How United’s Oscar Munoz Bounced Back After a Heart Transplant
How United’s Oscar Munoz Bounced Back After a Heart Transplant
Now recovered, the CEO is helping his once-troubled airline close the gap with rivals Delta and American.
Oscar Munoz is telling his pilots about the day he almost died. “I want to share with all of you the advice that saved my life,” he says.
It’s mid-October and the CEO of United Continental (UAL) is standing, microphone in hand, at one end of a conference room in a Radisson hotel outside Denver. Dapper and relaxed in a blue blazer and gray slacks, Munoz is here to address 250 of the airline giant’s veteran pilots, who have flown in for annual training exercises.
The charismatic 57-year-old executive has already won the room over with his sense of humor, pointing out that today’s crowd is in a far more jubilant mood than the tense group at the same event last year—before the company and the pilots’ union had agreed to a generous contract extension. “I was facing a room full of fingers pointing at me,” he says.
But suddenly his sunny mood turns somber. The room grows quiet as Munoz recalls the morning of Oct. 15, 2015. “This is the anniversary week of my heart attack,” he tells his rapt audience.
Munoz had just returned to his downtown Chicago rental apartment after an early-morning workout. The fitness freak—who had completed a triathlon weeks earlier and maintained a vegan diet—was mixing a protein shake when the phone rang. “As I went to answer, my legs buckled.”
The words of a cardiologist friend he jogs with suddenly came to him. “He said, ‘If you ever feel something weird, call 911, and tell them where you are. You may not get past that first phone call.’ ”
Munoz grabbed his landline—“I used to work for AT&T”—dialed 911, and sputtered his address. Then, remembering that he had locked the front door, he stumbled across the apartment in a stupor. Just as he got the door unlocked, he tumbled backward into a closet door, breaking his nose in the fall. Moments later the paramedics rushed in. Within 37 minutes of making the 911 call, he recounts, he was on life support at Northwestern Memorial Hospital.
The near-death experience occurred on Munoz’s 38th day as United’s CEO. And it marked the start of a series of medical trials that, on and off, kept him sidelined for six of his first seven months at United. On Jan. 5, his birthday, Munoz received a heart transplant in an 11-hour operation. (He’s been told the donor was a 30-year-old but has no further information.) But he returned to the job after an extraordinarily brief recovery of just over two months. In fact, Munoz is one of the very few CEOs of a major company to ever continue in the top job after receiving a heart transplant. “This is the craziest human-interest story ever,” says Robert Milton, the former chief of Air Canada who joined the United board in March at Munoz’s behest and now serves as chairman. “I took the job in part because I wanted this guy to win.”
Adds another new director, Ed Shapiro of PAR Capital, one of two hedge funds that threatened a proxy fight earlier this year before reaching an accord with Munoz: “What impressed us was that he put his life at risk to lead United. He chose to come back when it would have been easy to say, ‘I had a life-threatening issue, so I won’t be coming back’ to this incredibly stressful job.”
Almost as remarkable as Munoz’s swift return is the progress he has already made in turning around what has for several years been a struggling and divided airline. He has ended years of labor strife by reaching new deals with the company’s four major unions, recruited away top talent from the airline’s rivals, and boosted United’s on-time arrivals. And Wall Street has taken notice: As of early November, United’s stock price had soared 44% in four months—besting fellow mega-carriers American (37%) (AAL) and Delta (DAL) (17%). Indeed, a comeback at United promises to substantially shift the balance of power in the $700 billion global airlines industry.
In hours of interviews, Munoz recently provided Fortune with a close-up, exclusive look at his ambitious goals for United, his strategy for reaching them, and his amazing recovery from his near-death experience.
United has been an underperformer ever since the disastrous merger between United and Continental in 2010. Prior to Munoz’s arrival, negotiations on contracts with flight attendants and mechanics had been dragging on for years, causing a bitterly antagonistic relationship between management and labor. United regularly posted the worst on-time performance among America’s four major carriers.
As a result, the U.S. industry settled into a hierarchy that most experts predicted would persist for years. Among the nation’s Big Three global carriers, Delta was the clear -champion—with excellent reliability, strong margins, and a dominant market cap to match. After its successful merger with US Airways, American was a strong second place.
