DEIRDRE McMURDY August 31 1992



DEIRDRE McMURDY August 31 1992




Sidney Fattedad is an unlikely white knight. Genial and soft-spoken, he retired as the vice-president of Calgarybased Canadian Airlines International Ltd. in February after a 24-year career in the Canadian airline industry. But Fattedad, 48, says that when he learned in July that merger talks between his former employer and Air Canada of Montreal were under way, he was inspired to devise a bold plan to prevent that from happening. By raising $500 million from employees and outside investors, Fattedad intends to put Canadian Airlines and its troubled parent company, PWA Inc., back on their feet and revive the interest of American Airlines

Inc. of Fort Worth in a critical partnership deal. So far, five of PWA’S six unions, as well as its regional subsidiaries across Canada, have rallied behind him to form the Council of Canadian Airline Employees. And even provincial governments, which initially rejected the notion, are now showing flickers of interest. “I was happily retired—sitting on the beach, drinking beer,” said Fattedad. “But I couldn’t stand to see these people sold out. It has taken years of employees’ trauma and adversity even to get PWA this far.”

Fattedad’s worker-led rescue mission, however, is more than one man’s altruistic crusade to save jobs and corporate pride. Indeed, a

growing number of Canadian companies are turning to their employees in difficult times. As at PWA, employees are responding with everything from temporary wage concessions and voluntary layoffs to actual buyouts of the company. Said Allan Cahoon, a professor of man-

Air Canada United Airlines


1991 Revenue

1991 Loss


Fleet size

World rank by passenger miles 21

Claude Taylor Stephen Wolf

$3.57 billion $13.4 billion

$218 million $381.7 million

20,000 76,000

agement at the University of Calgary: “Historically, company management has kept the bad news from the troops as long as possible. But the ‘us’ and ‘them’ approach is breaking down under all sorts of new economic pressures— and management is often surprised by the commitment of workers in a crunch.”

Certainly, the employees of PWA will need all the commitment that they can muster in order to address their company’s financial woes. PWA is losing almost $1 million a day and it cannot raise or borrow new capital because of its already heavy long-term debt load of $1.5 billion and its weak share price (from a 1991 high of $9.37, PWA closed last week at $2.90). PWA’s weak balance sheet also destroyed the anticipated deal with American Airlines. Citing the company’s shortage of funds, American broke off talks that would have led to a $250million injection into company coffers. When that deal collapsed, a merger with Air Canada became a last resort for PWA even though about 10,000 jobs would be lost as a result.

Despite the size of the challenge they face, the PWA employees are not alone in refusing to passively accept the loss of their jobs and the demise of their company. Since the recession began in April, 1990, and the competitive pressures of global trade have increased, employees have purchased such major companies as Algoma Steel Inc. in Sault Ste. Marie, Ont., and Spruce Falls Pulp and Power Co. in Kapuskasing, Ont.

Workers also attempted, unsuccessfully, in 1990 to purchase operations from Inglis Ltd., a U.S.-based large-appliance company that was moving jobs from Canada to larger plants south of the border. Currently, the efforts of PWA employees are mirrored in the United States at bankrupt Trans World Airlines Inc. of New York City. In exchange for wage and benefit cuts, unions are proposing to acquire a 45-percent interest in the company over five years.

Although worker investment in small, healthy companies and start-up ventures is receiving increasing encouragement from provincial governments in the form of tax credits and support programs, most major employee buyouts still occur only when management has exhausted every other avenue of relief. Because of the uncertainty in cases where workers take on an unfamiliar ownership role at the same time as they struggle to save a troubled company, labor unions are frequently reluctant participants in the process. Basil Hargrove, president of the Canadian Auto Workers union, refuses to let his 3,500 members at PWA join in Fattedad’s plan for salary and benefit cuts. “The workers are being asked to take financial risks that other lenders won’t even touch,” said Hargrove. “Worker

ownership just means you lose your life savings as well as your job in the end. That’s no solution to anything.”

Hargrove’s concern that PWA employees may be taking desperate financial measures to salvage a lost cause is echoed by Robert Freedman, an Ottawa-based aviation industry consultant. Freedman noted that the fundamental structural problems in the Canadian airline sector make investment by PWA employees questionable. “We’re talking about a bloated industry with profound overcapacity,” said Freedman.

