Ralph Nader — a truly important voice in the 1960s and 1970s, who hasn’t been relevant since 2000 — wrote an open letter to United CEO Jeff Smisek.
He criticizes United’s share buybacks, largely as a rhetorical device to contrast his real target: United’s decision to outsource machinist union jobs. (United reached a deal with the machinist union out outsource 1150 jobs at 16 airports, less than the 2000 jobs at 28 airports being discussed at the time of Nader’s letter.)
There is much to criticize at United. The outsourcing of baggage handlers and customer service agents may have a negative effect on customers — you might get friendlier but less empowered agents, and baggage could get better or worse.
These are complicated issues, and current United management doesn’t have a strong track record that leads one to expect good outcomes or believe they’re making good decisions. Nonetheless, I’m not persuaded that Nader’s letter makes the cases that many excitedly claim that it does.
Here’s his argument:
Dear Mr. Smisek,
Two stories have come to public attention about your airline, which invites some serious introspection by you and your fellow executives who make millions of dollars a year.
The first appeared in the January 23, 2015 edition of the Wall Street Journal titled, “Suddenly Flush Airlines Debate How to Use Cash.” The article posed the choices: for increased services for consumers and reduced fares; for investors to cut debt and buy back stock. There was no indication of a cash dividend increase. Then this paragraph: “United returned $320 million to shareholders last year through share repurchases, and it said Thursday it could accelerate its buybacks with extra cash flow.” Stock buybacks — really a poor use of productive capital — are favored by executive suites as a way to elevate executive compensation compared to cash dividends.
Now comes the second story that was not so widely publicized. Your subordinates have been instructed to outsource 2,000 union jobs under a vendor bidding process that you will throw against your loyal skilled workers to match, or else. Twenty-eight stations at airports are affected in this round. You hope to save $2.7 million out of the pay of long-time United Airlines workers (many who make $15 per hour and benefits) on the tarmac at dawn or dusk, and rain, snow or shine.
Do these two stories prod you to wonder what’s going on in your monetized mind that excludes common decency and elemental labor management relations? Do you think that vendors’ lower paid, inexperienced labor pool is not going to cause you problems down the road?
And does a merged airline (with Continental) planning more unproductive stock buybacks to pile on the $320 million in 2014 have any qualms squeezing 2,000 already hard-pressed workers with families out of $2.7 million (not to mention other similar plans, past and future), astonishingly at a time of record profits? Squeezing appears to be your corporate policy tool for your passengers as well — for example, squeezing their leg room, squeezing them by innumerable fees and penalties, and squeezing their time by delays on the phone in responding to their questions.
Why is it that a far tighter oligopoly of domestic airlines than before deregulation mimics each other’s race to the bottom in labor and consumer relations, instead of mimicking better practices by Southwest Airlines with a far more consistent record of profits and no layoffs? Does this perverse behavior also make you wonder?
Mr. Smisek, you’re pushing the envelopes in ways that reflect a power trip — that is if you can get away with it, you will. At this point I am reminded of the courteous UAL of the Sixties, Seventies and early Eighties with services and attentiveness, with a fine record of domestic maintenance standards. That history should provide you with some contemplation about the role of top management over the years.
Consider this advice: drop the risky outsourcing; treat your employees as Southwest does; and stop ratcheting up the fees for baggage, changes of reservations, etc. Unless, that is, you believe that customer backlash, investigations by media and lawmakers and lower job gratification are not anywhere on your horizon.
Your response is welcomed.
Share repurchase leads to many questions but is not itself inappropriate.
- It’s a rather sorry affair that United doesn’t believe it had effective uses for the capital, that the managers aren’t savvy enough to earn a strong rate of return, so they were best off returning the funds to shareholders.
- There certainly are perfectly legal, though ethically questionable, uses for share buybacks. Nader insinuates those could apply here, but never makes that case. For instance, a buyback increases earnings per share by reducing the number of outstanding shares — so executive compensation deals tied to earnings per share may be gamed.
Outsourcing baggage handlers isn’t good for the incumbent baggage handlers, and is pretty good for the new baggage handlers. It’s even conceivable a new company winning the contract could hire the same people and pay them less. That’s going to be tough for those accepting less pay for similar work. They may not have good options. That’s tremendously regrettable and worth lamenting.
Whether or not it’s the right decision for the airline to make is complicated. Saying that this will ‘only’ save a few million dollars a year misses the point, the airline does have higher costs than the rest of the industry despite not performing as well overall as some of their competitors. So they need to make changes across their operation. Any given change may add ‘only’ a few million dollars to their bottom line. Multiplied across the entire entire the changes taken together will be huge. Any given change can be dismissed as small, but if you dismiss each one you miss the large gains.
Outsourcing customer service leads to changes that are more customer-facing.
My own bet is that United is penny wise and pound foolish, but I don’t have the full context for these decisions and Nader certainly doesn’t explore them.
I’m not sure there’s a right amount that United ought to pay baggage handlers, if there is I certainly don’t know it, so I’m not willing to say they’re moving forward with a plan to pay the ‘wrong’ amount.
What about you: does Nader persuade you that United is behaving improperly with the agreement it has come to with its union that will allow it to outsource ~ 1150 jobs?