Third-place United’s problems ran deeper than just poor reliability and grumpy onboard service. In recent years the U.S. market has proved extremely profitable, in part because the industry has shrunk to just four big carriers (including the leading budget choice, Southwest). But instead of expanding to benefit from the packed planes and strong fares, United had neglected its U.S. business to focus on profits ferrying passengers to Asia and Europe.
Munoz has made bold moves to reverse these trends—and at least one blockbuster hire. In an August coup that astounded the industry, United grabbed the longtime president of American Airlines, Scott Kirby, to take on the same role at United. Kirby, a master of orchestrating schedules to maximize lucrative connecting traffic, is renowned as the best “network manager” in the business.
Munoz is counting on Kirby’s network magic to close the gap with American and Delta. To be sure, today all three major carriers are profitable thanks to a steep fall in the price of jet fuel and the industry consolidation that has helped lead to packed planes. But United trails its rivals by a wide margin on key financial metrics: For the first nine months of 2016, United posted an operating margin of 14.5%, far below Delta at 19.7% and almost two points under American’s 16.3%.
Here’s why United actually has a shot at a strong comeback: It boasts what’s arguably the best array of hubs of the majors. It is the first- or second-ranking carrier in more of the biggest urban markets than any of its rivals—holding the top spot in Denver, Houston, New York City/Newark, and San Francisco and ranking second in Washington, D.C. “The key is the opportunity to exploit all that potential we haven’t been exploiting,” says Milton, the United chairman.
Sitting in his 11th-floor office in Chicago’s Willis Tower (the former Sears Tower), the trim, athletic Munoz shows no outward signs that he’s powered by a recently implanted heart. The only apparent legacy of his health issues is a slight looseness in the grip of his right hand. (He’s back cycling but with a special brake lever installed on the left handlebar that works both front and back wheels.) But he’s shaking hands where he used only fist bumps a couple of months ago and says his grip is returning. To increase his stamina, he has shifted from being a pure vegan to what he calls a “flexitarian,” by adding fish and poultry to his diet.
United is making some splashy moves to attract business travelers. In December it will introduce a new service called Polaris that combines the former business- and first-class cabins on international flights so that every seat has direct aisle access. Polaris will also offer special, extra-luxurious lounges serving sit-down gourmet meals and equipped with showers.
But Munoz doesn’t think that such amenities are what’s going to lift United above its rivals. “Everyone eventually matches or leapfrogs everyone else,” he says.
Instead, he’s set on transforming the United culture—from extremely passive to highly aggressive. “Our employees and competitors thought we were docile,” he explains. “We want to be defiantly disruptive. I don’t mean necessarily by launching price wars but by being the best at the basics—having the best customer service, the best on-time performance, the best coffee—in a thoughtful, not a testosterone-laced, way.”
Munoz learned about operational discipline early in life. He grew up in Southern California, the son of a union meat cutter born in Mexico and the oldest of nine children. “We didn’t have nine brands of cereal at home,” he recalls. “We’d line up to fill our bowls from a giant vat of oatmeal.”
After graduating from USC in 1982, Munoz rose through an ascending series of financial analyst and controller jobs, first at PepsiCo (PEP), then at Coca-Cola Enterprises. In the mid-1990s he secured a coveted chief-of-staff-like role under legendary Coca-Cola (KO) CEO Roberto Goizueta. He moved on to stints at Qwest and AT&T.
In 2003, Munoz made a big jump when he joined railroad operator CSX (CSX) of Jacksonville as CFO and chief of strategy. “Oscar brought a certain steeliness,” says its general counsel, Ellen Fitzsimmons. He helped streamline the bloated managerial ranks by eliminating 800—or 20%—of the management positions. He also developed new analytics that identified the most profitable product segments, steering CSX to increase its shares in high-margin coal and chemicals. Over his 12 years at CSX, its market cap soared from $7 billion to $28 billion with a 15.9% average annual stock return that was double the performance of the S&P 500.
