402 1 BEFORE THE NATIONAL MEDIATION BOARD 2 3 4 PRESIDENTIAL EMERGENCY BOARD NO. 236 5 6 7 UNITED AIRLINES, INC. 8 THE INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS 9 VOLUME 3 10 11 12 Friday, January 11, 2002 13 9:10 a.m. 14 National Labor Relations Board Washington, D.C. 15 16 BEFORE: 17 HELEN M. WITT, Chairman 18 IRA F. JAFFE, Member 19 DAVID P. TWOMEY, Member 20 BENETTA MANSFIELD, Deputy Chief of Staff National Mediation Board 21 SUSANNA FISHER, Attorney Advisor 22 National Mediation Board

403 1 APPEARANCES: 2 On behalf of United Airlines, Inc.: 3 JOHN J. GALLAGHER, ESQUIRE Paul Hastings Janofsky & Walker, LLP 4 1299 Pennsylvania Avenue, Northwest, 10th Floor 5 Washington, D.C. 20004-2400 (202) 508-9500 6 THOMAS J. MANLEY, ESQUIRE 7 Hunton & Williams 421 Fayetteville Street Mall, Suite 1400 8 P.O. Box 109 (27602) Raleigh, North Carolina 27601 9 (919) 899-3053 10 STEPHEN SAWYER, ESQUIRE Assistant General Counsel for Litigation 11 United Airlines, Inc. FXO-LD 12 P.O. Box 66100 Chicago, Illinois 60666 13 On behalf of the International Association of 14 Machinists and Aerospace Workers: 15 ROBERT BUSH, ESQUIRE IRA L. GOTTLIEB, ESQUIRE 16 Geffner & Bush 3500 West Olive Street, Suite 1100 17 Burbank, California 91505 (818) 973-3219 18 DAVID NEIGUS, ESQUIRE 19 Associate General Counsel International Association of Machinists and 20 Aerospace Workers 9000 Machinists Place 21 Upper Marlboro, Maryland 20772-2687 (301) 967-4510 22

404 1 APPEARANCES (CONT'D): 2 ALSO PRESENT: 3 William Hobgood, Senior Vice President, Human Relations, United Airlines, Inc. 4 Peter Kain, Vice President, Labor Relations, 5 United Airlines, Inc. 6 Robert Roach Jr., General Vice President, Transportation Department, 7 International Association of Machinists and Aerospace Workers 8 9 10 * * * * * 11 12 13 14 15 16 17 18 19 20 21 22

405 1 C O N T E N T S 2 WITNESS: PAGE 3 Michael L. Wachter 409 4 Peter Kain 438 5 Tom Roth 464 6 Closing Statement for the Union 485 7 Closing Statement for the Company 493 8 COMPANY'S EXHIBITS: 9 No. 34 - IAM District 141M - Mechanics and 462 Related Employee List of Open 10 Issues and Costs 11 No. 35 - Line AMT Rates at Various 462 Pay Steps 12 No. 36 - January 2, 2002, MEC Update 462 13 No. 37 - Productivity and Wage Concession 462 14 Plans, Alaska 15 No. 38 - December 30, 1992, Memorandum, 462 DeLucia to Pattison 16 17 18 * * * * * 19 20 21 22

406 1 P R O C E E D I N G S 2 CHAIRMAN WITT: Good morning, 3 everyone. We are ready to begin again 4 today. 5 I believe you completed your 6 evidentiary case yesterday, Mr. Gallagher, 7 and now we are into rebuttal. 8 MR. GALLAGHER: Not precisely, 9 Madam Chairman. The sequence of our flow 10 was -- of our planned flow was disrupted, so 11 we have two witnesses this morning, the 12 first is a labor economist who will be 13 rather brief. The second is Mr. Pete Kain, 14 the company's vice president of labor 15 relations. I'd expect that we'd be able to 16 present both of those witnesses in less than 17 an hour, at which point we would be prepared 18 for closing. 19 CHAIRMAN WITT: All right, that 20 will be fine. I understand that Mr. Bush, 21 his attendance is required at another 22 hearing this morning and we will take a

407 1 recess during that period. 2 MR. GALLAGHER: We understand, 3 Madam Chairman, Mr. Bush has suggested 11 4 a.m. and it -- I suppose we'll have to see 5 how far and how fast we get. We may well be 6 finished by that point. 7 CHAIRMAN WITT: All right. 8 MR. GALLAGHER: But we can't 9 commit to that, of course. 10 CHAIRMAN WITT: I understand. 11 MR. GALLAGHER: All right. 12 CHAIRMAN WITT: Been around 13 lawyers a long time. 14 MR. GALLAGHER: And even if we did 15 commit to it, we'd probably renege at some 16 point. Madam Chairman, the company's first 17 witness this morning is Dr. Michael Wachter. 18 Dr. Wachter is the William B. 19 Johnson professor at law and economics at 20 the University of Pennsylvania, where he 21 teaches in the law school and in the 22 department of economics. Dr. Wachter has a

408 1 Ph.D. in economics from Harvard and a 2 distinguished resume which we will circulate 3 and place in the record. 4 He has testified in prior 5 Presidential Emergency Board proceedings, as 6 the chair is aware, as well as a labor 7 economist for the United States Postal 8 Service in American Airlines proceedings, as 9 well as the Northwest Emergency Board. 10 Also with Dr. Wachter is Dr. James 11 W. Gillula, Dr. Gillula has a Ph.D. in 12 economics from Duke University. He works in 13 tandem with Dr. Wachter and is now a 14 managing director of economics consulting 15 for DRIWEFA, which is a Washington acronym 16 for economic forecasting association, and 17 again, has a long history of economic 18 analysis of Government labor statistics. 19 He has assisted Dr. Wachter in the 20 preparation of the data and may respond to 21 questions from the Board about the data, but 22 Dr. Wachter is the principal author and will

409 1 be the presenter. 2 With that, the company calls 3 Dr. Michael Wachter. 4 Whereupon, 5 MICHAEL L. WACHTER 6 was called as a witness and, having been 7 first duly sworn, testified as follows: 8 THE WITNESS: Good morning, thank 9 you. Let me apologize at the beginning by 10 saying that I am getting over a cold. When 11 we send our students out for winter break, 12 they go to all different parts of the 13 country and bring back whatever the local 14 germs are. We started classes on Monday and 15 by Wednesday, I was already showing the 16 signs. I don't know if it was from Nebraska 17 or Wyoming the one that I have. 18 In any case, let me indicate that 19 this work is very much done jointly with Jim 20 Gillula, who is -- worked with on a number 21 of occasions. We've published together in 22 academic journals regarding the kinds of

410 1 testimony we've presented in different 2 hearings of this type. 3 Our analysis today has five parts 4 to it. Each one will be brief. The first 5 is a comparison of UAL mechanic wages with 6 wages of comparable workers throughout the 7 economy. This is one of the key areas of 8 focus of labor economics and is at the heart 9 of not only what I've testified to, but much 10 of the research I do and the publishing that 11 I do. 12 Second is a comparison of UAL 13 utility wages with the wages of comparable 14 workers throughout the economy. That is the 15 only part we are doing with the utility 16 worker. Most of our focus will be on the 17 mechanics. 18 Third, we return to the mechanics 19 and an analysis of mechanic wages paid at 20 other airlines. 21 The fourth part is an analysis of 22 United airline mechanic quick rates and

411 1 separation rates, terms that I'll define 2 when I get to that section. 3 Finally, an analysis of the round 4 of airline mechanic wage adjustments that 5 were triggered by the last recession 6 of 1990, '91. We believe that that's a 7 particularly important part of the past 8 history and is one that we will focus on in 9 our brief remarks. 10 Let me say again that the starting 11 point for our analysis is wage 12 comparability. Is United Airlines paying an 13 appropriate wage from a labor market 14 prospective, and again it's the broader view 15 that academic economists take, not only in 16 their research, but in the consulting work 17 that they do. 18 A wage freeze is proposed by 19 United, will allow the company to retain its 20 skilled mechanic work force, if United pays 21 a wage above competitive levels. So one of 22 the important reasons we look at wage

412 1 comparability is to see whether United pays 2 at wage premium and what would be the 3 impact, for example, if it were a wage 4 freeze, would the mechanics pick up and go 5 elsewhere or is it more likely they would 6 stay at United because their wages would 7 still be far above competitive levels. 8 Our first slide looks at mechanic 9 earnings compared to earnings of other 10 mechanics throughout the economy. This is a 11 different look that -- than one normally 12 sees. Again, it's the heart of the kind of 13 analysis that I do. 14 What we are doing is we are 15 looking at airline mechanics, compared to 16 mechanics throughout the economy. The 17 Bureau of the Census provides us with a 18 comparability group. The Bureau of the 19 Census has a categorization of occupations 20 and the occupation in -- the broad 21 occupation in which United airline mechanics 22 fit is a category called mechanics and

413 1 repairers. 2 Let me emphasize that this 3 category is the most skilled category of 4 blue collar workers, describe it as the 5 crme de la crme of the American production 6 work force. So these are highly skilled 7 mechanics throughout the economy. They 8 could be working in United on aircraft; they 9 could be working on heavy machinery; they 10 could be mechanics throughout the economy. 11 The wages that we are looking at 12 here are also different from what you may be 13 used to. These are not contract wages, they 14 are not top rate all-in wages, because the 15 Government -- the wage data collected by the 16 Bureau of Labor Statistics, based on the 17 Bureau of the Census occupational 18 categories, the data that they collect is 19 what's called average hourly earnings, it's 20 the average earnings of workers in these 21 jobs. 22 So that we had an apple to apple

414 1 comparison, we asked United to provide us 2 with the average earnings of airline 3 mechanics and that's what we are looking at 4 here. 5 As you can see, if I remember how 6 to do this, United airline mechanic wage, 7 in 1999 -- and 1999 was the last year, is 8 the latest year for which the Government has 9 data. We expect the 2000 numbers to be 10 coming out soon. 11 UAL mechanics, United mechanics 12 earned $22.57, that's their average wage. 13 Across the economy, aircraft mechanics, 14 economy wide, earned $21.12, or 6.4 percent 15 less than mechanics at United. 16 So these are aircraft mechanics 17 throughout the economy compared to United 18 mechanics. 19 The second category is, looking at 20 what we are calling other repairers, just 21 the other groups in the mechanic, repairer 22 occupation. What the data tell us, and

415 1 again, it's collected by the BLS based on 2 Bureau of the Census occupational 3 categories, is that all mechanics or 4 repairers, now except aircraft mechanics 5 which we already looked at, earned $15.86. 6 This means that United Airlines mechanics 7 had a wage that was roughly 30 percent 8 higher than that of mechanics and repairers. 9 Now, this is a 1999 look at the 10 data, given what has happened in the overall 11 economy and at United, that 30 percent may 12 now be closer to 27 percent, but it is still 13 a very, very sizable number. 14 These results are clearly 15 averages. There's no doubt that some 16 mechanics are paid more than United. We 17 know that at some of the majors that 18 recently signed contracts, the wages are 19 higher than at United. Most, however, for 20 mechanics are lower. 21 What this shows us, though, is 22 that on average, if you compare United

416 1 mechanics with, again, the most skilled 2 group in the American blue collar work 3 force, that is mechanics and repairers, 4 United mechanics earn a 30 percent premium. 5 The traditional reliance that you 6 have in hearings of this sort and in 7 collective bargaining typically looks at a 8 much smaller group of comparisons. That is, 9 the typical look would be what are other 10 major airlines paying because they are the 11 closest to United Airlines. 12 That's a shorthand wage 13 comparability analysis that in normal times 14 is a reasonable short cut to take to look at 15 the kinds of market forces that would be 16 important in setting an appropriate wage. 17 At a time when the economy is in 18 great distress, which is certainly the case 19 now, and where the airlines are under 20 enormous pressure, unprecedented pressure, I 21 believe that it's really incumbent upon us 22 to take a broader look at what the economy

417 1 is actually paying mechanics, because it can 2 tell us a lot about what might happen, for 3 example, if there were a wage freeze. 4 If there were a wage freeze, for 5 example, and United mechanics were earning 6 the going rate, the competitive wage, which 7 would still be a high wage but it wouldn't 8 be what they are earning, then mechanics 9 might leave the United positions and go 10 elsewhere. 11 If there is the kind of wage 12 premium we are talking about here, then it's 13 very, very likely that if there were a wage 14 freeze, few mechanics -- few United 15 mechanics would leave their positions 16 because their alternatives would be much 17 lower. 18 In the 1980s, when companies like 19 eastern airlines were in trouble and 20 eventually went out of business, aircraft, 21 airline mechanics at the majors -- at 22 eastern, might be able to get jobs at other

418 1 majors, or at least at regionals if not at 2 majors, but there was a good shot at even 3 other majors because employment in that 4 economy was increasing. 5 What we have in the airline 6 industry today, looking at it from a labor 7 economist and an economist perspective, is 8 unprecedented pressure on the industry. The 9 workers who lose their jobs in this economy 10 are unlikely to be able to get labor market 11 positions in the airline industry and are 12 much more likely to be receiving, assuming 13 they can get a wage -- get a job as the 14 economy begins to recover, more along the 15 line of the $15 wage that I mentioned, which 16 is the average across the economy. 17 The US economy does look like it's 18 already beginning a coming out of the 19 recession, recovery may be at the very 20 beginning stages, but it's very unlikely 21 that the airline industry will come back any 22 time soon.

