SUMMER OF HELL EXACTS HEAVY TOLLS                          

The pilots fumed in 2000 about new UAL chief James Goodwin's bid for US Airways. They wanted a raise and used customers to make their point

By Tribune staff Greg Burn, Susan Chandler, Flynn McRoberts, and Andrew Zajac

Of all the 25,000 canceled flights, of all the customers stranded by United Airlines' summer of delays and disservice three years ago, Gerry Nendick remembers the weeping woman trying to make a funeral.

The passenger's sister had died in a traffic accident. She was desperate to get to the service in Pennsylvania. But her United flight out of O'Hare International Airport had been delayed once - a mechanical problem, the pilot said. Now it looked like the replacement plane might be canceled too.

Tears streamed down the woman's face as she appealed to Nendick, a United customer service rep who had spent two decades trying to solve passengers' problems.

Hoping to plead the woman's case, Nendick poked her head into the cockpit. The captain turned around and asked, "Who's going to kiss me first? This flight is canceled."

Fixing the smug pilot with a glare, she sputtered, "You go out and tell the woman who is going to miss her sister's funeral how happy you are."

She couldn't prove it, but Nendick was convinced he was firing another volley in a widening battle between the pilots and United management.

Turning to leave, she added, "I don't care what your situation is. You don't have the right to affect the lives of other people like that."

It was a snapshot of the summer from hell, the nightmarish season in 2000 when a work slowdown by United pilots cascaded through the nation's air transport system.

Although passengers took the brunt of the disruption, the pilots' intended target was Chief Executive James Goodwin. They were furious over his push to buy rival US Airways, a merger that held out certain strategic advantages for United but great peril for its labor relations.

This latest case of corporate whiplash was the most egregious example yet, as each new CEO ushered in different, often incompatible, plans for the carrier.

Over the last two decades, while its toughest competitors steered a steadier course under consistent leadership, United lurched from travel conglomerate to global mega-carrier to a warm-and-fuzzy model of employee empowerment. Amid all the shifts in strategy, United lost sight of its reason for being - getting customers from here to there with minimal hassle.

The parade of CEOs also piled up resentment among the carrier's workers. "While all these big shots are leaving with millions, we're left with the [labor] concessions," said Joe Szymusiak, a longtime United baggage handler at O'Hare. "It's our duty to make up for management's mistakes."

Goodwin's zeal for the US Airways deal would set in motion a chain of events that propelled his airline toward bankruptcy court.

But no one could have predicted that outcome as Goodwin and US Airways Chairman Stephen Wolf stepped into the Michigan Room at the O'Hare Hilton at 10 a.m. on October 11, 1999.

Both airlines were making money, but United clearly was in a better financial and strategic position. US Airways was being squeezed between the biggest carriers and low-cost airlines such as Southwest.

The setting for their meeting was austere, a windowless room just big enough for a table and several red leather-backed chairs. Tucked behind a nondescript glass door just off the Hilton's lower-level concourse, the room was chosen for convenience, not secrecy, though both CEOs wanted to keep their discussions quiet.

They had come to talk business but could have been playing poker as they sat down at the circular table.

Wolf, who had run United a decade earlier, pitched Goodwin on the idea that had prompted the meeting - Wolf's airline joining the Star Alliance, United's elite partnership with mostly foreign carriers that allowed customers to fly on multiple airlines with a single reservation.

Goodwin let Wolf finish. Then he made a pitch of his own: What would Wolf think of United acquiring US Airways?

United coveted the rival's routes along the East Coast. But Wolf's airline had more to gain.

Keeping the straightest face he could, Wolf told his one-time executive underling: "I'd be happy to discuss it with you down the road. But really I am here to talk about the Star Alliance."

In truth, Wolf was elated. Who cares about the Star Alliance, he thought to himself.

Chance of a lifetime

When Goodwin took over United in mid-1999, he seemed a safe choice. A down-to-earth bear of a man, he had spent 32 of his 54 years at United, joining the company straight out of Salem College in his native West Virginia.

"I never envisioned that I would be asked to do that job, nor did I run for office," he said.

Although few knew him on Wall Street or Capital Hill, Goodwin was popular within United, where he had run several departments. When the 6-foot-5-inch executive ambled through maintenance bays in San Francisco, mechanics would shout out, "Hey, Jimmy! How you doing?"

John Peterpaul, a longtime machinists union leader who joined the United board when the employee stock ownership plan was adopted in 1994, remembers how Goodwin would go to the local union committeeman's office at the maintenance base in San Francisco. He'd knock on the door, poke his head in and say, "All right, fellas, where are you going to screw me today?" Peterpaul recalled.

