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Managing Corporate Change:
Management Combines Forces with
Unions

Interview with John Dasburg
Northwest Airlines CEO

Part I: Saving Northwest – Management’s Perspective
CEO John Dasburg tells just how desperate the situation was in the final hours before the company signed a ground-breaking labor agreement.

Part II: Improving Capitalism
A CEO’s view on making capitalism more fair, in his own company and beyond.

Part III: The Benefits to Management
Labor unions are not the only beneficiaries of their presence in the boardroom.  Dasburg gives Hedrick Smith concrete examples of how management has gained from the experience.

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Part I: Saving Northwest – Management’s Perspective

IN 1993 AS CEO OF NORTHWEST AIRLINES, JOHN DASBURG HEADED A COMPANY ON THE VERGE OF BANKRUPTCY. DASBURG PULLED BACK FROM THE BRINK BY STRIKING A DRAMATIC AGREEMENT WITH NORTHWEST’S UNIONS. THE UNION GAVE UP NINE HUNDRED MILLION DOLLARS IN WAGE AND WORK RULE CONCESSIONS AND THE OWNERS GAVE LABOR THREE SEATS ON THE CORPORATE BOARD, AND 30% OWNERSHIP OF THE COMPANY.

THE DEAL GAVE NORTHWEST AIRLINES ONE OF THE UNITED STATES’ BIGGEST ESOPS  EMPLOYEE STOCK OWNERSHIP PLANS. CEO JOHN DASBURG HAS FOUND NORTHWEST’S NEW RELATIONSHIP WITH ITS UNIONS AN ADVANTAGE TO THE CORPORATION. IN THE 80’S, NORTHWEST LABOR RELATIONS WERE SO BAD, THAT SOME PEOPLE NICKNAMED THE COMPANY COBRA AIRLINES  THEY’D STRIKE AT ANYTHING.

TODAY NORTHWEST HAS MADE A STUNNING ECONOMIC COMEBACK, ONE THAT DASBURG ATTRIBUTES LARGELY TO GOOD LABOR MANAGEMENT RELATIONS. DASBURG LIKES TO HAVE LABOR REPRESENTATIVES ON HIS BOARD AND VOLUNTARILY EXTENDED THEIR PARTICIPATION FOR ANOTHER TEN YEARS.

SMITH: Tell me about the situation that led up to the dramatic concessionary agreement in July of 1993.

DASBURG:When we had the difficulties back in the early 1990's, we had to ask our employees to make sacrifices and to give up a certain amount of their wages. And, in turn, we gave them an interest in the company in the form of stock. And the ESOP just turns out to be the proper vehicle to do that.

So -- and the labor leaders were -- felt very strongly that if the company were successful post the -- the transactions in the early 90's, that the employees should share and, of course, we agreed with that. And, so, that's really where the ESOP comes from.

SMITH: How close were you to filing for bankruptcy?

DASBURG: It was imminent. We would have filed the next morning. In 1992 and then into 1993, the entire industry fell on very hard times, very difficult time for the industry. We had the Middle East war, we had increases in fuel prices. We had a major loss and business people were afraid to travel due to their fear of terrorism.

The economy was in a slump or had been in a slump and things were very difficult for the entire industry. In fact, one commentator suggested that the industry was -- was on a balance sheet basis bankrupt as an industry.

We had our own difficulties, because we had a considerable amount of debt coming due, so we had a liquidity problem and we worked closely with our labor leaders, our banks, our vendors and the communities we served to -- to work our way through this.

And -- and in the summer of 1993, we were working with our labor leaders to pull together what -- what we refer to as the concession package, which basically is a voluntary agreement by the employees to reduce their wages for a set period of time.

And in those negotiations, we also had to renegotiate the underlying labor contracts. Very very difficult period of time, around the clock negotiations, went on for weeks. And they were -- they culminated in that first week of July and they worked literally around the clock. And they ended up in my home, I guess the evening of the 6th, which was my -- my wedding anniversary the next day -- and one of the -- one of the stories that emanates from that period of time is that on -- on the evening before our wedding anniversary my wife went in to go to bed and one of the labor negotiators had collapsed from exhaustion and was asleep in the bed. So, we had a very interesting couple of days there.

SMITH: How close WAS it?

DASBURG: We were ready to file bankruptcy and we would have filed bankruptcy that morning had we not reached an agreement. And some time -- three - four o'clock in the morning -- I reached an agreement with the last labor group, the pilots union, and made the phone call to Wilmington.

