G.

Richard Shell
Negotiation Workshop

ICARUS AIRLINES: A CORPORATE ACQUISITION -- BUYER'S ROLE

Background Information Given to All Parties

Airline entrepreneur Carla Chang has worked out the major financial details for the
acquisition of Icarus Airlines, a family-owned regional carrier operating primarily in Northern
New England and led by the legendary local entrepreneur, "Grandfather Icarus." Final
acceptance of the deal by both sides depends on whether both can agree on the details regarding
the present nonunion workforce. The family that now owns Icarus is deeply concerned that the
terms of any final agreement be fair to employees, to whom the family feels a sense of loyalty.
Carla Chang, of course, feels equally strongly that the airline she buys be positioned to be
profitable. Each side has appointed a negotiation team to work out these final details. The
agreement on each issue will be incorporated into the acquisition contract.

There are a number of issues that need to be resolved. The following list summarizes
most of them.

1. Pay raises for pilots, flight attendants, mechanics, and gate agents. The airline fell into
financial difficulty after making a bad real estate investment. To remain liquid, the airline froze
the pay of its employees (one year ago) assuring them that their foregone cost of living increases
would be restored as soon as the financial crisis was over. The one hundred (100) flight
attendants even took a $3,000 pay cut. The employees contend that the acquisition ends the
financial crisis, and therefore their pay should be adjusted as part of the deal. Carla Chang
disagrees, contending that Icarus Airlines had overpaid its workers. She says that in the
aftermath of deregulation, this is an age of competitive pressures. In this context, Chang feels
that 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 of the Airline's sixty-five (65) 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.

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3. Increase in Vacation Days. When the financial crisis hit, management curtailed the
company's policy of giving three-weeks 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.

4. Create Pilot Teams and 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. The Icarus plan was 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 "pilot teams" of 6-10 pilots. Carla
Chang's position on this plan is unclear.

5. Retention of Business Manager. The Business Manager (an Icarus family member who
was primarily responsible for the real estate investment that caused Icarus such financial pain) has
been working for Icarus Airlines for fifteen years. He raised the issue of his post-acquisition
status with the Icarus family, and the family mentioned it to Chang toward the end of the initial
negotiations without taking a position on it one way or the other. The parties, running short of
time, did not discuss the matter. That issue is now on the table.

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 PRIVATE INFORMATION FOR THE BUYER, CARLA CHANG

You are part of a negotiating team representing Carla Chang. Before preparing the case
in detail, you must pick which roles you will play in the negotiation. One person in your group
(the most competitive and assertive) should act as Chang's V.P. for Corporate Development --
her "dealmaker." A second person (more relationship-oriented and accommodating) should play
the role of the new President of the airline if it is bought. If there are three on the team, the third
person should play the Chang's V.P. for Airline Personnel and Human Resources -- a role that
can be appropriately filled by someone with either an assertive or cooperative style. Chang
believes in incentives and has told you that you can each expect to earn a minimum of $6,000
with a good chance of making $10,000 or more as a bonus for representing her in this
negotiation.

The bonus works like this: You start with $10,000 in your pocket. For most issues listed
below, there is a "penalty" or deduction from that $10,000 for making a concession that Chang
would prefer not to make. In some cases, however, Chang has provided ways for you to add
some money to your bonus by getting something she particularly wants. Finally, Ms. Chang
wants you to walk away from any deal that yields less than $6,000 according to the "scoresheet"
below. Chang can always go buy another airline.