419 1 It has taken already an enormous 2 hit on its balance sheets. Those kinds of 3 hits can cripple a firm into the indefinite 4 future and it's certainly the case that the 5 kind of cash burn that we've seen in the 6 last few months is still going on today. 7 All right, let me switch briefly 8 to the utility workers at United and our 9 analysis here is the same as our analysis 10 before we were looking at average hourly 11 earnings. Again, we do not do, we are not 12 matching the utility workers with private 13 sector workers. It is the Bureau of the 14 Census that does that as part of determining 15 what groups different occupations fit in, 16 and the group that they fit in is called all 17 handlers, equipment cleaners, helpers and 18 laborers. 19 The data showing again, these are 20 United airline average hourly earnings 21 provided to us by the United, is $12.70, in 22 the private sector the comparable wage

420 1 is $10.26. This means that United airline 2 utility workers enjoy almost a 20 percent 3 premium over comparable workers throughout 4 the economy. 5 All right. Returning to the 6 mechanics, I want to take a look at, now, a 7 more focused comparability analysis, that as 8 we started with the largest outlook of 9 mechanics throughout the economy, here is a 10 focused look at the kind of data you're more 11 used to, although we've added some other 12 information to it. 13 The data show that as of today, 14 mechanics at other airlines are earning 13.4 15 percent more than at United. This is 16 largely the result of contracts that were 17 signed since the beginning of 2001. 18 We believe it's useful, however, 19 to not only look at aircraft mechanics at 20 the majors, but aircraft mechanics at the 21 regionals, as well. 22 The workers, mechanics at the

421 1 regionals are doing work that's very, very 2 similar to work at the majors. It is not 3 identical by any means, but is very similar. 4 We also know that when the majors 5 are hiring, they tend to hire the mechanics 6 from the regionals, indicating that they 7 believe that this is the pool that they will 8 draw from. 9 What the data show us is that 10 United mechanics, compared to airline 11 mechanics at the regionals, enjoy a wage 12 premium of 17.3 percent. 13 So, that is if a worker were to be 14 hired from the regionals, they would get 15 that kind of a wage increase, again, 16 depending upon the base, it would actually 17 be a little over, around 20 percent using 18 the lower base. If a worker were to leave 19 United and go to one of the regionals, that 20 worker would take a 17 percent pay hit. 21 Again, if the work weren't 22 available at the regionals and that worker

422 1 had to go to the private economy, the wage 2 hit would be closer to 30 percent. 3 To economists, wage comparability 4 answers important questions. It's really at 5 the heart of much of what we do when we are 6 looking at wages and wage comparisons. 7 The first question is whether 8 United airline mechanics are being paid more 9 or less than roughly comparably skilled 10 workers throughout the US economy. Is the 11 wage appropriate from a labor market 12 perspective? Again, this down turn is worse 13 by -- is far worse than ones we've seen in 14 the past as it affects the industry, and so 15 again as I've stated now a number of times, 16 mechanics who lose their job at United are 17 more likely to find -- have to find work 18 throughout the economy. 19 The second question it answers, 20 which I haven't really addressed, is the 21 question of ability to pay. Ability to pay 22 matters because ability to pay pays the wage

423 1 premium. In highly competitive industries 2 where there aren't wage premiums, you don't 3 have ability to pay. In those cases, you 4 really couldn't have a wage freeze because 5 wages would then fall below competitive 6 levels. But where you have a wage premium 7 and the ability to pay erodes, one would 8 expect that there would be pressure on the 9 wage premium. 10 If there weren't pressure, again, 11 one could be reasonably confident that 12 United would be able to maintain the skilled 13 work force that it currently enjoys. 14 What I'd also like to do is move 15 back a year to January 1st of 2001. This is 16 prior to some of the very generous contracts 17 that were awarded mechanics since 18 January 1st. And what you see here is that 19 United is slightly behind the average of 20 other airlines, namely 4.2 percent below an 21 unweighted average of the other airlines. 22 There are two points worth making

424 1 with respect to this data. First is given 2 the unprecedented developments beginning 3 with September 11, and truly these are 4 unprecedented events. When one talks about 5 September 11th as being the second Pearl 6 Harbor, that order of magnitude, one is 7 clearly talking about a world that has 8 changed. 9 I think it is reasonable to ask 10 whether we will end the year 2002 closer to 11 where we started 2001, rather than where we 12 were on September 11. 13 The adjustments haven't really 14 begun yet, but it's very likely that major 15 adjustments will occur as the ability to pay 16 of the major airlines becomes enormously 17 affected by the cash drain and the 18 extraordinary weakening of their balance 19 sheets. 20 The second point is that it would 21 be incorrect to say that this 4.2 percent 22 means that United aircraft mechanics are

425 1 actually paid on a value of the job basis 2 less than mechanics elsewhere. 3 In combination with the pilots, 4 United mechanics own a controlling block of 5 stock in a publicly traded company, UAL. 6 Most ESOPs are in closed 7 corporations. This is an extraordinary ESOP 8 in the fact that it is in a publicly traded 9 company, where there are minority 10 shareholders. 11 With seats on the Board, United 12 mechanics enjoy a control over their destiny 13 which has been exercised from time to time 14 in the past with the pilots. That is 15 extraordinary, certainly in the airline 16 industry and truly throughout the economy. 17 We tried to count the number of other 18 publicly traded companies where you have 19 this kind of an ESOP and you could -- I 20 think we came up with one or two. You may 21 have others, but it's that limited number. 22 That has to be taken into account.

426 1 Job security, especially in this kind of 2 economy, has enormous value; hence, to 3 conclude that the 4.2 percent shown there 4 represents a wage discrepancy against United 5 mechanics just simply leaves out the value, 6 the extraordinary value of this 7 extraordinary ESOP. 8 All right, let me turn next to the 9 quit rate analysis that we've done and if 10 wage comparability forms one of the key 11 parts of the economists arsenal of analyzing 12 labor market developments, the quit rate is 13 the key piece of evidence we use to confirm 14 the results that we get when we look at the 15 wage -- at wages. 16 The question might be raised as to 17 whether United airline mechanics believe 18 that they are earning a premium pay; that 19 is, pay above that received in jobs that 20 they might hold, were they to lose their 21 United jobs. 22 Quit rate analysis is really where

427 1 the rubber hits the road. How do workers 2 perceive the value of the job? I'm not 3 talking about whether they are happy in the 4 job, unhappy in the job. The question is 5 how do they perceive it compared to other 6 opportunities they have elsewhere? 7 Workers who believe that they are 8 under paid generally go elsewhere. Workers 9 who believe that they are paid more than 10 they could get at comparable, at other jobs 11 in the economy generally stay put. 12 The findings here -- okay, the 13 findings we have here is that the quit rate, 14 which has been below 1 percent for much of 15 the time is now 1.7 percent. Don't think of 16 that as increase in the quit rate. That 17 would what's off called the tyranny of low 18 numbers. The quit rate in the private 19 economy, when the Government was last 20 collecting quit rate data, was closer to 20 21 percent in manufacturing. 22 So when you're looking at a quit

428 1 rate that's either below 1 percent or 2 slightly above 1 percent, it is truly an 3 extraordinarily low quit rate. 4 Unfortunately quit rate data hasn't been 5 collected by the United States Government 6 since the early 1980s. It was part of the 7 cut in funding for some of the BLS programs 8 in terms of data collection, so the 9 Government stopped doing that in 1980, but 10 the Bureau of National Affairs has picked up 11 the ball. 12 They published something called 13 separation rates rather than quit rates. 14 The nice thing about the quit rate is it was 15 collected for blue collar workers in 16 manufacturing, that's another high skilled 17 occupation and again the quit rates there 18 were somewhere between 15 and 20 percent in 19 the late 1970s. 20 Looking at separation rates 21 throughout the economy, one finds that the 22 separation rate at United, and this is a

429 1 separation rate -- and a separation rate 2 includes firings, retirements, disability, 3 deaths as well as voluntary quits. It does 4 not include layoffs, this is just the 5 definition of separation rates, it's data 6 collected by the Bureau of National Affairs. 7 What the data show is that United 8 airline mechanics leave their jobs at much 9 lower rates than workers throughout the 10 economy. Again, the separation rate for 11 United is 4.2 percent. This is composed we 12 know of a 1.7 percent quit rate. The 13 retirement rate is about 2 percent, and the 14 other .5 would cover disability, discharges 15 and other separations. 16 For the overall economy, we 17 estimate that the retirement rate is also 18 approximately 2 percent, perhaps another 1 19 percent is due to the other factors, such as 20 discharges, disabilities and so on. 21 Consequently, we estimate that the 22 national quit rate is approximately 11 to 12

430 1 percent. It is likely higher among blue 2 collar workers, on average, throughout the 3 economy, and lower among white collar 4 workers. This is an average. 5 As I noted before, the low quit 6 rate of United mechanics is extraordinarily 7 important. It really does show that the 8 wage comparability analysis that we've done 9 is correct when perceived by people who are 10 actually doing the work. It's possible you 11 get a high wage, but the high wage is in 12 return for lousy working conditions, other 13 factors that are really unpleasant and 14 workers may still leave those jobs and would 15 leave those jobs. 16 When the job is viewed as highly 17 attractive in terms of its pay package, 18 workers stay with the job, so that the low 19 quit rate is entirely consistent, and an 20 extraordinarily low quit rate is entirely 21 consistent, with a high wage premium that 22 are other analysis disclosed.

431 1 In terms of my brief remarks, let 2 me end with a look at recent history. 3 This slide deals with the 4 recession that began in July of 1990, and 5 ended in March of 1991. It was the last 6 recession, the only real recession since the 7 years after airline reorganization, so it's 8 the one sort of recession we can look at 9 reliably. 10 The airline industry is, as we all 11 know, highly cyclical. The result is when 12 there is a recession, even a normal 13 recession, the airline industry comes under 14 some real pressure. The deeper the 15 recession, the more it's focused, the harder 16 it hits the airlines. The harder it hits 17 them, the harder it hits their balance 18 sheet, in large part because of the high 19 fixed cost structure of this industry. 20 The recession today is much deeper 21 than the recession of '90, '91, that 22 recession lasted nine months.

432 1 This recession is here, the one 2 in 2002, is likely to be somewhat deeper, 3 probably last longer, but it won't be an 4 extraordinary bad recession, it won't be an 5 extraordinarily deep recession. What is 6 extraordinary about this recession, coupled 7 with the events of September 11, is the 8 degree to which it has hit the airline 9 industry. 10 The airline industry is suffering 11 as if we were in a great depression. And 12 this is a very different environment than 13 the one we observed in 1990, '91, which was 14 a much milder hit on the airline industry. 15 The union, I wasn't here for their 16 presentation, I've looked at the transcript. 17 My colleague, Jim Gillula was here, we know 18 that they presented a detailed account of 19 the history of collective bargaining between 20 the airlines and the mechanics. The 21 recession of '90, '91 received almost no 22 attention in their analysis. They were

433 1 taking a longer view of -- sort of decade 2 developments and this particular period of 3 history sort of disappeared into the 4 averages. 5 We believe that history, 6 historical analysis is very important, but 7 that it's particularly important to focus on 8 the history that's most relevant to the 9 current circumstances. 10 What we find is that in the mild 11 recession of '90, '91, mechanic wage 12 increases essentially came to a halt. 13 If you look at the data for 1990, 14 the average wage, and this again, this is a 15 top rate -- this is the top rate wage across 16 the majors indicated below, it was $19.16. 17 Four years later, it was 18 at $19.62. In other words, the recession 19 that began in the middle of 1990 ended at 20 the very beginning of 1991, continued to 21 have an impact on the wages of aircraft 22 mechanics for the next three years. There

434 1 were essentially, although there may have 2 been some increases, the increases were 3 extraordinarily small. 4 If we go on to the next slide, 5 what we find is that in the mild recession, 6 from July 1990 to March of 1991, for a 7 nine-month recession, that nine months 8 kicked off essentially a four-year period 9 where the average wage increase for aircraft 10 mechanics over that four years was less 11 than 1 percent per year. In fact, roughly 12 half of 1 percent per year. 13 So that what we find is that mild 14 recessions have major impacts on wage 15 setting entirely consistent with what one 16 would expect to happen in an industry with 17 very high fixed costs. 18 One last slide takes another look 19 at the same period. What we've done is 20 marked with Cs in green where there have 21 been concessions and in blue we have Ns for 22 no increases.

