline's culture, only to fail. Even if Tilton does succeed in remaking United,there's the question of whether changes are coming too late to make a differencein the company's fate, given its financial ill health and a stagnant economy. Asone United mechanic told the San Francisco Chronicle: "Everybody's crossingtheir fingers and hoping this guy is the guy to do it, because he's all we'vegot right now."

Disgruntled employees contributed to United's plight
    Publicly, Tilton has so far offered few specifics about the reorganization,other than his intention to launch a new discount airline to compete withJetBlue and other airline companies--an idea that sounds a lot like the UnitedShuttle, an experiment that the company tried for seven years but ultimatelyabandoned in 2001. In an interview with BusinessWeek, Tilton seemed intent onmaking measured adjustments and improvements to the failing airline's sprawling,complex operation, rather than tearing it apart and building anew. While Unitedmust transform itself, he cautioned, the company "can't go back to a blank sheetof paper."

But if there's one area in which United needs revolutionary change, it'shuman resources. The company's labor costs, according to a J. P. Morgananalysis, are the highest in the industry. Then there are work rules--pilots,for example, fly only about 60 hours a month, compared to 80 for Southwest--thatexperts say are efficiency-busters. Costs at competitor Southwest are far lower,in part because management has been able to convince unions to accept lower payand minimal rules. The reason: the upbeat, cooperation-oriented culture createdby Southwest legend Herb Kelleher. "Workers at Southwest are delighted to bethere, work hard for less pay, and feel like part of the team," says Universityof Chicago business school professor James Schrager. "United has more of thetraditional union/management model, where there is a constant fight over goalsand outcomes." Indeed, from 1997 to 2002, the human resources division at Unitedwas headed not by a career human resources executive but by William P. Hobgood,an attorney and former U.S. Department of Labor official whose expertise was inlabor negotiations.

Gittell, author of The Southwest Airlines Way: Using the Power ofRelationships to Achieve High Performance (McGraw-Hill, 2002), says one key tothat airline's success has been promoting "relational coordination"--that is,strong, trusting partnerships between managers and workers that allow allconcerned to execute the mind-boggling intricacies of making an airline runsmoothly. Instead of imitating Southwest's human resources ideas, Gittell says,United has either ignored them or tried them only halfheartedly. At United, "employeesare hired for functional skills rather than relational skills," she says. "Performanceis measured in a functionally specific, divisive way, rather than allowingcross-functional responsibility for performance."

United has made some attempts to innovate--in particular, its experiments inthe mid-1990s with an employee stock-ownership plan and the introduction of theUnited Shuttle, a low-cost, no-frills, high-efficiency clone of Southwest. Whileboth ideas generated bursts of employee enthusiasm, Gittell says, the effect wasshort-lived. One reason was poor conception. The ESOP, for example, gaveemployees 55 percent of United's shares in exchange for pay and benefitreductions from 1994 to 2000. But workers soon discovered that tax laws tookaway much of the financial benefit of the stock grants, and since flightattendants didn't participate in the plan, the distribution created groups withdivergent interests. Beyond that, stock ownership didn't translate intoinfluence in day-to-day operations--though it did create plenty of nervous,angry worker-shareholders as United shares gradually lost close to 90 percent oftheir value between 1998 and 2003. And while the United Shuttle's innovationsenabled planes to get in and out of the gate more quickly and cheaply, bothmanagement and unions resisted some of the ideas and gradually watered themdown, until the project finally was discontinued in late 2001 as part ofcost-cutting.

Poor communication between management and employees also has hurt United,according to Wayne Cascio, a University of Colorado-Denver management professor.He cites the airline's costly imbroglio in the spring of 2000, when pilots wereangered by what they saw as foot-dragging in contract negotiations. Then theyfelt blindsided when they discovered that then-CEO James Goodwin secretly hadbeen pursuing a merger with U.S. Airways, which would have caused many to losetheir seniority. The result was a work slowdown that resulted in thecancellation of tens of thousands of flights. Ultimately, the pilots were givena placating raise that incited other workers to demand more money, and thatdrove up costs.

Continental's response to crisis
    Can United be resurrected? Industry leaders point to other companies thathave made comebacks from similarly dire straits. Continental, which wentbelly-up in 1983 and again in the early 1990s, is the most notable example. In a1998 Harvard Business Review article, former Continental president and chiefoperating officer Greg Brenneman reported that pilots routinely turned downair-conditioning on flights--despite passengers' discomfort--because of amisguided policy that gave them incentive pay for reducing fuel consumption.Supervisors tended to concentrate more on winning promotions by sabotagingin-house rivals than on improving the airline's performance. Management'simplicit communication policy was "don't tell anybody anything unless absolutelyrequired," Brenneman wrote. Employees were expected to adhere to the "Thou ShaltNot" book, a nine-inch volume of arcane rules, even if it meant displeasingcustomers. Morale was so low that when he visited a facility in Houston,Brenneman was shocked to discover that employees had torn the airline's logo offtheir uniforms in embarrassment.