1. Pay Raises for Pilots. It is important to keep the salaries of this most expensive group
relatively low because of the possible precedent set for other airlines owned by Carla Chang.
Indeed, you would like to cut the pay of the pilots if possible. However, a modest increase is
acceptable so as not to alienate this vital employee group. You believe that the pilots receive just
slightly below the average pay for regional airlines (and well below the average for all airlines --
but that standard does not apply here). You would like to keep all pay categories at Icarus
"slightly below average" so Chang will have a low-cost, competitive company. Your bonus
deductions run in "bites" as follows:

Increase in Earned Bonus

Pilot Salary Deduction

Pay cut of any kind $+500

$0 - 1,000 0
$1,001 - 2,000 $-300
$2,001 - 3,000 $-600
$3,001 - 4,000 $-900
$4,001 - 5,000 $-1200
$5,001 - 6,000 $-1500
$6,001 - 7,000 $-1800
$7,001 - 8,000 $-2100
$8,001 - 9,000 $-2400
Over $9,000 Not acceptable

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2. Pay Raises for Flight Attendants. In Ms. Chang's opinion, the flight attendants were
slightly overpaid by both national and regional industry standards prior to the airline's financial
crisis. The pay cut and the fact that they have not gotten any raises lately has brought their
compensation down to a reasonable rate. Now they are slightly under the average scale for
regional airlines and well under the national scale. Chang would like to keep it that way, but
realizes that the attendants are not easily replaced if they decide to quit over the pay issue. They
are hard to train and the airline operates in a relatively unexciting, cold region. Ms. Chang
therefore wants to keep their pay within reasonable bounds, but she also wants to keep them
working for Icarus. Your bonus structure reflects this.

Increase in Flight Earned Bonus

Attendant Salary Deduction

Pay cut of any kind $+200

$0 $0
$1 - 1,000 $-100
$1,001 - 2,000 $-200
$2,001 - 3,000 $-300
$3,001 - 4,000 $-450
$4,001 - 5,000 $-600
$5,001 - 5,500 $-750
over $5,500 NA (Not Acceptable)

3. Pay Raises for Mechanics. These are the skilled hands that keep the airline flying. Their
pay ($25/hour) is fair now in Chang's estimation, but she is not going to nickel and dime this
group. She pays as high as $30/hour in some other areas of the country, but New England wage
scales are generally a bit low.

Increase in Earned Bonus

Mechanics' Deduction
Hourly Rate
Pay cut of any kind $+100
0 percent 0
1-8 percent $-100/percent
over 8 percent NA

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4. Pay Raises for Gate Agents. These guys are the "beach bums" of the airline business.
They don't deserve a raise of any kind (they now get $15/hour) unless Icarus makes a stink about
it. In no event can you go higher than 4 percent.

Increase in Earned Bonus

Gate Agents' Deduction
Hourly Rate
Pay cut of any kind $+150
0 percent 0
1-4 percent $-150/percent

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 Carla Chang 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. You can give up on this issue, but
it will cost you plenty in your bonus.

Reinstatement Earned Bonus

Deduction*

No Reinstatement +500
Yes, without pension -2,000
Yes, with pension -2,500

* Obviously, you would greatly prefer to have no reinstatement. If you yield to the demand for
reinstatement, however, you can gain 100 points for a 1-year "phase-in" of the reinstatement; 300
points for a 2-year phase-in; 500 points for a 3-year phase-in; and 1000 points for a 4-year phase-
in. Anything beyond 5 years, and you get a full $2000 back. As noted above, the pension issue
is still worth $500 to you no matter how long any reinstatement is phased-in.

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6. Increase Number of Vacation Days. Up until a year ago, the company had a 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 Ms. Chang would like to keep.

Ms. Chang likes the egalitarian principle of everyone getting the same vacation and wants
to implement this at her other airlines. She will have trouble doing so, however, if Icarus is
giving its employees more than three weeks of vacation.

Increase in Earned Bonus

Vacation Days Addition/Deduction

0 $+300
1-5 0
6-10 $-300
over 10 NA

7. Create Pilot Teams and Rank/Pay of Senior Pilot. Chang really likes the idea of pilot
"teams" (she likes the idea of teams in all parts of the organization). But she does not think that
people ought to be paid extra money or given special titles to work as team players. 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.
And pilots should be willing to help train newcomers, for their own safety and convenience.

