What Is Wrong With United?

United Airline

First there were the preteen girls who were denied boarding because their “casual attire” – leggings – did not meet with a gate agent’s approval.

Then there was the 69-year-old doctor, bloodied and dragged from his seat because an airline employee needed it to fly from Chicago to Louisville.

Which leaves us to wonder: What on earth – or in the heavens – is going on at United Airlines?

Any seasoned business manager can probably diagnose the problem from a distance. This is a company flying on autopilot. The problem starts at the top with the CEO, Oscar Munoz, and climbs even higher to a board of directors that is not doing its job.

If United seems to put its customers last, that’s because it is the way this company is built to fly. United’s 15-member board of directors includes the aforementioned Munoz, two representatives from labor unions – who were granted their seats in exchange for givebacks in the airline’s bankruptcy proceedings a decade ago – and about 10 directors whose main goal seems to be to avoid jeopardizing their own positions. Only two insurgents – Edward Shapiro and Barney Harford – seem to have any interest at all in shaking up this staid enterprise where self-interest rules.

Shapiro and Harford were part of a group that tried to take control of the board last year. Harford is the former CEO of Orbitz, and Shapiro is a partner at PAR Capital Management, a major investor in the airline. The takeover effort failed, but the activist investors behind it settled for securing seats on the board for Shapiro and Harford – who were promptly sidelined into peripheral roles. Many of their fellow board members serve on multiple committees, but Harford and Shapiro merely serve on one each; neither is a part of the executive committee, where key decisions are most likely handled. That committee does, however, include Munoz.

It is a rare corporate director in the airline industry – or any other industry, for that matter – who is truly willing to rock the boat. For a limited amount of part-time work, directors are rewarded relatively comfortably. Most serve on several corporate boards. But if you develop a reputation for being unwilling to go along with company management, you are no longer nominated (or renominated) for such positions. Throw in the fact that many of United’s board members are near or past retirement age, and it becomes unsurprising that they have little appetite to challenge the company short of anything resembling an impending financial crash landing.

Customer satisfaction is one of the metrics that determine United’s executive bonuses, but it is telling that such satisfaction is measured not against industry competitors, but against United’s own reported customer satisfaction in prior years. This represents the lowest bar possible for the airline to clear. In some ways, the benchmark even discourages too much improvement, since approaching perfect satisfaction would make it that much harder to demonstrate improvement in future years.

Munoz served on Continental Airlines’ board starting in 2004, and subsequently became a member of United Continental Holdings, Inc.’s (NYSE:UAL) board in 2010 when United acquired Continental. He took over as United Airlines’ CEO in 2015, after his predecessor, Jeff Smisek, was accused of trading favors with the head of the Port Authority of New York and New Jersey. Almost immediately after taking over, however, Munoz went on medical leave to undergo a heart transplant, missing nearly six of his first seven months on the job. He returned full-time last March.

United had underperformed financially since the 2010 merger with Continental. Shareholders hoped that Munoz could kick-start the company, especially considering his impressive track record at his prior position with CSX Corporation. He pledged to repair the airline’s labor relations, which had been adversarial in the recent past, and has made employee satisfaction a major element of his approach.

In his prior position as the head of CSX’s rail freight enterprise, Munoz had plenty of transportation experience – but clearly not the right kind. Freight never complains or resists when you tell it that it will not go where it wanted or arrive when it expected. Munoz has made it abundantly clear that he expects United’s passengers to behave similarly to freight, which is exactly how some of the airline’s employees appear to treat their customers.

United’s two recent public relations debacles ought not to have happened at all. Young girls who are decently and inoffensively dressed should not be singled out for public shaming in the gate area, regardless of whether they are flying on “buddy passes” or regular tickets. And if United needs to open space on an overbooked flight to get its staff where it needs to go, the answer is to increase the incentives offered to passengers to willingly give up their seats to a level that attracts the necessary volunteers.

As George Hobica, the president of Airefarewatchdog pointed out, “United could have easily avoided this historically bad public relations disaster had they increased the bumping compensation offer, either before boarding or once boarded.” He added, “Whatever it cost … $1,000, $2,000, $3,000, would have been far cheaper than the cost to its reputation and the loss of business.”

Even Chicago Aviation Security, whose officers actually removed the passenger at United’s request, recognized that leaving a customer dazed and bloodied was not the way to handle the situation. The officer involved was placed on leave pending a review of the incident. In contrast, Munoz initially issued a response that was both tone-deaf and image-blind. In an effort to support his employees, he alienated many of the airline’s customers. Munoz insisted that the airline’s employees had done nothing amiss, even as the internet erupted over the video in question from Chicago to Shanghai.

By Tuesday afternoon, the outcry prompted Munoz to issue an actual apology on United’s behalf. Munoz said the airline would conduct a full review of its policies and procedures and that it would take “full responsibility” for the incident. “No one should ever be mistreated this way,” Munoz said in his statement.

The video of a passenger being dragged off his flight is not the first time United went viral to disastrous effect. Back in 2009, Dave Carroll of the band Sons of Maxwell created a YouTube hit out of his frustration with the airline. When his attempts to secure compensation after United’s baggage handlers broke his Taylor guitar went nowhere, he composed a catchy tune succinctly titled “United Breaks Guitars.” The old business adage is that a happy customer tells two people and an unhappy customer tells 20; Carroll has now told over 16 million.

I travel extensively. Although United is not officially on my personal “no fly” list, it has been years since I visited the unfriendly skies. As cabin crews like to say, travelers have a choice. I invariably choose another airline if I have the option because of United’s minimalist approach to customer satisfaction.

However, United will not respond to anything that does not measurably affect its bottom line. In a time of constrained capacity, my personal decision and those of other individual passengers will not be noticed in the airline’s boardroom bunker. If anything makes a difference, it will be corporate travel departments deciding not to subject their personnel to the vagaries of what United calls “customer service.” United’s share price also fell as internet outrage gathered, suggesting investors as well as passengers were rattled by the incident.

Who knows? Maybe United’s complacent board will be humiliated into action to replace the company’s leadership and demand that leadership demonstrate in deed, as well as words, that customers actually matter.

About Larry M. Elkin 549 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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