Ready for takeoff

Steve Goepfert

PwC alumnus Steve Goepfert offers a look at the 2010 United-Continental merger from the chief auditor’s seat.

When United Airlines merged with Continental Airlines in 2010, Continental’s chief audit executive, Steve Goepfert, took on the responsibility of overseeing the internal audit function of what had become one of the largest airline companies in the world. The new organization, which took United’s name, is now home to more than 86,000 employees, 697 in-service aircraft and $34 billion of pro-forma consolidated revenues in 2010.

Upon graduation from Southern Illinois University in 1975, Goepfert launched his career in public accounting at Coopers & Lybrand in the St. Louis office. His career in the airline industry began in 1980 when he joined Houston-based Texas International Airlines, which became Continental Airlines through a merger two years later. Except for a brief detour, Goepfert has worked for what is now United Continental Holdings, Inc., ever since. This 30-year airline veteran is actively involved with several industry and professional organizations, including serving as the chairman of the board of the Institute of Internal Auditors from 2006 to 2007. Keyword recently caught up with Goepfert to discuss his transition to the newly integrated airline.

From an auditor’s perspective, the world is full of opportunities, but it’s also full of risk.
— Steve Goepfert

What is it like to be the chief audit executive at one of the biggest airlines in the world?

Goepfert: It’s very exciting and, to some extent, somewhat humbling. As we saw earlier this year with the price of oil going over $100 a barrel, things are always changing. From an auditor’s perspective, the world is full of opportunities, but it’s also full of risk. We have to be cognizant of those risks: not just the regulatory and operational risks, but also the other kinds of risks that people sometimes lose focus on. The process of talent selection is one example—we need to make sure we have the right people in place to lead us through these times.

In a nutshell, why was the merger a good deal for both companies?

Goepfert: The two airlines’ networks complemented each other very well. Part of the reason the merger was approved so quickly by both the Department of Justice and the Department of Transportation is that there was so little overlap from a competitive standpoint. United’s strengths in the US were in the western part of the country, with a major hub here in Chicago; great hubs in Los Angeles, San Francisco and Denver; and of course an important presence in Asia. The merger added Continental’s major hub in Newark, which is a jumping-off point for routes to Europe, Africa and the Middle East, as well as its hub in Houston, which opens up to Latin America. The combined route structure gives the customer the ability to get almost anywhere on the face of the earth.

2010 was a turnaround year for the airline industry in terms of profitability, and United was a part of that. What factored into this outcome?

Goepfert: I would say a good deal of the return to profitability was due to capacity reduction, being able to price products appropriately in the marketplace, and a return in demand for air travel. Of course, there’s also the choice that we’ve given customers. A lot of people talk about the fees that airlines have started to charge for things like checked baggage, meals and extra legroom, but I consider them choices that we’ve given our customers. It’s a lot like the hotel industry: You can have a garden-view room, you can have an ocean-view room, or you can actually have the waves lapping up at your feet. You have to pay more money for that sort of thing, of course.

The airlines embraced this idea somewhat late, realizing that customers have choices—not just between sitting in economy or business or first class, but whether they want to sit in an area where they have more leg room or whether they’d like a certain kind of meal. People can decide to go with no frills, to have some frills, or that they’re willing to pay more to have the best kinds of products on their flight. This has worked out well from the standpoint of generating more revenue for us while also meeting the needs of our customers.

How long would you estimate it will take to truly merge operations, including your accounting processes?

Goepfert: Some portions of the integration activities could take another 12 to 24 months. Some of these things will be in place by Customer Day One, which is when the customer will be able to see that we are operating as a combined company. Right now, if you’re a customer flying on a United aircraft, and you walk up to a Continental ticket counter to check in for your United flight, the systems don’t talk to each other. That’s one thing that will change. Another big milestone will be getting what we call a single operating certificate that is under the control of the Federal Aviation Administration (FAA). It basically involves presenting our plan to integrate the operating nature of our airline to the FAA. They want to make sure the flight crews, the maintenance people and so forth really know how to operate as one carrier. Our hope is that within a year, we’ll have that.

In your career, you’ve watched the airline industry go through major shifts. How has the job of the chief audit executive changed?

Goepfert: It’s changed quite a bit. When I started, it was rare for people to come from a public accounting background. This was one of the first landscape changes, when auditing changed from a function of the people drawn solely from the organization to being a more professional department.

Several big changes coincided with the Sarbanes- Oxley Act coming into existence. First, internal auditing returned to its roots in financial auditing, because internal auditing had changed to a consultative approach—from “How do we add to the bottom line?” to “How do we go back and ensure the financial controls are sound?” Second, the chief auditor came into the spotlight in meetings with executive management and the auditing committee. It was a diametric change. Previously, you may have mailed in your reports and on rare occasions may have spoken for a few minutes at a meeting. Now you’re a public speaker, encouraged to take on an executive role and hold the attention of everyone in the room.

In essence, you have responsibility for making sure your fellow executives and board leaders have the information and guidance they need to make the “right” decisions for shareholders. Would you say that a chief auditor is like a cleric to a company’s financial soul?

Goepfert: I wouldn’t say a cleric; I’d say the litmus paper. When someone makes a statement, my job is to evaluate it. I either say, “Yes, that’s right, that makes sense,” or, occasionally, I’m sitting there shaking my head from side to side. That’s when my colleagues tease me and say, “I see your forehead furrowing; I need to make a mental note to talk to you.”

The internal auditor is the organizational voice who lets people know if something is slipping. You have to communicate why something doesn’t sound right, either from a financial perspective or because it would put an organization’s reputation at risk. In the end, they don’t have to agree with what you say, but they should listen.

What attributes are most useful in your job?

Goepfert: You have to be an effective leader, so people will want you to be part of the discussion. And you need strong ethics. At times, you’ll tell executives and the board things they aren’t going to be happy to hear but need to hear anyway. It’s extremely important to be perceived as being ethical, someone who knows right from wrong, who understands risks, and who will tell the truth, the whole truth and nothing but the truth. Last, from an auditor’s perspective, you have to be a good developer of people and hire really good people. It’s one of the things I’m most proud of. We bring people in, give them a good orientation to the company and help them become leaders.

As past chair of the board of the Institute of Internal Auditors, you’ve traveled the world speaking to other auditors. What advice do you give them?

Goepfert: I give this advice to everyone, including my staff: Be enthusiastic about what you’re doing. I always tell the people who work for me: If you’re not happy, I’ll find another place for you where you can be. Life is too short to be in a job you don’t like. Fortunately, I work with people I love, and I love the place I work. You’d have to get several cases of dynamite to get me out of this job.