Playing the Gordon Bethune card

By playing a single major card—the prospect of former Continental Airlines CEO Gordon Bethune becoming chairman of United Continental Holdings’ board of directors—insurgent United shareholders Altimeter Capital Management and PAR Capital Management were able to extract major concessions from the parent company of United Airlines.

The proxy fight over the makeup of United’s board has been settled, and United’s management team has gained one big victory: Bethune will not be joining the airline’s board.

But in order to get that win, which will be popular with many of United’s employees, United had to make some major concessions: 1) Non-executive board chairman Henry Meyer will step down, to be replaced by former Air Canada CEO Robert Milton, who joined United’s board just last month. 2) CEO Oscar Munoz, who had been slated to also take on the chairman’s role in 2017, will now not become chairman until at least 2018. 3) In addition to Meyer, two other current United board members will step down at the company’s annual shareholders’ meeting in June. 4) Joining the board will be two new members selected by Altimeter and PAR: PAR managing partner Edward Shapiro and former Orbitz Worldwide CEO Barney Harford. 5) Though it isn’t a concession written in ink in the proxy fight settlement being submitted to the US Securities and Exchange Commission, Altimeter and PAR, who together own 7.1% of United’s shares, have demonstrated that a minority of shareholders can force significant changes at United if they don’t like what’s going on.

Altimeter and PAR made one shrewd move when they launched their insurgency against United’s board on March 8: Naming Bethune as one of the six directors they would nominate to the airline’s board at the next shareholders’ meeting and then unleashing the loquacious Bethune to speak to the media, including a particularly provocative appearance on CNBC on the morning of March 8, where he slammed United’s current board and management.

“I do know the front end from the back of an airplane and that would be a novel experience for the [United] board,” Bethune said, adding that a “country club atmosphere” prevailed in United’s boardroom.

This immediately led to widespread speculation that Bethune, Continental’s CEO from 1994-2004, would be riding in on a white horse to essentially take over United.

Many of United’s employees bristled at the prospect of Bethune becoming the company’s chairman, and United’s major unions quickly backed Munoz and the current board over the insurgent hedge funds. In a blistering letter to United’s 11,000 pilots from the Air Line Pilots Association (ALPA) United master executive council, in which the United pilots union’s leaders accused Altimeter and PAR of “looking to raid the corporation,” it was noted that Bethune is closely associated with “the ineffective Mr. Smisek,” a reference to former United CEO Jeff Smisek, who resigned abruptly last September. Smisek, in fact, was famously hired by Bethune to be Continental’s general counsel in 1995, leaving a successful Houston law firm where he had been a partner, and was regularly publicly praised by Bethune.

The end result was that Altimeter and PAR put United in a corner—keeping Bethune out of the boardroom became an imperative. To settle the messy public dispute over United’s board makeup and the direction of the company’s management, United had to do what was necessary to achieve that result.

Bethune, appearing again on CNBC on April 20 following the announcement of the proxy fight settlement, conceded that Altimeter and PAR had “used me as a credible alternative” to force changes at United. When asked whether he was disappointed that he won’t be joining the airline’s board or become United’s chairman, Bethune said, “That’s fine with me … I was [part of the Altimeter/PAR effort] in spite of the fact that I didn’t want to go back and work very hard.”

Munoz, Bethune said, “is a wonderful man but not a veteran of the airline industry.” Munoz was formerly the president and COO of rail and intermodal giant CSX Corp. Now that Milton will become chairman and other airline industry veterans, such as former Delta Air Lines COO James Whitehurst, have joined the board, “some people with real expertise” will be sitting in United’s boardroom, Bethune explained.

“The board itself had no airline experience,” he told CNBC, later adding, “Somebody on the board needs to know how to fly an airplane.”

The 74-year-old Bethune, smiling and looking relaxed as he chatted amiably with cable television moderators, appeared to be more than happy to have been the hedge funds’ trump card.