435 1 What you can see is that during 2 this period, and again, it's a relatively 3 mild recession, beginning in the middle 4 of 1990, ending at the very beginning 5 of 1991, kicked off a three-year -- a 6 four-year period of concessions or no 7 increases across most of the majors, only 8 Alaska, American and Southwest weren't 9 affected. America West had concessions, 10 Continental had concessions, Delta had 11 concessions, Northwest had the stock, where 12 the concessions bought stock. TWA had no 13 increases in concessions. United had no 14 increase in '90 and then concessions tied to 15 the ESOP and US Air had concessions, as 16 well. 17 Certainly what happens next will 18 be determined by events as they unfold. If 19 one bases one predictions on how the parties 20 have responded in the past, given the 21 obvious requirements of an industry with 22 high fixed costs that's under enormous

436 1 pressure, I think one can reasonably 2 conclude that whether it's concessions or no 3 increases, there are likely to be the 4 environment in this industry for a number of 5 years. Again, this hasn't started yet and 6 it will unfold before us and we will see how 7 it happens. 8 Certainly if the airline industry 9 recovers quickly, that might change things, 10 but I don't think anyone is predicting that 11 that will happen. Moreover, the hit the 12 airline firms have already taken to their 13 balance sheets from an key economists 14 perspective is extraordinarily important 15 because, again, it's the balance sheet and 16 the ability to pay that has funded the wage 17 premium in this industry for so many years. 18 Thank you. 19 CHAIRMAN WITT: Thank you. 20 THE WITNESS: If you have any 21 questions, I'd be delighted to answer them. 22 CHAIRMAN WITT: Thank you, no, but

437 1 thank you very much. 2 MR. GALLAGHER: Madam Chairman, I 3 do have copies of Dr. Wachter's and 4 Gillula's slides which I'll distribute. 5 Madam Chairman, at this time the 6 company would call Mr. Peter Kain to make a 7 presentation. Mr. Kain, as I indicated 8 earlier, is the vice president of labor 9 relations for United Airlines, a long-term 10 employee of United Airlines who has been 11 heavily involved in IAM negotiations, first 12 with IAM District 141, which represents the 13 approximately 20, 22,000 other IAM 14 represented employees who are not involved 15 in this proceeding, and then more recently 16 Mr. Kain, due to a promotion has taken over 17 responsibilities for this bargaining 18 relationship, as well. 19 Mr. Kain and his labor relations 20 team are the principal authors of our 21 position statement and the supporting data 22 behind it, including all of our exhibits.

438 1 He's the sponsoring witness for all of that 2 material. 3 I should note that we have one 4 additional exhibit with which we had 5 logistical problems this morning which 6 compares the -- it's similar to our big blow 7 up chart which compares the costs of our 8 position with the IAM position. 9 We have a similar exhibit which 10 compares the cost of the company's market -- 11 or excuse me, target rate proposal with the 12 IAM's position and highlights the difference 13 and as soon as that arrives, I'll share it, 14 but Mr. Kain will also be the sponsoring 15 witness for that exhibit. 16 With that, Madam Chairman, I turn 17 it over to Mr. Kain. 18 Whereupon, 19 PETER KAIN 20 was called as a witness and, having been 21 first duly sworn, testified as follows: 22 THE WITNESS: Madam Chairman,

439 1 members of the Board, I'm Pete Kain, Jack 2 has explained for you my background. I've 3 been with United for 26 years. 4 You have heard the description of 5 United's financial condition and the 6 industry's state from the investment 7 community perspective and specifically at 8 United and the unique challenges that we now 9 face in regard to this proceeding. 10 My role is to describe for you 11 what we consider to be the only practical 12 contract resolution, in light of the cold, 13 hard facts that we've heard over the last 14 couple of days. 15 First I want the PEB to understand 16 that like this union, we would prefer to be 17 able to work out this difficult issue in 18 direct negotiations or in mediation. 19 Everyone involved has put an extraordinary 20 amount of effort into doing that, but under 21 the difficult circumstances we haven't 22 gotten through to a conclusion.

440 1 And we also agree with what we 2 heard from the union that if United is going 3 to be successful through this difficult 4 time, any sacrifices must be shared 5 equitably among all the employees of United. 6 That's our perspective on this. But we are 7 aware, we are now, because of the section 6 8 negotiations -- we are involved with and 9 because this is the state and position we 10 are in in this round of bargaining. 11 I'll take just a minute to review 12 some of what the union has discussed in 13 terms of the history of this round of 14 bargaining. 15 We recognize the inherent dangers 16 of the traditional airline bargaining 17 pattern going far beyond the amendable date. 18 And so nearly seven months before the 19 amendable date the parties got together and 20 started this effort. We bargained 21 seriously. The company committed key 22 people. The union committed key people. We

441 1 had our labor people involved, we also had 2 the senior vice president of maintenance 3 operations involved throughout the 4 negotiations. And I want to note for the 5 record, he intended to be here this week and 6 he is unable to travel and is home sick. 7 Now, the negotiating committees, 8 without my direct involvement because of the 9 position I was in when they began and the 10 other negotiations that I've been directly 11 involved in, those negotiating committees 12 resolved more than 70 issues, and the 13 company has committed to some significant 14 major movements in things like medical 15 insurance, the creation of a wellness 16 program, improvements in dental insurance, a 17 tremendous increase in the vacation 18 allocation schedule, a modification to the 19 expense provisions of the contract and a 20 long list of issues that the members told 21 the union negotiating committee were very 22 important to them and a long list of those

442 1 issues that are part of our exhibits have 2 been resolved by the parties. 3 The company made what we consider 4 by any standard to be very significant, 5 serious, comprehensive proposals to resolve 6 all issues as early as September of last 7 year -- as early as September of 2000. 8 Additional comprehensive proposals 9 were put forward without the ability to push 10 through to a final agreement and then the 11 entire industry changed in September and 12 changed most severely for United. 13 The forecasts we've heard over the 14 last couple of days are truly sobering. 15 I've been with this company as an employee 16 for the last 26 years and frankly have been 17 with this company my entire life, through 18 association with family members. This is an 19 industry and a company that has been through 20 tremendous ups and downs, and because of the 21 caliber of people involved with this 22 company, we have survived and done better

443 1 than survived through some serious 2 challenges. 3 There has never been a challenge 4 like the one we face now. And I doubt if 5 there's any lack of appreciation of that 6 among anyone in the room. The issue is how 7 do we resolve this most difficult issue in 8 light of that. 9 Well, this difficult situation 10 leads the company to make the proposal that 11 we see as frankly the only workable way out 12 of these unhappy circumstances. It's a 13 proposal that recognizes our financial 14 reality and also recognizes the legitimate 15 important interests of the union. 16 It's detailed in our statement and 17 in our exhibits, but I want to highlight 18 four key areas. Retroactive pay, pension, 19 rates of pay and the two company issues that 20 remain. 21 Let's look at retroactive pay, 22 first. The company and the union agreed

444 1 back in 1997, that the first pay increase 2 under this round of bargaining would take 3 effect July 12th of 2000. The company 4 stands by that obligation in its proposal. 5 We propose that it be calculated 6 at a rate of 15 percent for mechanics, 7 and 10 percent for utility employees who 8 have -- and that would apply to all 9 employees who have an employment 10 relationship when we signed the agreement. 11 The calculation period we would 12 propose would be July 12th of 2000 through 13 the date of signing. 14 We maintain this is the 15 appropriate retro pay level, considering all 16 the rates that have been in effect in the 17 industry for similar employees during that 18 term. 19 However, in recognition of the 20 devastating effect the $178 million item 21 would have under our current cash situation, 22 we would propose that this retroactive

445 1 payment be calculated, established, 2 accounted for, but not paid out until 3 beginning in January of 2004 in eight 4 installments, running from January 2004, 5 continuing quarterly through October 2005. 6 Let's touch on our pension 7 proposal. We propose to increase our 8 flat-rate benefit level by 41.6 percent for 9 mechanics and by 34 percent for utility 10 employees. We further propose to apply 11 these increases to all who have retired 12 since July 12th of 2000. This is an 13 expensive proposal, a very expensive 14 proposal. It would establish United as 15 having the best fixed rate plan in the 16 industry. 17 Without any of the add-on features 18 that are part of the current union proposal, 19 it's better than Northwest whose early 20 retirement factor and utility rates are not 21 as high and not as good as in the United 22 proposal. And we make this proposal,

446 1 despite everything you're heard here about 2 our financial situation. There are many 3 dedicated United employees who put in long, 4 faithful service who are ready to retire. 5 We have employees on layoff who would prefer 6 to be working. 7 So it's a very significant issue 8 to the members. Also, we think we can step 9 up to this issue immediately, unlike some 10 other issues because given the current state 11 of the funding of our plan, we can do this 12 with no negative impact on cash in 2002 13 or 2003. 14 So, this is not to say pension is 15 not a very expensive issue. Of course it 16 is, but with our key focus first on 17 establishing financial stability before 18 financial health, we can do this without a 19 drain on cash. 20 Turn now, please, to pay rates, 21 and obviously the situation we are looking 22 at here, this is the most difficult issue.

447 1 Before we review our proposal, I 2 want to go back to Wednesday, we would take 3 exception to many of the assertions that Tom 4 made in his presentation, but let me comment 5 on just a few of them. 6 After we went through the long 7 history of how the key historical factor in 8 establishing mechanic rates of pay is 9 mechanic rates in the industry, we were 10 asked to focus on other classifications, 11 like flight attendants, nonunion employees 12 and a cargo carrier. Let's spend a couple 13 minutes on that before we get to the company 14 part of that proposal. 15 Reference was made to United's 16 flight attendance. United flight attendants 17 signed a 10-year agreement and their 18 agreement includes a process for converging 19 their pay to the average of the other four 20 major carriers, not industry leading, but 21 the average, and in their 2001 compensation 22 conference, they had no increase to their

448 1 rate of pay. 2 The comparison was made to 3 United's salary and management employees. 4 That groups 2000 salary program achieved pay 5 rates competitive with general industry, but 6 not industry leading. 7 It was indicated by the company 8 and commented on by the union that the 9 actual increases for that group averaged 19 10 and a half percent. What we didn't talk 11 about, though, was the fact that that group 12 of employees, at that time, had what was 13 known as a C scale group. C scale employees 14 were hired in to salaried positions 15 between 1994 and 2000, at very low rates of 16 pay and in to salary ranges that never 17 merged with senior employees hired 18 before '94 in the same classifications. 19 Our experience with that was not 20 good, but it was one of the investment 21 decisions made to establish the salaried and 22 management participation.

449 1 The 2000 salary program eliminated 2 the C scale and a significant part -- I'm 3 sorry, I can't tell you in terms of 4 financial analysis which part -- but a 5 significant part of that 19 and a half 6 percent increase reflects the elimination of 7 the C scale and the raises necessary to 8 address that and I'm going to make reference 9 to union Exhibit 37, you don't have to dig 10 through your records, I'll give you a copy 11 of it here which has been highlighted to 12 talk about how that effect occurred. 13 All right, attachment 37 to the 14 union's initial statement includes excerpts 15 and examples of vision 2000, that was the 16 name associated with the salary program for 17 these employees in the year 2000, and if I 18 recall correctly, these are classifications 19 that were salaried and management when that 20 program went into effect and were later 21 accreted in to union representation. But 22 these people did participate in that

450 1 year 2000 salary program. 2 Now, whereas people who were at 3 the higher pay levels in each of these 4 classifications got raises that were -- the 5 examples there are 12.8, 7.7, 5.5, increases 6 of that magnitude, if you look at, for 7 instance, on the first page, air freight 8 operations coordinator, the very large 9 increases go to employees who were 10 paid $8.72 an hour and $11.87 an hour in a 11 job which had then increased to the $21 12 range. 13 If you look at the cargo rep 14 international support, the very large 15 increases went to people who were at 7.97 16 and 8.30 an hour, a much larger group is on 17 the following two pages, the station 18 operations representatives, and there you 19 see the people who were in the jobs 20 before '94 were the higher steps of the pay 21 scale, got increases 2.4, 9.4 and 9.8, 10.2, 22 et cetera.

451 1 The second -- the third page is a 2 continuation of the station operations 3 representatives and then the highlighted 4 section there, again for a job that had 5 moved up into the 20s in terms of hourly 6 rate of pay, we had employees ranging 7 from 9.50 an hour down to 7.64 an hour. 8 So, that was the C scale group. 9 They got significant increases as the 10 elimination of that separate pay scale 11 occurred and it is just necessary that we 12 keep in mind that the 19 and a half percent 13 increase includes the solution and 14 elimination of the C scale. 15 As a matter of fact, there was 16 another group of the C scale employees who 17 earlier had voted to be represented by the 18 IAM, the public contact employees as they 19 are now known, and that group included a 20 significant number of C scale employees and 21 one of the things the company and the union 22 did in the first public contract

452 1 negotiations was negotiate an elimination to 2 the C scale, put them on to a more 3 traditional pay scale and in the course of 4 negotiations during the ESOP, gave those 5 employees a 14 and a half percent pay raise, 6 followed by a 5 and a half percent pay raise 7 that took effect at the end of the initial 8 agreement. 9 We are now in bargaining for 10 increases from those rates. So in that 11 negotiation, the company and the union 12 recognized a desire to eliminate the C scale 13 and bring those people up. 14 Now that was a decision we had to 15 make at that time for the public contact 16 employees and a decision we had to make at 17 the end of the ESOP for the salaried and 18 management employees because the turn over 19 rates were so high for people that were in 20 those pay scales. My recollection is they 21 were running in the 30 to 40 percent range, 22 completely unlike anything United had

453 1 experienced. 2 So, that's a factor in what you 3 see as what we did for, what we did for 4 salaried and management employees. 5 Just one more comment on the 6 union's presentation on the pay scales. 7 United's position statement highlights the 8 many ways in which our target rate not only 9 meets, but exceeds American Airlines. For 10 example, American has an overhaul support 11 mechanic classification. At American, those 12 people do work that our contractor assigns 13 to mechanics, but they get paid much less 14 than American's mechanics. American has a 15 building and cabin cleaner classification, 16 it's paid much less than our -- they perform 17 work that our contract assigned to utility 18 employees, but pays them much less than 19 United utility employees. We do not propose 20 to establish new sub classifications. 21 In appreciating how the pay scales 22 work at American Airlines, we need to keep

