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United jumps after adding American Airlines' no. 2 to executive team

Wednesday, August 31, 2016 - 07:28

[ATLANTA] United Continental Holdings surged after the surprise hire of American Airlines Group's president strengthened its executive roster and won praise from industry analysts.  Scott Kirby will help United close its profitability gap with American and Delta Air Lines Inc. in the next 12 to 18 months, Savanthi Syth, an analyst at Raymond James Financial, said in a report. She raised her recommendation on the shares to the equivalent of buy from hold.

Mr Kirby's sudden hiring fills a key void at United with an airline-industry veteran and potential successor to Chief Executive Officer Oscar Munoz, a former railroad boss who returned from medical leave this year after undergoing a heart transplant.

Since getting back to work, Mr Munoz has unveiled a US$3.1 billion plan for savings and extra revenue, brought United to the brink of labour peace after years of discord and hired new chiefs to oversee finance and revenue.

"In 11 days, United completely revamped their C-suite and will now look to unlock the company's potential," Helane Becker, a Cowen & Co. analyst, said in a report Tuesday. "Given concerns over Mr Munoz's health, the potential for Mr. Kirby to eventually be his successor is a real one."

United jumped 8.6 per cent to close at US$50.99 in New York, the second-largest gain on the S&P 500 Index. American rose 2.4 per cent to US$37.05.

FARE PRESSURE

At American, Chief Operating Officer Robert Isom, 52, takes over as president. He will continue to oversee operations while assuming responsibilities for revenue, the airline said in a statement Monday.

The two presidents at American and United assume their new jobs as airlines contend with concerns that the supply of flights and seats is exceeding demand, driving down fares. That's led to drops in revenue for each seat flown a mile, contributing to the stock-market losses even after lower fuel prices have helped carriers post record profits.

Prices may deteriorate further if Mr Kirby prompts United to adopt American's aggressive approach to matching some fares at low-cost carriers, said Rajeev Lalwani, an analyst at Morgan Stanley.

"This may introduce downside risk to industry pricing dynamics," Mr Lalwani said in a report. "To the extent these sorts of competitive strategies are rolled out at United as well, it would be impactful to the industry."

TWO-DECADE PARTNERSHIP

Mr Kirby, 49, has already joined United and will start work in his new Chicago office on Sept 6, said Megan McCarthy, a spokeswoman for the carrier. He will oversee day-to-day functions from operations to network planning, ending a partnership of more than two decades with American CEO Doug Parker, 54.

Mr Kirby's compensation includes a base salary of US$875,000 plus an annual bonus, restricted shares and performance-based equity awards, United said in a statement.

Mr Kirby also received a signing award of US$5 million in stock options that can only be exercised if the shares are 25 per cent higher than the price on the grant date. He earned total compensation of US$8.3 million in 2015 at American, according to data compiled by Bloomberg.

The experience Kirby has with labour issues and integrating the mergers of America West and US Airways, and later joining American and US Airways, should "complement both the mission and more collegial management style" of Munoz, wrote Vicki Bryan, an analyst at Gimme Credit.

Mr Kirby is adept at analysing fuel hedging, flight operations, crew scheduling and revenue management, and American likely will miss those qualities, said Bob Mann, president of consultant R.W. Mann & Co. US Airways was the first major carrier to eschew systematic fuel hedging, or using financial instruments to minimize the risk of price spikes, largely under Kirby's leadership. The policy carried over to American with the merger.

"While I think Robert Isom is obviously a high-quality operations guy, I don't see an analytical replacement for Scott Kirby anywhere on the senior team," Mann said.

SUCCESSION PLANNING

Mr Kirby's departure from American came after a board review of succession planning, triggered by concern other companies would seek to hire away its executives, according to American's statement.

The Fort Worth, Texas-based carrier is committed to having "the most talented team" and will continue to be led by Mr Parker, who it considers "an exemplary individual," lead independent director John Cahill said in the statement.

Kirby won't be leaving American empty-handed.

The airline agreed to pay him US$3.85 million, representing 24 months of base salary, as well as his short-term incentive bonus and an accelerated vesting of more than 259,000 American shares currently valued at more than US$9.34 million.

He graduated from the US Air Force Academy with degrees in computer science and operations research, and a masters of science from George Washington University.

Mr Munoz has been negotiating contracts with United's employees in addition to his executive hiring since taking over from former CEO Jeff Smisek. Flight attendants, who were divided among pre-merger United and Continental camps, recently approved a contract that will join them. Mechanics have a general agreement on contract terms and are finishing language on a formal tentative agreement.

Mr Kirby's arrival is the "culmination of the formation of my leadership team," Mr Munoz said in a letter to employees on Monday.

Earlier this month, he tapped former Allegiant Airlines executive Andrew Levy to serve as chief financial officer and consultant Julia Haywood as chief commercial officer. United hasn't announced a formal succession plan.

"In our opinion, rounding out the management team with a well-regarded industry veteran who has 20-plus years of network experience should help lend credence to the margin improvement story longer-term," Mr Lalwani said.

BLOOMBERG