In mid-2015 the CSX board chose Munoz to succeed CEO Michael Ward at the end of the year. But then a challenge appeared that Munoz couldn’t turn down.
United needed a savior. And as a director of the airline—he had joined the Continental board in 2004—Munoz knew well that the company had been embroiled in a crisis that might end the tenure of CEO Jeff Smisek.
For months the Justice Department had been investigating charges that David Samson, chairman of the Port Authority of New York and New Jersey, had pressured United to reinstate a flight to Columbia, S.C., near his vacation home in exchange for improvements that United sought at Newark’s Liberty Airport. United reinstated the money-losing flight because of Samson’s demands, according to New Jersey’s U.S. Attorney. The federal investigation and United’s internal probe led to Smisek’s ouster in September 2015. (In July 2016, Samson pled guilty to bribery. United paid a $2.25 million penalty and agreed to substantially improve its compliance procedures. Neither Smisek nor other United officials were charged. Smisek has never commented.)
The United board didn’t see a good internal candidate to replace Smisek, who had consolidated power by holding the positions of president, CEO, and chairman. One potential contender, CFO John Rainey, had already left to take the top financial job at PayPal (PYPL). The directors had hired an executive search firm to look at outside candidates if Smisek was forced to leave. But they wanted to avoid a long-term search that could leave United even more rudderless. Their fellow director Munoz, with his knowledge of the airline and track record at CSX, seemed the logical candidate.
Munoz recognized the opportunity. He felt that if he could fix morale at United, performance would follow. “There was a high level of distrust and disengagement with employees,” says Munoz today.
His heart attack wasn’t the only major hurdle Munoz had to overcome to start the turnaround at United. Just two months after receiving his heart transplant and days before he returned to work full-time on March 14, Munoz faced a potentially crippling proxy battle with investors.
Two Boston hedge funds that specialize in airlines—PAR and Altimeter—had decided they could no longer tolerate United’s terrible record and demanded major changes to the board. They supported the selection of Munoz as CEO but, given his lack of an operating background in airlines, argued that he needed guidance from directors with long experience in the industry. None of United’s 12 directors had ever worked for an airline. In a March 8 letter to the board, the two hedge funds castigated United’s board as “underqualified, ineffective, complacent, and entrenched.”
The hedge funds demanded a slate of six new directors headed by former Continental CEO Gordon Bethune, whom they wanted as chairman. For Munoz, naming Bethune chairman was a deal-breaker; he argued it would inflame the old divisions between United and Continental. But he also sought to avoid a debilitating fight with major investors. “I didn’t want weeks and months of cultural damage and brain damage that would continue to undermine the company.”
Munoz recognized the need to fortify the board with more airline experience. So on March 7 he had launched a preemptive strike by naming three new directors, including two airline -veterans—Air Canada veteran Milton and James Whitehurst, former COO of Delta.
Munoz proposed appointing Milton as chairman and deferring his own ascension for a year, until mid-2018. The choice of a seasoned airline veteran was crucial to forging a deal. The hedge funds dropped their demands for Bethune to head the board. In April the two sides reached an accord by agreeing to three additional directors, including two picked by the hedge funds.
If part of being a successful airline executive is connecting with the rank and file, Munoz checks that box easily. He’s a natural at charming and connecting with everyone from ticket agents to baggage handlers.
On a recent trip to Houston, Munoz arrived at around 9 p.m. and went directly to a maintenance hangar to meet with a crew of mechanics. The next morning he strolled through the airport taking selfies and giving pep talks to ticket agents and customer service folks, then descended to the tarmac to hang out with the workers who move bags from planes to carousels. “I feel most comfortable in the hangars and ramps,” says Munoz. He also met for 30 minutes with a Teamster who had returned to work two days earlier following a heart transplant, after two years off the job.
Even before his own heart attack, Munoz set a new tone with a crucial shift in policy. Under Smisek, United was outsourcing jobs to non-union customer service reps and ramp workers in small cities such as Jacksonville and Boise. Munoz, who regularly flew out of Jacksonville while at CSX, saw firsthand how the policy annoyed travelers, since inexperienced new hires frequently provided below-par service. Shortly after becoming CEO, in the fall of 2015, he halted the outsourcing, which went a long way toward winning the confidence of the unions.
