Home News & Updates Summer Storms around the World 1: United Airlines

Summer Storms around the World 1: United Airlines

by AppliedCG

Now that we are all returning from summer breaks and getting back to the routines of business, it seemed interesting to look at a round-up of some of the corporate governance stories that have entertained (or appalled) us during the summer months.


United Airlines

Let’s kick off with the United States, and the recent story of the resignation of the CEO of United Airlines.

United was formed in 2010 by the merger of Continental, which had a very good reputation for customer service, with United, which had a much bigger network. Continental was driven by a charismatic CEO who, in turning round the airline over the ten years up to 2004, made a big thing about fostering employee morale, on the basis that this would translate into good relations with customers.

The merger created what is currently deemed to be the world’s largest airline, measured by the number of destinations served. However, in the process, it seems to have lost the good reputation with customers that was Continental’s proud boast and suffered lots of problems resulting from the merger.

The years since the merger seem to have displayed a disregard (by accident or design) of two of our five golden rules of good corporate governance:

  • our second golden rule is that there should be congruence of goals between the key stakeholder groups. Following the merger, the goal appears to have been to pursue growth and profitability as a priority over customer satisfaction, presumably to satisfy the financial backers of the merger. The results are evident in the customer surveys which show United as having the lowest customer rating of all airlines headquartered in the United States. So the interests of investors and customers were not properly aligned.
  • our fourth golden rule is that the company should have an organisation structured and resourced to fulfil the goal agreed by the key stakeholders and the related strategic plan. Following the merger, the major computer problems experienced with the airline’s reservation system, which have resulted in unacceptable cancellations and delays would appear to have their cause in the decision to adopt Continental’s system rather than face up to the need to develop a new system for the merged airline. Anecdotal evidence also suggests that lack of attention to the internal culture and employee morale, and the resulting stress on employees, led directly to complaints about customer service. Hence the organisation was not structured and resourced adequately.

United is perceived to have made some progress since the merger, though perhaps damned with faint praise by being described as having improved from the worst airline to just mediocre.

So we look at the performance of the recently departed CEO, Jeff Smisek, and we see that at least United’s financial performance has improved. According to the quarterly release, the six month revenue to 31 June 2015 was slightly down on the equivalent period in 2014 by 2.6% while there was virtually no change in the total number of passengers carried. But the operating expense was down by 11.5%, leaving net income up from $180m to $1,701m. The report also announced an additional $3bn share repurchase programme on top of the existing $1bn programme.

Does this suggest a focus on shareholders’ interests at the expense of customers? If the current $1bn programme had been spent on services provided by customer facing employees and a new reservations system, would it have prevented responses such as that reported by the recent Skytrax survey:

Michael Austin (United States) 14th September 2015

“I just want to say how displeased I am with United Airlines service. Our flight should have been a little over an hour, and the whole trip turned into 9 hours. Now I am on my return flight and encountering the same issues. I will never fly United Airlines again, mainly for the fact that they don’t even care how they run their business. I will never partake in this horrible United Airlines service again.”

And the remarks from Henry Harteveldt, a travel industry analyst and founder of Atmosphere Research Group:

“If you’re not getting the fundamentals right, if you don’t have an airline that travelers can trust to depart and arrive on time, if you don’t stick to your schedule, you don’t have the foundations for an airline.” 

Now we come to the ironic part of the story. Mr Smisek was CEO of Continental when the merger was being discussed and emerged as CEO of the combined airline. He is regarded as having made some progress with the development of the airline, but, as we have seen, there are plenty of critics, particularly among the two key stakeholder groups, customers and employees. It might be thought, then, that failings in these key areas of good corporate governance brought about his departure. But no.

His nemesis came in the political dimension, or rather in, allegedly, providing a special level of customer service to one stakeholder in particular.

Supposedly, it was suggested to him over a dinner by the chairman of the Port Authority of New York and New Jersey, David Samson, that he might re-instate a loss-making flight between Newark Liberty International Airport, where United is the biggest carrier, and Columbia, South Carolina. This would be convenient for Mr Samson and his wife to visit their holiday home and if implemented would facilitate the building of improvements at Newark airport, which was overseen by the Port Authority. Certain of these improvements would particularly benefit United. This “chairman’s flight” as it became known, was re-started in 2012 but terminated shortly after Mr Samson resigned two years  later.

The favour, if that’s what it was, came back to bite Mr Smisek and United when an investigation began into allegations, later confirmed, that in the re-election campaign of Mr Chris Christie for the governorship of New Jersey, one of his allies was involved in a revenge action against the mayor of a town on the New Jersey side of the George Washington bridge from New Jersey to New York. The mayor had failed to support Mr Christie, so his ally arranged (Mr Christie says without his knowledge) for lane closures on the bridge for a supposed traffic survey, which lasted several days and caused traffic chaos aimed at causing harm to the mayor and his political position. As “Bridgegate” was investigated, the probe was extended to look at the wider governance of the Port Authority and its dealings with business. This took the enquiries to the top of the Authority and ultimately resulted in the resignation of its chairman, Mr Samson.

In turn, that led to an examination of the Authority’s dealings with United and enquiries into whether Mr Samson had pushed United into re-instating the flights to Carolina, from which he benefited. United itself had earlier initiated an enquiry by its own lawyers into the airline’s dealings with Mr Samson and the Authority, it was suggested to cover themselves against a potential later prosecution.

On 8 September, United’s CEO Mr Smisek resigned, together with two senior officials.

This would appear to suggest that the very first of our golden rules of good corporate governance had been broken, namely the requirement for an ethical culture, led from the top.

So, ironically, the CEO seems to have left his post not because of pressure from the powerful investor stakeholders for under-performance and customer dis-satisfaction, or from disaffected employees complaining about poor morale, but from pressure from the board for falling below the ethical standards expected.

One wonders why it took a federal investigation to alert the board to the dangers they faced in their dealings with one of their important trading partners.

The Applied Corporate Governance approach would have tested United by independently surveying the key stakeholders and surely would have given a warning message that THREE of the golden rules of good corporate governance were showing red flags.

A final observation. According to Bloomberg, Mr Smisek’s severance agreement stipulates that in return for fully co-operating with any future investigations, he will be entitled to a total payout which could amount to $28.6m. One wonders what the other stakeholders think about the contract that led to that agreement. Perhaps at some point they will be able to convey their views to the board which approved it. If it figures in the upcoming presidential election campaign, it’s unlikely to improve the way big business is viewed on Main Street.

September 2015

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