454 1 that in mind. 2 I'm also going to give you a new 3 exhibit referenced by Mr. Gallagher, company 4 Exhibit 35, that compares some of the pay 5 scales under what was referenced by Tom for 6 American and UPS tentative agreement. 7 The union's comparison of the 8 proposal and United's target rate proposal 9 to American and UPS focused on the top of 10 scale rates. This Presidential Emergency 11 Board should also recognize that under both 12 the union's proposal and the company's 13 target rate proposal, a new hire line AMT at 14 United would be paid much higher than 15 American or UPS new hires. 16 So we have, we have taken three 17 different levels here, the entry level, 18 where they are the end of the third year, 19 beginning of the fourth year of employment, 20 and at the top step. And as was discussed 21 Wednesday, American's top step is 33.70, 22 when you include base, line, skill and

455 1 license pay. UPS tentative agreement is $35 2 when all of those factors are included. And 3 under the union's proposal, United would be 4 at 34.67, that ignores longevity pay. 5 United's target rate would 6 be 33.72. If you drop over to the left 7 side, though, the entry level, it's 8 important to note that the IAM's proposal 9 drives out a 24.80 start rate for such an 10 employee, and our target rate would 11 be 24.34. At American, an employee walking 12 in to the same situation would be 13 paid $20.48, and at UPS, $17. 14 So we are talking about 15 differences of, in the range of 4 to 16 almost $8 in one case, and as they move up 17 through the steps of the progression, the 18 same disparity is in existence. 19 So, the reference to American and 20 UPS pay scales are significantly lower until 21 you get to the maximum. So it's important 22 that we keep that in mind in looking at the

456 1 impact of pay increases on United Airlines. 2 But now let's focus on the 3 company's target rate proposal. We want the 4 Board to appreciate that we recognize our 5 employee's expectations, but we simply can't 6 afford to increase pay under our current 7 circumstances. 8 So we have proposed that we 9 establish target rates of pay. The target 10 rates would recognize that the IAM needs a 11 definition of the rates, that they would be 12 able to negotiate if the industry and United 13 were healthy. We expect that the target 14 rates will serve as an important benchmark 15 for measuring how each employee group at 16 United would make equitable sacrifices in 17 the recovery plan that we are trying to work 18 through with each of our employee groups. 19 Frankly, that's an effort that we 20 are relying on our unions to bring to some 21 form of understanding. But we simply cannot 22 responsibly spend the additional cash that

457 1 pay raises would create while that recovery 2 plan is being paid out, worked out. 3 This target rate approach is not 4 what we want to do. It's not what we 5 expected to do. It's not what we hoped to 6 do and we wish most sincerely that we could 7 do otherwise right now, but we are facing 8 the harsh reality that has been described so 9 carefully for us. We simply cannot meet the 10 cash burden increase that pay raises would 11 create. 12 As to the two contract changes 13 that the company is asking this Board to 14 recommend, one, we seek contractual 15 recognition that at 18 affected stations, 16 any employee be authorized to perform 17 receipt and dispatch of aircraft. We would 18 be willing to do this without laying off 19 mechanics as a result, and this proposal is 20 reflected -- the prevalent practice in the 21 industry for performance of this work. 22 We also recommend that new utility

458 1 employees, not current utility employees, 2 but new utility employees be placed on 3 a 10-year pay scale that has the same 4 minimum and maximum rates as the five-year 5 scale would have. 6 Other carriers in the industry 7 have longer scales for their utility 8 employees and contrary to what was said here 9 Wednesday, 63 percent of United's union 10 represented employees are in jobs that have 11 pay scales that are 10 years or longer. 12 So allow me to sum this up. We 13 believe our approach addresses the union's 14 legitimate need to have a concrete measure 15 of what rates would apply if they could be 16 paid, but also recognizes our inability to 17 pay those rates. We want to find a solution 18 that meets the IAM's needs and allows us to 19 survive. We haven't been able to agree on 20 what that is yet. 21 The union and the company have the 22 will to get this done and we would look

459 1 forward to the assistance of this Board in 2 helping us find and recommend the solution 3 that we think gets us where we need to be. 4 Thank you. 5 CHAIRMAN WITT: Thank you. Thank 6 you very much, Mr. Kain. 7 MR. GALLAGHER: Madam Chairman, at 8 this time I would like to distribute to the 9 Board a series of additional exhibits, the 10 exhibit that I referenced earlier comparing 11 the United target position with the IAM's 12 position is company exhibit number 34, which 13 is being distributed now. And company 14 exhibit number 36, which is being 15 distributed as well, is a printout from the 16 Web site of the airline pilots association 17 at United in which the United pilots MEC 18 advises the pilots that they do intend to 19 engage with the company in discussions that 20 will result in a win or the pilots, a win 21 for the airline and a win for all United 22 employees.

460 1 This is the only public 2 communication we've been able to discover on 3 that point, but it does confirm that the 4 appropriate dialogue has been initiated with 5 the, certainly the single other most 6 important work group on the property in 7 terms of collective bargaining relationships 8 that must be addressed in order to solve on 9 a broad basis the problems confronting 10 United. 11 Exhibits 37 and 38 are historical 12 documents drawn from the files of the 13 airline industrial relations conference. As 14 the Board may know, the airline industrial 15 relations conference, more commonly known as 16 Air Con, is a membership organization 17 composed of most of the major US air 18 carriers. And Air Con's purpose and reason 19 for being is to act as -- as an information 20 clearing house on labor costs, collective 21 bargaining and the status of contract 22 negotiations between all of the major

461 1 airlines and their unions. 2 So in effect, Air Con is in the 3 business of collecting and compiling and 4 circulating to its members reports and data 5 indicating the status of the collective 6 bargaining relationships and contract terms 7 in effect at the various airlines. 8 The director of air conference who 9 was responsible for the original production 10 of these documents -- and they are dated, 11 Exhibit 37 is dated in 1989 and exhibit 38 12 is a collection from air conference's files, 13 not of miscellaneous summaries -- the 14 director of air conference is present if we 15 need, if we need to go through the process 16 of authenticating these documents as from 17 their files. 18 They are offered, Madam Chairman, 19 in order to make sure the Board's 20 understanding of history is accurate in 21 terms of reflecting the significant round of 22 concessionary bargaining that happened in

462 1 the airline industry in the early '80s, in 2 Exhibit 37 fully summarized and again in the 3 early '90s in a less formal fashion but also 4 summarized and illustrated in the documents 5 accompanying exhibit 38. 6 With those exhibits offered, Madam 7 Chairman, I do want to make sure that the 8 company's position statement and binder of 9 exhibits are also formally offered and 10 accepted. I would offer all of the 11 company's exhibits and position statements 12 in to evidence. 13 CHAIRMAN WITT: And they are 14 received. 15 (Company's Exhibit Nos. 34 16 through 38 were marked for 17 identification and received in 18 evidence.) 19 MR. GALLAGHER: And with that, 20 Madam Chairman, the company would rest its 21 formal presentation. 22 CHAIRMAN WITT: Thank you.

463 1 Mr. Bush. 2 MR. BUSH: Perhaps we could take 3 about a 10-minute break and consider whether 4 we would be putting on any rebuttal. 5 CHAIRMAN WITT: That would be 6 fine, good, thanks. 7 (Discussion off the record) 8 CHAIRMAN WITT: We will stand 9 adjourned until 2:00. Thank you. 10 (Whereupon, at 10:40 a.m., a 11 luncheon recess was taken.) 12 13 14 15 16 17 18 19 20 21 22

464 1 A F T E R N O O N S E S S I O N 2 (2:07 p.m.) 3 4 CHAIRMAN WITT: I see everyone 5 back and we are ready to continue. 6 Mr. Gallagher had finished with 7 his witnesses and Mr. Bush was going to 8 indicate whether he had some further comment 9 from witnesses. 10 MR. BUSH: We will have a short 11 rebuttal from Tom Roth to some of the last 12 information provided by the company. 13 Whereupon, 14 TOM ROTH 15 was recalled as a witness and, having been 16 previously duly sworn, testified as follows: 17 THE WITNESS: Good afternoon, 18 Madam Arbitrator, or Madam Chairman, and 19 Board members. 20 I'll be as brief as I can be. 21 This should only take 20 minutes or a half 22 hour, at the most, and we are not as well

465 1 organized here as we are -- we customarily 2 are in as much as we saw this material that 3 you saw this morning for the first time and 4 only had a few, an hour or so to put some 5 thoughts together in response. 6 The first point I'd like to make, 7 it's really in the nature of a 8 clarification. This goes to a -- some 9 testimony by Pete Kain. And it's really not 10 so much a challenge to what he has said as 11 it is to clarify his characterization of the 12 March 7, 1997 IAM midterm agreement. 13 Now that document itself, and I'll 14 let it speak for itself since it is in 15 evidence, is attached to the carrier's 16 materials as their exhibit 2. It's in the 17 big black binder behind the labor agreement 18 which was their exhibit number 1. 19 It is our interpretation of that 20 document and we think it's fully supported 21 by the language, that the intention of the 22 parties was to make retroactive not only any

466 1 increase negotiated in the base rates, but 2 in all rates, in total rates, and whatever 3 those -- whatever those negotiations 4 resulted in by way of changes in what we've 5 been calling the total paid rate or the 6 all-in rate, including licensed premiums, 7 skill premiums, line pay, all the 8 differentials, that the midterm commitment 9 made by the carrier in that agreement was to 10 make all of those elements retroactive and 11 that, by the way, is consistent with the 12 union's proposal here to make those 13 collateral payments retroactive to July 12th 14 of 2000. 15 That's not to say, of course, that 16 the parties aren't free to negotiate 17 whatever level of adjustment is appropriate 18 in those pay elements, but we thought that 19 after Mr. Kain was finished, you may have 20 gotten the impression that it was the 21 intention of the parties, pursuant to that 22 agreement, to isolate base pay and commit

467 1 only to retroactivity with respect to that 2 element and we wanted to advise you that 3 that certainly is not the reading that the 4 IAM gives to that document. 5 I would like now to just confine 6 the balance of my comments to Michael 7 Wachter's testimony and ask that you have in 8 front of you for this purpose the copy of 9 the -- the hard copy of the slides that he 10 had offered in connection with his 11 testimony. 12 Now, overall, Madam Chairman, the 13 focus of that testimony was on the role that 14 the labor market plays in the making of wage 15 rates in this industry, or at least how the 16 role of the labor market should, in the 17 making of labor agreements and wage 18 determinations in an industry. In part the 19 focus was on quit rates, noting that the 20 quit rates here under, at United were among 21 the mechanic and related craft were 22 relatively low compared to what you might

468 1 find elsewhere in the national economy. 2 Now, this, the focus on quit rates 3 of course assumes the application of what we 4 would regard as a classic theory of labor 5 market supply and demand. The approach used 6 by Mr. Wachter, in fact, involves the 7 application of a national labor market 8 supply and demand model, assumes that if a 9 mechanic, for example, in New York City 10 earns more than a United mechanic in San 11 Francisco, that this worker would move his 12 family to New York in order to take 13 advantage of that higher wage level. 14 It assumes, of course, that the 15 worker has absolute occupational mobility, 16 that he knows what job opportunities lie out 17 there in the economy, that he knows of all 18 of the detail of the compensation structure 19 that is offered by that employer, not only 20 with regard to the wage rate which is most 21 evident, but also to the collateral fringe 22 benefits and other rules and other elements

469 1 of pay that define the quality, the overall 2 quality of compensation. 3 It assumes, as well, that an 4 employee is able to move his family to the 5 job, that there are no personal barriers, 6 for example, that his spouse may be working 7 in San Francisco, that his children may be 8 in schools in San Francisco, that they would 9 not like to be moved from. 10 This classic theory of supply and 11 demand assumes that there are no other 12 institutional barriers to the person's 13 mobility such as seniority system, which 14 is -- which the person would have to forfeit 15 when he moves from job to job, that there is 16 no value, for example, apart from -- apart 17 from the naked wage level to a seniority 18 system that might go to non-pecuniary 19 benefits of being employed in a job that 20 enables you to exercise seniority to either 21 increase your pay through overtime 22 opportunities or to improve the quality of

470 1 your work life by having weekends off. 2 It assumes, for example, that 3 there is no value to the service that you 4 have accumulated with your existing 5 employer, and which of course drives such 6 benefits as vacations and sick leave 7 accruals. In short, the -- this labor 8 market theory, like all theories, are simply 9 abstractions, and they are useful in an 10 academic sense, they are useful analytical 11 or academic tools in which the analyst 12 may -- against which he may measure reality. 13 The problem is that it's not reality at all. 14 It's an academic exercise and it has 15 absolutely nothing to do with the manner in 16 which contract -- wage contracts are 17 determined not only in this industry, but 18 elsewhere. 19 The fact of the matter is that it 20 is the, that that collective bargaining is a 21 social institution for resolving differences 22 between employers advantagements, focuses

471 1 not so much on what the labor market would 2 drive in terms of wage levels or 3 compensation levels, but what is, but what 4 was obtainable by the employees through the 5 exercise of their collective activity. It 6 is the proper function of a labor 7 organization not to simply replicate what 8 the labor market would otherwise determine 9 as the appropriate wage rate, but, in fact, 10 distort those labor market forces in favor 11 of the employees to enable them to acquire 12 greater compensation that would otherwise be 13 available to them, without the benefit of 14 co-determination. 15 The whole premise here that the 16 employees are somewhat -- are overpaid 17 because they are -- because they are earning 18 more than what the labor market would give 19 them is premised on the existence and 20 application of this labor market theory 21 which as I said is an abstraction, it 22 doesn't exist in the real world.

