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Continental Airlines chairman and CEO Larry Kellner last week spoke with financial analysts after the company posted a $236 million third-quarter loss, dragged down by a $606 million year-over-year increase in jet fuel costs and a $50 million hit from Hurricane Ike's adverse effects on the carrier's Houston hub operations. Kellner fielded questions on a number of topics. An excerpt of that discussion follows.
What's the trigger point that gets you to go further or deeper in terms of capacity cuts?
There are a couple of things we look at. Clearly, we can't go on losing money for the long term. We need to get this business to sustain profitability, but we also don't want to go guardrail to guardrail, quarter between quarter. We have seen just dramatic shifts both in the economy and in fuel prices, so as you look at planning: Things that were great at $70 a barrel for oil or $80 a barrel for oil don't work at $130 a barrel for oil. But you have to make those decisions months in advance, so you will see us both be willing to move where we need to, but not try to overact quarter by quarter. If we feel our survival is threatened, we'll take very dramatic action but, within that range, we're going to focus on sustained long-term profitability. If we're convinced we can't make a route work on a long-term basis, we're going to take it out. If we're convinced in the short term, we could do some fine tuning ... During the SARS crisis, we pulled Hong Kong down for about six months, if my memory is right. That was a case where it just didn't make sense in the environment, yet Hong Kong was a market we wanted to be in for the long term. There was so much pressure on that route and when you looked at the load factors, you had to take it out for a while. So we'll continue to make those decisions, but our general focus will be, "Do we think we can be at sustained profitability on a long-term basis on this route?" If we don't, it will come out. If we do, we'll try to keep it. Clearly, if the business is under stress, we'll make the tough decisions we need to make.
In terms of ancillary fees, have you seen a change in behavior recently?
Absolutely. We are seeing significantly less second bags. On the first bag fee we have not yet seen much change in behavior, but we are seeing less second bags, and that's a result we're very comfortable with because there's clearly a cost both to handle [baggage] and fuel-related. Our goal is to get a fee in places that we believe will help us offset those costs.
Does the improved profit outlook make the waters any more conducive to possibly taking the United Airlines relationship beyond just the Star Alliance participationlevel?
We're in a period of incredible uncertainty, so while I'll never take consolidation off the table for the long term, in periods of uncertainty, we're best keeping our flexibility, and we do that best as an independent carrier. We're excited about the potential to join Star; we think that will do a lot for our business and that's our focus.
In transitioning from SkyTeam to Star, it would seem hard to come up with a transition that would actually be seamless. Is there the possibility that there is some revenue that's left on the table?
There's clearly a risk. We've shown in the past that we execute pretty well, but clearly moving from one big global alliance to another presents a lot of challenges. Our No. 1 goal is to do it in a way that is customer friendly so people feel like if they've come to depend on something in SkyTeam, we deliver what we're going to deliver there with our planned move to Star. Obviously, we want to ramp that up in a way that the technology works from day one. There's clearly some risk, but by the same token we'll work hard to execute as well as we can and make that transition just as smooth as we can, and try to manage it in a period of stronger demand. Where the economy is has some impact on that because the stronger the demand the more you can cover some traffic you might lose from an alliance partner. With the economic uncertainty, we've doubled our focus to make sure we do that. Within our priorities internally, we always keep a focus on our top three items, and Star is the biggest strategic thing we're looking at.
Will the U.S. Department of Transportation's actions regarding slot restrictions and auctions in the New York metropolitan area have any effect on your planning going forward?
The key is we need to somehow get the focus back on improving the capacity into, specifically, the New York area. There's a huge set of challenges there. It's very troublesome for our customers, and it's very troublesome for my coworkers that the system doesn't work well in New York. Right now, the government is proposing shifting around who might use some of that as opposed to focusing on fixing the problem we have. I hope as we move forward next year we can try to make real improvements in the airspace in New York through air traffic control reform. We need a new system. We need fundamental change, and I wish that was the focus rather than slot auctions.
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