UAL Stock: United Airlines Stuck With Inept Board

It’s a shame that United Continental (UAL) CEO Oscar Munoz suffered a heart attack, and the company’s flatfooted response to the crisis underscores the dysfunctional state of the world’s second-largest carrier.

united-continental-stock-ual-logo-185It also raises questions about the board’s lack of oversight and is reason enough to avoid UAL stock.

Indeed, it took several days for the Chicago-based company to confirm the media reports that Munoz had suffered a heart attack and subsequently name Brett Hart, the company’s general counsel, as acting CEO.

The carrier has said that it is “too soon to know the course of treatment and timing of recovery.”

Munoz had lot on his plate, from negotiating new contracts with flight attendants and mechanics to restoring consumers’ trust. And although I respect Munoz’s right to privacy, I find it hard to believe that United couldn’t provide shareholders with some idea as to when Munoz will return to work. If he returns at all.

United’s treatment of Munoz’s illness is the latest evidence of how poorly the United board has served UAL stock holders.

UAL stock did, however, shoot up over 6% Friday, which comes after United Airlines reported earnings of $4.53 per share, below consensus estimate for $4.55. If you’re interested in the nitty gritty, revenue fell another 2.4%, and passenger revenue dropped 5.8% from a stronger dollar, gutted surcharges and the energy sector’s cutback in corporate travel. Still, UAL stock sprang to life after Credit Suisse upped its target on UAL from $85 to $88.

But it’s hard to see why anyone could be bullish on UAL stock with the carrier’s dismal record of customer service, which has been well-documented in many media reports including the New York Times and the Wall Street Journal.

Much of the blame for these woes can be traced to the 2010 merger of United and Continental.

The carrier also got into hot water with the U.S. Department of Justice for allegedly trying to curry favor with David Samson, the head of the agency that oversees New Jersey’s Newark Liberty Airport. According to media reports, United restarted a “money-losing” flight between Newark and Charlestown, South Carolina, where Samson had a vacation home. When Samson, who was implicated in the Bridgegate scandal, resigned, the South Carolina flight stopped. Neither Jeff Smisek nor Samson has been charged with a crime.

The question that UAL shareholders need to focus on is what did the board know about the miserable state of the airline and when did it know it?

Examining United Airlines’ Board

Noted journalist Walter Issacson has served on the board since 2006, as has Chicago Board of Education President Donald J. Vitale. And the non-Executive Chairman of Global Brass and Copper Holdings John H. Walker joined in 2002. None of these members appear to have any background in the airline industry beyond their board service.

In particular, Issacson’s appointment is especially puzzling. Issacson runs the Aspen Institute, a think tank, and is a best-selling biographer whose work on the late Steve Jobs was the basis of the critically acclaimed movie that was recently released. Just because you have written a book about a corporate visionary doesn’t make you one.

Another puzzling board member is NCR (NCR) CEO William R. Nuti, who joined in 2013. Nuti is a seasoned technology executive who, according to the most recent proxy, “brings to the Board the perspective of an active chief executive officer with primary responsibility for the oversight of all aspects of a publicly-traded, global technology company with international operation.”

Again, no direct experience with airlines.

Several board members such as bankers Charles A. Yamarone and Laurence E. Simmons served on Continental’s board, as did retired Boeing executive Carolyn Corvi and former FAA administrator Jane Garvey.

These board members should have had enough of a background in the industry to raise questions about the poor state of the company. Apparently they didn’t.

Indeed, the latest proxy offers no hint that the board had issues with Smisek’s performance. In fact, he got a 39% increase in his compensation in 2014. He is going to receive $29 million in severance, which he gets to keep as long as he cooperates with the government’s investigation.

And the acting CEO, Brett Hart, is seeing an increase by $100,000 per month to his salary.

Nice work if you can get it.

While questions of board governance may not be as sexy as political shenanigans or as memorable as irate passengers, it’s important for owners of UAL stock, whose shares have fallen about 9% this year.

UAL has underperformed peers such as Delta (DAL) and Southwest (LUV), which have eked out gains of about 3% and 7%, respectively.

UAL stock trades at a forward multiple of 7.15, which is cheaper than its peers, but there are better choices in the airline sector such as DAL and LUV (which, unlike UAL, pay dividends).

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

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