472 1 If, in fact, high wage employers 2 were attracting workers from low wage 3 employers in any one labor market, and as a 4 consequence the low paid firms would have to 5 raise their rates in order to compete for 6 that labor, and ultimately there would be an 7 equilibrium in the labor market which for 8 any occupation within the labor market, 9 there would be a single wage rate. 10 Now we know, intuitively and in 11 fact that there is diversity in the labor 12 market, in terms of levels of pay and 13 compensation for identical jobs, and not 14 sameness and equilibrium as the theory would 15 imply. 16 In any event, I would thank 17 Mr. Wachter for crystallizing in his 18 testimony really the differences between the 19 approaches taken by these parties, because 20 it is the union who at the outset of our 21 presentation drew -- encouraged the panel to 22 rely upon those wage factors and

473 1 determinants that were important to the 2 parties in the past as opposed to some 3 more -- some other factor consideration 4 which not only we could demonstrate had no 5 bearing and had no relevance in past wage 6 determination between these parties, but did 7 not for very good and obvious reasons. 8 But the point is that I am not 9 offering my opinion as to -- as to how wages 10 should be determined as apparently 11 Dr. Wachter is. 12 I am simply directing your 13 attention to the manner in which, in fact, 14 wages have been determined by these parties. 15 And frankly, for someone to come around here 16 in the year 2002 and question the basis of 17 wage determination between these parties in 18 the past 50 years and suggest that there -- 19 that the consequence of those negotiations 20 had placed the relative position of these 21 employees within -- in accordance with this 22 labor market theory, over and above what

474 1 they should be making, is an indictment to 2 the negotiators, it's an impeachment of the 3 process, if you will, of how wages have been 4 determined historically. 5 And it's a bit arrogant I think to 6 presume that any one of us here in the 7 year 2002, have greater intelligence as to 8 how wages ought to be determined than the 9 generations of negotiators on both sides of 10 the parties who have successfully and 11 properly arrived at decisions which were 12 mutually acceptable, which were a balancing 13 of interests and which -- and resulted in 14 co-determination and as we know, a decision 15 which is made on subjects as profound as the 16 worth of a person's hour of labor is of a 17 higher quality if it is reached mutually 18 between the parties as opposed to being 19 imposed by one party or the other. 20 So the Board has a choice here. I 21 mean you can reflect on how the parties, in 22 fact, have made their contracts and what

475 1 factors have been relevant at the bargaining 2 table, not only historically, but in this 3 very round of negotiations. Let me tell 4 you, I was there throughout the process. No 5 one talked about quit rates, no one talked 6 about the rates of pay that generally 7 prevail for a generic average mechanic in 8 the work force or in any one labor market, 9 nor did we focus on the non-major airlines. 10 This was not part of the either sides' 11 agenda in these negotiations. 12 So, you have a choice, you can, as 13 we were urging you, to consider this process 14 as an extension of the collective bargaining 15 process or you can step back, take a more 16 academic view and exercise some other 17 external wisdom on how the parties should 18 have behaved over the past 50 years but did 19 not. So that, of course, will be your 20 decision. 21 Now apart from our philosophical 22 differences and I think they are very

476 1 apparent, we have some particular criticisms 2 of the approach here used by the carrier 3 through their witness this morning. 4 And I just want to -- I'm not 5 going to take very much time with this, give 6 me another 10 minutes and we'll be 7 concluded. But if you will look at the -- 8 let's look first at page 1 behind the -- 9 page 2, behind the cover page, where we have 10 a comparison between aircraft mechanics, 11 mechanics economy-wide and other mechanics 12 and repairers economy-wide. 13 Now we haven't had a great deal of 14 time to conduct a lot of research as to 15 whether or not these numbers are accurate, 16 but we assume they are on their face. 17 But one thing clearly leaps off 18 the page, and that is the absence of any 19 consideration for the local labor market 20 differences that prevail throughout the 21 economy. There is no one national labor 22 market. It's rather diverse. It really is.

477 1 There are great regional differences and 2 local labor market differences for the same 3 occupations because, of course, people don't 4 have complete occupational mobility 5 throughout the United States. 6 But we know from the carriers 7 submission that has already been placed in 8 evidence that we have a distribution of our 9 mechanics across the country in areas such 10 as San Francisco, Chicago, Denver, San 11 Francisco, LA, Washington and Boston. The 12 fact is 35 percent, according to the 13 company, of all aircraft mechanics work in 14 the San Francisco, Oakland area. The 15 balance work in Indianapolis. 16 Now, we looked quickly at some 17 numbers from the same source as used by 18 the -- by United's witness here and shown on 19 page 2, the same source of material and it's 20 easy to determine that for the same 21 occupational categories, wages tend to be 35 22 percent higher in San Francisco than they

478 1 are nationally, 35 percent higher. 2 Indianapolis has wage rates for 3 these skilled craft classifications that are 4 involved in this analysis that are 24 5 percent higher than the national average. 6 Now we didn't have a lot of time to look at 7 Boston and Chicago, but I suspect that those 8 kinds of regional differences are going to 9 be found there, as well. But again, you can 10 take the information for what it's worth, 11 but we think that any kind of analysis that 12 doesn't take into account, even if this were 13 a valid approach to determine the adequacy 14 of United's pay rates and of course we 15 disagree that it is, but even if it were, 16 not taking into account regional and local 17 differences in the price of labor is just a 18 fatal flaw in the whole analysis. 19 If you flip over to two pages in, 20 I want to talk quickly about this, let's 21 look at page 4, of course, has the average 22 of seven regional airlines, and I don't know

479 1 what this is worth, you can use your own 2 judgment. 3 There's no evidence in the history 4 of bargaining between these parties that any 5 of those wage -- those properties were 6 material in their own decision-making, but 7 let's focus on what is characterized here as 8 the average of the eight major airlines, 9 which is on page 5. 10 Now there are a couple things 11 wrong with the presentation that you have 12 been presented with, but on its face, by the 13 way, even in its current construction, it 14 suggests that there is no justification even 15 on this basis for any kind of wage freeze 16 that of course is inherent in the company's 17 position. So, point number one, they can't 18 justify their own position based upon even 19 the most exaggerated presentation, but let 20 me do a couple of things with this 21 presentation. 22 First of all, the average that you

480 1 see at the top of the page, the $26.68, 2 which they compare with our 25.60, is a 3 simple average of the eight major airlines 4 that appear below it, a simple average. We 5 have 15,846 mechanics, according to DOT 6 form 41 in the middle of September that are 7 in the mechanic classification. Now, that's 8 a -- again, that's a source which is less 9 refined than the numbers for United that the 10 carrier has offered here. 11 So, but as of that point in time, 12 they reported to the DOT, which in turn 13 reported in form 41 that in the "mechanic 14 department, if you will, there were 15,846. 15 Now the comparable number at the same moment 16 in time for America West was 653. American 17 was 15,139." 18 So what the carrier is suggesting 19 or what the analyst is suggesting here is 20 that you should give the same weight when 21 determining what mechanics make in this 22 industry to America West, with 653 people,

481 1 or Alaska with 562 as you would to American. 2 We think that's misleading. 3 I'm going to make -- I'm going to 4 do one simple thing. First I'm going to 5 weight these wage rates by the number of 6 mechanics at each of the airlines and 7 secondly, I'm going to give you the current 8 wage rates rather than the rates which were 9 evident on January 1, 2001, very carefully 10 selected date because as we know a few 11 months later, American settles for a huge 12 increase, a few months after that, Northwest 13 settles for a huge increase and coincidently 14 with that in May of '01, Northwest settles 15 for a huge increase. So January 1 is 16 selected quite intentionally and we've been 17 quite -- think quite in a manner which 18 distorts the facts here. 19 If we use the current wage rates 20 and if we weight them by the number of 21 employees, then the average becomes $31.47. 22 That's -- that would require, to reach that

482 1 number, it would require an immediate 22.9 2 percent increase in the United rate. So, 3 thank you for the analysis, but we think it 4 supports our position, not the company's. 5 I want to do one other thing. 6 Let's go out to 2002 rates, because we know 7 and we've already laid this out in detail in 8 our materials, that in May 1 of 20 -- let's 9 see here, on Northwest, yes, Northwest, in 10 May of 2002, they go from $33.10, which is 11 their current rate, to $33.94. 12 We know that American goes on 13 March of 2002 to $36.46 from their current 14 level of $34. We know that US Airways, 15 October of 2002 will have a parody 16 adjustment. We know as of today that Delta 17 has reinstated their deferred or suspended 18 wage change and that they will go on 19 March 1, 2002, to $34.47. 20 So if I recalculate this using a 21 weighted average and giving you the 2002 22 rates, the average will be $33.38.

483 1 We need a 30 percent 2 increase, 30.2 percent to be exact increase 3 in our paid rate of $25.60 to match the 4 weighted average of this group, 5 understanding that the group includes 6 America West, Alaska, Continental and Delta, 7 which have never been mentioned as 8 competitors or proper comparators throughout 9 these negotiations. They appear out of the 10 clear blue for the first time in this 11 proceeding. 12 I don't know if I misspoke or not, 13 but what I -- the airlines of the eight that 14 were part of the parties analysis throughout 15 these negotiations were Northwest, American, 16 US Airways and Delta and in part Southwest, 17 so I didn't mean to exclude Delta. If I 18 did, I misspoke. 19 With respect to the rates that are 20 actually stated here, we have a quarrel with 21 Continental's rate, we think it's 26.85, but 22 you know the rest of what I would have to

484 1 say I would categorize as being rather knit 2 picking under the circumstances, because 3 frankly we think that the analysis itself 4 does not do anything to detract from the 5 position that the IAM has taken, nor the 6 magnitude of the increases that we are 7 calling for and if anything, with a few 8 adjustments, the material supports in full 9 the proposals that we have laid out before 10 you. So I think with that, I'm not going to 11 consume any more of your time, Madam 12 Chairman, and I thank you for this 13 opportunity to make a few remarks. 14 CHAIRMAN WITT: Thank you very 15 much, Mr. Roth. 16 Mr. Bush. 17 MR. BUSH: We don't have any 18 further rebuttal testimony. 19 CHAIRMAN WITT: All right. 20 Mr. Gallagher, do you have some surrebuttal? 21 MR. GALLAGHER: No, we do not, 22 Madam Chairman.

485 1 CHAIRMAN WITT: Our original plan 2 called for the parties to make closing 3 arguments. Then at this point is each of 4 you prepared to go forward or do you prefer 5 a 10-minute recess? 6 MR. BUSH: We are okay now, we can 7 proceed. 8 CHAIRMAN WITT: All right. 9 MR. BUSH: Would you wish the 10 union to proceed first in the closing, madam 11 chair? 12 CHAIRMAN WITT: That would be 13 fine, yes. 14 MR. BUSH: All right. Robert 15 Roach will provide our closing statement. 16 Closing Statement for the Union 17 MR. ROACH: Madam Chairman, board 18 members, I intend to be very brief. I think 19 that Tom Roth has eloquently described the 20 union's position in terms of numbers and 21 what numbers -- and what we have done in the 22 past and in trying to reach an agreement. I

486 1 think it's ironic that on the day that 2 United Airlines brings Dr. Wachter and Pete 3 Kain to discuss wages that on one hand they 4 say that we are overpaid, according to the 5 figures that we were given, and then 6 Mr. Kain says he understands that we are 7 underpaid and he feels sympathy for us. And 8 that is indicative of where these 9 negotiations have been the last two years. 10 It's an allusive moving target and 11 from day to day we don't know what the 12 target is. We have attempted on many 13 occasions to resolve the outstanding issues 14 as it relates to wages, benefits and working 15 conditions and each time we have found that 16 where we thought we needed to be, based on 17 discussions with the carrier, it's not 18 there. 19 We, in addition, with Delta, 20 today, after Jake Brace said that everybody 21 was going to come down, Delta suspended 22 their raise, there's an announcement that

487 1 Delta now gave their employees, mechanic 2 skilled technicians a 16 percent increase 3 was announced today, that it appears that 4 American Airlines can find the understanding 5 and the good will to pay their employees, 6 their skill technicians a proper wage 7 because they need them and recognize their 8 worth and that US Air can do the same thing 9 and now that Delta, under no pressure to do 10 so, is saying we must do the right thing by 11 our employees. 12 And we find ourselves in a 13 situation where the carrier that our members 14 have helped for the last six years, have the 15 lowest labor costs in this industry, build 16 that carrier up to number one and now they 17 tell us they can't afford to pay us. I was 18 quite hurt and I believe all the members of 19 the negotiating committee were very 20 concerned about the Morgan Stanley 21 presentation, that this carrier has CAAA 22 bond ratings, the lowest in this industry,

