Scott Kirby’s surprising move to United Airlines from American Airlines appears an opportunistic one on his part but may have been prompted by an unexpected break with the latter.
In Fort Worth-based American's statement after the New York stock markets closed on 30 August, the airline said that a change in its “succession planning process” meant that it would “not be able to retain its existing executive team in their current roles for an extended period”.
In addition, the airline filed a “transition and separation agreement” for Kirby with the US Securities and Exchange Commission that includes a $3.85 million cash payout, up to two years of health insurance coverage and lifetime travel privileges on American - not severance benefits regularly associated with the departure of a senior executive to a major competitor.
Wall Street analysts agree with this view. A number cite the changes in the succession plan in reports, while Morgan Stanley analyst Rajeev Lalwani goes as far as to describe Kirby’s departure as “involuntary”.
“The leadership change was a proactive decision by AAL's board and an unexpected development for the market with management highlighting it as a necessary move for long-term succession planning and creating a more complementary skill set on the executive team,” writes Lalwani in a report.
Complementary or not to American’s long-term plans, Kirby is a well-respected manager who is considered by many as one of the “best revenue managers in the industry”, as Credit Suisse analyst Julie Yates puts it.
Kirby has been American chief executive Doug Parker’s right hand man since 2006, when he became president of US Airways, though they have worked together since the mid-1990s. During his tenure he oversaw the integration of America West Airlines and US Airways, developing advantage fares (lower fares for connecting flights to compete with nonstops) to boost traffic and, most recently, the integration of American and US Airways since their December 2013 merger.
WIN FOR UNITED
Kirby’s hire by United is widely seen as a big positive for the Chicago-based carrier. He is expected to put the revenue and network management prowess that he was respected for at American and US Airways to work at the airline, something it is widely seen as needing.
He will not be doing it alone. Kirby is the third senior management hire at United in two weeks, joining its new chief financial officer Andrew Levy and its new chief commercial officer Julia Haywood at the airline, in what rounds out chief executive Oscar Munoz's new C-suite team. Levy was previously president of Allegiant Air and Haywood a partner at Boston Consulting Group.
Munoz himself is relatively new, having taken over as chief executive in September 2015 after the departure of Jeff Smisek as part of a corruption probe involving the Port Authority of New York and New Jersey (PANYNJ). However, he has only begun his work in earnest since returning from a five-month medical leave of absence in March.
“Following recent management announcements, we have increased conviction that United will be successful in diminishing its margin gap relative to its peers over the next 12-18 months,” says Savanthi Syth, an analyst at Raymond James, in a report.
United has lagged its competitors on numerous fronts since its integration with Continental Airlines. While Syth cites the margin gap, the airline has also lagged American and Delta Air Lines on metrics ranging from operational performance to passenger unit revenue.
The carrier reported a pre-tax margin before special items of 14.5% in the second quarter, when American reported a pre-tax GAAP margin of 14.4% and Delta an operating margin of 17.3%.
United has improved its operational performance but still lags. The US Department of Transportation reports that 82.1% of its flights arrived on-time, ranking it fourth among US carriers, during the year ending in June. This compares to a rank of ninth with only 76% of flights arriving on-time during the same period a year earlier.
However, the mainline carrier still has a way to go to catch up to Delta, which was ranked second with 87.2% of its flights on-time during the year ending in June, the DOT data shows.
United reported passenger unit revenue (PRASM) of 12.52 cents in the second quarter, down 6.6% from a year earlier. American reported PRASM of 12.71 cents and Delta 13.59 cents during the period.
These are just a few examples of what Kirby, as well as Levy and Haywood, will be looking to improve as they take their new roles at United.
"I am honoured to be joining United at this important and exciting time and to have the opportunity to help accelerate the momentum the airline has achieved over the past year," said Kirby in a statement. "I see real opportunity to build on the airline's vast global network and, along with my 86,000 United teammates, create the world's best airline.”
United is expected to unveil details of its plans to address the issues mentioned as well as surpass its competitors at a fourth quarter investor meeting, something Cowen analyst Helane Becker calls a “must attend” event of the year.
MINIMAL IMPACT
American is expected to feel a minimal impact from its likely decision to give Kirby the boot. Robert Isom, formerly its chief operating officer and a long-standing member of Parker's senior management team, has been promoted to president.
Analysts see Isom as an able manager, if more operationally focused than Kirby. He joined Parker’s management team in 2007, when he was appointed chief operating officer role of US Airways, and moved to American as part of the 2013 merger.
“Mr Isom perhaps stylistically fit what the BoD [board of directors] wanted more than Mr Kirby as a complement to CEO Parker,” writes Yates.
American is expected to continue on the same track as before with Isom as president as it did with Kirby. This includes increased segmentation with the debut of a new no-frills fare by the end of the year other revenue accretive plans.
Source: Cirium Dashboard
