The Chairman, president, and CEO of United Airlines (NYSE:UAL), Jeff Smisek, is resigning amid the controversy surrounding a new probe into corrupt practices by the airline. While the media coverage has focused on the details of the seedy relationship between United and the chairman of the Port Authority of New York and New Jersey, David Samson, most indications were that the company was struggling to plug up multiple holes in its metaphoric hull even before the current bad publicity hit the newswire.
Will reshuffling the airline’s executive structure help reverse United’s fortunes, or will it continue to fall farther behind rivals like Delta (NYSE:DAL) and American Airlines (NASDAQ:AAL)?
Heart of the Controversy
At the center of the current bout of bad news swirling around United is its questionable relationship with the Port Authority of NY & NJ. While it makes sense that a major airline and the Port Authority would have some sort of rapport, it appears that favoritism and self-enrichment reigned supreme in United’s dealings with Port Authority Chairman Samson. After Samson took over as chairman, the airline started running biweekly flights from Newark, NJ to Columbia, SC—where Samson owns a summer home. Conspicuously enough, this flight pattern stopped just after Samson resigned when the apparent conflict of interest came to light.
Maybe United will set up direct flights from New Jersey to my or your hometown, right?
The situation with Samson, though hardly on the scale of accepting a government bailout or “Golden Parachute,” was nonetheless a clear indication of corruption: it involved politically motivated decisions and some degree of favoritism on the part of United, done undoubtedly in exchange for a repayment in kind by Samson and the Port Authority.
Plugging the Leaks
United CEO Smisek was dealing with a series of fires even before the corruption probe hit the fan this week: the airline dealt with a recurring computer glitch that caused outages in both June and July; its customer satisfaction ratings took a hit as patrons increasingly suffered through flight delays and lackluster service; it became ensnared in a painful labor dispute with its workers’ union; and, on top of it all, the company struggled to make the adjustment involved in its 2010 merger with Continental Airlines.
A New Deal?
Oscar Munoz takes over as CEO with Smisek departing. He will attempt to assemble a new executive team, as much of the officers surrounding Smisek followed him from Continental, where Smisek served as CEO and orchestrated the merger with United, creating the world’s largest airline (at the time). In addition to Smisek and the team he carried over from Continental, the company’s CFO John Rainey also resigned this past August.
Among Munoz’s primary objectives will be increasing the airline’s profit margins, which have fallen behind their competitors in the industry, in addition to rehabilitating the company’s image among shareholders and the public at large. Even though average flight delays have improved slightly, only Southwest (NYSE:LUV) lags behind United’s 24.6% delay rate among the “Big Four” airlines.