ICARUS AIRLINES: NEGOTIATING A CORPORATE ACQUISITION Background Information Corporate raider Carl Icon has worked out the major financial details for the acquisition of Icarus Airlines, a family-owned regional carrier operating primarily in Northern New England. Final acceptance of the deal by both sides depends on whether both can agree on the details of what to do with the present workforce. Each side has hired a negotiator to work out these final details. The agreement on each issue will be incorporated into the acquisition contract. There are several issues that need to be resolved: 1. Pay raises for pilots, flight attendants, mechanics, and gate agents. The airlines fell into financial difficulty after making a bad real estate investment. To remain liquid, the airline froze the pay of its employees, assuring them that their forgone cost of living increases would be restored as soon as the financial crisis was over. The flight attendants even took a $3,000 pay cut. The employees (who are not unionized) contend that the acquisition ends the financial crisis, and therefore their pay should be adjusted as part of the deal. Carl Icon disagrees, contending that Icarus Airlines had overpaid its workers, especially flight attendants, but also gate agents and mechanics. He says that in the aftermath of deregulation, this is an age of competitive pressures. In this context, the pay-cut and lapse in cost-of living adjustments has fortuitously restored pay rates to a competitive level for the industry. There is no issue of equity between groups. In other words, pilots do not compare their pay increases with flight attendants, etc. So the decision to adjust the pay of any one group is independent of what is decided about the others. 2. Reinstatement of Laid-Off Pilots. Fourteen pilots were laid off during the financial crisis, as an austerity measure. These individuals had the expectation that they would be reinstated when the immediate crisis was over. There is disagreement over the need for and terms of reinstatement. 3. Two-Attendant Staffing Policy. The relatively small planes used by Icarus Airlines have always been staffed by one flight attendant. Prior to the financial crisis, management had decided to put two attendants on each flight, but postponed implementing this decision. Mr. Icon wants to continue to use only one attendant on each flight. 4. Increase in Vacation Days. When the financial crisis hit, management curtailed the company's policy of giving three weeks of vacation to everyone, shortening it to two weeks. It was assumed by the workers that the three weeks would be restored when the crisis was over. 5. Create Rank of Senior Pilot. The company has been planning a reorganization that would create a hierarchy among the pilots. Until now, pilots have been of equal rank, and officially report to the Chief Operating Officer. Unofficially, certain pilots have been informally training and supervising others. Management's plan is to formally recognize (and compensate) those functions in the role of Senior Pilot. Senior Pilots would take care of all the scheduling, training, supervising, and dispute resolution of 6-10 pilots, currently a headache for the COO. Carl Icon prefers the low cost and simplicity of the present non-hierarchical structure. 6. Retention of Business Manager. The business manager has been working for Icarus Airlines for ten years. His name was brought up toward the end of the initial negotiations but the parties, running short of time, did not make any substantive progress. His post-acquisition status is therefore unresolved, and is a topic for the upcoming negotiations. 7. Employee Review Committee. For many years, Icarus Airlines has maintained a standing committee to deal with employee problems, primarily discipline cases and grievances. The committee consists of three managers, a pilot, and a flight attendant. The existence of the committee has probably helped to stave off unionization. The question of its continuity has been raised but not resolved. CARL ICON REPRESENTATIVE ROLE Carl Icon knows what he wants and is willing to pay for performance. When he hired you, he told you that you could expect to earn $5,000-10,000, and possibly more, depending on how well you did. Ten thousand dollars is your baseline fee, and you need as much of it as you can get because it has been a while since you brought in a commission and your debts have piled up. Five thousand dollars is the lower limit because Mr. Icon wants you to walk away from any deal that yields less. If you do reach an impasse, you will be paid the $5,000. There is no upper limit on what you can earn. 1. Pay Raises for Pilots. It is important to keep the salary down to a reasonable increase, because of the possible precedent set for other airlines owned by Carl Icon. However, a small increase is acceptable so as not to alienate this vital employee group. Your bonus additions and deductions are as follows: Increase in Earned Bonus Pilot Salary Deduction $0-5,000 $5,001-6,000 $6,001-7,000 $7,001-8,000 $8,001-9,000 $9,001-10,000 over $10,000 0 $-80 (i.e. $80 deduction from your $10,000 baseline fee) $-160 $-320 $-640 $-1,280 NA (not acceptable) 2. Pay Raises for Flight Attendants. In Mr. Icon's opinion, the flight attendants were overpaid by industry standards prior to the airline's financial crisis. The pay cut brought their compensation down to a reasonable rate, and they did not get a cost of living increase since that time. They are more easily replaceable than pilots, so the possibility of their leaving because of low pay is not a major problem. Mr. Icon therefore wants to keep their pay within reasonable bounds, and your bonus structure reflects this. Increase in Flight Earned Bonus Attendant Salary Deduction $0-3,000 $3,001-4,000 $4,001-5,000 $5,001-5,500 over $5,500 $-240 $-480 $-960 $-1,920 NA 3. Pay Raises for Mechanics. Increase in Mechanics' Earned Bonus Hourly Rates Deduction 0 percent 0 1 percent $-60 2 percent $-120 3 percent $-200 4 percent $-300 over 4 percent NA (not acceptable) 4. Pay Raises for Gate Agents. Increase in Gate Agents' Earned Bonus Hourly Rate Deduction 0 percent 0 1 percent $-40 2 percent $-120 3 percent $-280 over 3 percent NA Note that there is a special bonus of +$200 additional dollars