How a traffic jam on a New York bridge led to a CEO’s ousting
Ed Crooks in New York and Gina Chon in Washington / Financial Times / Sept 9, 2015
Jeff Smisek has stepped down as CEO of United Continental
It is one of the strangest business stories in the US in the recent years: an investigation into traffic jams on a bridge into New York that has led to the downfall of the chief executive of one of the country’s largest airlines.
On Tuesday, Chicago-based United Continental announced that Jeff Smisek, its chief executive, chairman and president, had stepped down “in connection with” an internal inquiry carried out by the company, which in turn was linked to a US federal investigation into the Port Authority of New York and New Jersey.
What began as an investigation into allegations — subsequently confirmed — of politically-motivated lane closures on the George Washington Bridge from New Jersey to New York has gone on to examine whether United laid on a special “chairman’s flight” for the benefit of the head of the port authority.
It is that investigation that led to Mr Smisek’s abrupt departure, to be replaced by Oscar Munoz, a longstanding director of United and former chief operating officer at CSX, the railway group.
The affair has also caused problems for Chris Christie, the governor of New Jersey who is seeking to be the Republican candidate in next year’s presidential election, but has been lagging behind in the polls in a crowded field.
The lane closures were allegedly ordered to cause traffic problems in Fort Lee, a town on the New Jersey side of the bridge, after its mayor declined to support Mr Christie’s re-election campaign for the governorship. David Wildstein, a former ally of Mr Christie, in May pleaded guilty to having been involved in the conspiracy.
The federal investigation into that issue led to a wider look at other issues relating to the port authority, which operates bridges and tunnels in the New York area, including the George Washington Bridge, and also the New York region’s three airports. Mr Wildstein had been a senior official at the authority.
United was drawn into the investigation when federal prosecutors started to examine whether the airline had been asked to do favours for David Samson, the port authority’s former chairman, in exchange for benefits such as improvements at Newark airport.
Subpoenas have been issued seeking information about those potential favours, including details surrounding United flights between Newark and Columbia, South Carolina. Columbia is a small town 56 miles from where Mr Samson had a weekend home, according to people familiar with the case.
The twice-weekly service was known as the “chairman’s flight”, according to The Record, the New Jersey newspaper that first reported on it. The flight was stopped three days after Mr Samson stepped down from the port authority in March last year.
Mr Samson has not been charged, although he is under investigation. A spokesperson for Mr Samson declined to comment.
Mr Smisek’s exit comes soon after United’s reputation took another battering because of persistent problems with its computer systems. They have been troublesome in spite of efforts to improve them since the group was formed when United Airlines and Continental were brought together through a merger in 2010.
In June this year United was forced to stop all domestic flights for an hour because of what it called “automation issues”, and then in July halted all operations out of the country for an hour because of “computer problems”.
United was ranked the lowest for customer satisfaction of the traditional US carriers in a survey conducted by JD Power in 2014-15.
However, Adam Pilarski of Avitas, a consultancy, says Mr Smisek and his team had been making some progress in improving the performance of United, which had long suffered from poor management before the merger with Continental.
“Smisek is an educated lawyer, he’s not a charismatic guy, but he has been an excellent CEO,” says Mr Pilarski.
“United was the worst airline, and now they are just mediocre, which is an improvement. They get a solid C grade, and they used to be D-minus.”
United Continental’s financial results have improved, and its share price performance has reflected that. Its shares are up 172 per cent over the past five years, compared to a 70 per cent rise for the US airline sector as a whole.
The group’s pre-tax profits for the first half of 2015, excluding special items, were more than four times their level in the equivalent period of 2014 at $1.85bn, after it reported record earnings for the second quarter.
At the top of Mr Munoz’s agenda will be fixing United’s information technology problems, and that is clearly a tough job.
In other respects, though, this looks like a good time to be taking over a US airline. Consolidation appears at last to be creating some market power that will allow carriers to improve their margins, enabling them to benefit from the fall in oil prices.
After the turbulence at United Continental this week, Mr Munoz can hope for some smoother air ahead. |