488 1 after all that they have gone through, all 2 the employees of this carrier, what they 3 have gone through to protect this carrier 4 and to make it number one, that a carrier 5 not too long ago who was going to pay $4 6 billion in cash for US Airways and knew that 7 it was over paying just to get it, a carrier 8 that was scheduled to spend $250 million and 9 BizJet now comes to the table and says we 10 are broke. 11 This is reminiscent of what 12 happened at Enron, I think it's criminal and 13 I think we should look into it and I'm quite 14 sure we will be looking into how did this 15 happen. How did all the sacrifices over six 16 years of people, pilots, machinists, 17 passenger service agents and ticket agents 18 come to a point where a presentation is 19 made, a public presentation that United 20 Airlines is now broke and cannot borrow 21 money on a reasonable basis in the market, 22 when other carriers such as Continental can

489 1 sell equity in the market and can raise 2 money, we are now in this particular 3 situation. 4 But we are where we are and this 5 organization is committed to resolving the 6 disputes and resolving this collective 7 bargaining agreement. We intend to reach an 8 agreement, but no matter where we go, we 9 understand the only place this agreement 10 gets done is at the collective bargaining 11 table as I said when we opened up, with the 12 people who have a stake in the ongoing 13 enterprise of United Airlines, which is the 14 elected officials, the IAM from United 15 Airlines who have been toiling for the last 16 two years in an attempt to reach an 17 agreement. 18 I would urge this panel, this 19 Board if they do anything, their success 20 will be to get the parties back to the table 21 to reach an agreement, make a meaningful 22 effort to reach an agreement that is

490 1 satisfactory to the parties. I would urge 2 this panel to use it's power, as I indicated 3 before, to make a real effort this time. 4 It's not time that we must go home on the 5 weekends or celebrate holidays. 6 The time has come that we must 7 reach an agreement for the benefit of 8 the 98,000 people who are depending on 9 United Airlines to survive. Our members are 10 very concerned. They are concerned about 11 management changes. They are concerned 12 about what has happened. They are concerned 13 about all these buy-out proposals and 14 ventures that are going on and they don't 15 believe that anything that they've done for 16 the last six years is being taken into 17 consideration. You cannot run an airline 18 without people. You cannot run a successful 19 enterprise service business without the 20 support of the people. 21 We must make our members, United 22 Airlines employees feel safe and secure and

491 1 the fact that they will have a job and want 2 to come to work there to save this carrier 3 from the devastating things that happened 4 September 11th. 5 They have to be able to conduct 6 business as everybody else. They cannot 7 come to us and say because of 8 September 11th, we want to have an unfair 9 advantage over the rest of the carriers to 10 fly in the United States, and that's what 11 they are asking us to do. They are asking 12 us to come in and get zero raise, zero 13 raise, which is $10 below the market of the 14 major carriers. 15 They are asking us to take 16 inferior work rules and inferior benefits 17 because something went wrong in the last 18 year and it had nothing to do with the 19 people who have fixed these airplanes, who 20 service these airplanes, who clean these 21 airplanes. They did their job, somebody 22 dropped the ball.

492 1 But again, we are prepared to come 2 to the table tonight, this weekend, next 3 week, whatever it takes to get a collective 4 bargaining agreement. And again, I urge 5 this Board to use its power and its 6 authority to get the parties to do that. I 7 want to thank you for the opportunity to 8 speak. I had an opportunity to have some 9 side conversations with you and I know that 10 you are as concerned as we are about what is 11 happening here and I know that you 12 understand the only place this gets fixed is 13 among the parties. 14 An arbitrator once told me, a 15 negotiated settlement is always better than 16 one imposed on the parties. I agree with 17 that and I hope that you can do all that you 18 can as we will do all that we can to get 19 that negotiation agreement done. Thank you 20 very much. 21 CHAIRMAN WITT: Thank you very 22 much, Mr. Roach.

493 1 Mr. Gallagher. 2 Closing Statement for the Company 3 MR. GALLAGHER: Thank you, Madam 4 Chairman and we would like to thank you the 5 Board members for your courtesy and patience 6 over the past several days. 7 As you are now well aware, the 8 issues that these parties have grappled with 9 in their collective bargaining are, indeed, 10 difficult and monumental issues for both 11 sides and issues of critical importance that 12 I know both sides are deeply committed to 13 resolving and finding a way out of this 14 unfortunate predicament in which they found 15 themselves. 16 But before I elaborate on that 17 point in any detail, I would like to make an 18 extraordinary request of the Board. 19 I would like to ask for a moment, 20 just for a brief time, that you suspend 21 belief and that we talk for a moment as if 22 this was not a company in financial distress

494 1 and as if September 11th hadn't happened, 2 because I want to address what would be the 3 industry standard or a reasonable offer or a 4 reasonable recommendation from a PEB for 5 United's mechanics in ordinary times. 6 We already have before you company 7 Exhibit 33, which shows the difference 8 between United's position before this Board 9 and the IAM position before this Board. And 10 in round numbers, we are talking about $1.8 11 billion over five years. 12 That, of course, is the company's 13 position in light of its current dire 14 financial circumstances. Now I would like 15 to call your attention to company exhibit 34 16 which we passed out just before the break. 17 Company exhibit 34, and we do have 18 extra copies, Madam Chairman, if it's not 19 accessible. 20 CHAIRMAN WITT: Oh, I'm sure it's 21 here somewhere. I have it. Thank you. 22 MR. GALLAGHER: Company exhibit 34

495 1 is a list of the same open issues. It lists 2 United's actual proposal with the same 3 numbers, but it also adds a new column. The 4 target rate proposed by United, which as 5 we've told you and has been described, is 6 based upon the American contract rates, but 7 in many cases exceeds the American contract 8 rates and of course our position describes 9 the many different ways in which the 10 American Airlines contract has cost 11 advantages for the company in its 12 classifications. 13 Even under a target proposal, the 14 hypothetical proposal that we would meet or 15 exceed the American Airlines rates, and that 16 is the most recent and richest contract 17 negotiated in the industry. 18 You will notice that there remains 19 a difference between that target rate and 20 the IAM's position before this Board of $850 21 million over five years, almost, but not 22 quite half of the total gap between our

496 1 current position in light of financial 2 distress and the target rate which would 3 meet or exceed American Airlines, almost 4 half of that amount is moneys or costs in 5 excess of what mechanics in this industry 6 are getting under the latest, richest 7 contract agreement. 8 Now, that is with the transport 9 workers union of America, but they do have a 10 reputation of rather vigorous representation 11 as well as the IAM does. 12 So, we offer this exhibit to 13 highlight for the Board the reasons why I 14 said in my opening statement that even if 15 this were a conventional negotiation, the 16 IAM's proposal would be extraordinary. 17 Now, Mr. Roth indicated that they 18 took offense at that statement, certainly 19 none was intended and we regret if they took 20 offense. 21 That statement was oriented to 22 this data, that even in ordinary times, the

497 1 proposal the IAM has on the table is 2 extraordinarily rich. And the IAM in its 3 oral presentation has focused only on wage 4 rates, but as you can see from this list of 5 open items and as you can see from the 6 enumeration of the cost elements, wages here 7 are only the tip of the iceberg. The IAM 8 proposal is loaded with costly issues which 9 this company could not afford and for which 10 it would not be prudent for this company to 11 adopt, even in ordinary times. 12 With that, Madam Chairman, I'd 13 like to come back to reality and present 14 time. We can't offer to pay the American 15 Airlines target rate today, or any time in 16 the foreseeable future because we don't have 17 the money, because if we did pay it, we 18 would accelerate our crisis point and 19 accelerate adverse consequences far more 20 severe for the company and for all of our 21 employee groups that would be inappropriate. 22 So, what have we come up. We have

498 1 come up with what we've called a target 2 rate, some circumstances people would call 3 it a book rate. Why do we make that 4 proposal, what are we trying to say with a 5 target rate? What we are trying to say is 6 that we recognize where we would have gone 7 in normal times. There's not really dispute 8 about that, and with that recognition, it is 9 our hope that the IAM can use that as a 10 benchmark in its discussions with the other 11 unions on our property about the rightful 12 place from which to calculate any further 13 adjustments or share of equitable sacrifice 14 that will be made this year, even in the 15 next few months, that will be made because 16 it must be made one way or another. 17 And so we offer the target rate as 18 recognition of all that Mr. Roach has said 19 about where is -- where are the comparators 20 we traditionally use. There's no dispute 21 about that. The rates are out there, they 22 are what they are. There has been no

499 1 dispute about -- from either side, about 2 what are the rates in place today in the 3 industry. 4 But we've offered the target rate 5 in recognition of the dilemma that our 6 economic condition creates for the IAM and 7 for our mechanic employees. We know they 8 have expectations. We understand their 9 expectations and we wish we could satisfy 10 their expectations. Indeed, that is what 11 this proceeding is all about, how can we 12 satisfy their understandable and legitimate 13 expectations in the face of severe economic 14 distress. 15 And we know already, of course 16 there's no easy answer. If there were, we 17 wouldn't be here. 18 Now I would like to turn to the 19 subject of a standard for decision for this 20 Board's recommendation to the President. We 21 know that there have been only two other 22 airline emergency Boards since the

500 1 deregulation of the airline industry in 1978 2 and one of those was just last March 3 involving Northwest mechanics with such a 4 dynamic chairman of the emergency Board that 5 the parties settled before the Board report 6 was issued. 7 CHAIRMAN WITT: Dynamic was a very 8 nice word for you to use, but -- 9 MR. GALLAGHER: It was an 10 excellent result, Madam Chairman, for all 11 concerned, because it was a result achieved 12 in collective bargaining, with the 13 persuasive force of the Board behind it. 14 But I highlight the fact that 15 there have been so few PEBs in the airline 16 industry because since deregulation, of 17 course, competition and competitive forces 18 and economic crisis have become endemic, 19 unfortunately, in this industry. 20 Most of those crisis have been 21 resolved in direct bargaining. This is the 22 first proceeding that I am aware of in which

501 1 either party has exercised its prerogative 2 to carry the dispute forward, through a 3 release, through mediation, through release, 4 through a strike deadline and to an 5 emergency Board. The crisis, the timing of 6 this proceeding is driven by the request and 7 decision for release. The economic problems 8 would be there anyway, but the deadline has 9 been created by the release. 10 Now, there are very few airline 11 emergency Boards at all. The other one did 12 not involve wages, and this is the third. 13 The railroad industry, as you know, bargains 14 on a national basis, and they have a very 15 unique bargaining history, and a very unique 16 pattern of uniform wages among all of the 17 class 1 railroads, so there's very little 18 PEB precedent to look to for this standard. 19 But Mr. Roth cited and quoted to 20 you from an Amtrak PEB. Well, Amtrak isn't 21 is real business and we all know it. Amtrak 22 is a Government agency. Amtrak has Federal

502 1 money behind it. Amtrak has political, a 2 broad political constituency behind it, but 3 ultimately Amtrak has, for many years, lost 4 lots of money and Congress has continued to 5 fund it. 6 That's not our situation, so the 7 Amtrak precedent is no precedent at all. 8 United Airlines is a real business 9 enterprise, not a Government agency; but you 10 know there is, it is truly extraordinary to 11 realize that in September, after 12 September 11th, the Congress of the United 13 States gave to the US airline industry $5 14 billion in direct federal grants. That is 15 truly extraordinary. They just gave the 16 money away, no strings attached. 17 Needless to say, Congress doesn't 18 do that too easily or too readily. Why on 19 earth did they do it? They did it because 20 the Congress of the United States determined 21 that the entire airline industry had been 22 thrown into a financial crisis as a result

503 1 of September 11th. Everyone was 2 hemorrhaging very, very badly and the 3 airlines of course initially asked for more, 4 but 5 billion was a very good start on 5 addressing their financial problems. 6 We accepted the money that United 7 got and we are very grateful for it, but it 8 was, unfortunately, nowhere near enough to 9 stop the hemorrhaging. There is, 10 unfortunately, no prospect of additional 11 federal grants, for us, unlike Amtrak. 12 There is the possibility of 13 federal loan guarantees, but in that 14 instance, the Federal Government would only 15 guarantee a loan through another commercial 16 source and the carrier would be the borrower 17 and it would be taking out a loan. It would 18 not be increasing its profitability, it 19 would be simply mortgaging its future. 20 And as you heard the investment 21 banker say yesterday, the cost of doing that 22 would more than exceed the economic benefit

504 1 that United could hope to derive from the 2 use of the money, because taking out a loan 3 and mortgaging its future doesn't solve the 4 fundamental business problem. The 5 fundamental business problem is that our 6 costs continue to this day to very 7 materially exceed our revenues. 8 Now, you heard Mr. Brace and 9 others describe the fact that United reduced 10 capacity by 23 percent. I want to make sure 11 it's understood why United reduced capacity 12 by 23 percent. It was because there were no 13 passengers. Demand dried up after 14 September 11th and has remained reduced ever 15 since. It has improved, but it has remained 16 dramatically reduced since September 11th. 17 The only way we have gotten our 18 load factor up to its present level, in the 19 high 60s or low 70s, is by reducing 20 capacity. If we were still operating 100 21 percent of our pre 9/11 capacity, our load 22 factor would be down in the 50 percent