Goodwin and workers would sit down and have coffee together. "He'd listen to them bitch and complain," said Peterpaul.

T The good-old-boy manner and internal relationships mattered a lot. Under United's ESOP, the
pilots and machinists unions had veto power over major decisions - most important, who ran the place.

To the casual observer, the United Airlines that Goodwin took over was robust. The carrier had the most comprehensive route network of any airline on the globe. It was the world's largest airline, with the biggest operations at O'Hare, the world's busiest airport for decades. It had earned profits every quarter since the end of 1995, and its stock traded comfortably in the $60 area.

Beneath the veneer of success, though, United was deeply troubled. Already, its earnings were starting to slip, as the financial advantages and improvements in morale bestowed on the airline by its novel ESOP were being frittered away.

With its San Francisco hub, United had exploited the Silicone Valley technology boom to attract droves of customers wiling to buy premium-priced tickets. The resulting gush of revenue covered up inefficiencies and miscues big and small.

When the dot-com bubble burst, United took one of the heaviest hits in the industry. According to Goodwin, the carrier at the rime derived more than 40 percent of its revenue from traffic in, out or through California.

Most of all, United was suffering from the fallout of an audacious but failed experiment to save the carrier money while giving its employees a louder voice in how it was run. Instead of improving teamwork and morale, the ESOP had left labor relations more venomous than ever.

In the face of festering discontent over the state of employee ownership, Goodwin seemed the perfect remedy for restoring trust. As Peterpaul put it, "We figured he could hold it together and get production out of these people."

But the same open and easygoing nature that helped Goodwin get the CEO job also was a cause of concern for some of his top lieutenants. They were so uneasy about his negotiating skills that they coached him before he went into key sessions.

They were especially worried in early 2000 when Goodwin was meeting with the formidable Wolf to craft the US Airways acquisition, which faced skeptical federal regulators.

Whatever you do, Goodwin's advisers say they told him, don't take their maintenance facilities. And don't pay too much.

But Goodwin came out of the meetings with little from his ex-boss, according to some of his top executives, and agreed to a price tag of $11.6 billion, which many observers considered excessive. "Wolf would just beat him down," recalled one former United executive.

In a recent interview, Goodwin pointed out that the merger terms were arrived at with input from his entire leadership team. "Ninety-nine percent of the negotiations were done by others," he said. "At that price, the economics were good at the time. Everybody can always second-guess who out-negotiated who."

Tempting company

US Airways always had held a strong attraction for United executives.

Their routes fit together almost seamlessly. Where United is strong in the Midwest and on the West Coast, US Airways flies hundreds of short trips daily up and down the East Coast, where more than a third of the country's population lives.

The Southeast was filled with growing technology, manufacturing and financial firms in places such as Raleigh-Durham, NC, and Charlotte that needed closer ties to lucrative markets in Asia. These were precisely the elite business travelers United most coveted, but they were flying Delta or American overseas.

Furthermore, the airline industry was consolidating, and United wanted to prevent its competitors form cobbling together a route network that could rival its own. American and Delta, the No. 2 and 3 carriers, respectively, bought regional airlines in early 1999.

Goodwin fretted that if United didn't buy US Airways, American would - not an unreasonable fear given that American had talked with the smaller carrier about such a deal in 1995.

Although Peterpaul supported the merger, there was considerable labor opposition, and under the ESOP the unions would have to sign off on the acquisition.

Selling United's 10,000 pilots on the US Airways deal would have been difficult under the best circumstances. The last thing United's pilots wanted were 5,000 of their US Airways peers competing with them for plum assignments.

Besides, the pilots already were chafing at more than a year of unproductive contract negotiations with United management.

Much more than usual was riding on this round of talks between the airline and United Chapter of the Airline Pilots' Association.

The airline's experiment with employee ownership was coming to a crossroads. The distribution of stock to pilots and other union employees would stop in April 2000. And pay would "snap back" to 1994 levels, thanks to an agreement struck with workers in 1997. Pilots let it be known that they would be looking for hefty raises to compensate for years of swapping wages for stock.

If there were any doubts about their mood, the election of Rick Dubinsky as union chairman in the fall that year should have clarified them. Since he last led the union in 1991, Dubinsky had played no formal role in pilot politics, although he was a well-known supporter of employee control of the airline.

