Why UAL's Pilots Have It All Wrong

Pilots for UAL Corp.'s (Nasdaq: UAUA  ) United are calling for CEO Glenn Tilton to resign. Their reasoning, per a press release put out by their union leaders, is that United has regressed in operating performance and customer satisfaction.

There's truth to their argument. Throughout 2008, UAL has cut jobs like a gardener cuts grass, joining unionized bleeders Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and Embraer (NYSE: ERJ  ) . On-time performance has suffered since. Only 59.3% of its flights arrived on time in June, more than 10 percentage points off the national average. Only AMR's (NYSE: AMR  ) American was worse, on time just 58.8% of the time.

Don't think this is just a legacy carrier problem – US Airways (NYSE: LCC  ) trounced the national average by arriving on schedule 76.3% of the time. Why is UAL so badly underperforming the carrier it once hoped to merge with? Pilots say it's Tilton's fault.

Balderdash.

Both management and employees -- and, yes, I'm including pilots -- deserve the blame. I know because I've read UAL's proxy statement. Page 31 reveals this screwed-up business for exactly what it is. There, you'll find UAL's performance versus its internal targets for what the company calls a "success sharing plan." But that's a gross misnomer. More on why in a minute; first, the numbers:

2007 United Promoters Score

Q1

Q2

Q3

Q4

Target

22.1%

22.9%

30.9%

31.7%

Actual

20.7%

16.9%

22.4%

22.3%

Source: SEC filings

On-Time Departures

Q1

Q2

Q3

Q4

Target

59.9%

61.4%

61.6%

61.9%

Actual

56.9%

57.7%

57.2%

50.6%

Source: SEC filings

More troubling: These scores, and targets, are far worse than what UAL put up in 2007:

2006 Definite Intent to Repurchase

Q1

Q2

Q3

Q4

Target

38.2%

35.8%

35%

35.2%

Actual

35.6%

34.9%

34.4%

35.1%

Source: SEC filings

On-Time Departures

Q1

Q2

Q3

Q4

Target

59%

59%

59%

61.1%

Actual

56.6%

58.6%

61.2%

61.1%

Source: SEC filings

Yet, in each case, participants in this program were paid bonuses. Last year, more than 45% of the pool of money set aside was paid out, which means UAL is paying for underperformance.

But the most troubling part of this (ahem) success-sharing plan is that some employees aren’t participating. From the proxy:

The Success Sharing Plan for 2007 provided eligible employees, including the named executive officers, the opportunity to earn short-term incentive awards based upon the achievement of certain predefined performance goals. Since the beginning of 2008, several employee groups have elected not to participate in the Success Sharing Plan in exchange for other compensation. [Emphasis added.]

Tilton's the problem? Yeah, he's part of it. But isn't the bigger problem a business model wherein the interests of management and employees are anything but aligned? One in which underperformance is actually rewarded? Nah, that couldn't possibly be the issue. It makes too much sense.

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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. When he’s not typing up articles for Fool.com, you'll find him picking growth stocks for Rule Breakers. Get access to all of his writings here, or enjoy a daily dose of his Foolishness via this feed for your RSS reader.

Embraer is a Stock Advisor selection. The Motley Fool's disclosure policy tries to keep its software shopping to a minimum.


Read/Post Comments (10) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 12, 2008, at 4:57 PM, Bucko44 wrote:

    Tim Beyers displays an unfortunately shallow understanding of the dynamics at United Airlines. Take if from a UAL employee who sees the toxic atmosphere created daily by Glenn Tilton and his management team. It's obvious to every UAL employee that Tilton sees the company as his own personal ATM -- a way to callously withdraw hoards of cash for himself and his Board at the expense of his employees. He has publicly stated, "employee morale is not my problem," as if morale has nothing to do with a smooth-running operation. He has never grasped how to run an airline. His utter disregard for anyone but himself is earning him a place near the top of a list of infamous CEOs in history. I see parallels between UAL and the ill-fated Enron. Instead of looking at a bunch of numbers, Mr. Beyers, how about going out and talking to some front-line employees? They'll surely give you a real education.

