Date: April 13, 2007
From: PlaneBusiness
Author: Holly Hegeman

Why is this man smiling?

I think it might have something to do with the fact that when this picture was made, United Airlines CEO Glenn Tilton finally knew not only that United Airlines was indeed going to finally get out of bankruptcy, but that with this emergence, he, and a number of top-ranking United executives under him, would walk away from the experience -- richer.

Much richer.

Two weeks ago we talked here about how we considered Glenn a "placeholder" CEO. By that we meant that Tilton was brought in to United for one main purpose -- to push the airline through the bankruptcy process. At the same time however, there was a secondary but related objective--to gut the airline of as many labor-related costs as possible.

The understanding in such arrangements is that there will be a big payoff at the end of the tumultuous tunnel.

But there are payoffs and then there are....payoffs.

In the contest for this year's PlaneBusiness Ron Allen Airline Management Award Glenn Tilton placed second in the number of nominations.

But --Tilton's performance over the last year was not, I felt, an example of poor airline management.

There was nothing about his performance that was in any way related to airline management. Poor or otherwise.

Rather, Glenn excelled at what he was brought in to do. While it is not a popular notion to put forth, there are those in financial circles who are quite happy that United Airlines no longer has employee-pension plans. While there are those in the leasing business who are still seething over their interactions with the airline during bankruptcy, again, there are those who see the end results justifying the means.

I'm not just talking about some on Wall Street.

Obviously the members of the UAL board must feel this way. Otherwise, why would they have approved the -- for this industry -- excessive bonus payments and other stock allocations to a management team that, other than knocking down some low- hanging labor costs, has done little to dramatically shake up the United Airlines operation?

Oh, I know. The airline made it very clear in testimony before the bankruptcy court that, according to the consultants they had hired, the proposed bankruptcy payouts were "in-line" with what other companies issued. The big problem with this rationale? The other companies were not airlines. Those other companies had not seen their employees lose their pensions.

Speaking of the UAL board, each member walked away with a nice 10,000 shares of the new UAUA stock in his/her pocket after the bankruptcy as well. Multiply 10,000 times $40 and I'd say this was a nice little bit of pocket change.

Who says it's not advantageous to sit on the board of a bankrupt airline?

One other interesting thing about the current UAL Board. While Glenn Tilton may have been hired originally as a "hatchet man" by the UAL Board at that time, the current outside board membership has seen a huge turnover since 2002, when Glenn first came onboard. Essentially, the outside members of the board now reflect a majority of Tilton-era selected members.

Only three outside board members are the same as they were in 2002 -- James Ferrell, James J. OConnor, and John H. Walker.

Put it all together and what do you have -- Glenn Tilton is clearly in charge. Which means he clearly agreed to and supported the airline's moves to compensate himself, along with top management, so handsomely as the airline moved out of bankruptcy.

But the problem with this type of "compensation" is that it is not based on any meaningful type of performance. It is simply based upon the adage that if it's there, and you can get it, you need to grab it.

As the character Gordon Gecko forcefully put forth in the movie Wall Street, "Greed is Good."

It's pretty clear that this is certainly the thinking of Glenn Tilton.

Just for grins, let's say that the consultants had told Tilton in December that yes, management could "justify" their proposed largesse. And let's just suppose that Tilton had decided that, given what the airline's employees had been through, it was not appropriate to give himself, and others on this team, as much as the consultants told them they could take.

What message would that have sent?

Clearly it would have sent a much more positive one than the one we are now left with -- especially after the airline announced, after it exited from bankruptcy, additional stock option grants.

At least the bankruptcy court had the sense to reduce the airline's original compensation requests by about half, after creditors squealed. Instead of receiving about 15% of the stock in the new airline -- the court cut Mr. Tilton's executive team's take to "only" 8%.

As Ben Stein wrote in a New York Times column in January, should this be called "creative destruction or looting?"

Stephen Wolf -- The Model

After deciding to create this award, the question presented itself of whom to name the award after. After all, Stephen Wolf, former CEO of both United and US Airways, would be the obvious choice for such an accolade.

His systematic pilfering of US Airways through salary, stock, and stock options has stood for years as the measure to be met.

But, as one subscriber wrote to me in March, after I ran the idea past him as to which man should be immortalized, "As for Glenn, the more I thought about it, the more I came to the conclusion that it would be unfair to Wolf to name the award after him. Tilton?s deal is so egregious that on further reflection I would name the award after Glenn, so he could be forever immortalized like Ron."

Not only that, but Tilton's not done yet.

The Numbers

You might have read this week that Fidelity Investments is now the largest investor in United Airlines, with the Boston-based company now the proud owner of just over 12 million shares of stock, comprising a 13% stake in the airline. U.S. Trust is now the second largest investor, as it now owns 11.3 million shares, or 12.2% of the airline. Meanwhile the Pension Benefit Guaranty Corp. is now the airline's third largest investor with 11.1 million shares.

But guess who the airline's fourth largest shareholder is?

That's right.

Glenn Tilton. Tilton now owns 545,000 shares of United Airlines stock outright. At today's prices that equates to about $20 million. But that's just the tip of the iceberg.

In a recent SEC filing, options were once again awarded to the top executives at the airline. I say again, because this was the not the first, not the second, but the third time the airline doled out options to its top executive team.

Any bets on why all of these options were not simply given out at one time?

I think it's obvious.