And we had lawyers and everybody on the -- on the steps and we had actually -- on the judge's calendar -- a time to go in and actually file. So, we called it back and we were within hours of -- of filing.

SMITH: What would that have meant to the airline if you'd had to go the other route? How bad would that have been?

DASBURG:Every airline and every business is affected I think a little differently by -- by Chapter 11 filings. In our case, we have a very large business in Asia; and, in particular, in Japan.

And the understanding of Chapter 11 in -- in Japan and Asia is such that it is really -- it's kind of a contamination of your -- of your business. And, so, my assessment is that had we filed Chapter 11, I think it could have led to such a substantial restructuring of the airline, because of a loss of business in Japan and Asia -- that we might not have survived it.

SMITH: So, it was a matter of survival in your mind?

DASBURG: In my mind it was. I think we were unique because of the -- the huge franchise, the huge operation we had in Asia and Japan. And I think there's an arena that doesn't truly understand American views of capitalism and Chapter 11.

SMITH: How important to putting the whole package together, not just in dollar and cents terms, but in keeping your creditors, keeping other people at the table, how critical were the wage concessions, those nine hundred million dollars worth of concessions from the unions, to the survival of Northwest?

DASBURG: They were absolutely essential.The concessions were clearly a sine qua non. Had it -- had it not been for the concessions, no one else would have -- would have come to the table. There's no question about that.

SMITH:But for you, as a CEO, what was it like the first time you had three labor board members sitting in with your other directors?

DASBURG: Well, that turned out to be really no surprise at all. The gentlemen that the unions chose were very able, still are, the ones that are still on the board -- very able gentlemen.

They're experienced. They not only understand labor, but they understand business. They've spent years with very very good economic advisers and business advisers and, so, it was like adding any other person that's had experience to your board. That really worked out very well for us.

But the overall experience at the time was very difficult, the pulling all the pieces together and dealing with each constituency. And, of course, everyone wanted to protect their interests, which you can't -- you can't blame them.

So, as a consequence, the banks had their own interests, the vendors -- we had aircraft orders -- they had their own interests. The labor leaders wanted to protect the workers, so they had their own interests. We wanted to -- to protect the entire enterprise and wanted the enterprise to survive, which, in turn, protected -- protected every constituency. And, so, it -- it was a -- a very challenging time.

Part II: Improving Capitalism

SMITH: In practical terms, has the ESOP been a good deal, positive for Northwest?

DASBURG: Well, I think the ESOP is the manifestation of -- of really an economic transaction and -- and the measure of whether it works out or has worked out is then in turn a function of the value of the stock.

And since we've been fortunate enough to -- to be operating an airline during our relatively good period, the value of the stock has turned out to be greater than the amount of concession.So, in that regard, in that -- in what you might call a net worth context, the answer is, yes. But that's only half the answer.

The fact of the matter is that -- that if you need liquidity and you agreed to a concession, the fact that you're receiving stock equal to or greater than your concession is -- is a good -- is theoretical, because you actually want the liquidity now.

So, there was -- there was a sacrifice. So, I think the broader question is, yes, the jobs were retained. Yes, the value of the stock is greater than the concession, slash, the sacrifice. But in all cases there was a sacrifice.

SMITH: You’re describing stake holder capitalism. You've got people today in America who say the shareholders, that's all we care about. We're after shareholder value. You don't sound like a fellow who is -- who buys that simplistic a view.

DASBURG:I've participated in -- the first answer is, no, I don't buy that -- that simplistic a view. I’ve participated in many debates, both formal and less formal on this particular subject. And there are a number of books. There's lots of literature on the subject as you alluded to. And the fact of the matter is there are stakeholders and capitalism is predicated on self-interest.

And I think we've -- if nothing else -- over the last perhaps decade -- we've determined that the utopian view of the world doesn't work. It's flawed. That -- that the fact of the matter is people don't voluntarily give up their self-interest for the collective good.

And we've had enough experience in the 20th Century with national socialism and with Stalin, Bolshevikism and on and on to conclude that -- that the utopian model is flawed.

My concern about the capitalist model is that -- that while it seems to work and we're all involved in capitalism in an incredibly existential way -- the fact of the matter is that there is -- there is -- in my view -- the need for some type of balance.

Democracy didn't work without -- without certain rights being guaranteed, what we call a bill of rights. And in my view there is somewhat of a bill of rights to capitalism.

You -- you just simply must take into consideration all of the various interests in society in the enterprise. And if you fail to do that, capitalism will fail.

SMITH: That's a big statement, you’re saying not only the company, but the system will fail.

