United Airlines faces board fight over poor performance
Mar 08, 2016
Two investment funds with major stakes in United Continental Holdings Inc (UAL.N) launched a fight for control on Tuesday, proposing a slate of directors led by industry legend Gordon Bethune to shake up the board of the poorly performing airline.
PAR Capital Management Inc and Altimeter Capital Management LP, which together own 7.1 percent of the second-largest U.S. airline, said its "underqualified, ineffective, complacent and entrenched" board had caused years of "inexcusable company underperformance" and needed an overhaul.
"We believe that our conclusion is shared by many of United's long-suffering stockholders, customers and 80,000-plus dedicated employees," the funds said in a letter to United's board.
United has badly underperformed other U.S. airline stocks since its 2010 merger with Continental Airlines. It has suffered from a series of computer problems and poor employee morale, and its on-time performance and profits have lagged its peers.
Bethune is known for leading Continental through a dramatic turnaround from 1994 until his retirement in 2004, during which the stock soared.
Bethune said he was asked to help by longtime United shareholders PAR and Altimeter, which lack a track record of starting the kind of proxy battle typical of so-called activist investors. Saturday is the deadline for board nominations. The annual meeting is expected in June.
United Chief Executive Oscar Munoz warned the proposal by the Boston-based asset managers could wrest away control of the airline, and urged employees to keep improving United, which fared better in late 2015 after years of underperformance.
"This situation shouldn't change your focus," he said in an email to employees.
United's flight attendants union said the investors were "creating a distraction at just the wrong time." United's machinists union also voiced support for Munoz.
United Continental shares ended 2.2 percent lower at $56.34 amid a broader sell-off in airline stocks.
Bethune, 74, said the fight was "not about Mr. Munoz."
"It's about ... having someone who actually understands the airline business on the board," Bethune said in CNBC interview Tuesday. He noted that the investors insisted he stand for election as United's chairman, and that he would only stay two years, if appointed.
The proposed slate of directors also includes Altimeter founder Brad Gerstner, former Orbitz CEO Barney Harford and former Delphi Automotive CEO Rodney O'Neal.
United said it had tried to work with the funds and even offered to amend its bylaws to extend the deadline for board nominations, but they were "uninterested" in an agreement.
The two funds built stakes in United last year, and talks with the carrier intensified in late 2015, said a person familiar with the matter who was not authorized to discuss it publicly.
SHAKING UP THE BOARD
"This situation is really all about shaking up what Altimeter/PAR thinks is an entrenched and ineffective board," said Don Bilson, head of event-driven research at independent research firm Gordon Haskett.
United has posted relatively weak earnings, among other problems. It lost $724 million in 2012, when rival Delta Air Lines Inc (DAL.N) posted more than $1 billion in profit. In 2013, United earned $539 million, compared with Delta's $10 billion profit.
Former United CEO Jeff Smisek stepped down in September following the disclosure of a federal investigation into the airline's dealings with the Port Authority of New York and New Jersey.
The fund's plan to change United's board came two days after the airline said Munoz would return on March 14 after being on medical leave since October, when he suffered a heart attack.
On Monday, United added three independent directors to its board, increasing the size. The company said some directors would step down but declined to say which ones or how many.
"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," United Non-Executive Chairman Henry Meyer said on Tuesday.
But the investors said the board changes, together with an increased stock buyback plan, were not enough.
"Yesterday's last-ditch effort – adding just three people to its now 15-person board – is a cynical attempt to preserve power by this entrenched board," Gerstner said in a statement.
Other investors said the proposal would have little immediate impact.
"Today's news doesn't affect our view of the company's credit profile or its trajectory," said Jonathan Root, an analyst at Moody's Investors Service, which rates United three notches below investment grade, with a positive outlook.