By 1999, the years of Dubinsky's fighting with management and his fellow pilots, had taken their toll, and he carried serious political baggage. Dubinsky ticked off his own liabilities in a December 2000 report to the United board: "I am viewed by many as radical. I had organized and led the 1985 pilot strike. I was given the nickname ‘Mad Dog' by the senior management then in power. "

When Dubinsky was elected again, the message couldn't have been clearer: Labor-management relations at United were in deep trouble, and pilots were determined to extract raises that would vault them ahead of counterparts at other airlines.

Choking the goose

In late January 2000, Dubinsky met with Goodwin in his office at world headquarters in Elk Grove Township. The union chief took a piece of paper and started scribbling.

"Here's where you're going to end up Jim," Dubinsky told him, drawing a graph with an ascending line, underscoring 21 percent. "I'll settle for this."

Goodwin made a counteroffer. Dubinesky rejected it and the April 12 renewal date of the pilot's contract came and went . Under previous CEO Gerald Greenwald, the unions had obtained automatic back pay no matter how long contracts negotiations dragged on, so the pilots had little incentive to move quickly.

Dubinsky promised hard-nosed tactics. Goodwin recalls that Dubinsky in one meeting repeated his oft-stated philosophy of negotiations. "We don't want to kill the goose," he said. "We just want to choke it by the neck until it gives us every last egg."

With United "awash in cash," in Dubinsky's words, he figured the goose had plenty of eggs to spare.

But the dot-com boom that had contributed so much to United's profits was reaching its peak, and it was about to collapse. Like a lot of other companies, United didn't see it coming.

When United's numbers declined in 2000, Goodwin's team chalked it up to pilot service disruptions, bad weather and competition within the industry. The falloff in high tech business customers was just one drop in a rainstorm.

Only in January 2001, when big tech companies started telling United they were cutting back on travel, did Goodwin recognize the airline's premium business was imploding.

Goodwin's main focus remained completing the deal with USAirways. In May 2000, he did.

Standing side-by-side in the art deco elegance of Manhattan's Waldorf Astoria Hotel, he and Wolf announced the merger proposal they had succeeded in keeping hush-hush.

But as they basked in the limelight during the block buster announcement, both executives understood the deal could fly only if they overcame the deep seated antitrust concerns of federal regulators. Winning approval for the merger became United's top priority.

All the attention focused on the merger gave the pilots enormous leverage. They lashed out with a show of militancy unseen at United since the strike of 1985.

As the crucial summer travel season approached, the pilots began to work "by the book," in effect an undeclared work slowdown.

A flight schedule is a delicate thing, easily knocked out of kilter by the complex interdependence
of crews, planes and weather. The sheer scale of United's operation-roughly, 2,000 flights a day, made it particularly vulnerable.

The Minneapolis -St. Paul International Airport provides one example. United operates 21 flights a day there, though the airport is not one of the carrier's so-called domiciles, where crew and aircraft are permanently based.

So a plane outbound from Minneapolis to Chicago might arrive from one city, its crew of flight attendants from a second city and the pilot and co-pilot from a third city. Bad weather or other delays at any of those three locations can knock the outbound flight off schedule. In turn, that delay creates other delays at the destination city.

United and other major airlines routinely assume a certain amount of voluntary pilot overtime when building a schedule, even though pilots have the contractual right to refuse to work extra hours.

In early 2000, United's management eager to pump up revenues, assembled an especially busy summer schedule. Such a tight timetable made them particularly dependent on pilot cooperation.

When it became clear that a new contract was not in the offing, many pilots refused to work overtime. Others simply refused to take off, citing purported safety problems and other issues. If this was a war, the pilots had found the enemy's soft spot.

But in sabotaging the schedule, they also were creating innocent victims: their customers. In doing so, they were abandoning their role as stewards of the employee-owned airline, undermining the financial health of their own company.

Point of no return

Successful airlines sell certainty. Now, with the slowdown grinding down operations, United was providing only uncertainty.

For many longtime customers who stuck with United because if its unmatched route network and schedule of flights, the summer of 2000 marked the point at which eroding service finally became intolerable.

Paul Baron, then president of a Quaker Oats division, flew United about 50 times a year, even as he put up with a decline in morale and performance.

His tolerance ran out on a Friday night in late summer at the Salt Lake City Airport. Baron, of Wilmette, had been booked in a flight slated to leave for O'Hare about 6 p.m. It was canceled, but Baron was assured he could board the next flight to Chicago.

About 9 p.m., the connecting plane landed. "We'll turn it around, and it will be already for you," he recalled the gate agent announcing.

But not long after came another announcement: "The crew has put in too many hours. They can't fly the plane. You're going to have to stay overnight in Salt Lake City."