DASBURG:The system will fail. And we, as CEO's have a responsibility to see to it that we take into consideration all the stakeholders. And I just simply don't buy the view that maximizing shareholder value and disregarding other interests is a sensible way to run an organization. And it's certainly, in the long run, I think, places in jeopardy the entire underlying economic system.

Now, there are some who rationalize and say, well, if, in fact, you maximize shareholder value what you're really doing is taking into consideration all of the constituent interests in the enterprise in any event, because long term, you have to take them into consideration or the enterprise won't be there.

Well, that becomes sufficiently tautological if you eliminate the underlying question. The fact is the answer to the underlying question -- must you balance constituent interests, the answer is absolutely, or you will really place in jeopardy the entire system.

SMITH: But there are some personal things that are kind of interesting. I mean, here you sit as the chief executive officer of this company, determining lots of people's salaries and involved in negotiations with labor unions about their pay. What's it like for you as a CEO to have labor union members sitting on the compensation committee deciding what your salary and your stock options are going to be?

DASBURG:You've now gone from the theoretical to the existential. The fact of the matter is that all of these things are -- are things that you deal with every day. They're real issues and they have to be worked through. And --

SMITH: Is it awkward?

DASBURG: I don't find it awkward at all. I don't find it awkward at all. In fact, we are -- we're very open. We believe that if you tell the truth, you don't have to be overly clever or be smarter than you might otherwise be, because you don't have to remember any lies you told.

The fact is, you just have to be open and you have to reach reasonable compromises. And it may be at any one point in time that you just simply have a disagreement and -- and wherever the power resides is going to ultimately win that disagreement at that one point in time.

But then you have to go on. And -- over time, if you're correct, hopefully you'll find a way to be persuasive and you might even find out you were wrong. And that the position you lost on was a good one to lose on. You just didn't realize it at the time.

SMITH:Opening the books, though -- I mean, there are a lot of people, there are a lot of executives, I've talked to them myself -- and lots of others I haven't talked to -- who feel that opening the books is, itself, a significant surrender of power or at least a significant sharing of power that impinges on their power and authority as the CEO.

DASBURG:Well, starting with the assumption that only one set of books is kept so that -- so that you really are correctly recording and reporting what's going on in the enterprise. If you're a public enterprise, your statements are audited, the information is in the hands of the public. And while there are certainly some schedules and some information that one would conclude, at least on a short term basis, are confidential, in point of fact, over any reasonable time horizon, all that information is actually public. And, so I --

SMITH: Sometimes the time horizon is critical. I mean, knowing -- knowing what kind of decision a board is about to make as it's approaching the decision, in that circumstance, the timing of the information you get is critically important. I mean, that's what our business is, for example, in Washington, trying to let people know what Congress is deciding before it decides. Tell them afterwards how it was decided and why and how the vote went is one thing. That's a historical exercise. Telling them before it happens means that other people have the power to wade in and influence the process.So, I mean, the timing and the information is critical. You don't find that a pressure on you that -- that's difficult?

DASBURG: Not at all, I think the people -- in fact, I know the people who are involved in the decision making process are capable of being involved in the decision making process, so they need the information in order to give you their views. So, there's -- no problem at all and no conflict in that sense.

If someone is indiscrete with information that they receive, whether, I might add they be a member of labor or a member of management, that's a different issue. But, again, operating on the basis that you keep one set of books and operating on a basis that everyone is discreet with information and understands its sensitivity, given the chronological implications of its application, then hearing other views I think helps you make a better decision.

Part III: The Benefits to Management

SMITH: Could you describe for me your relationship with Duane Woerth, the pilots association member on the board of directors? Do you talk to him often?

DASBURG: Duane is a member of the board. He has the responsibility to think like a board member and he can bring to the table his experience and expertise on aircraft and that experience and expertise is helpful in making a decision, for example, if you're choosing between competing aircraft.

But the fact of the matter is that he is still expected to behave as a board member, taking into consideration all of the issues of the enterprise and he invariably has. And, of course, I'm expected to do the same thing.

And, so, I just think we get better decisions. We get a perspective, we get expertise and a labor leader can give you feedback. The labor leader can say, you know, this decision makes a lot of economic sense, but have you taken into consideration how this particular labor group might think about this decision.

And you think you have. But you can almost say, well -- well, what are your views? And share your views with me. And all of a sudden you realize that the people who advise you maybe have missed a very important ingredient.