  • Report this Comment On August 12, 2008, at 5:04 PM, business9 wrote:

    Why Motley Fool and financial analysts have it all wrong. This article goes to the heart of why they have it all wrong. It explains that Glenn Tilton isn't the problem, its the poor business model and bad business targets. You see, Wall St believes the only purpose of the CEO is to come into a company and remove as much money from it as they can before they retire or move on to the next cash machine (publicly traded company). These guys don't seem to understand what the job of a CEO really is: to develop and manage the business model and strategies correctly and to set the proper corporate targets and bench marks. So instead these pundits sit around telling us that its not the CEO's fault, its just a poorly run business. Afterall, to these guys the job of the CEO is to remove money, improve their personal perks, and the very BEST ceo's will be perky and witty and charismatic with the cameras and on-stage. So is part of the problem the Motley Fool trying to tell us about why CEO's are not to blame when they really don't understand the role of a CEO? yeah. Yeah, its part of it. But isn't the bigger problem the fact that all of Wall St is trying to sell us on the idea of paying big money for CEO's without any accountability? One in which underperformance is actually rewarded? Nah, that couldn't possibly be the issue. It makes too much sense.

  • Report this Comment On August 12, 2008, at 5:56 PM, stevefilson wrote:

    I met Glenn Tilton his first day at work at United Air Lines. When his limo pulled up out front of the terminal in San Francisco, he hopped out and got his own suitcase out off the trunk. The next scene was pretty comical.

    Here's a guy who hadn't flown on the air transportation system since long before the post 9/11 TSA screenings. He had his own jet before United. Anyway, there he was, 6am in the morning with his arms outstretched in T fashion while the TSA goons had their way with him. Seems he didn't understand all the things you couldn't carry on board an airliner.

    Then he came up to our SFO flight operations to make the introductions amongst we managers.

    My impression?

    A smart guy but incredibly patrician. It doesn't surprise me he has not connected with the employee group and has never grasped the center of this business.

    Look at the United advertisements on the NBC Olympic coverage. Maybe somebody likes them but they are so obscure and obtuse you really wonder what they are selling. United is a company that doesn't understand its center. Those ads show that in spades. The employees are not the ones to provide that center, the CEO is.

  • Report this Comment On August 12, 2008, at 6:10 PM, ramprat099 wrote:

    facts always seem to be missing from news articles in American media nowadays..while stating some configurations to the UAL employee profit/success sharing program,the public is left out of the general knowledge that while Tilton and other top execs got million dollar pay-outs for bad performances,the average ramp worker got a quartly check net of $40.00- 60.00..now that is what you call sharing?? and one would question why morale is at a all-time low??Tilton is just a tool of the big banks which are purposely causing and creating these issues.want to find out where its all heading? read Naomi Klein's -The Shock Doctorine.

  • Report this Comment On August 12, 2008, at 7:55 PM, TMFMileHigh wrote:

    Hello Bucko44. Thanks for writing. I've talked to a number of front-line employees and managers. They all agree; morale is low. But most of them also agree that management and unions at UAL are at war, and in a war, nobody wins, customers and investors especially.

  • Report this Comment On August 12, 2008, at 9:20 PM, capncrunch2008 wrote:

    As any pilot of a major airline knows, the captain sets the tone for the trip.

    Glenn Tilton and the top management of United Air Lines represent failed leadership. The leader of United is typical of the robber barons and carpetbaggers who lead too many of America's businesses. On the lookout for themselves first, they are willing to watch their employees sacrifice while they bask in safety, not willing to sacrifice, to march into battle, themselves.

    The tone they set rings loud of self reward and abuse.

