United Airlines announced Thursday that CEO Oscar Munoz will turn over day-to-day management of the airline next spring to President Scott Kirby, who will become company’s chief executive officer.
The change happens in May, when Munoz becomes executive chairman, succeeding Jane Garvey, who is retiring from the board.
The announcement ends speculation Kirby could be hired to replace Doug Parker as CEO of American Airlines, where shares are down 26% in the last year. Kirby was Parker’s top lieutenant for a decade as Parker merged America West with U.S. Air and later merged U.S. Air with American, creating the largest airline in the U.S. In October, Kirby said he would not be leaving United.
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A spokesperson for United tells CNBC rumors of Kirby possibly leaving United did not play a role in the decision to elevate him to chief executive. Instead, the company says the board and Munoz both felt it was time to begin the process of a smooth transition to the next CEO.
“With United in a stronger position than ever, now is the right time to begin the process of turning over the baton to a new leader,” Munoz said in a news release from United announcing the leadership change.
The move is one many in the airline industry and on Wall Street have anticipated for some time. Kirby, who was hired by Munoz in 2016 with a mandate to improve the airline’s execution, has been a driving force behind United improving its performance and growing profits over the last two years.
In a videotaped message sent to United employees announcing the leadership change, Kirby thanked Munoz for hiring him in 2016. “I will be a much better executive today, will be a much better CEO and a better person, for what I learned from you and following in the footsteps of an incredible leader,” said Kirby.
Munoz tenure: Turmoil then growth
Munoz will turn over the CEO job with United in much better shape than the day he took the job four years ago. Back then, Munoz, who was on the United Board of Directors, was suddenly tapped to run the airline after former CEO Jeff Smisek was forced to resign due to a federal investigation into United adding flights to influence decisions made by the New York Port Authority.
Within a month of becoming CEO, Munoz suffered a heart attack that forced him to take a medical leave. In early 2016 Munoz received a heart transplant which kept him out of work for several weeks.
When he returned, Munoz found an airline trailing its competitors in almost every metric that matters, including earnings growth, profit margin and customer service. Things got worse in April 2017, when a major scandal erupted after security officers dragged a passenger off of a United flight that was oversold.
Video of the passenger, Dr. David Dao, being pulled down the aisle was played repeatedly on news reports around the world. United was blasted not only for forcibly having a passenger kicked off a flight, but also for how poorly it handled the crisis. Munoz made things worse when his initial comments about what happened were criticized for being cold and uncaring. “This is an upsetting event to all of us here at United. I apologize for having to re-accommodate these customers,” Munoz said in a statement the morning after the incident. It took several days before Munoz and United changed their tone and fully apologized to Dr. Dao.
By then, the damage was done. Munoz’s handling of the crisis prompted the United board to drop plans to elevate him to Chairman. The CEO vowed to improve customer service, United was viewed by many as a large airline where passengers were treated with indifference. That reputation was re-enforced in early 2018 when a United flight attendant had a passenger put their dog in an overhead bin, where it died during a flight from New York to Houston. Once again, news reports portrayed United as a heartless airline. Within hours, Munoz issued a public apology and once again said his airline would do better.
Adding capacity, soaring in 2019
The fact is, by early 2018 United was doing better in many areas, largely because of new initiatives spearheaded by Kirby. After years of cutting routes and service in smaller cities around the U.S., United switched gears and started aggressively increasing capacity. It added flights from secondary cities like Rochester, Minnesota, to United’s hubs, especially Chicago, Denver, and Houston. The idea, boosting traffic through hubs will lead to greater efficiencies and higher profit margins.
While many feared Kirby’s plan would spark fare wars and dilute earnings, analyst Hunter Keay from Wolfe Research said the strategy was vintage Kirby, “Arguably, United has no choice but to either shrink drastically or to pursue this path, and Scott Kirby wasn’t hired to shrink anything,” Keay told clients.
The strategy has paid off with United growing its net profit from $2.1 billion in 2017 to $2.5 billion last year. In 2019 United has already earned $2.3 Billion through the third quarter and raised its full-year earnings guidance in October.
Kirby’s CEO strategy: Improve execution
After 20 years in the airline business where he has consistently boosted revenues and margins, Kirby is widely viewed as one of the best in the industry at making routes and operations more profitable.
As CEO, he’ll oversee the third consecutive year where United grows capacity 4% to 6%. As has been a hallmark of his growth strategies in the past, Kirby is likely to further leverage traffic through United’s hubs. And while the airline’s profit margins have improved, they still trail Delta. In short, Kirby still has plenty of room to grow United’s profits, especially if he can further improve United’s performance when it comes to customer service. “I love the fact that almost every time I get feedback from employees, 99.9% of the time it is something about how do we make this airline better for our customers,” Kirby said in a video e-mailed to employees. “That is an incredible amount of energy, innovations, and creativity and that’s the foundation that a great airline is built on.”
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