United Gets Off Easy, Pays $2.4M Penalty For Using Planes To Chauffeur Airport Exec To Vacation Home

Image courtesy of (Jason Daniel Brown)

Last year, United Airlines CEO Jeff Smisek abruptly resigned amid a federal investigation into allegations that the airline had provided illegal special favors to an official in charge of Newark Liberty International Airport — including relaunching a route to South Carolina that just happened to be near a home owned by that official. United has now agreed to pay $2.4 million to settle a Securities and Exchange Commission investigation into these allegations — just a tiny portion of the financial benefit the airline received as a result of this back-room dealing.

The Securities and Exchange Act requires that United maintain a system of internal accounting controls sufficient to prevent the misuse of the airline’s assets, and that the airline’s books “accurately and fairly reflect” the transactions made by the airline.

However, five years ago — shortly after United acquired Continental Airlines and promoted Continental CEO Smisek to run the combined organization — the airline relaunched a route from Newark to Columbia, SC, even though United had already concluded that this particular route would be a money-loser. In fact, only two years earlier Continental had shut down the Columbia route because it made no financial sense.

So why did they do it? To get in the good graces of David Samson, who had at the time recently been named Chairman of the Port Authority of New York and New Jersey, the organization that operates Newark International.

Before the United/Continental merger, Continental had the largest presence of any single airline at the New Jersey airport. The combination of the two airlines only made Newark that much more important. According to the SEC, as soon as Samson stepped into his key role at the Port Authority in early 2011, he began to pressure United into offering this flight.

At the time, United was looking to lease land on Newark International property to operate a maintenance hangar that would save the airline millions of dollars. However, after United began to let Samson’s people know that the airline wasn’t going to relaunch the South Carolina route because it was a money-loser, the Port Authority Board removed the pending United lease from its agenda.

Shortly thereafter, Smisek personally approved the South Carolina flight without consulting legal or compliance personnel at the airline. That same day, the Port Authority Board approved the lease for the United hangar at Newark.

“The route provided Samson — who exercised authority and influence as a Port Authority official in matters affecting United’s business interests — with a more direct route to his house in South Carolina,” explains the SEC order [PDF] detailing the settlement.

Not only was the route tailored to give Samson ready access to his South Carolina home, says the SEC, but Smisek — sidestepping the airline’s normal approval processes — had this route scheduled based on Samson’s preference.

Samson has pleaded guilty to bribery in a federal criminal case, but United is actually getting out of this mini-scandal relatively unscathed.

In addition to the $2.4 million civil penalty to the SEC, United has already entered into a non-prosecution agreement with the U.S. Attorney’s Office in exchange for a $2.25 million payment. Combined with the nearly $1 million the airline lost on the South Carolina route, that brings the total loss for this can’t-call-it-bribery-because-United-hasn’t-been-convicted to more that $5.6 million.

But since United estimated that it would save $47.5 million per year from the new hangar at Newark International, these penalties were apparently a very small price to pay for this misuse of company and assets, and disregard for simple ethics.

Meanwhile, Smisek flew off into the sunset with a nice package of perks including millions of dollars in compensation and United stock, a free car, parking (in Chicago and Houston), and comped flights on United.

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