United Once More

By Janice Castro

Look out, Texas Air and American! Fasten your seat belts, TWA and Delta! The old United Airlines is aiming to make a comeback -- under new leadership. And forget about that weird name Allegis, which Builder Donald Trump said was "better suited to the next world-class disease." The new chairman plans to scuttle that moniker, along with the company's dubious strategy of being a sprawling travel conglomerate that rents cars and runs hotels. From now on, United will concentrate on the airline business, this time with its pilots eyeing roles in the boardroom as well as in the cockpit. After years of inner turmoil, the company is determined to recapture its onetime dominance of the friendly skies.

Just as a starter, the airline last week flew some of the fanciest loops and passes ever seen in corporate aviation. After a pressurized seven-hour meeting of its board of directors, the 52-year-old firm announced that Chairman Richard Ferris, 50, had resigned and would be replaced by Frank Olson, 54, who is currently head of the company's Hertz rental-car subsidiary. At the same time, for-sale signs were tacked onto Hertz as well as the Westin and Hilton International hotel chains, whose 149 hostelries constituted the third branch of the firm. Management also said it would seriously consider demands by the pilots for employee ownership. Finally, Olson recommended that the company's name, which had been changed only six weeks ago from UAL to Allegis (a combination of the words allegiance and aegis) at a cost of some $7.3 million, be returned to what it was originally: United Airlines.

The upheaval was the almost inevitable result of attacks on Allegis from all sides. Its pilots were pressing to buy the airline because they felt Ferris was spending too much time and money buying hotels, to the detriment of the company's core business. Meanwhile, dissident shareholders, led by a trio of Manhattan-based investors called Coniston Partners, launched a campaign to oust management, arguing that the company would be worth far more if it were broken into pieces and sold. The critics pointed to the firm's lackluster financial performance: its net income was only $11.6 million last year on revenues of $9.2 billion, and the airline itself lost $80.6 million.

The 7,000 United pilots had never forgiven Ferris for a bitter 1985 labor confrontation. The chairman demanded that United employees accept a two-tier wage system that would relegate newly hired pilots to a lower pay scale. In protest the pilots staged a 29-day strike, but Ferris prevailed and set up the new wage system anyway. He insisted that the carrier needed lower costs to meet the challenge of cut-rate competitors like Texas Air, which through a series of mergers has eclipsed Allegis to become the largest U.S. airline company, with both Continental and Eastern now under its wing.

The recent events that led to Ferris' downfall began last April, when the United pilots proposed a $4.5 billion employee buy-out of the airline. The plan called for employees to raise $2.3 billion and assume $2.2 billion of United's debt. The pilots, who earn an average of $85,000, volunteered to give up as much as 25% of their pay and pitch in some $300 million from their pension funds to help make the purchase. Flight attendants and pilots began sporting buttons that read BE UNITED/BUY UNITED. Company management scorned the offer as "grossly inadequate," but Wall Street's interest was sparked. The price of the firm's stock rose from 59 to 72 in three days.

One of the first major investors to begin sniping at management was New York City Developer Trump, who bought just under 5% of the company's stock and hinted that he might join in the pilots' takeover effort. But Trump sold his stake in the airline for a reported profit of $55 million. In the meantime, the little-known Coniston Partners had been quietly amassing shares, and suddenly emerged as Allegis' largest shareholder. Brandishing a 13% stake in the firm, the partnership announced its intentions to overthrow the Allegis board, name its own slate of directors and sell off the company piece by piece.

It was a threat that Allegis could not take lightly. Coniston Partners has been terrorizing companies ever since 1982, when it was formed by Investors Augustus Oliver, 37, Paul Tierney, 44, and Keith Gollust, 42, who together put up an original investment of only $3 million. The partners have rung up more than $100 million in profits since, by forcing restructuring plans and boosting stock values at Cyclops, Storer Communications, NL Industries, Viacom International and Gelco. Nonetheless, the three men still take the New York City subway to work every morning, avoiding limousines and other costly perks. Says Tierney: "We preach leanness and efficiency. We practice what we preach."

Confronted by the specter of these raiders on their doorstep, the Allegis directors unveiled on May 28 a recapitalization plan as a new takeover defense. Under its provisions, the company would take on more than $3 billion in additional debt and then give stockholders a $60 cash payment for every share they owned. Company officials apparently believed the huge new debt would make Allegis a less attractive takeover target and that the cash payout would placate Coniston and other restive shareholders. They were wrong. The pilots still talked takeover, and Coniston pressed forward with its proposal to break up the company, maintaining that Allegis stock, then hovering in the 80s, remained undervalued.

Beginning on Friday June 5, the Allegis board conducted several emergency meetings through telephone conference calls. Then Ferris convened a 3 p.m. session last Tuesday at the Manhattan offices of Morgan Stanley, one of the airline's investment bankers. Among the 17 directors present were Ferris, Olson, former Secretary of Commerce Juanita Kreps, Chairman Richard Cooley of Seattle's Seafirst banking company, and Charles Luce, former chairman of New York City's Consolidated Edison power company. The directors were ready for decisive action, and before the meeting had even started, Luce told Chairman Ferris that his job was on the line.

Nonetheless, the board members painstakingly reviewed their options: the pilots' buy-out bid, Coniston's breakup proposal and Ferris' recapitalization plan. As the meeting dragged on into the evening, says an Allegis official, "it became clear that Ferris' strategy would not survive." The directors would undoubtedly have asked him to resign, but they did not have to. By the time the session broke up at 10 p.m., Ferris had voluntarily stepped down. Any sympathy for the chairman was tempered by the fact that strapped firmly on his back was a recently negotiated "golden parachute" calling for compensation of $2.9 million over the next five years.

New Chairman Olson, a finance whiz who began his career as night man on a rental-car desk at San Francisco International Airport while he was studying accounting, has a reputation as an impatient boss who is equally demanding of labor and management. "If the pilots thought Ferris was tough," says an Allegis executive who has worked with both men, "wait till they have to deal with Frank Olson." Maybe so, but immediately after his appointment last week Olson telephoned each of United's union leaders to discuss their concerns. Ferris had seldom spoken with any of them.

Despite Olson's appointment, the company's future is still unsettled. For now, Coniston Partners says it will support the new management because Olson intends to sell off Hertz and the hotel chains for some $3 billion. Because of the run-up in value of Allegis stock, which closed last week at 91 3/8, the partnership could make a tidy profit of about $200 million on its $520 million investment.

The company seems likely to sell a major chunk of the airline to employees. The pilots still plan to push for a controlling interest, but the machinists' union has said it does not want workers to have a majority stake. No matter who controls the carrier, it will need to lower operating costs. With that in mind, the pilots are sticking to their pledge to take a 25% pay cut if the employees become owners. They know that when United slashes costs, the airline will be better able to fight the fare wars fiercely and make the skies a lot less friendly for competitors.

With reporting by Lee Griggs/Chicago and Thomas McCarroll/New York