United’s earnings–call shakes Wall Street’s faith in CEO
IN THE span of a one-hour conference call, Wall Street’s confidence in the leadership of United Airlines plummeted.
Analysts pressed Chief Executive Officer Oscar Munoz and President Scott Kirby on how they planned to deal with rising costs and falling pricing power. Would they rein in growth in the face of fare weakness? Provide more detail on revenue initiatives? Revisit financial goals outlined last year?
Munoz asked for “a little bit more patience.” The exchanges turned testy. And what began in the morning as a moderate stock slide after a disappointing earnings report turned into the biggest tumble for United’s stock in eight years. Shares halted the slide last Friday, rising less than one per cent to US$ 60.03 ( RM270) at 9.59am.
By the end of the day, analysts said they were fielding questions from investors about whether United needed a management change. That’s adding to pressure on Munoz, who has been under fire this year for fighting a fare war with discounters, bobbling the rollout of a new no-frills product and mishandling the furore when a passenger was dragged off a plane in April.
Before the call, “we had heard rumblings from the investment community about another potential management change at United Continental,” Helane Becker, an analyst at Cowen & Co., said in a note to clients. After the call, “they aren’t rumblings, but full-fledged screams.”
United Continental Holdings Inc. declined to comment on analysts’ discussions of any management changes. On the call, Munoz said the current managers need more time after inheriting an industry laggard from previous leaders.
“We have dug ourselves in a hole from a competitive perspective, and the team that we’ve gathered to get out of here is about regaining that competitive advantage,” he told analysts.
Munoz, 58, took over two years ago when his predecessor left amid an internal inquiry into the airline’s ties to the former chairman of the Port Authority of New York & New Jersey. Serious health problems struck: Munoz suffered a heart attack and underwent a heart transplant before returning to work in 2016.
Undeterred, the former railroad executive set about forging labour peace, pushing operational improvements and drawing up turnaround plans. He weathered a proxy fight by Altimeter Capital Management and PAR Capital Management Inc., with United replacing its chairman and giving board seats to the hedge funds. Munoz then brought in Kirby, a veteran of American Airlines. United’s reward for last year’s changes: A 27 percent stock gain, the most among major US carriers.
But the winning streak petered out. United suffered a publicrelations fiasco from the dragging incident. Analysts faulted it for endangering its profit goals by implementing a no-frills “basic economy” offering too widely. Aggressive growth and a price war with discounters this summer battered its fares. Now investors are questioning the strategy – and whether Munoz and Kirby are the best people to carry it out.
“Is this a catalyst for management change?” Stifel Financial Corp. analyst Joe DeNardi said in a research note Thursday after the earnings call. “That’s the No. 1 question we’ve received today.” It’s hard to see how United’s current strategies will close the profit gap with Delta, DeNardi said in a followup interview. United’s cost per seat-mile should be falling as it ramps up the supply of seats and flights, with the expenses being spread out over a greater number of seats, he said. Instead, costs are rising.
It’s not that simple in the real world, Chief Financial Officer Andrew Levy said on the call. The company is working through its costs and “a ton of inputs,” he said. “We’re going through all of that, and we’re just not ready to give detailed commentary on 2018 for costs,” he said.
The approach by Munoz and Kirby still has a chance to bear fruit. United’s strategy of confronting discount rivals in its hubs is likely to work over time, said Susan Donofrio, a Macquarie Group analyst. The problem is the short-term pain.
“A lot of changes are being put into place,” she said. “It really depends on how patient investors are going to be,” The answer to that question is that time is running out, if Thursday’s epic stock plunge is any indication. Also, the company faces
We have dug ourselves in a hole from a competitive perspective, and the team that we’ve gathered to get out of here is about regaining that competitive advantage. Oscar Munoz, Chief Executive Officer
structural problems that the management team isn’t really tackling, including the lack of hubs where it enjoys true dominance and can exert greater pricing power. United’s effort to add flights out of its major airports is an attempt to bolster its position in the long term, DeNardi said. — WP-Bloomberg