My day at World Headquarters...

My apologies for the delay in posting this report; I know many of you are anxious to hear about what happened at my meeting with Senior Management at World Headquarters this last Wednesday.  It was really difficult to take a day away from the office to go to Chicago, but I could not pass up this opportunity to be able to discuss my concerns, as a shareholder, customer and supporter of the front-line employees, about what is happening to United Airlines.  The last few days have been a struggle not only to find the time to sit down and write this, but to be honest, it was difficult for me to figure out how to tell you all that I did not come away from the meeting having succeeded in directing any change, or with any optimism that things are going to get better in the near term. 

The meeting was held in a conference room on the 10th floor at World Headquarters in downtown Chicago.  In addition to myself, in attendance at the meeting were:

Brett Hart –    Executive Vice President, General Counsel and Secretary

James Compton - Vice Chairman and Chief Revenue Officer

P. Douglas McKeen - Senior Vice President Labor Relations

John Gebo - Senior Vice President Financial Planning and Analysis

Jonathan Ireland - Managing Director for Investor Relations

I had met Messrs. Gebo and McKeen before this meeting.  I have had the chance to sit down with Mr. Gebo on other occasions to talk at length about what is going on at United.  He has always been fair and candid with me, and I was glad he was there.  Mr. Compton is the only executive in attendance that had come over from Continental. 

Instead of starting out with a dry recap of what transpired in the nearly two hour meeting, it is best just to come right out with the “take away.”  For as much as I was hoping to make a difference, I knew there was little chance that what I had to say was going to influence any of the decision makers in attendance.  I did leave the meeting feeling confident that the facts I used as the basis for my arguments could not be disputed.  The meeting was relaxed and cordial, and I did not feel intimidated into re-thinking my position.  They appeared to respect what I had to say and I felt good right after the meeting; however, the next day as I had a chance to review some information I had been given at the meeting, and after taking some time to talk to a friend at LAX, it was apparent that much of what was discussed was still just a lot of “lip service.”  I got caught up in the moment and in my desire to show them I appreciated their time and commitment, I withdrew my shareholder proposal.  I failed in my attempt to make a difference.

Executives at United are certain they are on the right course.  In any area where the airline is under-performing, the blame can be placed squarely on merger-related “hiccups” or weather.  Customers should also expect to find more automation and outsourcing as they are the better business decisions.  The most significant revelation I got from this meeting is confirmation that a Joint Collective Bargaining Agreement (“JCBA”) for the Flight Attendants is going to have to mirror the tentative agreements in place now for the sCO/sCM Flight Attendants.  Until then, layoffs will continue on the sUA side as older equipment is retired, or demand drops off forcing more capacity reductions.

Looking Ahead

Even though I withdrew my proposal, shareholders will still have at least two opportunities to cast their vote of “no confidence” in the leadership team.  The first is the election of the Board of Directors – shareholders can vote “For,” “Against” or “Abstain” for each nominee, one of which will be Mr. Smisek as Chairman of the Board.   It does not take a majority vote “Against” to convey the message that shareholders are waning in their support for Mr. Smisek.  More often than not there is a lack of interest by shareholders; therefore, management exercises their right to vote “For” each nominee by proxy for the non-voting shareholder.  If there is a big increase in shareholders actually taking the time to vote “Against” the nominees; that can send a pretty loud message to the Board members who keep Mr. Smisek employed. 

The second is to vote on an Advisory Resolution approving the compensation for Mr. Smisek and his Executive Management team.  This is only an Advisory Resolution, meaning that the Board is only required to take into consideration the desire of the shareholders.  Even if there is a majority vote “Against” this resolution, the Board can still approve the compensation for the name executives as laid out in the Proxy Statement.   However, like in the election for Board members, if there is a big jump in the number shareholders actually voting, it is another “no confidence” signal that is very public and casts a bad light on Mr. Smisek and his team.

For the Flight Attendants, consider re-setting some of the objectives laid out for your Joint Negotiations Committee.  Management is not changing its course, so it is more important now than ever that all United Flight Attendants come together as soon as possible.  From what I learned from Mr. McKeen, once there is a JCBA in place, those who have already crossed over will get their seniority back, and when staffing needs require it, furloughed Flight Attendants will be called back to work.  As long as the three Flight Attendant groups stay divided, management will always have the stronger hand.  I wonder how effectively Mr. Risoli can manage when he can no longer hold the threat of furlough over his employees.