“How are employee pay cuts at one airline going to do much more than briefly prolong the inevitable?”

When it became apparent that Algoma Steel was destined for bankruptcy and that 8,000 workers faced losing their jobs, the United Steel Workers of America began to advance the notion of an employee purchase plan. But the Canadian branch of the union went to extreme lengths to ensure that workers were not throwing good money after bad. In exchange for five years of reduced wages and benefits and the suspension of their right to strike, workers got more than just a 60-per-cent equity stake in the company—they got effective control of daily operations.

“Algoma has become the Canadian case study,” said John O’Grady, a Toronto-based economic consultant.

“The new collective agreement between management and workers is absolutely unprecedented.”

Rather than the conventional corporate structure, which is geared to producing the highest possible value for shareholders, the steelworkers demanded a new one which reflected their objectives: preserving jobs. To that end, each employee was given the right to vote on decisions usually reserved for senior management. Worker approval is now required for Algoma managers to invest outside Sault Ste. Marie or the steel industry as a whole. They also require permission to issue new shares, which could dilute the worker equity. Similarly, the union has authority over new training programs and technology. “The objective is to give as much authority as possible to the worker doing the job,” said Kenneth Delaney, research director for the steelworkers in Canada. “The result is not an unwieldy corporate structure but a flattened organization.”

No matter how much care goes into the design of a new regime, however, some problems inevitably remain unforeseen. According to Delaney, there is no mechanism in place yet to deal with the voting shares and rights of workers who want to leave or retire and those who replace them—especially if the shares increase in value as a result of a turnaround. Said consultant O’Grady: “If new workers aren’t given access to the same stake as the

others, you eventually create two classes of workers—which can be explosive.”

At PWA, the issue of worker equality is already surfacing because of the autoworkers’ refusal to join forces with the company’s other five unions. Indeed, analysts acknowledge that the more unions and the more agendas that are involved in an employee buyout, the more

volatile the coalition may be. In some cases, buyout deals unravel as unions struggle among themselves for dominance. In 1990, the three principal unions at United Airlines Ltd. of Elk Grove, 111., failed to secure final financing for a joint $ 5-billion buyout proposal in part because outside investors expressed concern that their united front was too fragile.

Traditional tensions between labor and management can also be a stumbling block in employee-led companies. According to Calgary management professor Cahoon, many managers have trouble accepting workers as partners, let alone as shareholders with a voice in decision-making. “There is no legacy of collective problem-solving,” he said. “Everyone

knows that in theory co-operation is better. But the sides are usually so polarized and entrenched.” At Algoma, in fact, workers and managers struggled to overcome bitterness left over from a 112-day strike just months before they forged their new corporate order.

For his part, Fattedad says that he is confident that the urgency of the situation will help bring management and workers together and help them to put past grievances aside. As recently as last fall, several PWA unions refused the company’s pleas for voluntary wage restraints. “The problem with most companies is mind-set: you’re paid to work and I’m paid to manage,” said Fattedad. “That won’t get you where we need to go.” But even where internal conflicts can be resolved, external pressures may prevail. In Europe, where many governments aggressively promote worker ownership, an infrastructure of credit unions, banks and advisers exists to support such initiatives. Even in the United States, legions of lawyers, consultants and investment bankers have already emerged to capitalize on burgeoning employee buyouts.

In Canada, where banks are generally conservative and the four largest investment dealers are bank-controlled, those resources are far more limited. And in the current economic climate, credit is tight even for companies with strong, proven financial records. As well, Delaney noted that “workers face a credibility problem in the financial community. ; They tend to be very dismis□ sive.” To counter those bias2 es, he added that the steel1 workers “were extra careful with our analysis, held press conferences and issued fancy documents.” Even though Fattedad is wellconnected in financial circles through his former job, he acknowledges that his rescue plan has “a lot of people looking at me sideways.” Despite the formidable obstacles, PWA’s board of directors spent two days in Vancouver last week listening to Fattedad’s survival plan. He also met with officials in the British Columbia government, who have offered to contribute $50 million to save PWA if others participate as well. Although Fattedad told Maclean ’s that “my wife thinks I’m crazy—she’s just shaking her head,” as his mission gains momentum, she is clearly in the minority.