Create Teams and Rank of Earned Bonus

Senior Pilot Addition/Deduction

Create teams w/o rank or extra pay +200

Create teams w/rank but no pay 0
Create teams with pay and no rank -100
Create teams with pay and rank -150
Do not create teams -500

In general, you should know that Chang will set up a formal "Employee Policy Review
Committee" at Icarus to air various policy issues and make nonbinding recommendations to
management. Chang is very serious about empowering workers and intends to use this
committee to handle any significant issue of contention that arises in the employment area. While
Chang is very jealous of her discretion to assign, hire and fire workers, she is genuinely
interested in employee input. For example, based on this input, she recently decided to follow a
seniority-based system for economic layoffs at another airline.

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8. Retention of Business Manager. Carla Chang's staff has spent some time with this
individual (an Icarus family member) preparing for the acquisition, and concluded that the airline
would be better off without him. He's basically incompetent, and in fact was involved in some
way with the real estate investment that caused the financial crisis.

You wonder if the family will voice its usual "protect our loyal employees" viewpoint and
insist he be retained. If this were to happen, Chang could still bring in a Controller above the
Business Manager and reduce his role to office manager. You should get rid of him if you can,
however.

Retention of Earned Bonus

Business Manager Addition/Deduction

Fire $+400
Keep $-200

SUMMARY

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 Ms. Chang. Second, you
should not accept any final package that has a total payoff of less than $6,000. Obviously, you
should try to maximize you dollar payoff as much as possible, since this is best for you, and best
for Ms. Chang, who hired you for this assignment.

Finally, should the other side raise issues that are not discussed here, handle them in
accordance with Chang's overall preferences and philosophy -- financial efficiency, fairness to all
workers based on performance, loyalty to Chang Airlines, competence, and worker participation
in decision making.

GOOD LUCK!

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 SUMMARY OF INFORMATION FOR THE BUYER, CARLA CHANG
(POINTS ARE GIVEN AS DEDUCTIONS FROM $10,000 TARGET BONUS: BOTTOM
LINE = meet or exceed $6,000 in bonus dollars)
1. Pay Raises for Pilots

Increase in Earned Bonus

Pilot Salary Deduction

Pay cut $+500

$0 - 1,000 0
$1,001 - 9,000 $-300 per $1,000 raise
over $9,000 NA (not acceptable)

2. Pay Raises for Flight Attendants

Increase in Flight Earned Bonus

Attendant Salary Deduction

Pay cut $+200

$0 $0
$1 - 1,000 $-100
$1,001 - 2,000 $-200
$2,001 - 3,000 $-300
$3,001 - 4,000 $-450
$4,001 - 5,000 $-600
$5,001 - 5,500 $-750
over $5,500 NA (Not Acceptable)

3. Pay Raises for Mechanics

Increase in Earned Bonus

Mechanics' Deduction
Hourly Rate

Pay cut $+100

0 percent 0
1-8 percent $-100/percent
over 8 percent NA

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4. Pay Raises for Gate Agents

Increase in Earned Bonus

Gate Agents' Deduction
Hourly Rate

Pay cut $+150

0 percent 0
1-4 percent $-150/percent
over 4 percent NA

5. Reinstatement of Laid-Off Pilots

Reinstatement* Earned Bonus

Deduction

No +500
Yes, without pension -2,000
contributions
Yes, with pension -2,500
contributions

* Greatly prefers no reinstatement, but gains $100 for a 1-year "phase-in" for reinstated pilots;
$300 for 2-years; $500 for a 3-years; $1000 for a 4-year phase-in; $2000 for anything longer
than 4 years.

6. Increase Number of Vacation Days

Increase in Earned Bonus

Vacation Days Addition/Deduction

0 $+300
1-5 $ 0
6-10 $-300
over 10 NA

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7. Create Pilot Teams and Rank of Senior Pilot

Create Teams and Rank of Earned Bonus

Senior Pilot Addition/Deduction

Create teams w/o rank or pay +200

Create teams w/rank and no pay 0
Create teams w/pay and no rank -100
Create teams w/rank and pay -150
Do nothing (no teams) -500

8. Retention of Business Manager

Retention of Earned Bonus

Business Manager Addition/Deduction

Fire $+400
Keep $-200

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