What I was happy to hear on this trip is that nearly 90% of sCO Customer Service workers voted to join their peers on the sUA side and become part of the IAM.  This means that all of United’s Customer Service employees are now governed under one JCBA.  This was a blow to the managers who lobbied hard to convince them to vote against joining the union.  Now with all of the front-line employees unionized these Continental managers find themselves treading in unfriendly waters. 

My last take-away from this meeting took me by surprise and left me a bit embarrassed.  After the meeting, Mr. Hart’s assistant had arranged for me to take a tour of the Operations Center.  It was a fascinating and impressive experience, but what I realized is that even though the customers may not see these professionals who work in dispatch, man the crew and hotel desks, watch the weather and airport operations, and keep their eyes and ears open to any security risks – these employees are as much on the front-line as those employees we see at the airports.  The merger was intended to consolidate these departments; thereby reducing a significant portion of the fixed costs for the airline. We do not hear much about it, but there are a lot of good people who have already lost their jobs.  Now when I voice my support for the front-line, I will keep in mind those in the Operations Center and those in support positions at WHQ.  They too are at risk as myopic managers make poor decisions.

To repeat what I said before – Proxy Notices will be coming out any day now.  If you want to make sure you get a chance to vote, consider buying some shares if do not hold any now, and if you do own shares, follow-up with your Brokerage account manager to let them know you want to vote.  When I withdrew my proposal it was conditioned upon more of the shareholders being given the opportunity to ask questions or express their views at the Shareholders Meeting.  I was assured that would happen.  I am planning at being at that meeting, and I ask that you consider taking time out of your busy schedules to be there.  Change will not happen if no one questions the actions of these managers. 

Never forget that you are more than a co-worker, - YOU – are United Airlines!

Meeting Recap

The meeting was relaxed and each manager had prepared in advance to address each of the five points that I brought up in my Shareholder Proposal.  Much of what they discussed was taken from the presentations that were made at the last Investor’s Conference held back in November of 2013.  This conference is a meeting with those fund managers and institutions that hold 95% of UAL stock, as well as Wall Street and Media Analysts that follow UAL.

1. Merger Costs.  In my proposal I had stated that merger and integration related costs had far exceeded original projections, and had exceeded what had been reported by Delta Air Lines in connection with their joining up with Northwest Airlines.  On the last 10-K filed by United Continental Holdings, the total for what was reported as “Merger and Integration Related Costs” was $2.025 billion.  Shareholders were originally told that these costs would be around $l.2 billion, and when I checked again, the total reported by Delta on their 10-K’s as “Merger and Integration Related” was just over $1.5 billion. 

Mr. Ireland explained that this area can be subjective in its reporting.  His interpretation is that Delta reported other costs separately that really should be considered as “merger related.”  When you add in those other costs, Delta’s true integration costs are closer to the $2.0 billion that UAL has spent.  They feel that the costs are in line and justified.  What I need to take time to do is look at the 10-K’s for both companies to see if there are other one-time charges that are reported separately, but might be considered “merger related.” 

2.  Operational Performance.  This is where I brought up that expense growth was outpacing revenue growth, when measured on a unit basis (PRASM, Yield and CASM).  I also brought up that revenue growth rate at Delta was outpacing United, in fact almost twice the rate. 

This is when I received my first lesson in “Stage Length Adjustments.”  Because United is more of a long-haul carrier, it follows that their nominal unit revenue statistics (PRASM and Yield) will be lower that those reported by a carrier who’s “Average Stage Length” is lower.  In a nutshell, Delta flies more of the shorter, higher revenue producing city pairs than does United.  To more accurately compare the performance of the two carriers; those nominal statistics reported have to be adjusted to account for the difference in the “Average Stage Length.”  They displayed a graphic that they used at the Investor Conference that United’s “Stage Length Adjusted” unit revenue statistics are the highest in the industry. 

