The Avoid Case For United Continental Holdings - Demonstrated Lack Of Governance

| About: United Continental (UAL)


The Board seemingly does not know the product their company delivers.

No clear communication with investors - or allegedly even their own Board on CEO wellness.

Demonstrated lack of business resumption plans related to the management team.

Elevator Pitch

Recent communications regarding the wellness of United Continental Holdings (NYSE:UAL) CEO, Oscar Munoz, lead me to believe that the Board of Directors is not fully engaged or informed. When the Board is not aware of a pending heart transplant for their CEO, I am left to wonder what else is not being communicated. As such, I don't believe an investment in UAL is warranted at this time.

Let me start by saying that I hope Oscar Munoz experiences no setbacks on his recent procedure and has a full recovery. I also hope that UAL can learn from what many perceive as omissions, errors and missteps that were highlighted over the last several months as a result of their CEO's health issues. However, "hope" and "investing" do not overlap in my world, so I am steering clear of UAL until evidence shows that the leadership is aware and demonstrating a higher level of engagement.

When Jeff Smisek resigned on September 8, 2015 UAL announced his replacement. The WSJ reported that the world's second largest airline named Oscar Munoz as UAL's new president and chief executive. Henry Meyer, a UAL lead independent director, was named nonexecutive chairman. Mr. Munoz was selected from UAL's Board of Directors.

Good for the UAL Board that they had a replacement named and ready to go when they showed Smisek the door.

One of the first things reported was that Munoz said he would fly commercial to see what the airline was like. Bravo! Who hasn't sat in coach and experienced something less than acceptable service? But I need to question, what was he doing as part of the Board of Directors of Continental, and then UAL, all these years? Non-employee members of the Board receive flight benefits for themselves, their spouse/partner, and certain other eligible travelers. How many of the Directors utilize this, and thus can comment on the quality of the product as experienced first hand at each meeting? It would seem that Mr. Munoz was not utilizing this, or UAL and the press wouldn't have made such a big deal over his now flying commercial.

Another good question is what percent of the miles United directors and executive officers fly per year is flown in coach? Calls to the UAL Investor Relations number seeking comment were not returned.

In fact, from the CSX proxy dated March 25, 2015, if the CEO is excluded, Mr. Munoz was the NEO with the largest "All Other Compensation" for 2012, 2013 and 2014. This included personal aircraft usage, financial planning services, physical examination, annual health care savings account contribution, excess liability insurance, the Company's match under the 401(k) and nonqualified deferred compensation plans. In 2014 this amounted to over $50,000 for Mr. Munoz. All that time on a private plane was not providing any insight to how UAL was operating.

On October 16, 2015, United reported that Mr. Munoz was hospitalized due to a heart attack one day earlier. Unfortunately this was only after the Wall Street Journal had reported it (see here). Then, investors were left in the dark all weekend while the airline reported it would finish on Monday the "corporate governance process" brought about by Munoz's hospitalization, with plans to provide more details Monday (Oct. 19) or Tuesday (Oct. 20). On Monday Oct. 19 UAL named an interim CEO. What surprises me is that UAL did not offer that the rest of the executive leadership team was in place and could run the airline while Mr. Munoz was unavailable. Instead, they opted to leave investors hanging over the weekend. This signals a lack of business resumption plans for the executive leadership team.

All that is background noise. What really leaves me questioning the leadership of the company is what happened on January 6, 2016. That was the day it was reported that Mr. Munoz underwent a heart transplant and was recovering. Up until that point, UAL reports were that all was well, Mr. Munoz expected back in Q1 2016, and he was slowly coming back on board, working with the interim CEO, and even visiting with employees in Chicago over Thanksgiving. And the worst news of all, according to the Wall Street Journal, was that the Board of Directors were not aware of the heart transplant until just one day earlier, January 5. How can an employee (the CEO) be in such a condition that he/she is on the heart transplant list, and not tell their boss (the Board)? It is troubling if Mr. Munoz's condition warranted a heart transplant and the Board was told "all clear".

Now, I'm not a medical doctor. But it strikes me as odd that a person can go from recovering and slowly getting back on board to needing a heart transplant as the preferred treatment. I understand that Mr. Munoz should be afforded some level of privacy. However, when the CEO of a publicly traded company has a heart transplant and the Board finds out the day before the operation, there are some serious corporate governance gaps.

Corporate Governance is not just another buzz word. Investors should look beyond financial analyses to ascertain a complete picture of the business and the leadership prior to coming to a decision to invest or not. Regardless of the financial attractiveness of a company, a red-flag in governance should lead an investor to look elsewhere.

There are reasons to consider investing in airlines these days. Fuel prices are down, hedging losses are ending, the strong dollar makes overseas travel less expensive, etc. Personally, I feel UAL warrants consideration, but not before improved governance and a willingness for the executives to experience the product the majority of their customers enjoy is demonstrated.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.