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United Continental's CEO Resigns In The Wake Of A Federal Investigation – Tough Times Ahead?

Just when everyone thought that things were improving for United Continental Holdings ( UAL ), as it joined the S&P 500 Index last week , the airline's president and chief executive officer, Jeff Smisek, along with two other senior officials, stepped down in the wake of a federal investigation questioning their connections with the Port Authority of New York and New Jersey. Oscar Munoz, who has previously worked at a railroad company, CSX Corporation ( CSX ), and is currently a member of United's board, will replace Jeff Smisek as the head of the company with immediate effect, while retaining his seat on the board. United has elected Henry L. Meyer III, the airline's lead independent director as non-executive chairman of the board of directors. The market was not pleased with the news and the airline's stock was down 1.7% in after-market hours. While no one knows how and when the investigation will conclude, we figure that the news is likely to have an adverse impact on United's stock performance in the near term.

Source: Google Finance

We briefly discuss the charges that have been raised in the federal probe against United:

  • In February of this year, United had disclosed that the US Attorney for New Jersey was investigating the airline and some of its top executives for trading favors with David Samson, the former Chairman of the Port Authority.
  • Despite being uneconomical, the airline restarted direct bi-weekly flights from Newark to Columbia, South Carolina, after David Samson became the Chairman of the Port Authority. It is alleged that the flight was resumed since Samson has a vacation home in Columbia, because of which the flight was nicknamed "the Chairman's flight" by some of the Port Authority officials.
  • To return the favor, Samson approved major improvements at the Newark Liberty International Airport that were indirectly proposed by United. Coincidentally, United is the largest carrier operating at the Newark airport.
  • Soon after Samson resigned from his position last year, United canceled the flights on the Newark-Columbia route.

Though it is difficult to comment on the merits of the probe, we expect this change in management due to a federal investigation to further weaken investor confidence in United's fundamentals.

See Our Complete Analysis For United Continental Here

On a separate note, United's new website - United.com - that was unveiled in May this year, was temporarily unavailable for a couple of hours on Tuesday, 8th September 2015. Consequently, the airline had to divert customers to its mobile application and airport kiosks to book and/or check in for flights. However, the outage did not cause any flight delays or cancellations. While one could have ignored this incident as a one-time event, this wasn't the first incident of operational failure on the part of the Chicago-based airline. The legacy carrier has been facing a number of technical glitches since its merger with Continental Airlines in 2010. For instance, a computer fault in July of this year caused all the US departments of United to come to a standstill for almost two hours. A similar incident occurred in June of this year, which led to cancellation of some flights due to insufficient flight dispatch information. There have been other instances in the past as well, where technical failures have resulted in a drop in United's operational performance. If the airline does not work towards improving its operational performance and overall perception in the market in the near future, it may become difficult for the world's second largest airline to catch up with its peers. While it remains to be seen what the new leadership will bring to the table, we foresee a tough road ahead for United.

UAL-scorecard

Source: The Wall Street Journal

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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