Munoz also played a decisive role in clinching the new attendants’ contract. Under Smisek, the talks had been grounded. “It was a lot of stalling and talking around in circles,” recalls Sara Nelson, a United flight attendant who now heads the AFA, the national flight attendants’ union. “We couldn’t get past things like compensation for jury duty, let alone the big pay issues. Probably 90% of the issues weren’t settled after three years of talks.”
Reaching an agreement was essential to finally integrating United and Continental: Bizarrely, the rules barred the legacy Continental flight attendants from working on planes owned by United before the merger, and vice versa. Let’s say a plane arrived late in Houston and the “Continental” flight attendants onboard had finished their shift and a “United” reserve crew was free. The “United” attendants weren’t allowed to service the flight to its next connection.
Under the previous regime, United felt that it couldn’t afford to match the “market” wages and benefits paid by Delta and American. Munoz took a different view. “This is a pattern-bargaining industry, like railroads,” he says. “You need to pay market to get a contract at all, and without contracts, you have a poor relationship with workers.” So Munoz directly intervened to break the final deadlock, authorizing a more generous deal.
The payoff has been a remarkable improvement in on-time performance. According to statistics complied by FlightStats, for the first three quarters of this year, 82% of United flights opened their doors at the gate within 15 minutes of scheduled arrival—the definition of “on-time.” That’s an improvement of five percentage points from the 77% number in the same period last year. United actually beat American by more than two points and narrowed the gap with Delta from six to under three points.
Now that he has achieved labor peace, Munoz is focused on improving network management. He wants to fully exploit the potential of United’s powerful collection of hubs. And luring Kirby was essential in making the leap.
The story of how American’s president landed at United is a closely guarded secret, but Fortune has learned that Munoz and the board heard Kirby would be leaving American about two weeks before his departure. In a surprise move, American’s board had decided to promote its COO, Robert Isom, to president—tabbing Isom as the heir apparent to CEO Doug Parker rather than Kirby, and forcing Kirby’s departure. United got a big break because Kirby wasn’t restricted by a noncompetition agreement that would have prevented him from joining another airline for an extended period. “I jumped on it right away,” says Munoz.
American disclosed -Kirby’s departure at 4:15 p.m. on Aug. 29, and United announced his appointment as president at 4:18 p.m. The move wins praise from the crusty Bethune. “A lot of guys won’t hire strong people because they’re afraid of being overshadowed,” he tells Fortune. “But Oscar had the balls to hire Kirby—the right guy for the job. He rose 1,000% in my estimation.”
Munoz pounced for an obvious reason: Getting the rightsized planes to the right places, all funneled through hubs, is Kirby’s specialty—and the keystone of any airline’s profitability. Of the three mega-carriers, United’s network management is by far the weakest. And Kirby, who had been targeting United to win customers to American just a few months ago, knows its problems inside-out.
The weekend after this speech to the pilots near Denver, Munoz marked the anniversary of surviving his heart attack by celebrating with friends and family. His wife has remained in Jacksonville to allow the youngest of their four children, a teenage boy, to finish high school. The pair flew up to Chicago, accompanied by two of the son’s friends and their parents, for a sports super-weekend—featuring excursions to watch the Bulls on Friday (they won) and to Soldier Field to see the Bears lose to Munoz’s last hometown team, the Jacksonville Jaguars, on Sunday.
On Saturday night the group joined revelers in a restaurant to watch the Cubs defeat the Los Angeles Dodgers in game one of the National League championship series. “When [Chicago catcher] Miguel Montero hit that grand slam,” says L.A. native Munoz, “I transferred my lifelong loyalty from the Dodgers to the Cubs.”
The home run came on Oct. 15—one year to the day after Munoz had managed to stumble to his apartment door, and salvation. For an airline in need of a comeback, it’s hard to imagine a better-qualified leader.
A version of this article appears in the December 1, 2016 issue of Fortune with the headline “A Miracle Comeback at United.”