During the past year I have been a consistent critic of activist investors seeking to take over or influence well-run companies including Apple, PepsiCo, Amgen, DuPont, Dow, eBay and Allergan. However, I have supported activists who have challenged moribund management teams backed by complacent boards of directors.
The new challenge to United-Continental Holdings, known as United Airlines, fits the latter description perfectly. United deserves to be challenged. This week, PAR Capital and Altimeter Capital, two hedge funds with years of experience investing in the airline and transportation industries, have assembled 7.1 percent of United's shares and seek to name six board members.
Leading their charge is none other than Gordon Bethune, the successful former chairman and CEO of Continental (1994-2004) and career veteran of the airline industry.
Bethune, in an appearance on CNBC this week, criticized the airline's performance and lack of airline experience on its board and in its executive leadership.
"The current board has a country club atmosphere," Bethune said.
Having Bethune at the helm would be a refreshing change for United's leadership, which has been non-existent since CEO Oscar Munoz's heart attack in October and subsequent heart transplant. Prior to Munoz's appointment last September, the board ousted former CEO Jeff Smisek who had created "the chairman's flight" to South Carolina to win favor with the chief regulator of the Newark International Airport in order to gain concessions for United.
United's troubles existed long before Smisek's termination. The 2010 merger with Continental was plagued by poor integration, battles with its unions and computer problems that led to persistent delays, missing luggage, and poor customer service. Its first-line employees were angry at how they were being treated, and their attitudes impacted United's passengers. According to the Bureau of Transportation statistics, over one-quarter of its flights arrived late last year – by an average of 65 minutes! That was well above other airlines, includingDelta and American.
The contrast is marked between United's woeful performance and the stunning leadership of Richard Anderson, Chairman and CEO of Delta Airlines. Anderson is an airline industry veteran who revived the former Northwest Airlines as its CEO, before a brief sojourn as executive vice president of United Health Group. Anderson became Delta's CEO in 2007 to lead it out of its 2005 bankruptcy. The following year he merged Delta with Northwest, which had also gone through bankruptcy, and quickly created a unified culture, sound relations with the pilot's union, and an integrated route structure. He took the unusual step of changing ID numbers on employee security badge to erase any identification with Northwest or the old Delta.
Anderson is a hands-on leader who meets regularly with employees and is often found on the flight line talking with the maintenance crew or in the cockpit jump seat chatting with pilots. He eliminated the bottlenecks in flights by boarding passengers forty minutes early, ensuring minimal lost baggage, and enabling many flights to arrive early – all of which have led to high levels of customer and employee satisfaction. Since the 2008-09 recession, Delta has experienced strong profitability and is using its cash flow to invest in updated aircraft and improvements to in-flight customer service.
As a frequent flyer on Delta and a reluctant passenger on United, my experiences with the two airlines differ dramatically. It is a pleasure to fly Delta where the pilots and flight attendants seem to genuinely enjoy flying and serving passengers. Delta is so efficient that I have come to expect to arrive early, and walk away feeling very satisfied. In contrast, the morale at United seems low. Do employees care whether the flight arrives on time or not? In a way, you cannot blame them as their systems are so poor that flight delays are inevitable.
Thus, United is a perfect target for an activist takeover that could benefit from a board and leadership team of airline veterans. Who better than Bethune to lead the transformation? For the sake of United's passengers and employees, this is one battle the activists deserve to win.
This article was originally posted to CNBC.com on 3/9/2016.