The Question for United Airlines' Activist Investors: Why Now?

Why now is the question for activist investors at United Continental  (UAL)  who are trying to appoint new board members. 

Are they fighting the last war, even as CEO Oscar Munoz is fighting the current one?

The carrier seems to be starting -- finally -- to turn around under Munoz. Operational performance, labor relations and customer relations have improved dramatically since he took over in September, even though he suffered a heart attack in October and had a heart transplant in January. On Sunday, he returned full-time to the job.

News of the activist investors' action surfaced in a press release at 8:15 a.m. Tuesday. The release came 45 minutes after United announced plans to speed up deliveries of Boeing 777s and 787s and purchase 25 additional Boeing 737-700s, and 15 minutes after acting Chief Financial Officer Gerry Laderman began a presentation at a JPMorgan airline investor conference.

The press release disclosed that investment firms Altimeter Capital Management and PAR Capital Management, which collectively own 7.1% of United shares, nominated a slate of six directors headed by former Continental CEO Gordon Bethune.

Investors and analysts in attendance at the investor conference didn't seem aware of the initiative; at least they did not question Laderman about it, and he did not mention it. He did say, however, that "in 28 years at the airline, I've never felt more optimistic about the U.S. airline industry and United Airlines than I do today."

Laderman also said that a United effort to reduce non-fuel costs by $1 billion by 2017 would achieve that target in 2016. And although Teamsters, who represent United mechanics, were demonstrating outside the conference, Laderman said that United has made "terrific progress" in labor relations since Munoz signed on, and that "January and February operational results were at the top of the industry."

On Tuesday morning, Sara Nelson, president of the Association of Flight Attendants, which represents United flight attendants, spoke out in support of Munoz.

"Our union has worked with a lot of management teams over seven decades and we have rarely experienced a CEO as engaged or committed to the success of an airline," Nelson said in a prepared statement. "Oscar is moving United Airlines out of the era of struggling airlines and a failed merger to a vision of shared purpose that provides hope and excitement for the future of the airline.

"These investors are creating a distraction at just the wrong time," Nelson said.

In a letter to employees late Tuesday morning, Munoz noted that Bethune, who retired as Continental CEO in 2004, "is credited with leading Continental's turnaround over 20 years ago.

Like Continental in the '90s, we are starting to see real improvement in our performance by focusing on our employees, operation and customer experience," Munoz wrote.  "However, PAR and Altimeter aren't just advocating appointing Gordon to the board. They are nominating six director candidates, which we believe is designed to put their nominees in control of the board and our company's future.

"Our focus must remain on running a great airline that all of us are proud to work for and that our customers choose to fly," Munoz wrote.

A spokesman for the investors did not immediately respond to a request for a comment on the timing of the shareholder move.


However, it seems the investors were angered by United's move over the weekend to add three new directors to its board, bringing membership to 15. "Over many weeks of discussions with the board, Altimeter and PAR sought to work cooperatively with the board to improve United's board composition," Altimeter and PAR said in the press release.

"In a knee-jerk response to the stockholders' efforts, the company hurriedly added three new directors to its board on March 7, 2016, while simultaneously expanding its board size from 12 to 15 directors," the firms said in the release.

In a letter to the board, Altimeter CEO Brad Gerstner and PAR CEO Paul Reeder wrote, "As long-term United stockholders, we have been greatly disappointed with United's poor performance and bad decisions over the last several years."

The activists listed three reasons for their action.

First, they said, "United has a clear record of sustained and substantial underperformance despite premier, industry-leading strategic assets." 

Secondly, they said, the United board has been "under qualified, ineffective, and entrenched." The board lacks leadership, has failed to adequately align management compensation with stockholder interests, and "is too stale to effectively represent stockholders," they said.

Third, "United urgently needs a course correction" - which can be provided by their six board nominees.

Responding to Atimeter and PAR, Henry Meyer, non-executive chairman of the United board, declared, "We are deeply disappointed that after United attempted to engage in a constructive, good-faith dialogue with PAR and Altimeter, repeatedly communicated our willingness to make meaningful changes in our board, publicly announced our intention to name four new independent directors with deep relevant experience and named three of them yesterday.

"PAR and Altimeter have unilaterally taken this hostile action with no concern that a proxy fight could distract the company from executing on Oscar's strategic plan," Meyer said in a prepared statement.

In a research note, veteran S&P Global Market Intelligence analyst Jim Corridore wrote. "We think that whatever happens, UAL is well served to be pushed to improve performance.

"While Mr. Bethune could be a disruptive force, he is a seasoned executive with great skill, in our view," Corridore said.

In late morning trading, United shares were down $1.04 to $56.57, and were down 1% year to date.

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Opinion

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

2 More Reasons to Sell All Your Stocks and Run Away

2 More Reasons to Sell All Your Stocks and Run Away

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Netflix Blowout Earnings Remind Investors of One Thing: This Company Is a Beast

Netflix Blowout Earnings Remind Investors of One Thing: This Company Is a Beast