505 1 range. 2 So we reduced capacity and parked 3 airplanes in the desert because we couldn't 4 operate them profitably. Mr. Brace 5 mentioned that the 727s and 737s that were 6 parked are older aircraft. The 747/400s 7 that were parked are not older aircraft. 8 They are very valuable aircraft, but they do 9 have high fixed operating costs. They have 10 a huge capacity, almost 400 passengers, and 11 it makes no sense to fly them across the 12 Pacific with a 400 passenger capacity when a 13 much smaller 767 or other airplane can fly 14 the number of passengers who are actually 15 flying at substantially lower operating 16 costs. 17 So if the demand were there, 18 presumably the 747s would go back in 19 service. But United has a heavy 20 international exposure and if you were a 21 Japanese businessman and you had the choice 22 now between JAL or Singapore Air and United

506 1 for a trip to the United States and you knew 2 that terrorists were targeting US carriers, 3 it would be understandable why you might 4 choose the non-US carrier. And a lot of 5 that has been happening. 6 That, combined with, of course, 7 the more generic fear of flying resulting 8 from the events of September 11th. 9 Now, complicating that reduction 10 in demand is the issue of fare levels. The 11 passengers who are willing to fly have to be 12 enticed by low fares, that fare sale ad that 13 I held up on the first day is simply 14 illustrative. The business passengers 15 clearly have not returned in numbers 16 sufficient or at fare levels sufficient to 17 match anything like we had prior to 2001. 18 I want to call your attention to 19 one of the most striking exhibits presented 20 in this proceeding. It's in the Morgan 21 Stanley package, at page 21. 22 This exhibit was prepared by UBS

507 1 Warberg for its own publication to its 2 clientele, having nothing to do with a 3 relationship with United Airlines. This was 4 published by them for the Wall Street 5 marketplace. And this was their analysis 6 and their data gathering of the consequences 7 of September 11th. 8 In comparison to the recession of 9 the early '90s, to the airline industry's 10 price war over value pricing in '92, '93, 11 which was a fare war, which reduced revenue 12 and the -- what's being measured her, RASM, 13 R-A-S-M is revenue per available seat mile, 14 it's the general measure of unit revenues in 15 the airline industry, so this is a 10 16 or 11-year profile of the revenue patterns 17 in the industry. And it certainly shows a 18 periodic cyclicality, up until 2001. 19 Then in early 2001, the yellow ink 20 began to -- on this graph yellow ink, in our 21 financial ledgers red ink, began to increase 22 because the economy went in to recession and

508 1 the business travelers substantially 2 decreased and that accounted for the problem 3 in the early parts of 2001, but my God, look 4 what happened then. 5 We all know about the horrible 6 events and the publicity that they brought 7 to airline security issues and we all know 8 that not a day goes by today that we don't 9 hear another story or read another 10 newspaper, hear another TV story about an 11 airline security issue and whether security 12 is good enough. And I know that all of us 13 know someone who is afraid to fly. 14 What the terrorists took away from 15 us, from this industry, is the perception 16 that had grown up in the rapid growth of 17 the 1990s that air travel was convenient and 18 safe and relatively speaking inexpensive. 19 It remains relatively speaking inexpensive 20 but it's no longer anywhere near as 21 convenient because of a two hour line for 22 security, which is especially a deterrent to

509 1 the business passenger and it's no longer 2 perceived, perceived as safe, even though 3 we, of course, are confident that it is, or 4 we wouldn't be flying. 5 But that's the marketplace that we 6 are in today and that is a different 7 marketplace, a radically different 8 marketplace and business world than we were 9 in in the year 2000 when this contract 10 expired and we were in -- undertook 11 negotiations with the IAM in good faith, 12 never anticipating the recession, never 13 anticipating September 11th. We were 14 prepared to and probably would have, if 15 circumstances had gone otherwise, settled 16 for an agreement along the lines that 17 American eventually settled for. 18 But, for a variety of reasons, it 19 didn't happen. Now, Mr. Brace's 20 presentation, I hope, demonstrated to you 21 that United is not picking on organized 22 labor costs, that United has done an

510 1 universal, broad-based effort to reduce its 2 costs wherever it could. This is a labor 3 intensive business as well as a capital 4 intensive business. We have 5 furloughed 20,000 employees. Mr. Roach 6 misspoke when he mentioned 98,000 employees. 7 We are down to about 78,000. We regret 8 that. All of those are good, loyal United 9 Airlines employees who we hope will be back, 10 but the only way to deliver on that hope is 11 to make this an economically sound company. 12 The cash burn rate is still 13 unacceptably high and it will remain so 14 until United achieves labor cost reduction. 15 And I hope that it's clear by now that 16 stopping a cash burn, a negative cash 17 outflow is only step one. That is only 18 stopping the bleeding. It is by no means a 19 step towards a positive -- a step towards 20 restoring financial health, because even if 21 we get the cash flow to break even point, or 22 to a level point, it's not break even, we

511 1 would not be profitable. We would simply no 2 longer be bleeding cash. We would be in a 3 hole, we just wouldn't be digging the hole 4 deeper. 5 But we need to get out of the 6 hole. We need to get back to profitability, 7 and that would be the next step after that. 8 You noted, I hope, Mr. Strong's 9 comment that he had looked at the company's 10 numbers, the company's own internal 11 estimates and judgments and the only 12 observation he had, certainly not that they 13 were flawed, but that if anything, the 14 company was being too optimistic. 15 After we get out of the hole and 16 turn profitable, we will begin to move 17 towards sustained profitability. And as we 18 do, we recognize and intend to satisfy an 19 obligation to our employees, and especially 20 in this case to these IAM represented 21 mechanic and related employees. That's why 22 we have proposed a deferred payment of retro

512 1 pay. That's why, another reason why we have 2 proposed to recognize a target rate, but we 3 have to be brutally candid here, that is not 4 a short-term proposition. That, this hole 5 is so deep and so large, it will not turn 6 around in six months or a year. 7 The internal projections are that 8 it will take much, much longer, and that's 9 another reason why labor contract 10 adjustments, with all of our groups, are 11 essential to recognize that fact. 12 Now, shifting to the subject of 13 labor contract adjustments, listening to the 14 IAM's presentation and looking at some of 15 their materials, one might get the 16 impression that airline collective 17 bargaining, especially for mechanics, has 18 been one continuous series of leap frog 19 contracts since the time of deregulation, 20 for almost 24 years since 1978. 21 But, in fact, that's a very 22 selective reading of history. Some would

513 1 say revisionist history. Because while 2 certainly the long-term trend has been up, 3 it has not been an escalator. It's been 4 quite a roller coaster and those of us who 5 have been in this industry over that period 6 of time are quite aware of what we mean by 7 that. 8 There have been long periods of 9 financial crisis for some or all airlines 10 repeatedly, wage increases have slowed or 11 stopped, been stagnant in those periods. In 12 the Air Con materials that we shared with 13 you this morning demonstrate that, very 14 briefly stated "In the early 1980s, when the 15 first impact of the competition resulting 16 from deregulation was being felt, numerous 17 air carriers were in severe financial 18 trouble and restructured their labor costs." 19 Eastern got concessions from its 20 unions with a variable earnings plan, with 21 the IAM. Western airlines got concessions 22 from all of its unions and subsequently was

514 1 still in financial difficulty when it merged 2 in to Delta, but those employees' jobs were 3 saved and preserved as a result of the 4 concessions that were made. 5 American Airlines didn't do 6 concessions, it did the B scale, and that 7 became the vogue in the '80s. And that, by 8 the way, is something I should observe on. 9 In each one of these crisis periods, there 10 were one or two very strong airlines that 11 didn't have to actually go for cuts, they 12 were so strong that they could do other 13 things to adjust their competitive standing, 14 and American was very creative in inventing 15 the B scale in this industry and it spread 16 like wild fire and was very popular for a 17 time. It's now dramatically decreased in 18 popularity to the point where it's gone, in 19 most places. 20 In 1984, Republic got concessions 21 for stock. That, again, Republic was in 22 trouble, that turned out to be a very good

515 1 deal for the Republic employees. They got a 2 substantial premium on their stock when 3 Northwest bought Republic. They got a 4 premium on their stock, their jobs were 5 saved, it was a win/win situation. But in 6 each of those situations, the unions and the 7 employees they represented agreed, they 8 recognized the financial difficulties and 9 agreed that concessions were the necessary 10 and appropriate remedy. 11 Now after this series of problems 12 in the early '80s, the late '80s became a 13 boom time for most carriers, except for a 14 few. Eastern continued to have chronic 15 difficulties and ultimately, even more labor 16 controversy that led to its demise. 17 Pam Am had a series of 18 accommodations, concessions or reductions 19 with its unions, but they never, ever came 20 up with a good business plan. They never, 21 ever came up with a plan to make their 22 revenues match their costs. Instead what

516 1 they did was they mortgaged their future. 2 First they mortgaged and then they sold 3 their office buildings and then their hotels 4 and then some of their crown jewels and 5 finally what was left was not enough to 6 sustain itself. Neither one of those is a 7 model United chooses to emulate. 8 But other than those carriers, the 9 late '80s were a boom time for the industry. 10 Those employees who had given concessions in 11 earlier years caught, not only caught up, 12 but did well. The roller coaster was in an 13 up cycle. 14 Then we got to the early '90s, 15 when a recession hit and the Gulf War hit 16 and lo and behold with the Gulf War, an 17 awful lot of people stopped flying and fuel 18 prices went through the roof. We were back 19 in the soup and in Dr. Wachter's exhibits 20 confirm what happened, the wage rate 21 stagnated at United, the ESOP eventually 22 resulted from the recession that started

517 1 in 1991. And usually the economic 2 reductions by employees or the consequences 3 for the carrier have followed the actual 4 recession experience by a year or two. 5 So, now in the late '90s, of 6 course boom years, booming economy, booming 7 profits, but now we are out of the late '90s 8 and in to the early 2000. So we've got 9 early '80s problems, late '80s boom, 10 early '90s problems, late '90s boom and now 11 we are in to the early 2000s and we have 12 another recession. But this recession, 13 unfortunately, is accompanied by a seismic 14 change. 15 The tremendous growth in airline 16 travel, and there was tremendous growth in 17 the '80s and '90s, has stopped because the 18 terrorists have destroyed that fundamental 19 proposition of safety and convenience and 20 inexpensive air travel. 21 United Airlines, unfortunately, 22 and we regret this and we wish it were

518 1 otherwise, we have the highest cost 2 structure in the airline industry. We have 3 experienced the greatest impact of all of 4 the majors of September 11th. We settled a 5 very generous pilot contract in 2000, and we 6 are now the first major carrier to face a 7 contract deadline in a release from the 8 national mediation board since 9 September 11th. 10 Other carriers will follow, as 11 night follows day. There will be 12 exceptions, perhaps Delta. Delta currently 13 is regarded as one of the strongest carriers 14 in the industry. Lucky them. Several years 15 ago anyone in the industry would have put 16 United on the same list of the strong and 17 that's the problem. We are not there any 18 more and like Mr. Roach, I'd love to look 19 into why, but for present purposes, why is 20 not as important as recognizing the reality 21 that we are confronting. 22 So what should happen to us now?

519 1 Mr. Roth said there was no airline precedent 2 to reduce costs or wages. Well, as I've 3 just indicated by my historical run through, 4 there's a tremendous amount of airline 5 precedent, it's just not PEB precedent 6 because no one pushed it to the level of 7 PEBs. Instead they were pragmatic and 8 realistic and did what they had to do, on 9 both sides, to preserve the company and 10 preserve jobs and where they didn't, like 11 Pam Am and eastern, the employees and the 12 company suffered a horrible fate. 13 We need the Board to recommend an 14 outcome here that will preserve these jobs 15 and preserve this franchise and restore it 16 to its position as one of the strongest 17 carriers financially. 18 Now, we spoke at the opening about 19 the ESOP and I want to call your attention, 20 if I may, to company exhibit number 31: 21 Company exhibit number 21 is a letter 22 written by a distinguished labor leader,

520 1 Mr. Roach, to his members on 2 July 12th, 2000, the amendable date of the 3 last agreement, and we do not agree with 4 everything in the letter but we commend it 5 to your reading. There is much wisdom 6 reflected here. There is also, of course, 7 reflected here the IAM's approach to this 8 contract. The demand for an industry 9 leading contract, their feeling at that time 10 that they had substantial leverage because 11 the US Air merger was pending and the 12 company wanted it dearly. 13 But among other things, Mr. Roach 14 looked over the history of the preceding six 15 years and talked about how well United's 16 mechanics had done. He also talked about 17 the reasons why they did the ESOP. What was 18 important to the IAM represented employees 19 then. And he said, and I quote from page 2 20 "...though his great people, his membership, 21 realize that if they wanted any long-term 22 job security, they had to take risks and

521 1 make sacrifices. Placed in its darkest 2 terms, the employees gave up wages and 3 benefits, one at the bargaining table in 4 exchange for partial employee ownership of 5 the company AND long-term job security. 6 "But in reality they came together 7 to rebuild an airline, to make some money 8 and to keep their jobs. 9 "And most importantly, not one IAM 10 member was laid off involuntarily in those 11 last six years, from 1994 to 2000." 12 On page 4 of his letter he talked 13 about what they got in return. They got UAL 14 stock, a representative on the board of 15 directors who has a substantial say in how 16 the corporation is run, a part of the 55 17 percent employee vote on shareholder matters 18 and protections against subcontracting out 19 and furloughs. 20 And I would note that one of the 21 companies exhibits talks about the relative 22 percentage of contracting out and the

522 1 percentage of subcontracting at United is 2 the smallest among all of the major 3 carriers, despite the fact that the work 4 could be done by outside vendors at 25 to 40 5 percent savings. 6 The company is not proposing to 7 change those restrictions, has made no 8 effort to do so now, but we fear that if we 9 don't have a realistic solution to our 10 problems, those are the kinds of 11 alternatives the company would be forced to 12 consider in other circumstances. 13 Now, Mr. Roach went on to say, "To 14 me, the critical lesson is to think 15 long-term. Good times don't last forever, 16 the airlines all tried a rapid growth 17 strategy in the late '80s, they all suffered 18 big losses in the '90s and the lesson of the 19 last six years, we must link our short-term 20 goals of getting the most dollars we can in 21 every contract with a long-term view of what 22 is required for real job security."