And maybe -- maybe this is a -- this is something that farming it out to a vendor has more emotion attached to it because of the unique history of this particular product line than perhaps farming out something that you've never worked on before. And, so, you need these perspectives. You can't make good decisions without them.

SMITH: Are you on the phone with your labor board members several times a week?

DASBURG:Probably several times a week is a fair estimate. And it'll be either the union members that are on the board or the non-union members that are on the board. It depends on what committees they're on and what decisions we're making. Yes.

SMITH: Do you find that frequently you're getting bad news delivered to you through your labor board members more than your executive structure?

DASBURG:I think that there's a general tendency not to deliver bad news in any institution. And no matter how hard you work to keep the channels open and -- and to not shoot the messenger, I think it's just human nature that you would rather pass the news on and get out of the way.

And, so, I'm sure -- quite often board members hear things that -- they have chats with me and I think they're being used as channels. And that's very healthy. I'm glad that people are comfortable using board members as channels.

SMITH:Did you at one point say to him you thought he had spies throughout the organization, picking up information all over the place?

DASBURG:Well, he gets a lot of information. The labor directors can get on the shop floors and work closely with their labor leaders. So, they get a lot of information. And they have more information because they're focussed -- than I would -- on anything that they're focussing on.

SMITH:He seemed to also suggest even within the executive -- among the executives -- he gets a lot of information. Not just from his own membership.

DASBURG: Well, I'm sure he does. He's a very well respected board member. And we operate without any -- any real hierarchical constraints. In other words, I encourage the board and I encourage the senior executives to work not only at any layer within the organization, but to break down the silos and work with each other. And I don't want a mid-level vice president to feel compelled to go all the way up his line and to get across and then go all the way back down. He ought to be able to walk across the hallway and talk to someone.

And so, we break down as much as we can, the hierarchies and we break down the silos. And that goes for me as well. And my board members ought to be totally comfortable speaking with any senior executive or any employee in this institution.

SMITH:When your labor members came on the board of directors, did it take time to establish rapport with them?

DASBURG:We really had spent a lot of time together during the negotiations.

And so by the time we really invited the labor leaders to join our board, we all really knew each other. So, I think it was almost anti-climactic.

SMITH: Regional jets have been a big issue for airlines all around the country. We've noticed odd events down at American Airlines and so forth. You all have managed to negotiate those waters, so far as we can tell, better than most, but there was a point at which I gather that you all were thinking about acquiring Tri-Star, at least you had an idea for acquiring Tri-Star. How did that play out? You backed off that and worked on Massada instead?

DASBURG: Oh, the real decision all along, as a practical matter was customer consideration. Our customers in the smaller markets clearly are expecting an improvement in service, product improvement, if you will, and the commuter jet or so-called commuter jet is that improvement.

And we're satisfying our customers' expectations and we're trying in the smaller markets to even exceed them at least for a while, which is good marketing. And the RJ 85 is a great product and it works for us and it fits our markets.

And, so, we decided that we needed to introduce those aircraft to our commuter airlines. In the process of doing that, we consulted with our union leaders recognizing that there's a sensitive subject here, jets being flown by other than Northwest Airlines pilots.

There's always a minority opinion. There's always a majority opinion and we ended up with a view that, yes, it was very important to Northwest Airlines that we serve these smaller communities with jets and so that was the solution.

Each airline has its own unique history and its own different trust levels. We -- I hope we've never given our pilots any reason to believe that we would be moving flying, if you will, from Northwest Airlines to another airline. We're adding aircraft at Northwest Airlines. Northwest Airlines is growing. And, so, we're really not taking jobs away from the airline. And I think if we were taking jobs away from the airline, they would have a legitimate issue.

SMITH: I guess the fear in Tri-Star, at least in part as I've heard it, is that those were not -- it was a non-union airline, and there were non-union pilots and, so, that was one they were uncomfortable with. I guess there were financial questions as well.

DASBURG: That never became a significant issue.

SMITH: One of the things --

DASBURG: [interrupting] It might have been an significant issue at some level, but by the time we got it to my level to make a decision, it was really purely customer focussed.

SMITH: One of the issues that's been terribly important in labor-management relations all over the country is the whole issue of out sourcing, what do you get done abroad, what do you get done outside your company, what do you keep inside the company, so your farmout committee and your -- the process we've been filming yesterday and the day before over there in the maintenance bays on the pylons was obviously very very important.

Talk to me a little bit about that, your philosophy, how that got started, why a farm out committee was one of the provisions of the 1993 agreement and what you've been trying to do.

