Boardroom Fights and Other Drama: It was a busy week in the U.S. airline industry, and not just at United
The airline’s called United. But that’s not how you’d describe its shareholders. Two of them in particular—Altimeter Capital and Par Capital which together own 7% of the company—are spearheading a boardroom revolt that headlined a busy and news-filled week for the entire U.S. airline industry.
The United fight follows the airline’s apparently preemptive decision to appoint three additional members to its board of directors, two of them familiar industry names: former Air Canada CEO Robert Milton and former Delta COO Jim Whitehurst. Displeased, Altimeter and Par nominated their own slate of six new members, led by Continental’s former chief Gordon Bethune, never mind Bethune’s unbending support for United’s management since its merger with Continental in 2010. (Bethune, by the way, once advised Delta’s board not to make Whitehurst the airline’s CEO before it ultimately hired Richard Anderson, according to Bethune in an interview for Airline Weekly’s recently published book about Delta, Glory Lost and Found.)
Altimeter and Par say their revolt reflects frustration with “long-term inexcusable company performance” and a “lagging stock price.” More independent board oversight, they argue, is required.
Who will win this battle? Shareholders will vote on the matter at the company’s annual meeting this spring—the date hasn’t yet been set. United’s management is wasting no time in defending itself, however, fervently describing the progress it says it’s made: operational reliability is improving, as are the company’s finances—non-fuel unit costs, for example, are trending better than rivals. United’s major unions, moreover, two of which have board seats, strongly expressed support for management, including new CEO Oscar Munoz, who is just returning from medical leave and has made labor relations a priority. Pilots, for their part, called the shareholder revolt a “coup attempt.”
That United has generally underperformed its peers—among those that survived the post-deregulation era, anyway—is indisputable. But the very fact that this underperformance has lasted so long, under different boards and different management teams (including the recent one featuring Bethune protégés from pre-merger Continental), calls into question the idea that management has missed any easy fixes (see Airline Weekly’s Sept. 14, 2015, cover story, “The Jockey or the Horse?”)
As it happened, last week also featured a major investor event hosted by JP Morgan and attended by most U.S. airlines—including United. Although it didn’t address the proxy fight directly, it further advanced its argument that things are on the upswing. On the operations front, it said, reliability is benefiting from a decision to serve 70% of its network with out-and-back flying, in other words, planes that fly from a hub to a destination and then back to the same hub, rather than circulating throughout the network during the day. This isn’t the most efficient strategy during smooth operations, but it isolates problems when things go wrong at one hub. United is also flying fewer fleet types at many of its non-hub stations, further simplifying operations. And it optimized maintenance at its San Francisco base most notably, outsourcing some tasks and insourcing others.
What’s more, United is expanding intercontinentally, especially but not exclusively from its booming San Francisco hub. It announced Hangzhou last week (see page eight), joining upcoming launches to Auckland, Singapore, Xian, Tel Aviv, Athens, Barcelona and Lisbon. Denver is another hub doing well in the wake of a big pullback by Frontier, providing a safety valve for capacity that needs to come out of currently weak markets like Houston. United also announced a new B737 order last week (see page five). It’s retiring B747s. And it will unveil new Spirit-buster entry-level fares in the second half.
United did say something else last week, echoing a sentiment that other carriers communicated at a JP Morgan conference: Unit revenues remain weak. In United’s case, passenger RASM will decline between 6% and 8% y/y this quarter, driven by weak foreign currencies, lower fuel surcharges, travel reductions from customers impacted by declining oil prices and softening domestic and international yields.
Nothing really new there, but adding to the unease was JetBlue, which set off some alarm bells with an 11% y/y decline in February PRASM, with declines for the full first quarter expected to register between 7% and 8%. It blamed tough y/y comparisons and unusually high capacity growth that month. But more worryingly, it expressed major disappointment with sales for the busy Presidents Day weekend, with high-revenue close-in bookings particularly elusive. Nevertheless, JetBlue has high hopes for its many profit improvement…
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