Mr. Compton and Mr. Gebo both conceded that United was lagging terms of growing revenue and had work to better those numbers.  The problem in 2011 was that is was the first year of the merger and that there were integration issues that were a distraction.  In 2012, that problem was the conversion to the SHARES system and the outages that were experienced, and in 2013 the blame is on the bad winter weather.   However, they wanted to assure me they are on track to better those numbers.  They continue to find more ancillary revenue opportunities.  In fact, a big part of the decision to go over to the SHARES system is that its programming is flexible enough to add an infinite number of “impulse items” that can be purchased when a customer is making a reservation or checking in for their flight. 

When discussing On-Time performance, they repeated the same excuses, merger hiccups, the SHARES outages and bad winter weather.  They also said that most of the delays were coming from United Express flights which are out of their control, and that previous tracking was based upon “padded” flight schedules.  It is easy to be on-time if you add on thirty minutes in the schedule.  While this “padding” can improve On-Time performance, it doesn’t work because it increases the block time for which in-flight employees are paid, keeps planes on the ground longer so they are used less, and it doesn’t paint a true picture of the airline’s performance.   They did say that there is work to be done here and they are on track to get that number back up to where it was before the merger.

3.  Stock Price Performance and Return to Shareholders.  My proposal pointed out that Delta shares have gone up nearly 170% in the last three years, while UAL shares have gone up 81%.  It is hard to argue against an 81% return and management certainly does not agree with the opinion any run up in UAL shares is momentum driven.  They think that the performance of the stock tracks with the performance of the company.  I think they are a little nervous though about what will happen this Thursday, April 24, when first quarter 2014 earnings are reported.   

4.  Market Share and Customer Satisfaction.  Mr. Ireland pointed out that management is not where they want to be, but they see that the J.D. Power rankings are improving, and that United’s own internal polling shows big improvements.  I asked where they got the data for the internal reporting and they said it came from the surveys customers are asked to fill out after every flight.  I told them that I had not received a survey request since the merger which they said was some kind of glitch and they would see that it is corrected.  They also talked about the commitment in retraining over 43,000 employees involved in customer service. 

There was no real discussion offered by them about the exodus of passengers to other carriers, by my estimate at least 9 million in the last 3 years.  They did concede that they are not where they want to be in this measure and that that merger hiccups have disappointed long-time customers.  Based on what they did, or rather did not offer here, I am more certain that capacity cuts have been more driven by the drop in demand that they would care to admit.  They want shareholders to believe that it is a focus on “capacity discipline” in order to drive up revenue and cut costs. 

5.  Labor Agreements.  This is where Mr. McKeen came into the presentation and discussion.  His first point is that JCBA’s have been reached for all of the employee workgroups except the Flight Attendants.  He repeated what had been said before - that sUA Flight Attendants have had numerous opportunities to keep their jobs and cross over to sCO.  Older planes on the sUA side were being taken out of service and delivery of new planes was coming from orders previously placed by Continental, and those new planes are considered sCO metal.  He said it the AFA that wanted the restrictions that prohibited employees from the named divisions from working on the other’s metal until a Joint Agreement was in place. 

Mr. McKeen was also forthcoming in that management is expecting a Joint Agreement that mirrors the Tentative Agreements in place for sCO and sCM flight attendants. The pay scales are higher for sCO and sCM flight attendants, but the more restrictive work rules on the sUA side are expensive and inefficient, so much so that it makes sense they do what they can to get more sUA employees to cross-over.  Further, he put the delay on reaching a Joint Agreement squarely on Marcus Valentino and Greg Davidowitch and their “butting heads” with each other, and in some sense jockeying to see who was going to come out the leader.

I asked Mr. McKeen and Mr. Compton if they truly realized how demoralizing and divisive this has all been.  I told them that from my own experiences and in my talks with other customers, there remains an uncomfortable atmosphere in the airports fueled by the efforts of management to keep some employees divided.  Executives brought over from Continental, especially Mr. Smisek, have not garnered any level of respect from pre-merger United employees.  Long-time loyal United customers have not been happy with all of the changes and the numbers prove a lot of them have defected to other carriers. 

My sincerest thanks to all of you for your support and well wishes – it meant a lot to me; and Thank You for keeping the Skies Friendly!