if pay increase for both mechanics and pay agents are held to zero, as Mr. Icon believes they should be. 5. Reinstatement of Laid-Off Pilots. The airline laid off some pilots during its financial crisis, resulting in the "lean and mean" pilot workforce size that Carl Icon believes is ideal in today's competitive environment. The airline wants to rehire them, and worse, give them retroactive pension contributions for the layoff period. These are highly-paid individuals who fully realize that high returns involve high risks, so they certainly shouldn't expect pension contributions during the period that they didn't do any work. Reinstatement Deduction Earned Bonus No 0 Yes, without pension contributions $-1,000 Yes, with pension contributions $-1,400 6. Two-Attendant Staffing Policy. The airline is functioning well with only one attendant per flight, and this should be the model for all airlines with similar sized planes. (Many competitors have two, especially on high-load flights, but these are the companies Mr. Icon intends to outcompete.) Flight Attendant Policy Earned Bonus Addition/Deduction Status quo $+300 Two on some, but not all flights $-100 Two on all flights NA 7. Increase Number of Vacation Days. Up until a year ago, the company had an overly-generous three-week vacation for everyone, irrespective of rank, job category, or seniority. The financial crisis forced them to cut this back to a more reasonable two weeks, which Mr. Icon would like to keep. The egalitarian principle of everyone getting the same vacation is a good idea, and should be retained if possible. Mr. Icon gets very irritated when he sees high-seniority deadwood getting ridiculously long vacations just because they've been hanging around for years. Also, there's no reason why pilots should get more than others. They are already highly compensated and work only a few hours per month. Increase in Vacation Days EarnedBonus Addition/Deduction 0 $+100 1 $-40 2 $-80 3 $-120 4 $-160 5 $-200 6 $-260 7 $-320 8 $-380 9 $-440 10 $-500 over 10 NA (not acceptable) 8. Create Rank of Senior Pilot. The existing structure works well, without creating the expense and complications of additional layers of management. Pilots have it easy with Icarus Airlines. They spend little time away from their families, and enjoy a pleasant work atmosphere. Each one should be willing to make a broad contribution, not just fly planes. The COO is not particularly busy, and therefore can do most of the scheduling and supervising. And pilots should be willing to help train newcomers, for their own safety and convenience. Create Rank of Earned Bonus Senior Pilot Addition/Deduction No +100 For training only $-300 Yes $-400 9. Retention of Business Manager. Carl Icon's staff spent a lot of time with this individual preparing for the acquisition, and concluded that the airline would be better off without him. He's basically incompetent, and in fact was the "brains" behind the real estate investment that caused the financial crisis. You'd like to replace this man as soon as possible, but you're afraid the family will voice its usual "protect our loyal employees" viewpoint and insist he be retained. If this were to happen, Icon could still bring in a Controller above the Business Manager and reduce his role to office manager, but you should get rid of him if you can. Retention of Earned Bonus Business Manager Addition/Deduction Fire $+800 Keep $0 10. Employee Review Committee. Carl Icon was intrigued with the employee review committee because it has the potential to stave off unionization. It gives employees the feeling that managers are not summarily and autocratically making decisions to discipline them. Rather, they feel that they are protected from angry or impulsive decisions by this appeal board. It would be nice to keep the committee and use it as a model for other firms within the Icon group of companies, particularly the other airlines. But the family that currently owns Icarus seems intent on disbanding it, or changing the membership or its voting/consensus procedures. It is important to Carl Icon that there be continuity in the committee's existence. If the family disbands it, the new managers could re-create it, but employees would probably view it as something that Icon imposed as a tactic to discourage unionization. So it is vitally important that you keep the committee in existence. The Icarus Airlines managers have talked about adding four new members to the committee: a gate agent and a mechanic, plus two more managers for balance. They have also talked about changing the voting procedure to a simple majority from the existing consensus rule (which means that if one member objects, then the committee cannot issue a decision). If the four members were added and the consensus rule maintained, that would be awful, because any one of nine people could hold out and prevent the committee from arriving at its decision. The consensus rule is fine as long as the present membership is retained, because the pilot and the flight attendant have been on the committee for so long that they think like managers and can be swayed by pressure from the managerial majority of three. If the voting procedure is changed to a simple majority, Mr. Icon is indifferent to whether the committee is expanded: In either case, management has a clear voting majority. Employee Review Committee Earned Bonus Addition/Deduction Disband $-2,000 Add members, no vote change $-400 Add members, change vote $+400 No new members, no vote change $0 No new members, change vote $+400

SCENARIO You have been given broad authority to represent Carl Icon at the negotiating table, and you are to make final, binding agreements on his behalf. Remember that there are two constraints that you must operate under. First, you should not accept any terms that have been judged not acceptable (NA) by Mr. Icon. Second, you should not accept any final package that has a total payoff of less than $5,000. As long as you are above this $5,000 threshold, any package is, in principle, acceptable to Mr. Icon (so long as it does not contain any NA items, obviously). However, you should try to maximize your dollar payoff as much as possible, since this is best for you, and best for Mr. Icon, who hired you for this assignment.