Throughout that summer United pilots often invoked their contract right to turn down overtime flying. But Baron figured the airline's flight managers shared the blame for not tracking crew hours and anticipating the disruption.

"I'm sure they could have know three or four hours before and made arrangements for another crew," he said, "instead of having us all sit there."

Fortunately for Baron, now retired, there was an alternative for his family: "We switched over to Delta."

At United's world headquarters, some executives argued that the only option was to ground the fleet. But Goodwin rejected the idea.

Another option was suing the pilots. But Goodwin and the carrier's 12 member board chose not to do that either. Having lived through the 1985 pilot strike, Goodwin was loath to declare war again. He wondered if suing the pilots this time would simply provide them another rallying cry.

In considering such questions, United directors were like many other boards in supporting the strategic vision of their chief executive.

In many ways United's governance was highly unusual. Unlike other major companies, two directors represented unions, and the ESOP gave them a substantial voice in deciding who would serve as directors.

United managed to attract a relatively prestigious group of senior executives to the board, not least, some say, because veteran directors got free lifetime travel benefits on the airline. One director, investment manager Paul Tierney Jr., racked up more than $200,000 worth in 2000 alone.

The pilots had left Goodwin and the board with no simple way out

Coupled with unusually stormy weather in the Midwest, the pilots' actions led to the cancellation of thousands of flights, delaying thousands more. The airline's on-time performance for much of the summer was below 50 percent, by fare the worst in the industry.

Furious customers took it out on front-line workers, especially flight attendants and gate agents. United flight attendant Sandy Alvarez remembers customers screaming in her face over canceled and delayed flights.

"The cockpit door was never open because [the pilots] didn't want to catch the grief," she said. "We were an easy target because we weren't going to fight back. We had to say, "Thank you and have a nice day."

Even Alvarez reached her limit, though. "I finally got to the point where I would point to the cockpit and say ‘Say it to them' It was pure hell."

To this day, however, pilots union leaders blame the summer chaos on an overly aggressive schedule and weather, while downplaying any pilot culpability.

By some accounting, fewer than 1 in 10 pilots participated in the slowdown. Yet even that amount caused lasting damage. "Clearly we shouldn't have slowed down, because we lost our high-yield customers, said George Wright, a recently retired United caption. "We trained them that they could fly Southwest."

With politicians joining passengers in the criticism of United, pressure mounted on Goodwin to end the agony and reach a deal with the pilots. Belatedly, United managers moved with urgency to settle the pilots' contract.

On the morning of August 26, the pilots' negotiators, Goodwin and his top lieutenants met at the O'Hare Hilton. Goodwin read a brief statement agreeing to settle the contract, pending a vote of rank-and-file pilots.

The deal translated into huge pay hikes -21.5 percent immediately for pilots on narrow-bodied planes and 28.7 percent for those flying wide-bodies, plus 4 percent annually over the life of the four-year deal. A senior United 747-400 captain went from making about $200,000 to $257,000.

Dubinsky called the proposal "nothing less than a grand slam home run for United's pilots." If the members approved it, he added, "Santa Claus [will be] arriving a little early this year."

So it was no surprise when United Pilots voted 7,663 to 366 in favor of the contract, which vaulted them at least 10 percent ahead of their peers at American and Delta.

Goodwin tried to put the best face he could on the contract. In a Sept 7, 2000, letter to the United board, he said the agreement was 20 percent higher than the company wanted to spend, "but we feel, on balance, it is fair to both sides."

The combined price of the disrupted summer and Goodwin's capitulation to pilots was punishingly high for United.

As travelers shunned the carrier, American, Northwest and Delta posted increases in passenger traffic.

The carrier blamed its pilots for costing it 1 million passengers in August alone. United carried 7.2 million passengers that month, down from 8.29 million in August 1999.

United's financial numbers plummeted in the third quarter of 2000. For the first time since 1995, it reported a loss.

Over at rival American Airlines, operating earnings soared 51 percent in the third quarter, courtesy of an influx of alienated passengers from United.

Goodwin and union leaders like Dubinsky believed that other airlines would follow United's lead in setting new pay scales, and United wouldn't be hurt in the long run.

Only nine months later, pilots at Delta signed a more generous deal-a reflection of the leapfrog pattern of airline labor contracts, one of the factors driving the airline industry's recurring financial troubles.

United was generous even with employees who had no leverage. Non-union salaried workers such as supervisors and managers were given double digit raises. Goodwin rationalized that these employees need the boost to be paid competitively.

By the time United finished settling wages, its over labor costs jumped 48.5 percent of total operating revenue in 2001 from 38 percent in 1999.