DASBURG: Well, here you have the -- kind of a classic tension between two courses of action. The first is how do you develop expertise or take the -- the advantage of the economics of expertise in something that needs to be done for the enterprise. And this is the old question of what do you do -- what do you buy and what do you make. It is very difficult sometimes to determine which you should buy and which you should make.

Overall, however, you ought not to be making things that others can make for less cost than you can make them. Otherwise, there's a heck of an inefficiency, the end result of which is that it negatively affects your business.

That's one side of the equation. The other side of the equation is you have employees that have expertise, they're on your payroll, they’re paying mortgages, they have their children in school and they have the right to believe that they're going to continue to be employed and you have to do everything you can to continue their employment and to help them advance with their own particular interests.

And, so, you have to sometimes be willing to accept doing something inside the enterprise that may be on the margin you ought to be doing outside the enterprise. But in the long run it's in the best interest of a stable labor force and the morale of your people.

But you have to be careful how you draw those lines. And what the farm out committee does is it helps bring those interests together, it helps get -- develop an objective view of what is being done outside and what it costs to have it done by, let's say, sub-expertise or expertise in an enterprise other than yourself.

And this is I think a fair way to debate these issues and then reach a conclusion, should this go to X company because this is all they do, they know how to do it better than anybody. Their assembly lines are organized to do it and their people are trained to do it and they can do it for a fraction of what we can do -- do the same thing for.

Or is this an area where, look, there are people with expertise in this. We have as much expertise if not more than they do and let's sit down and figure out what we have to do in order to do it internally at a competitive price to what they do.

SMITH: To go from the abstract to the existential, the refurbishing of the DC-9s in Atlanta was obviously a big step. Your decision to let your own employees, your machinists, rework the DC-9s down in Atlanta was a watershed. What triggered that and why was that so important and then how did you get to the point you got to on that specific issue?

DASBURG: Well, we believe that we have more expertise in DC-9s than anyone in the world. We have a very large fleet. Northwest Airlines has flown McDonnell-Douglas products for decades and decades.

And, so, it seemed to us that as a general rule we ought to be able to do as much of this refurbishment as possible. On the other hand, what we discovered is that refurbishment includes certain elements that really we have not historically done and that others have. And, so --

SMITH: [interrupting] You mean the interiors.

DASBURG: In the interiors. And, so, we then concluded, well, as to interiors, let's not reinvent the wheel. Our cost to do interiors may be considerably higher than someone else's cost for doing interiors, so let's draw a line a little differently there.

Hushkitting engines was another issue. Structural work, we think we're the world's leading expert on structural work on DC-9s. Clearly we should be doing that kind of work inside Northwest Airlines.

SMITH: Did that issue become contentious at any point with labor leaders?

DASBURG: My recollection is that this worked itself out relatively routinely. We have -- we clearly have a bias to advance our own people to make absolutely certain that they have a future with Northwest Airlines and, so, we want to make certain that we do everything we can inside. On the other hand, they have to have an interest in making sure we're doing it competitively. That normally, incidentally, more of the work rule issue than it is a salaries and benefits issue.

There's a tendency for salaries and benefits to be relatively competitive and when they're not, they normally -- normally reflect levels of expertise. So, I'm comfortable that going outside Northwest Airlines to do work is, as a general rule, not an issue of salaries and benefits, of wages and benefits, it's really an issue of can we be efficient inside. And if we can be efficient inside, then we ought to be able to do the work. And if we can't be, we ought to sit down and talk to the labor leaders and talk about the politics of making us more efficient and how to be more competitive.

SMITH: Why did you propose extending the membership of the labor board members on your board of directors?

DASBURG: I believe that I could benefit from their perspective. They are not only members of the board and have all of the constituent interests to deal with, but they also bring a perspective that they can only bring, that I can't bring to the table, because they've been in the labor movement all their life and they understand the labor movement. And so yes it is helpful.

SMITH: Has there been a change in management's attitude towards labor?

DASBURG: I think it's very fair to say that we broke down some of the old barriers that have developed over the years between, in quotes, management and labor. And I think there's a much better understanding today on the part of the rank and file what management's job really is and I think there's a better understanding on the part of management of what someone actually does every day and they come in and they turn a wrench.

And I think that environment has -- that understanding has been helped by an environment where people are working closer together. I think the farm out committee is probably a good illustration of that.

So, yes, in that regard, I think that -- clearly there's a better understanding and I think management probably has a higher level of trust regarding the outcome of allowing someone who's turning a wrench to go forward an actually turn the wrench. Yes, I think that's been positive.

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