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United Continental Gets a New CEO

By Adam Levine-Weinberg - Sep 9, 2015 at 12:40PM

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Jeff Smisek is out at United Continental amidst an ongoing corruption investigation. Here's why this might actually be a good thing for the company.

Now-former United Continental (UAL 6.74%) CEO Jeff Smisek kept his post through years of missed merger deadlines and financial underperformance. However, Smisek finally resigned on Tuesday, brought down by an ongoing corruption investigation.

Too much heat
The investigation at issue first came to light early this year. David Samson, the former chairman of the Port Authority of New York and New Jersey -- which operates Newark Airport, a major United hub -- has a weekend vacation home near Columbia, S.C. Smisek and other senior United executives allegedly scheduled a loss-making flight between Newark and Columbia to win Samson's support for various infrastructure improvements at the airport.

A Bloomberg investigative report published in April indicated that Samson may have strong-armed United Continental using his control over the Port Authority agenda. Nevertheless, if the flights were instituted merely to curry his favor, it could still be considered illegal conduct.

United disclosed the investigation in its annual report (filed in February) without providing any details and also stated at the time that it was conducting an internal investigation. There was no advance warning that the probe could bring down the company's CEO, though.

Nevertheless, United made it clear that the investigation was the cause for Smisek's resignation. According to the official press release: "The departures announced today are in connection with the company's previously disclosed internal investigation related to the federal investigation associated with the Port Authority of New York and New Jersey."

Moving forward
United Continental held a conference call on Tuesday afternoon to discuss management transition. However, it refused to talk about the findings of its internal investigation or why the probe led to the resignation of Smisek and two of his lieutenants.

Investors did get one piece of good news, though. Company officials stated that they did not expect any meaningful financial or operational repercussions from the ongoing official corruption probe. Instead, the call mainly served as an introduction to United's new CEO. The company appointed Oscar Munoz -- previously the president and chief operating officer at railroad operator CSX -- to its top post. Munoz has served on United Continental's board of directors since its 2010 merger and on the Continental Airlines board before that.

At first blush, Munoz appears to be a good pick. He has been a high-ranking executive at a top-performing transportation company for more than a decade. And as a longtime board member, he should be able to get up to speed relatively quickly while also potentially bringing some new ideas to United.

Does it matter?
It's always unsettling to investors when a CEO resigns with little or no warning. Not surprisingly, United Continental stock declined modestly in early trading on Wednesday. However, this change may be for the best. While United Continental has started to get its performance back on track in the past year or so, Smisek's tenure has had more downs than ups.

The carrier routinely ranks at the bottom of the industry in terms of customer satisfaction. Furthermore, labor relations have deteriorated in a big way under Smisek's leadership. Five years after the merger, United still hasn't reached joint collective bargaining agreements with two major employee unions. Even those labor groups that have signed contracts with the airline have remained critical of the company's management.

By contrast, Munoz struck a conciliatory tone in a letter sent to employees on Tuesday afternoon. He stated that one of his key priorities in the next few months will be to meet with employees to hear about their concerns and suggestions for improving United's performance.

Munoz also said on the conference call with analysts that he wants to reach agreements on the remaining labor contracts as soon as possible. At least two unions seemed happy about the changes: The IAM union -- which represents several United Airlines work groups -- put out a supportive statement on Tuesday night, as did the ALPA pilot union.

In short, as long as United's executives are correct in assessing that the government's ongoing investigation doesn't raise any financial risk for the company, Smisek's ouster isn't a red flag for the stock. Indeed, incoming CEO Oscar Munoz could provide a breath of fresh air and foster an era of more cooperative labor relations, helping to take United Continental to the next level.

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