MIAMI— Jeff Smisek is stepping down from his role as the CEO of United Airlines, effective immediately, due to a federal corruption probe. Smisek will be replaced as CEO by Oscar Munoz, a current member of United’s board who also serves as president and chief operating officer (COO) of rail freight company CSX. Smisek will also step down from his roles as president of the company, director, and chairman of the board. And two other United executives, Nene Foxhall (EVP of Communications and Government Affairs) and Mark Anderson (SVP of Corporate and Government Affairs) have also stepped down in the wake of the investigation.
“The Chairman’s Flight”
The three United executives departed after an extensive internal investigation paralleling a federal investigation of the Port Authority of New York and New Jersey (PANYNJ) While the federal investigation also deals with the larger “Bridgegate” scandal that engulfed New Jersey governor and presidential candidate Chris Christie, United Airlines is being targeted due to its interactions with former Port Authority Chairman David Samson. While the full story is explained in this Bloomberg article, the investigation boils down to whether United traded a resumption of nonstop service between Newark and Columbia, South Carolina for preferential treatment from PANYNJ on the renegotiation of United’s ease at its Newark hub and the construction of a new widebody hangar at Newark. According to Bloomberg’s David Kocieniewski and David Voreacos:
Halfway through dinner at Novita, an Italian restaurant in Manhattan, Port Authority Chairman David Samson surprised the group [of United executives] with a request of his own. He complained that he and his wife had grown weary of the trip to their weekend home in Aiken, South Carolina, because the best flight out of Newark was to Charlotte, North Carolina, 150 miles away. Until 2009, Continental had run direct service from Newark to Columbia, South Carolina, 100 miles closer.
In a tone described by one observer as “playful, but not joking,” Samson asked: Could United revive that route? An awkward silence fell over the table.
Though the United CEO didn’t agree to the request at the dinner, according to the accounts of some who attended, the airline ultimately added the money-losing route that became known as “the chairman’s flight.” Now federal prosecutors are looking into whether its genesis crossed the line from legitimate bargaining into illegal activity.
No Immediate Impact on Operations or Finances
Despite the executive swap, United maintains that there will be no impact on its operations or finances at Newark and system-wide. On a conference call this afternoon announcing Smisek’s departure and Munoz’s hiring, United Airlines COO Greg Hart re-affirmed that no immediate financial or operational problems have arisen due to the investigation, though the federal investigation is ongoing. In particular, Hart noted that United doesn’t “expect this [investigation] to have any impact on the proposed slot swap with Delta at JFK.” When analysts on the called pressed for further details, United demurred, reiterating that it was cooperating with the government and had no other comments at this time.
Smisek’s Tenure Was Mixed Bag
While the oft-maligned Smisek presided over several quarters of record financial results for United, he also locked horns with employee work groups and customers over cost-cutting initiatives and oversaw several technology mishaps after the 2010 merger between Continental Airlines and United Airlines.
In particular, systems integration was a major sticking point for Smisek after a reservations system meltdown in 2012 was followed by a technology meltdown earlier this year that grounded United’s fleet, and an apropos, if uneventful two-hour blackout of united.com today before Smisek’s departure was announced. Smisek’s overall management of United’s merger integration left plenty to be desired, particularly in terms of technology and labor integration. Indeed the latter process has been so thoroughly mismanaged that two United workgroups, flight attendants and technicians, still lack a unified contract, more than five years after the merger. Smisek also battled with customers frequently, drawing ire both over the company’s adjustment of frequent flyer benefits (a sound economic decision) and its subpar operational reliability (an abject corporate failure).
On the flip side, Smisek did win plaudits, particularly from investors, for his commitment to, and even market leadership on capacity discipline over the last few years, a role he took over from Richard Anderson once Delta began its Seattle buildup. Smisek also oversaw improvements in United’s cost and productivity metrics through the Project Quality initiative, though those changes may have been bludgeoned down employees’ throats as opposed to jointly agreed upon. On the whole, Smisek was a CEO better loved by Wall Street than his own colleagues.
Munoz Starts off with Focus on Employees and Customer Service
In Munoz’s first exposure to analysts and the media as United’s CEO during this afternoon’s call, the tonal differences between him and his predecessor were immediately apparent. During the conference, it was apparent that the decision for Smisek to leave was taken recently, as Munoz was not yet up to speed on specific detail oriented elements of the business like tech systems or the impact of recent Chinese economic weakness.
But he wasted no time in setting a positive forward looking agenda: “The airline presents an incredible opportunity for a lot of things, including innovation and earnings growth, and more importantly improving the customer experience.” Customer experience was in fact a key focus of Munoz’s initial press conference at the helm, and he built on the initial mention by speaking to some of the challenges United faces. “We just have to think of a service excellence model that all of us can work together on… a shared purpose,” he noted, adding, “We need to reach our customers with a better service product. And need to convince them that that is our commitment. And that’s going to take a lot of time and effort… for now, it is an outreach process.”
Munoz also opened his tenure by taking an upbeat and conciliatory stance on employee relations: “The first step is that I’m going to spend the first 90 days traveling the system and listening and talking to our people, and working with management team. We’ve made a lot of progress, but there’s still a lot to be done. With regards to labor, where I’m coming from, at CSX we’re almost 90% unionized, and we’ve made some big innovative strides in those relationships, and I’m committed to reaching agreements here as quickly as possible, with the folks that we still have outstanding, but more importantly, beginning to build a (…) “win-win” environment for all of the employees here.”
And he also threw a bone to investors when asked if he would maintain the capacity discipline employed by his predecessor: “Yes is the answer… because I think it’s important to manage and work through the product and the service and the places where you can deliver it effectively, and capacity management seems to be something that has worked in the industry.”
CEO Change is No Panacea
Despite the optimistic start, merely changing CEOs does not guarantee that United will be able to overcome the many challenges that plague it. The first and most pressing question is whether the investigation into PANYNJ has any serious effects on United (i.e. if the SEC pursues fines or something like that). While it appears that the feds are currently focused on the broader web surrounding Christie, if that occurs, then United has a much more immediate problem on its hands and opens the door to the possibility that Munoz is just a caretaker CEO, in which case not much might occur over the next few months.
However given that Munoz was in line to become CEO at CSX, it’s unclear why he would agree to take the United job for such a role. Assuming that Munoz is the man going forward, he has a bevy of issues to target, beginning with labor relations. A railroad industry background will serve Munoz well in dealing with complex labor challenges, but United’s particular workgroups have pitfalls that may be beyond Munoz’s control. For example, there is no good answer to the question of whether the flight attendant seniority list should be blended or based on hire date. Due to the radically different growth paths taken by United and Continental in the decade and a half preceding the merger, the former would benefit ex-Continental flight attendants while angering ex-United ones and vice versa.
On a broader level, Munoz must tackle a corporate culture and institutional rot that led United’s service and operational quality to deteriorate (in relative terms), which is not a task that will happen magically overnight just because Smisek is gone. And of course Munoz must balance investments in these areas against Wall Street pressure to maintain earnings and return cash to shareholders. The first step is for him to begin building bridges to employees and begin reassuring customers. At least on those fronts, his first conference call and letter to the workforce combined to form a solid opening salvo.