One-On-One: Star Aligns For Departing Continental Airlines CEO Larry Kellner

Before leaving for private equity firm Emerald Creek Group LLC at the start of next year, Continental Airlines CEO Larry Kellner plans to change airline alliances, implement a joint venture with key Star Alliance members and deploy a new premium cabin. He spoke with BTN senior editor Jay Boehmer and editor-in-chief David Meyer last month.

BTN: What are your priorities for the rest of your tenure?

Kellner: I think the key for us is the transition to the Star Alliance, and that was a defining thing, even in making the decision for timing and transition. Despite some of the enthusiasm on Wall Street—and I hope that's a good sign—I won't say the business market's recovered. What I will tell you is that the trends have stabilized. It's stabilized, oil is way down from where we were a year ago, and in June we could finance airplanes. The last question for me is, as I looked and said I want to do this, I've got to get to Star.

This is just a huge strategic move for us. Delta merged, and we chose not to merge. Our view at the time was that we could get in before the Bush administration was over. Clearly, that didn't work. That's always the challenge with antitrust. Delta's approval with Northwest went about as smoothly as it could go. Ours took over a year from when we filed to when it got approved.

We're going into Star on Oct. 27 and we're coming out of SkyTeam on Oct. 24. There are multiple things to do from a systems standpoint to make sure we deliver to the customer. I'll tell you today I'm pushing my team just as hard as I can to make that transition seamless. While there are lots of day-to-day issues, the number-one thing I'm focused on is to make sure we have a smooth transition. (Continental president and CEO-in-waiting) Jeff (Smisek) is here, and he is ready. The people are the key to our success, so I'm working to make the transition to Star as smooth as possible. It's a huge opportunity.

BTN: You join Star on Oct. 27, but how long will it take to fully implement the joint venture you are creating with Air Canada, Lufthansa and United?

Kellner: We've got until January 2011, because we have 18 months. We'd like to get it substantially done sooner than that. I think you'll see codes come into place. When we originally looked at going into Star I would have liked to have gone faster than October, but when you look at the underlying systems to make it work right, I'd rather deliver what we say we're going to deliver than fail to deliver that. I'll hope we get it up some time in 2010. Obviously that's past my tenure, but it's not something I expect to get turned on until January 2011. We have to figure out the framework first, but my hope is to get it up some time next year.

BTN: How is the joint venture shaping up?

Kellner: That was a big part of getting antitrust approval. There are multiple steps. The first is you decide to do it, then you file for antitrust approval, then there's a lot of waiting because of the whole interlude with the government. Now we're back fast and furious working with United, Air Canada and Lufthansa to say, OK, how do the details of all this work? We couldn't figure all this out in the past year because we couldn't talk to them.

I feel good about the opportunities for that partnership, both working closer with United domestically and also working on the joint venture. I think there's a lot of upside for our customers. This is a big increase in customer choice because what you had was Delta and us sitting in the same alliance, with a lot of overlap in New York and a lot of overlap in Latin America. That's why it was surprising to all of us why it took so long for government approval, because while it's a complex topic, it's hugely beneficial to the customer because it now gives you real choice.

SkyTeam now has its alliance where you can deal with Air France or Delta. Star Alliance will now have a true transatlantic joint venture, because while they had a great joint venture, they were kind of dark in New York and dark in Latin America, and that's a huge part of this business. This is good for companies strategically.

BTN: A year ago, you unveiled your new business class seat, which is slated to come to market this year. Does the demand environment give you pause in those plans?

Kellner: Oh, no. First plane is out in September, the first 757 in November. If anything, it's frustrating: Whether it's Star or the seat or LiveTV, how do you do it faster? Next summer we're planning to be in a number of markets with flatbed seats. We're excited about the seat, and while we're behind some of our competitors and ahead of others, I think we worry more about the people behind us than the people ahead of us, because we know our seat beats the ones that are already out there. Buying this technology is a little bit like buying the coolest, newest video player, then finding out six months later you spent all that money and there's a new one.

Our only worry at the moment is the guys coming behind us. I'm not worried that we're too early, and I think we're in the sweet spot in the market for timing, but there have been so many advances in seat technology right now, compared to what you've seen for years, and how these video systems are tied in.

BTN: Hasn't there been a real shift as far as business class demand is concerned?

Kellner: It will be back. I'm a believer that in the short run, people will cut back on groups, people will cut back on meetings, and people will say they're going to teleconference more.

We had a meeting with a bunch of our big corporate customers and we had a debate. A number of guys said corporate travel would never come back to the level it was and that they were using videoconferencing. Before I could even respond, another guy said, "No, no. We tried that three years ago, and while it seems like fun, so much happens in the bar, over dinner and at the golf course. That's where the ideas ferment."

What this guy said—and I couldn't have said it better—was that what you could do in videoconferencing is make formal decisions: You can have a meeting, make presentations, make formal decisions. But, what we found with our companies, people want to find out what's going to work and not going to work. You don't want to get to the point of the formal decision and only be right half the time.

There's an awful lot of work that goes on in advance, and that happens one on one. Just think about any group dynamic you've been in where you're having a meeting and someone says, let's go out in the hallway and talk about this for a minute, have a sidebar. You can't have a sidebar in a videoconference. What the guy described beautifully was that it's a tool you could use, it made the company run better, but it didn't cut their travel.

BTN: What's demand looking like for the rest of the year?

Kellner: I'm not smart enough to know that. We can see bookings out several weeks. We don't see any signs that business demand is getting worse. It's stabilized as it has been going after the past several months, but I'll be hesitant to say that one data point makes a trend. When you see consumer confidence at this point, you feel good. It really comes down to what happens in September and early October from a pure business travel perspective, and then we'll have a much better handle on how this is going forward.