    They are not builders like Henry Ford, Bill Gates and Juan Trippe who built businesses from the ground up; people deserving of great reward. Tilton, et al., are merely managers, employees hired to oversee the product of someone elses creativity.

    Ford, Gates, Trippe and others, dynamos who could have populated an Ayn Rand novel, created new industries and jobs. They provided new livelihoods for thousands of Americans.

    No, this new breed of opportunists manipulates and browbeats their employees while filling their own deep pockets. They no nothing of the creative process. They manage by wringing the last dollar out of their operations. In the process they squeeze out life blood. It's no wonder UAL's performance is terrible when the company's implied motto is "the abuse will continue until morale improves."

    UAL is a service business. Tilton and other management employees' first customer group to make happy is the first line workers. And in tough times if they cannot be made happy then they need to be inspired.

    The airline industry has been on the rocks for years. In these tough times no thinking employee will expect unreasonable rewards. During hard missions, with the right leadership, people with follow their skipper through the gates of hell.

    You can be sure we have no General Pattons, MacArthurs or Admiral Nelsons leading United Air Lines.

    What mastermind came up with UAL's "reward the employees for failure" program? You can bet it was one of the highly paid employees in the executive suite. The final approval was inked by Tilton. It is a program worthy of Marie Antoinette (in the end the suggestion of cake did not work out too well for her).

    Tilton and executives like him are reaping rich rewards for abysmal performance. They are indeed modern day carpet baggers. They are failing the "holy trinity" of business; the customer, the stockholder and the employees. They cast about phony alms while doing nothing to re-create the industry.

    The situation at United Air Lines is not the employees' fault. Do not blame the crew for the captain's failures.

    P.S. Though it may sound like it, I am not an employee, disgruntled or otherwise, of United Air Lines.

  • Report this Comment On August 13, 2008, at 12:14 AM, vitaminj4u wrote:

    Well tim, Tilton is not only part of it, he is responsible for a big chunk of what's happening right now. What does an overseeir do? Just sit in his desk infront of His pc smoking a cigar? and the business model? who makes the business model for a business? isn't it top management or CEOs? Underperformance rewarded to employees and management, Well For employees, these rewards are a for free plane tickets. Not cash, who has the time and money to fly somewhere? That's why these employees work. It's nothing compared to the Million dollars of bonuses given to top management and Tilton himself. Talk about underperformance.

  • Report this Comment On August 13, 2008, at 12:41 AM, business9 wrote:

    I think its clear that nobody is on the same page as Motley Fools. They are about as out of touch with reality as the CEO's are. Rethink or get out of the game. Motley Fools, you are still talking nonsense and are becoming more and more irrelevant to financial issues.

  • Report this Comment On August 13, 2008, at 12:52 AM, business9 wrote:

    But if what I've read off motley fool over the years is any indication, here's all you need for them to pick your stock as a winner:

    Give them a comfy leather seat

    Give them a steak onboard

    Offer them free flights so there's no revenue stream at all.

    Give them a CEO who is good with the cameras and makes witty jokes and makes tons of money.

    That's all you need. Make yourself a CEO and make those your airline's policies until you run your airline out of business and you'll have Motley Fools' support all the way to the ground.

  • Report this Comment On August 13, 2008, at 10:36 AM, Johnchar0001 wrote:

    Other than the usual layoff, slash and burn tactics, Tilton's "big move" at ual has been the relocation of ual's HQ from O'Hare to downtown Chicago--physically and metaphorically seperating and disassociating himself from his employees and his customers.

    Tilton is not an "airline guy", so some of his many missteps can be attributed to inexperience. However, he is an "oil guy." How then to explain ual's abysmal performance with regard to fuel hedges-- that most basic and important airline management function?

    The answer: He doesn't know or care about the airline business. He knows that his $XX,000,000 payoff comes with the merger, sale or breakup of ual. The "creative destruction" he is wreaking on the 60,000 ual employees?? That, like morale, is "not his problem."

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