523 1 I couldn't have said it better, 2 Madam Chairman. We commend those words to 3 the Board. 4 As if Mr. Roach's own statements 5 were not enough, Judge Posner of the 7th 6 circuit commented about the United ESOP in a 7 piece of litigation brought challenging some 8 of the trustees fiduciary actions. The case 9 was dismissed, but in the course of 10 dismissing it, Judge Posner, in the 7th 11 circuit wrote, about the United Airlines 12 ESOP, about its value to the employees of 13 United. Judge Posner said, "that that value 14 was a function not only of the wage and 15 benefit give-ups, but also of the enhanced 16 job security brought about by a reduction in 17 United's labor costs. The plaintiffs, who 18 were employees, might not have their jobs or 19 equally good jobs today if United's labor 20 costs had remained what they were." 21 So it's clear that a key feature 22 of the ESOP was job security and it's clear,

524 1 as Dr. Wachter said this morning, that job 2 security has real economic value. It is 3 also clear that these are good jobs, even at 4 current wages. These are not sweat shop 5 jobs and these jobs are filled by excellent 6 workers, they are very good workers who work 7 hard and have been very important to the 8 success of United Airlines. 9 We recognize, of course, that it 10 is human nature to focus on those who make 11 more money than we do and want to compare 12 ourselves to them and want to be treated 13 with the best. We don't criticize the IAM 14 for that. We would all like to be paid with 15 the best. We would all like to be paid like 16 pilots, but sometimes our pride and our 17 aspirations have to bow to other 18 circumstances. 19 Sometimes in the business world, 20 controlling costs is ultimately the better 21 course because it makes the business more 22 profitable, so it can grow and create more

525 1 jobs and pay higher wages over the 2 long-term. And that's what happened in the 3 late '90s, at United as a result of the 4 ESOP. We need this Board to recommend that 5 course here, to confirm that it is not only 6 prudent, but absolutely essential to the job 7 security of the people the IAM represents, 8 to their long-term well-being and to the 9 long-term well-being of all 80,000 employees 10 represented by the IAM. 11 I want to close, Madam Chairman, 12 by focusing upon an extraordinary 13 proposition that I heard in the union's 14 presentation. When they said, among other 15 things, Mr. Roth said that the financial 16 condition of the company should not be a 17 factor in this Board's decision, while he 18 was saying that, he went on to say, and I 19 went back to check the transcript to make 20 sure I hadn't misunderstood, that the public 21 interest would be protected even if United 22 disappeared because there was excess

526 1 capacity elsewhere in the industry to serve 2 the public, and he said, "there is no 3 guarantee and there is no innate right for 4 any corporation to stay in business if it 5 can't afford to pay all of its factors of 6 production at the rates that the market 7 dictates." 8 We are troubled by those 9 propositions, Madam Chairman, by the 10 suggestion that it is even conceivable that 11 this company should be allowed to go out of 12 business if it can't pay these rates, as if 13 there were no public interest other than 14 particular seats on a particular flight. 15 I'm sure that the cities of Denver and 16 Chicago and San Francisco would all tell you 17 there is a much broader public interest at 18 stake here, the national economy would be 19 impacted if a company like United were 20 allowed to continue to decline as it is. 21 We think it's an extraordinary 22 proposition to say there's no public

527 1 interest, but what's even more extraordinary 2 are the implications of that remark for 3 the 13,000 mechanics and related employees 4 of United Airlines. 5 If United disappeared, it is 6 clear, as Dr. Wachter indicated, that there 7 are certainly no jobs available out there in 8 the airline industry today, because everyone 9 is laying off, and even if there were other 10 jobs in the industry, the employees might 11 lose work at United, would lose their 12 seniority, would start at the bottom of the 13 pay scale in the seniority ladder and they 14 would never, ever, ever catch up to where 15 they would be at United, even if current 16 wage rates were frozen. 17 Now Mr. Roth thought Dr. Wachter 18 was denigrating the value of that seniority 19 and that status on the pay scale. Far from 20 it. We certainly didn't intend that. What 21 we are saying is that these are valuable 22 jobs, they are good jobs and that although

528 1 there's heartburn in a wage freeze, let's be 2 realistic. Let's recognize that we are 3 talking here about relative degrees of value 4 in a very good job and very good work 5 environment. 6 So I hope that Mr. Roth didn't 7 mean what could be read in to his statement, 8 that it might be okay or even conceivable to 9 allow the worst to happen. But when he said 10 that, he highlighted the best argument 11 possible for this Board to adopt United's 12 position; these jobs must be preserved. It 13 is not thinkable to allow any other result. 14 Protect and restore this premiere airline 15 and all of its employees to their rightful 16 place in this economy. 17 Thank you, Madam Chairman. 18 CHAIRMAN WITT: Thank you very 19 much, Mr. Gallagher. 20 We have reached the end point of 21 three days of a lot of commentary, a lot of 22 evidence, a lot of opinion and on behalf of

529 1 the Board, I want to thank everyone, not 2 only the principals who participated and the 3 lawyers who represented them, but the 4 witnesses, as well, and certainly the 5 observers who have observed our rules and 6 all of whom have given us a great deal to 7 think about. 8 In that regard, though, I can't 9 help going back to the segue that 10 Mr. Gallagher provided to me a few minutes 11 ago when he made reference to the dynamic 12 leadership of the Northwest Board. 13 It is not dynamic leadership of a 14 Board at all that makes any difference here. 15 This is an internal family matter. This is 16 not unlike what you would find within your 17 own household. It is not a victory to get 18 to the point where someone else has to 19 resolve the problem. It is a failure of the 20 process that you had been using up to that 21 point to resolve it yourself and whatever 22 the leadership is, it cannot possibly

530 1 substitute for the good judgment, the 2 experience, the knowledge and the essence of 3 the relationship that you parties have 4 already created among yourselves. No one on 5 this earth can do this job as well as you, 6 in spite of the fact that we may understand 7 your problems fully, that we may have seen 8 problems such as this before, we simply 9 cannot do the job that needs to be done 10 nearly so well as you. 11 And for that reason, while we will 12 proceed from this moment on with the clock 13 ticking loudly in our ears until next 14 Saturday when our report is due and then 15 your clock starts ticking for another 30 16 days until the 19th of February when you 17 will either accept or reject what we 18 recommend, even while that is going on, 19 don't expect us to leave you alone. We will 20 be calling to see if there's anything new 21 with the process going on. We will say any 22 or all of us, and let's be clear about this,

531 1 there are three of us, we need not act in 2 concert. 3 Some of you know some of us better 4 than others. If you are comfortable with 5 any one or uncomfortable with any one for 6 some reason, that's fine, we have no private 7 authorship, we don't necessarily want to do 8 this report because it's not the best way to 9 have it done, but don't hesitate to contact 10 us and we will continue to contact you in 11 some informal way. 12 I've already indicated to the 13 parties that we would like to meet on 14 Monday, just to see if anything developed 15 over the weekend or if anything developed at 16 a meeting that I understand the parties are 17 having on Monday, we will speak with you 18 after that. We are all reachable through 19 the national mediation Board and lots of us 20 are reach able just through our own 21 telephone numbers that are all listed in the 22 national academy of arbitrators booklet, so

532 1 there's no big secret about that. 2 But we will be working, you need 3 to know that, but we want you to be working, 4 as well. Don't drop the ball now and take 5 your chances with what three people might 6 think is the very best think and with all 7 the best intentions in the world, but in the 8 long run, it is really not what's going to 9 work when you get down to implementing it. 10 It's not going to solve your respective 11 problems. 12 I would leave you with that and 13 with my thanks, but I want each of my 14 colleagues to also have an opportunity to 15 speak to you and express to you whatever 16 thoughts they may have had. 17 Professor Twomey. 18 MR. TWOMEY: I would just like to 19 thank you everyone for their attention and 20 we have an awful lot of data here and we are 21 going to work hard with the record and we 22 are also going to work hard with you and

533 1 encourage you to help us in our process if 2 it gets to us. But you know we wish you the 3 very best next week, we are going to be 4 following you people and so we'll be 5 studying this weekend, studying all the 6 data. We'll have a very good grasp. Next 7 week we'll be ready and able to work with 8 you and I'd like to thank you everyone. 9 CHAIRMAN WITT: Thank you. 10 Mr. Jaffee. 11 MR. JAFFEE: I don't know that I 12 can do much better than each of my 13 colleagues comments except to say that I 14 feel very strongly the same question. I 15 wish both of you collectively the path for 16 finding a sensible solution that you feel 17 works best to handle your problems. If not, 18 we will not only be following you, we will 19 be hounding you over the next week to see 20 that you can attempt to go ahead and make 21 this thing work. If not, as you know, we 22 have a different job, different

534 1 responsibility, different obligations. None 2 of us wants to utilize that and we are 3 hopeful that you will find a way frankly to 4 avoid that from happening. 5 Good luck, as well. 6 CHAIRMAN WITT: Good. Okay. 7 MR. BUSH: Madam chair, we have a 8 few housekeeping matters. 9 CHAIRMAN WITT: Yes, I was just 10 going to get to the matter of briefs. 11 MR. BUSH: And before briefs, if I 12 could deal with a few things. 13 One, the company's initial 14 position statement. The company has 15 reviewed it and has marked a few items which 16 they believe should be redacted, and 17 otherwise as I understand it they would have 18 no objection to having this item available 19 for public distribution and we would like 20 to, on the record, have them indicate if 21 that's the case so that we could, at the 22 appropriate time, distribute this redacted

535 1 statement. 2 MR. GALLAGHER: That is correct, 3 Madam Chairman, as we've advised Mr. Bush 4 with, as long as the identifying the 5 information is redacted, we do not object to 6 the publication or distribution of our 7 position statement. 8 CHAIRMAN WITT: All right, as an 9 opening statement, I think it's appropriate. 10 The other items which are part of 11 the transcript and part of the evidentiary 12 portion of the record which will be 13 forwarded to the White House is still, the 14 White House property at this point and will 15 not be released publicly until the report is 16 sent over there on Saturday, so I would ask 17 that those kinds of items not be shared yet. 18 MR. BUSH: I also would just like 19 to clarify, I believe that we previously 20 resolved that company Exhibits 1 through 32, 21 which were in the big binder, were not 22 subject to the confidentiality concerns of

536 1 the company and could be distributed also at 2 the appropriate time. 3 CHAIRMAN WITT: That's my 4 understanding. 5 MR. GALLAGHER: That is almost 6 correct, Madam Chairman. There are within 7 two exhibits some of the same confidential 8 financial information that's been redacted 9 in the text and we would want that redacted 10 as well and I'll be happy to consult with 11 Mr. Bush. 12 CHAIRMAN WITT: You can, all 13 right. That will be fine, good. 14 MR. BUSH: And finally, before we 15 get to the question of briefs, we had meant 16 to introduce in connection with Mr. Roth's 17 rebuttal testimony some -- for the 18 convenience of the Board, some news reports 19 from today on the Delta raises and I'm not 20 even sure we need to mark these as exhibits 21 since they are part of the public record, 22 but if I could just ask that as, perhaps

537 1 even as the hearing closes we could provide 2 them to the Board for your convenience, we'd 3 like to do that. 4 CHAIRMAN WITT: And the Board will 5 receive them. 6 MR. BUSH: Thank you. And that's 7 all I have. 8 CHAIRMAN WITT: Good. All right, 9 we had talked previously about briefs and I 10 think we were using Monday afternoon at 4 11 p.m. as a target date. I always think of a 12 brief as having a different meaning from the 13 French term from which it's derived, doesn't 14 mean another tomb comparable to some of the 15 large volumes we've already received. We 16 want your pithy comments and particularly 17 your view of the issues, what they are and 18 your view of what you contend -- how they 19 should be resolved and we will be relying on 20 things of that sort. We will have the 21 transcript. We have all of your arguments. 22 I'm not going to say that you can't make

538 1 additional arguments, but trust us for 2 having a memory that lasts at least as long 3 as next Monday on the things that have 4 already been said, so that might get some of 5 you out of the office over the weekend where 6 you can enjoy some of this extraordinary 7 weather. If there's no other business to 8 come before the PEB, we can adjourn for 9 today at whatever time it is, only 3:42, 10 that's excellent, and we will meet 11 informally with each party on Monday at some 12 point and we will let you know when and 13 where and that won't be a long meeting, 14 either. It will be by way of inquiry, by 15 way of a nudge. 16 So, we will see you then. Thank 17 you. 18 MR. GALLAGHER: Thank you, Madam 19 Chairman. 20 (Whereupon, at 3:42 p.m., the 21 PROCEEDINGS were adjourned.) 22 * * * * *