Sustainability Matters

Corporations behaving badly: United Airlines

It’s been a terrible week for United Airlines. Following on the heels of an incident in which the airline refused to let two young women board a flight because they were wearing leggings, last Sunday, a passenger already seated and ready to return home to Kentucky, was ripped from his seat by airport security in Chicago, bloodied, and dragged feet first down the aisle, all because the airline overbooked the flight. Social media exploded, and United made things worse with a gratingly insincere apology from CEO Oscar Munoz. He tried to up the sincerity quotient a couple times during the week, but any time you have to keep re-apologizing like that, it just serves to remind people how lame your initial apology was.

So now that United has taken a hit to its reputation, what will come out of an incident like this? No doubt, United will take steps to try to become more customer friendly and will improve the way it handles, in industry-speak, “involuntary denied boardings”. Any lasting negative impact on United’s business seems likely to be minimal because non-status passengers choose flights mainly based on price and schedule, and have come to expect indifferent customer service.

The incident may not be as much about United specifically as it is about the perception that U.S.-based airlines, as a group, don’t treat their rank-and-file passengers very well. Of the big four (United, American, Delta, and Southwest), I would have been surprised only if this had happened on a Southwest flight. Interestingly, Southwest had a higher rate of involuntary denied boardings than did United last year, but Southwest had the lowest overall rate of customer complaints of any of the 12 U.S. based airlines included in the annual Airline Quality Ratings. Southwest aside, if someone had asked me to guess the airline on which this incident took place, I’d have shrugged my shoulders and said “could have been any of ‘em”. So I doubt that many passengers will stop flying United over this incident because they figure other airlines are capable of the same behavior. This incident didn’t reveal anything all that new about United, in particular, or airlines, in general.

Shares of United Continental Holdings fell 2.6% last week

Source: Morningstar Direct

United stock did take a hit last week, falling 2.6%, which translates to a cost to investors of about $300 million. (By contrast, American Airlines gained 3.7% last week, Southwest lost 0.4%, and Delta lost 2.5%, as it dealt with the fall-out from a five-day meltdown after severe thunderstorms hit its main hub in Atlanta on April 7.)

Here’s the connection to sustainable investing: Most shareholders are going to give United a pass on this because customer satisfaction doesn’t affect the bottom line in airlines as much as it does in other consumer sectors. But sustainable investors actively engage with companies they own on a variety of issues that may not be the ones management is focusing on to maximize short-term profit, including how a firm treats its customers even when that’s not crucial to the next quarter’s bottom line. Sustainable investors urge companies to be high-quality corporate citizens that treat their customers well, which pays off in the long run, both for companies and for the overall health of the financial system.

Which brings me back to Southwest Airlines. It consistently has the fewest customer complaints in the U.S. airline industry. The Airline Quality Ratings measure of customer complaints is based on the number of complaints to the Department of Transportation per 100,000 passengers. Southwest has had the lowest rate of complaints in eight of the past 10 years (and was second to Alaska Airlines in 2015 and 2014). Its average rate of complaints over the past decade is far lower than any of its main four competitors and, it turns out, United’s is the highest of the group.

Source: Airline Quality Ratings, 2008–2017

And here is how each of the airlines’ stock has performed over the past decade:

Source: Morningstar Direct

Southwest has delivered an average annualized return of 14.7% over the past ten years, compared with 7.3% for Delta Air Lines, 6.9% for United Continental Holdings, and -5.4% for American Airlines Group.

There are all kinds of other reasons for Southwest’s success — efficiency in routing and use of one type of plane, cost controls, even successful hedging of fuel costs — and its strong customer brand may not withstand pressure from low-cost carriers going forward, but its success has come alongside it generally doing right by its customers, which is what we should demand from every public company, including airlines.