It's hard to find a chief executive more eager to dump his own company than UAL's Glenn Tilton. For months now, airline CEOs have been playing the dating game, and Tilton seems to be most eager to tango. But the parent of United Airlines shouldn't be sold merely because Tilton is itching to do a deal, or craves a big merger-related payday, or is plain tuckered out. Instead, the carrier's board should take a more promising approach: Drop the merger talks and bring in a new CEO who's committed to building a successful, stand-alone airline.
This is not a gratuitous slap at Tilton, who became UAL's top gun in 2002. A former vice-chairman of Chevron (CVX), Tilton, 59, deserves an attaboy for taking UAL (UAUA) through an arduous bankruptcy reorganization that ultimately forged a financially stronger company—albeit mostly by gutting employee pensions and benefits. Since bringing UAL out of Chapter 11, though, he has had no plan except selling the Chicago airline.
A Goal of Questionable Merit
Over the past two years, Tilton has chanted a mantra that airline industry consolidation is inevitable. To help that along, he has been squeezing every possible dime out of existing operations by postponing orders for new aircraft or refusing labor an extra nickel. There's no need to invest for the future, he seems to be thinking, if you're going to be gone anyway.
The fruit of his efforts? Employee morale is now worse than ever, especially among the pilots, who are openly hostile to Tilton's regime. What's more, United's customer satisfaction levels are tumbling. Of the top 20 U.S. airlines, United had more customer grievances last year than any other except US Airways (LCC). Making passengers pay a $25 bounty for toting an extra bag on board is hardly going to help.
Tilton would have us believe that a merger will ease United's service ills and make it more competitive. Global carriers are getting stronger, while U.S. airlines sit on their hands, he argues. Moreover, sky-high fuel costs and other expenses are chipping away at United's returning financial health. O.K., I'll buy all that. But let's also consider this: Where's proof that previous airline mergers have worked? Has the industry prospered? Are employees better off? Passengers happier? Investors richer? The answer is a resounding "No."
A Strong Incentive
Here's another question: Who stands to profit if UAL is taken over? Glenn Tilton. His contract permits him to cash out if there's a change of control at UAL, letting him reap up to $36.3 million in stock, options, and lump-sum payments, according to the 2007 proxy. (UAL contends his payout would come to only $13 million since his options are currently underwater.) Cash is king, but it's overly cynical to say Tilton is pushing a merger merely to fatten his wallet. It's also cynical, however, to contend that United can't go it alone. If the UAL board needs evidence a big domestic carrier can rise from the abyss, it need only look at Continental Airlines (CAL).
As a wee reporter in Texas during the late 1980s, I covered Continental, which was then run by the controversial and oft-despised Frank Lorenzo. Still, the airline survived his tenure (along with two bankruptcies) and eventually morphed into one of the country's most successful large carriers. Now Continental is enjoying solid financial returns, improved customer satisfaction, and stronger employee relations. What's more, its CEO doesn't want to merge and is even ordering new planes.
At UAL, the board has extended Tilton's contract to 2011 and says it supports his five-year plan. Instead, UAL directors should give Tilton his due, provide him fair compensation for time served—and begin the hunt for an executive who can build on his accomplishments and take an independent airline to greater heights.