Breaking down

Summer was over, but the hell continued even as temperatures cooled.

The airline's mechanics, who also had made major pay concessions under the 1994 employee ownership deal, demanded no less a raise than the pilots received.

Convinced the mechanics would follow the pilot slowdown with one of their own, managers moved to head off any such action.

Sig Mueller, a no-nonsense United maintenance manager transferred to O'Hare from San Francisco, issued an "urgent notice" for November 2000, declaring an "operational emergency" because so many flights were being canceled after mechanics took planes out of service for repairs.

"An employee who refuses an overtime assignment or fails to report for an assignment is subject to discharge, " he announced.

The actual number of mechanics fired was relatively small, but it had a chilling effect on those who remained. Feeling threatened for simply doing their jobs, the mechanics accused their bosses of insisting they "pencil whip" -sign off on repairs that aren't made.

In effect they were accusing managers of endangering passenger safety in the name of blocking another slowdown. United rejected the accusation, insisting that safety was never undermined and the company's admirable safety record remained intact during that period.

Still, the mutual distrust led to a costly game that hearkened back to the worst days of labor-management feuding before the ESOP.

Ken Thiede, a long time machinists union leader, described how the game worked. At O'Hare, for instance, a mechanic supervisor would angrily demand that his crew quickly finish a repair on a section of a plane.

The crew might tell the supervisor that the plane was in such dire shape that it was going to be what they call a "hangar queen" -sitting around for at least a couple of days before it was fixed.

Flight operations would cancel the flight, only to find out 10 minutes later that the pieces fit together after all.

"Is it right for a manager to come out and verbally abuse the workers? No. Is it right for the workers to screw the manager around by goofing up the operation? No." Thiede said. But "human nature being what it is, an unhappy worker is not a productive worker."

Management's relations with the mechanics hit a new low when the company sued the union, the
International Association of Machinists and Aerospace Workers, seeking $66 million in damages. Goodwin's team had had it. They weren't going to risk another work slowdown that would further infuriate passengers.

Worst yet to come

Nasty relations had come to define life at United; even workers were turning on each other. In Stuart Cohen's 16 years at United, from customer service at O'Hare to a job in Phoenix doing everything from loading bags to dumping aircraft lavatories, he had seen workplace tension before.

But the fallout from the pilots' slowdown made those animosities seem tame.

One day in Phoenix, Cohen was working in The Pit-baggage handler speak for the cargo hold of a plane- when a pilot strode up with his luggage.

After the pilot walked away, a baggage handler made a point of climbing into the pit and stashing the pilot's bag behind the customers' luggage.

"So when the plane got to the final destination, guess whose bag would be the last to get off?" Cohen said. "It was a way for them to get back for that summer from hell."

As if to underscore United's troubles, the distracted carrier soon lost bragging rights as the world's largest airline. The announcement of its plans to acquire US Airways had set off a scramble among the competition to match its expansion.

In April 2001, American cinched its purchase of a bankrupt TWA, overtaking United to become the world's No.1 carrier.

United's own merger plans weren't going nearly was well. Although the summer slowdown led to frosty relations on Capitol Hill, the merger fell flat for another reason. Trustbusters at the Justice Department had determined that combining United and US Airways would reduce competition, raise fares and hurt consumers.

Just hours after the antitrust division and a dozen state attorneys general vowed in July 2001 to file suit to block the deal, the airlines terminated their pact.

The price tag for the debacle; a $50 million breakup fee paid to US Airways, but much more in wasted resources and a chain reaction of employee demands.

The carrier's machinists still were insisting on the same industry-leading raises that United had given its pilots. Twenty-one months after starting contract talks, negotiators for United and its 30,000 ramp and customer service workers gathered in Washington, where the National Mediation Board had called the two sides in hopes of concluding an agreement.

Their talks wen through the day and night of Sept 10 and into the wee hours of the 11th. Finally, at 4:30 in the morning, the negotiators agreed to grab a little sleep and return the following afternoon.

At about 10 a.m., Randy Canale, the machinists' lead negotiator, awoke to the sound of someone banging on the door of his room at the Capital Hilton, about two blocks from the White House.

"You need to turn on the television," he was told.

Canale did so, then opened the drapes and looked out the window to see the morning's unfolding chaos; all sirens and soldiers. In the distance, he could see smoke risking from the Pentagon.

Like the rest of the nation, Canale didn't know what was coming next on this bright morning when terrorists used United and American planes to attack the Pentagon and the World Trade Center.

The contract negotiations that had seemed so pressing just hours before were not the least of United's concerns.