Airline Industry ESOPs and the Impact of September 11th

Introduction and Background

This paper examines the effects of the September 11th tragedy on employees' Employee Stock Ownership Plans (ESOPs) in the airline industry. The following background information is provided before addressing the central issue.

In the United States, the main vehicle for employee ownership in a company is the Employee Stock Ownership Plan, which first became a recognized plan in 1974. Between 17 and 20 million U.S. employees participate in large ESOPs or other contribution plans that hold stock. Employees may own stock directly in their companies through stock purchase programs or by being members of worker cooperatives.

Studies find that employee ownership has a positive impact on performance even in adverse times. September 11th adversely affected the majority of domestic carriers in the United States. Industry revenues dropped drastically, and President Bush signed a Stabilization Act that provided up to $5 billion in cash grants and $10 billion in loan guarantees to compensate for losses resulting from the attacks.

United Airlines was one of the largest employee-owned companies in the nation and was part of the megatrend that swept the airline industry in the 1990s. Northwest and Continental followed suit, giving their employees the ability to be "owners" of the company. Making owners of employees stimulates interest in productivity and operating efficiency. Since September 11th, and in the face of weaker demand for air service, most carriers announced significant reductions in both markets served and workforce size.

The Airline Industry Before September 11th

September 11th had a dramatic effect on the nation's airline industry, which in turn negatively impacted the ESOPs of most airline employees. The airline industry had been turbulent for several years, and it was the hope of many carriers in the 1990s that ESOPs would make a marked difference.

Historically, the airline industry has been losing altitude since deregulation was enacted in 1978. Hubs were built, carriers were merged, costs rose, prices fell, and profit margins all but collapsed. Most investors and lenders realized this was a losing proposition as the industry lost all the money it had made, and Wall Street was quick to downgrade its debt to junk status. It was almost inevitable that employees would become the next source of funding.

The airline industry is as turbulent and unpredictable as any flight can be. This highly competitive and volatile industry has attracted employee ownership advocates for many years. As a complete service industry linked to both business and leisure travel, it seems well suited to improvement at the hands of its own employees. Yet many factors outside employee control have doomed numerous airlines, and even ESOPs could not save them from their fate.

For any company that embraces employee ownership, it can be a godsend or merely a temporary reprieve from the inevitable. Market forces have long been pushing the industry toward consolidation or collapse. Stock shares cannot replace wages, and if the underlying proposition is a losing one, not only the company's profitability suffers — so do the employees themselves. There is no guarantee in the airline industry, or in any other. After the September 11th attacks, airline stocks were among the most volatile in any sector.