Published in July 2016 issue
In January, 1994 I wrote a newspaper Op/ Ed arguing against former Continental Airlines (CO) chief Frank Lorenzo’s launch of ATX, a low-cost airline intended to serve the East Coast. Years later, I was informed by a former Continental station manager that he was present when the Air Line Pilots Association (ALPA) submitted a copy of my editorial as an exhibit before a U.S. Department of Transportation proceeding. The DOT rejected Lorenzo’s plan for ATX on April 6, 1994 and upheld Judge Robert L. Barton’s ruling of September 8, 1993
By Michael Manning
Barton ultimately ruled that Lorenzo and ATX had exhibited “a pattern and practice of disobeying orders and filing frivolous and vexatious pleadings.” Mr. Lorenzo appealed that ruling, but it was followed by a second response on December 22, in which the judge wrote that the airline’s management “had failed to demonstrate that it has the managerial and technical competence to be found fit.” Judge Barton further highlighted Lorenzo’s “persistent and disturbing inability to correct or prevent maintenance operations or operational irregularities.” Ultimately, 125 members of the U.S. Congress agreed that Lorenzo should be banned from the airline industry.
Recently, Dan Reed, an airline correspondent with Forbes, came to Lorenzo’s defense after he publicly urged United’s (UA) shareholders and employees to repudiate what he characterizes as “a proxy fight being mounted by disgruntled minority shareholders.” While Reed lists Lorenzo’s disastrous track record at Continental and Eastern Airlines (EA), he attacks former CEO Gordon Bethune’s “almost mythological retelling” of Continental’s remarkable turnaround in his New York Times best-seller From Worst to First. Why Reed would marginalize Bethune goes beyond the ken of human imagining. He defends Lorenzo’s frustration, while acknowledging him as one of the worst airline executives in modern history. Reed justifies his views by citing a 25% uptick in United’s stock price in the first 45 days of 2016. He then mischaracterizes the actions of two hedge funds, Par and Altimeter, as conducting an end run around newly minted CEO Oscar Munoz. Nothing could be further from the truth. A fact check is in order.
Lorenzo’s private investment firm, Savoy Capital, has significant holdings in United Airlines. Even before U.S. prosecutors began to investigate allegations that former CEO Jeff Smisek and two lieutenants may have reinstated a route from New York to South Carolina to curry favor with former Port Authority of New York and New Jersey Chairman David Samson, United had plenty of unresolved problems. Five years after United’s merger with Continental created the world’s largest airline, revenue performance has lagged behind rivals American (AA), Delta (DL) and Southwest (WN). According to the J.D. Power 2015 North American Airline Satisfaction Study, United’s reputation with passengers is abysmal. Last July, its on-time arrival rate was 73.5%, according to the U.S. Department of Transportation. Only ultra-low cost airlines Frontier (F9) and Spirit (NK) fared worse.
Jeff Smisek resigned on Sunday September 6, 2015, and handed the reins of the company to board member Oscar Munoz amid a looming federal probe.
After Bethune retired in September 2004, Smisek succeeded him and later led the consolidation with United.
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Although United’s network was superior to those of rivals Delta and American, Delta’s integration with Northwest was smoother and began delivering greater reliability and stronger financial returns for shareholders. American’s merger with US Airways (US) produced similar results. Oscar Munoz was recruited to Continental’s board by Bethune from CSX 20 years ago. United’s incompetent board is at issue, not Munoz.
Over the past five years, UA’s board of directors has been an exercise in failure in establishing corporate governance, setting goals, and unifying two separate work forces. The failed integration of the merged company is a public embarrassment.
Reed’s position that Lorenzo is sensible for his encouraging stockholders to resist installing competent board members at United is absurd. Lorenzo dismantled Eastern Airlines, cast off 42,000 employees, and shifted $700 million worth of assets in dubious transactions to Continental in a cunning attempt to force a de facto merger. His resignation from the empire he spent almost 20 years building was a humiliating blow, and Continental was left in an absolute financial mess. Had it not been for Bethune’s leadership and financial triage after becoming CEO in 1995, Continental would have been liquidated.
In the wake of this evidence, it’s difficult to see why Reed marginalizes Bethune as an egomaniac. To the contrary, Bethune is just the leader needed to bring fiscal discipline to United and heal a fractious workforce, as he did at Continental. With Par and Altimeter’s desire to appoint six new board members, including Bethune as chairman, United appointed James Whitehurst, a former chief operating officer of Delta Air Lines, and Robert Milton, a former chairman and CEO of Air Canada (AC). This move is a good start.
But without Bethune as chairman, United will never reach its full potential as the top airline, outpacing Delta and American— and that is long overdue.