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Airline stocks haven’t been flying as high as they should be, especially with oil at near decade lows. The U.S. Global Jets ETF (NYSEArca: JETS), which launched last year and largely invests in major airlines, is down 9% since inception.
However, there are a couple of investors looking to shake things up in the airline industry. One of the largest players in the airline industry, United Continental Holdings (NYSE: UAL), is getting pressure from activist investors. This comes as United has been one of the worst-performing major airlines.
Shares of United are down 30% over the last year. The airline stock is underperforming the likes of American Airlines (NYSE: AAL) and Delta Air Lines (NYSE: DAL) this year. But there is a reason for this underperformance. United is facing leadership issues, while also having problems with its Continental merger integration.
The activist group is comprised of Altimeter Capital and PAR Capital, which own a 3.1% and 3.2% stake, respectively. The group intends to engage and have discussions with United about various things – including its corporate governance, board composition, strategic alternatives, capital structure, and allocation and management.
While United has offered little insight into what it thinks of the activist group, the company did have this to say: “We actively engage in dialogue with our shareholders, and welcome their constructive suggestions and feedback. … United’s board and management are committed to acting in the best interests of our shareholders and are focused on continuing to execute on our plan to create long-term value for all our stakeholders.”
In truth, United’s biggest problems lie with leadership and corporate oversight. This has overshadowed the fact that it’s the cheapest airline around from a valuation perspective and that its margins are still head and shoulders above peers.
Let’s dig deeper into the issues that need to be addressed at United.
Leadership Issues
United has had some leadership issues of late, which includes the fact that it delayed the announcement that its CEO Oscar Munoz underwent heart transplant surgery in January. United replaced former CEO Jeff Smisek in September with Munoz, and then Munoz had a heart attack in October.
Then there’s the fact that senior leadership has been called into question, driven by a federal probe into United’s ties with a former Port Authority of New York chairman. The issue there is that there are concerns that United launched a flight service from Newark to an airport near the Port Authority chairman’s home in South Carolina – and then ended that service three days after he resigned from his post.
Then there’s the merger with Continental Airlines from 2010, which has been a nightmare. The integration of organized labor has been slow and the expected cost savings have been lower than expected.
Shares of United are already down close to 20% this year after a large miss on fourth-quarter 2015 earnings expectations. Still, earnings were up much higher than fourth-quarter 2014.
But in the end, at close to 5 times next year’s earnings estimates United is the cheapest player in the industry. It also has the best profit margins and returns on invested capital among major airlines. If the activists can convince United to focus on leadership and streamline operations, there’s no reason to believe the company can’t outperform going forward.
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