United Wins Approval to Dump

United Wins Approval to Dump Pension Plans

The case of United Airlines and their pension plan illustrates many key components of business ethics. The integrity of a contract, involvement of stakeholders and the measurement of outcomes are all features of this deal.

Deal Summary

United Airlines was struggling to come out of bankruptcy protection for 29 months at the point when the deal was made. The pension plan was one of the biggest obstacles to their efforts. For their part, the unions involved were generally opposed to any changes to their pension plans. Membership viewed the plans as sacred cows, the one thing they were not willing to be flexible about. There had been several rounds of negotiations over the past months that resulted in numerous union concessions in other areas. From the union's perspective, these concessions were made on the understanding that the pension plans were not going to be effected. From the company's perspective, the unions were intransigent on the issue of the pensions, a view shared by the third major player in the deal, the Pension Benefit Guaranty Corp.

In the end, United felt that they had no choice but to cut into the pension plans in order to pull out of bankruptcy protection and salvage their business. Ultimately, they viewed it as an issue of finding the best among a set of unpleasant options to save the business. They worked a deal with PBGC, which is the firm funded by companies such as United that have fixed-benefit pension plans to guarantee the payments from those plans.

The Issues

Negotiation in good faith is a central theme in this case. In the initial rounds of negotiations, the unions approached the issue with a mind to keeping their pension plans intact. They knew and were upfront with the fact that the pensions were the biggest issue on the table for them. United went along with these negotiations, but it can be reasonably expected that they, and to an extent the union as well, were aware that the pensions comprised such a major portion of the firm's long-term liabilities that it would be very difficult to bring the firm out of bankruptcy without addressing the pension issue.

The question, in terms of ethics, is to what degree did United bargain in good faith - if they knew the pensions would have to be cut eventually, did they communicate this to the unions? The unions should have had fairly strong knowledge of the facts surrounding the bankruptcy protection before they entered the negotiations. Given that, it should be expected that their plan to negotiate other, less contentious issues first was based on a sound strategy they had, whereby they felt United could get out of bankruptcy without impacting the pensions if only the unions gave ground in other areas.

In a negotiation such as this, the ethical obligation of United is not to play to the union's position, it is merely to ensure that the union has the requisite information at hand to make its decisions. The case does not demonstrate any evidence that United withheld key information regarding its bankruptcy situation; it merely appears that the unions in following the desires of their membership undertook a strategy that had little hope of success. If the unions' poor strategy resulted in significant losses for their members, they have only themselves to blame.

United is continuing to make legal challenges with an eye to having some union contracts thrown out. This raises another aspect of this issue. When a deal has been made in good faith, is the company obligated to stick with it no matter the consequences. The argument being made in court is that the deals are too expensive. In general, the law holds that as long as the deal was legally fair when it was made, changes in cost after the fact are not a reason to have a deal nullified. The question here is that while United can legally challenge the deals, to do so is to operate on questionable moral ground. It sours the relationship with the unions, who had negotiated in good faith on the understanding that the deals would be upheld for their duration. Whether such legal actions are in good faith would depend on your interpretation of the concept - is good faith restricted to simply that which is upheld in a court of law or is the concept held up to a higher standard?

Another major issue in this case is that of stakeholder involvement. This issue centers around the fact that the deal to dump the pension plans was made between United and the PBGC. The third major stakeholder, the unions, were not involved.

For their part, the company and the PBGC are of the opinion that their negotiation was a final effort brought about by the unions' intractability on the pension issue. They felt that the unions were given ample opportunity to address the pension issue but refused to budge on their position. The unions, however, do not share this sentiment. They feel that to be left out of the discussion was an outrage, especially given that they are not only major stakeholders but also the stakeholder with the most to lose given the outcome. Their view is that regardless of the outcome of the bankruptcy proceedings and pension negotiations, United would continue and the executives would have secure futures, as evidenced by the $4.5 million retirement plan bequeathed to CEO Glenn Tilton. Their membership, however, stood to lose their future security.

Both sides make valid points, but ethical behavior holds that all stakeholders be involved in major decisions and negotiations such as this. The executives of United feel that the outcome meets their objectives, as does the PBGC. The unions, the only major stakeholders not involved in the negotiations, do not feel that the outcome meets their objectives. Essentially, the appearance is that United and the PBGC cut the unions out from the negotiations as a result of not being able to meet their objectives at the prior negotiations that involved the unions. If the rounds of bargaining prior to the United-PBGC negotiations were in good faith because of their transparent nature, surely the secret negotiations were not in good faith. The fact that the negotiations were taking place without the unions' knowledge shows that transparency was sacrificed for the sake of expediency, that the desire to get the deal done quickly overshadowed the desire to take into account the needs of all major stakeholders.

Another issue is that of outcomes. From United's perspective, the outcome was a just one. Judge Wedoff termed it "the least bad among a number of unfortunate choices," and that it "keeps the airline functioning, keeps people employed." Ethically speaking, however, there are serious issues that arise from this position.

In a situation such as this, there are numerous possible outcomes, and these will have a variety of impacts on the various stakeholders. At some point, a value judgment needs to be made as to which impacts are most and least undesirable. These must be weighted against their potentiality as well.

In this case, the risk to United was that it would be unable to come out of bankruptcy protection. This is in turn would put the existence of the company in jeopardy. Thousands of workers would be laid off, the blow to the economy would be huge. The likelihood of this probably increased the longer the bankruptcy proceedings dragged, creating the impetus for the deal with PBGC. Such an eventually would also have catastrophic impacts on the unions, who would not only suffer in terms of impact on their current workforce but would in all likelihood take a significant hit on their pensions as well, if they retained anything.

The likelihood of this eventuality, however, is fairly minimal. There are far-reaching ramifications of the United case, given the size of the company, the importance of transportation to the economy as whole and the major issue with regards to the pension plan. Many U.S. firms are facing similar pension plan issues, and this cuts to the heart of the integrity of the economic system. For a company such as United to face the end of its business and a 100% default on its pension would have grave consequences for the future of the system and economic confidence going forward. It is therefore viewed as unlikely that such an eventuality would be allowed to materialize.

The risk to the unions was that they would not only lose a portion of the pensions they'd won for their members but that they would lose much of their bargaining power as a result of the entire proceedings. That they would lose something a little bit of both seems a very likely outcome. The bankruptcy protection shifts the balance of negotiating power away from the unions, putting them on the defensive in terms of protecting their positions and their members' jobs. That they immediately were thrust into negotiations and forced to give concessions is evidence of this.