As a result, when Brenneman and his boss, chief executive Gordon Bethune,devised a rebuilding plan for Continental, they realized they had to fix morethan just the airline's finances and market share. They also strove to jettisonContinental's negative environment and replace it with a new culture. They fired50 of Continental's 61 corporate officers in the first few months and weeded outincompetent managers at all levels--and aggressively recruited the topmanagement understudies from their competitors to replace them. To showemployees that their judgment was trusted, they made a show of burning the "ThouShall Not" book in a company parking lot. They instituted a "tell everybodyeverything" communication policy and installed hundreds of bulletin boards atContinental facilities. To give employees a voice in company plans, Brennemanand Bethune directed each corporate officer to visit a city where Continentalhad operations at least once per quarter to brief workers on the airline's plansand to seek feedback. The company continued to pay incentives, but tied them toContinental's financial performance.

The airline rebounded strongly. Although the September 11 attacks plunged theentire industry into a brutal slump, Continental has not been hurt as badly asUnited. In the most recent quarter, as United was forced to declare bankruptcy,Continental was reporting revenue growth that beat Wall Street expectations.

Overhauling a failing corporate culture
    It might seem as if United should simply copy Continental's or Southwest'shuman resources blueprint. But emulating the tactics without real philosophicalchange won't work. In recent years, United also has tried to improve itsinternal communication, setting up a toll-free hotline and an online chat thatemployees can use to offer suggestions or air problems and criticisms. But thosetechnological tools haven't solved management's and workers' fundamentaldifficulties in communicating, and the resulting frustrations.

"Basically, United has a culture where the players have a win-loseorientation," Cascio says. "But everyone is pitted against each other, ratherthan seeing that they all win if they beat the competition."

Instead, what United desperately needs to do, experts say, is replace thatfailed culture with one emphasizing cooperation, trust, and teamwork--the samecore values that helped strengthen Continental and Southwest. The first step isfor Tilton to regain employees' trust. But in addition to making appearances andpressing the flesh, it's crucial for him to not make any initial flubs thatwould destroy his credibility with workers. United's human resources division,in turn, has its own crucial role to play. Tilton must compensate for hisnewness and lack of firsthand knowledge of the airline industry. "They have toserve as his archivists, to make sure he's fully aware of company history whenhe makes a move," says Peter Cappelli, director of the Center for HumanResources at the University of Pennsylvania's Wharton School. "It would bedisastrous for him to be caught proposing something that didn't work 10 yearsago. The workers will pick up on that, and write him off."

Tilton has to show workers that he really has a strategy for saving thecompany, beyond just subjecting them to more wage cuts. One way to accomplishthat is to enlist the workforce in creating the nuts and bolts of that strategy.Last September, before United declared bankruptcy, Tilton announced that he wasputting together a task force of company officials and outside experts to lookat ways to improve productivity at United, and that the group would reviewemployee suggestions. University of Colorado-Denver professor Cascio, who'sstudied successful downsizing efforts, thinks Tilton needs to go much further.

"United has tended to look at its workforce as a cost rather than as a sourceof innovation," he says. "Tilton has to change that." If Cascio were in charge,he'd bring representatives from United's employee constituencies together andform a group to brainstorm about improving efficiency without harming customerservice. "Look, let's face it--the customers are the only ones who are going tosave this airline. Management needs to get ideas from the people who are closestto the customers. All the wage and expense cuts in the world aren't going tohelp if the customers flee because service deteriorates."

As a start-up in the late 1990s, JetBlue used a similar approach to avoid the"culture of blame" that inevitable snafus at a new airline could create,according to a Harvard Business School case study written by Gittell andStanford business professor Charles A. O'Reilly III. JetBlue created "TigerTeams" to come up with solutions for persistent problems--and made a practice ofappointing as members the worst complainers among the employees. That encouragedthem to focus on solutions rather than criticism. The Southwest model includesinvolving workers in planning, gaining greater flexibility and efficiency bygetting rid of cumbersome work rules, and making job descriptions more elastic.

Tilton already has expressed an interest in starting a new low-cost service.Gittell recommends that he take a long look at the innovations that were part ofthe mothballed United Shuttle project. By experimenting with procedures, Shuttlecrews found that they could empty a plane of passengers and luggage, performnecessary maintenance and safety inspections, and reload the plane for takeoffin half the time it usually took. Flight attendants were allowed to try thingssuch as using trays to deliver drinks instead of pushing cumbersome carts downthe aisle--a trick that speeded up service and allowed them to give customersmore personal attention.

Whether Tilton will be able to effect such sweeping changes--and to save theairline--is anyone's guess. Continental did emerge from bankruptcy. Once-bignames such as Eastern Airlines, Pan Am, and TWA did not. Nevertheless, when herecently met with United employees in Denver, Tilton seemed determined to moveupward and onward. As reported in the Rocky Mountain News, the unwavering CEOdeclared, "We cannot afford to indulge ourselves in looking back. We don't havethe time."

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