April 20, 2016 / 10:34 PM / 2 years ago

UPDATE 4-United Airlines bows to activists, adds directors

(Recasts throughout; adds comments on new chairman’s record at Air Canada, background on hedge funds.)

By Jeffrey Dastin and Michael Flaherty

April 20 (Reuters) - The agreement by United Continental Holdings Inc to install airline industry veteran Robert Milton as non-executive chairman represents a partial victory for two first-time activist hedge funds, and puts an expert at turnarounds in the seat next to Chief Executive Oscar Munoz as he tries to fix United’s operational problems.

People familiar with Milton’s record as chief executive of Air Canada pointed Wednesday both to his success restructuring the once bankrupt carrier, and his battles with labor unions there.

“He wanted to make as much money for shareholders at the expense of the workers,” said Carlos DaCosta, the Canadian airline coordinator for the International Association of Machinists and Aerospace Workers (IAM).

Henri Courpron, chairman at Plane View Partners LLC, said he expects Milton would work with Munoz to improve operations and narrow the gaps in performance with larger rivals Delta Air Lines Inc and American Airlines Group Inc.

“I do not expect Robert Milton to interfere with the CEO, but rather use his insight and experience to support and encourage Munoz to re-evaluate the overall post-merger strategy for the airline as it appears to be lagging its peers on several fronts,” Courpron said.

Company officials said the agreement does not mean a sharp change in strategy for the No. 3 U.S. airline by traffic. Milton joined United’s board in March along with former Delta Chief Operating Officer James Whitehurst. Milton will take over as non-executive chairman when Henry Meyer steps aside at the company’s June annual meeting, the company said.

Activists PAR Capital Management Inc and Altimeter Capital Management LP, which together own 7.1 percent of United, had pushed for Meyer’s replacement, saying United needed more airline expertise on the board to guide Munoz.

The settlement “clears the way (for United) to control their own destiny and improve the operation,” said Janus Capital Group analyst Kristopher Kelley.

Munoz, who took the top job at United in September after being president of railroad operator CSX Corp, has made a point of improving labor relations. He won support from unions during the clash with the hedge funds last month. As part of the deal with the hedge funds, Munoz agreed to postpone his own appointment as chairman by one year to 2018, United said.

Some 30,000 workers represented by the IAM secured a new contract on Saturday with a 30-percent pay hike. The IAM’s U.S. airline division said it had no reason to believe relations with United would not continue to improve, and it hopes the new appointments do not poison the relationship.

PAR and Altimeter disclosed their effort to overhaul United’s board in March, after the airline refused to agree to name former Continental Airlines chief executive Gordon Bethune as chairman.

PARTIAL VICTORY

The funds dropped the push to install Bethune on the board, and did not secure seats for the full slate of six new directors it proposed for the United board. As part of the settlement, PAR managing partner Edward Shapiro and Barney Harford, former CEO of online travel services company Orbitz Worldwide Inc, have immediately joined the board. Only Harford was on the original slate of directors.

PAR and Altimeter have focused on the airline industry, but had never launched an activist campaign before.

PAR and Altimeter are part of a growing collection of investors who, for the first time, are publicly challenging a portfolio company’s board or management team for underperformance, taking a page from the playbook of pure play activist hedge fund managers who make their money by agitating for changes at companies.

United said it would make another appointment this year, meaning eight of its 15 directors will have joined no earlier than March. Meyer and two other directors will not stand for re-election in June.

The activist shareholder trend has swept Corporate America during the last few years, with a record 507 campaigns aimed at U.S. companies last year, according to Thomson Reuters data. (Reporting by Jeffrey Dastin, Greg Roumeliotis and Michael Flaherty in New York, Allison Lampert in Monteral and Ankit Ajmera in Bengaluru; Editing by Anil D‘Silva, Lisa Von Ahn and Bernard Orr)

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