According to SEC filings, members of the UAL board and the top executive team were first awarded shares of common stock last January. An SEC filing dated Feb.3 details the outright stock awards to each. These are the outright stock grants okayed by the U.S. Bankruptcy court.

Name	Position	Number of Shares
Glenn Tilton	Chairman, CEO	545,000
Jake Brace	CFO	218,000
John Tague	EVP Marketing and Sales	218,000
Pete McDonald	EVP, COO	218,000
Paul Lovejoy	SVP, Gen Counsel	109,000
Rosemary Moore	SVP Corporate and Public Affairs	109,000
Sara Fields	SVP People	109,000
Richard J. Poulton	SVP Business Development	109,000
James J. O'Connor	Director	10,000
Robert Steve Miller	Director	10,000
David J. Vitale	Director	10,000
James W. Farrell	Director	10,000
Walter Isaacson	Director	10,000
Richard J. Almeida	Director	10,000
Kelly Janet Langdon	Director	10,000
Robert D. Krebs	Director	10,000
John H. Walker	Director	10,000

On Feb. 17, another round of largesse took place, as a filing with the SEC outlined a number of options that had been awarded. All of these options, as well as additional options that were noted in subsequent filings vest in equal installments on August 1, 2006; February 1, 2007; February 1, 2008; February 1, 2009; and February 1, 2010.

Name	Position	Options	Strike Price
Glenn Tilton	Chairman, CEO	74,000	34.18
Jake Brace	CFO	109,666	34.18
John Tague	EVP Marketing and Sales	109,666	34.18
Pete McDonald	EVP, COO	109,666	34.18
Paul Lovejoy	SVP, Gen Counsel	54,666	34.18
Rosemary Moore	SVP Corporate and Public Affairs	54,666	34.18
Sara Fields	SVP People	54,666	34.18

But wait, there's more. On February 23, another SEC filing detailed yet more option awards:

Name	Position	Options	Strike Price
Glenn Tilton	Chairman, CEO	274,000	35.91
John Tague	EVP Marketing, Sales	109,667	35.91
Frederick F. (Jake) Brace	EVP, CFO	109,667	35.91
Pete McDonald	EVP, COO	109,667	35.91
Paul R. Lovejoy	SVP General Counsel	54,667	35.91
Rosemary Moore	SVP Corporate and Public Affairs	54,667	35.91
Richard J. Poulton	SVP Business Development	54,667	35.91
Sara Fields	SVP People	54,667	35.91

Finally, on Mar. 2, yet another round of option awards was made public in an SEC filing.

Name	Position	Options	Strike Price
Glenn Tilton	Chairman, CEO	274,000	35.65
John Tague	EVP Marketing, Sales	109,667	35.65
Frederick F. (Jake) Brace	EVP, CFO	109,667	35.65
Pete McDonald	EVP, COO	109,667	35.65
Paul R. Lovejoy	SVP General Counsel	54,667	35.65
Rosemary Moore	SVP Corporate and Public Affairs	54,667	35.65
Richard J. Poulton	SVP Business Development	54,667	35.65
Sara Fields	SVP People	54,667	35.65

You guys can get out the calculators and do the math. But I guarantee you won't like what you see. Unless your name is Sara Fields, Rosemary Moore, Glenn Tilton, Pete McDonald, John Tague, etc.

Then again, I suppose you could be jealous.

Performance-Based?

What sets the amount of money doled out to CEO Glenn Tilton and his executive team apart more than anything else is the fact that the airline has not, as best we can tell, successfully revamped, revised, or seriously retooled its internal operations.

If this team that is there now had shown to any of us that it was capable of pro-active improvements during the last three years-- rather than simply going after labor costs, employee pensions, and an abortive attempt at receiving an ATSB loan-- I might think differently of the largesse shown by the airline's board of directors.

But I simply don't see it. What I see instead is the same old, same old.

We mentioned last week a story in the Washington Post that basically was a glorified PR piece on the fact the airline had hired a customer-enhancement consulting firm who had worked with Nordstrom, among others, in an attempt to upgrade their hiring process for customer-service employees.

But who will these "specially hired" customer-service employees report to?

Has anything been done to seriously revamp the airline's "People" department? From what we hear the answer is no.

But as I wrote last week, what was most telling is the fact the airline made sure the story got out. As though this would serve to "prove" it was doing the right things.

Meanwhile, I continue to hear about marked fluctuations in the quality of service on the differing United products. We talked just this morning to a subscriber who is walking away from his United 1K membership. He's fed up. We've seen the airline's fall from grace in the monthly DOT rankings. We know the employee/management relationship has been, quite possibly, irretrievably broken. We've had no change in leadership at the airline -- a move that could work to improve that last situation to an extent, depending upon who came in to put the pieces back together again.

The airline's first advertising effort was same old tune, just more money spent on a creative director's dream sequence.

But oh, one thing Glenn Tilton has done well -- he made sure he and his team were well-compensated for riding out the storm.

Place in History

We've seen a number of airlines enter bankruptcy over the last few years. A number of them might as well have entered a Roach Motel. They checked in, but didn't check out. We've also seen one that managed to do so. Specifically -- US Airways last fall.

I assure you, after reviewing the SEC documentation on that bankruptcy exit -- there was nothing remotely close to these kinds of payouts made to the existing management team of bankrupt US Airways.

What we have witnessed at United Airlines deserves special mention. Frankly, what we have witnessed with United Airlines deserves never to be forgotten.

With the creation of this award -- we hope to do our own small part in making sure this is the case as the years go by.

Congratulations Glenn Tilton.