5Q With Larry Kellner Of Continental Airlines

Outgoing Continental Airlines CEO Larry Kellner last month appeared here at the National Business Travel Association convention. He was peppered with questions on, among other things, bag fees and passenger rights. On the former, Kellner said, "If you look today at our corporate travelers, less than 20 percent pay a first bag fee." On the latter, he told attendees that "I am not opposed to a passenger bill of rights. What I am opposed to is a passenger bill of rights that writes rules nobody can follow." After more than 14 years at Continental Airlines and five years as its CEO, Kellner at year-end will leave the company to start a new real estate private equity firm. Before he took the stage in front of thousands of NBTA delegates, Kellner spoke with Management.travelabout his career at Continental and his thoughts on the future of the company and the aviation sector.

In your five years at Continental's helm, you have seen the whole business cycle, from profitable growth years to today's challenges. How would you describe the changes that you have observed in the managed business travel channel and the value it provides?

We are a business travel airline. We have always been a business travel airline. We build our schedules for our business travelers. We have lots of leisure travelers, because they are going to fill the plane around the business travelers, but the decisions we continue to make are based around business travelers. I don't think Jeff [Smisek, Continental's incoming CEO] believes any differently, philosophically. Business travel doesn't occur because it is fun. Business travel occurs because it is necessary. Every time we have had technological innovation--whether it's been the phone, email or now videoconferencing that people talk about as cutting down on group and meeting travel--business travel comes back. The reason it'll come back is because it is a necessary part of doing business. What you'll continue to see going forward is ebbs and flows. In the good years, it is a way of investing in the business. In the tough years, you can cut back. But you can't not have a sales meeting for five years and be a successful company. You can pass up a year to get some savings, but ultimately you need to do it. The flip side is people will always look for better value, but they'll balance what is cost-effective. They may tell all international travelers to travel in coach. But when they realize that at the presentation in London Larry just didn't seem to have it together after riding for 10 hours in coach, they'll look for that balance. If you as a global organization tell someone that you want them to take over the group in Europe in addition to their group in the United States because it just doesn't work right with two leaders, but you tell them you want them to fly coach back and forth 30 times a year, you'll find that executive decides, "Well, I don't want to do that." You'll have the ups and downs. There will be a longer-lasting impact--people will be more sensitive to appearances--after the downturn we've just been through. But most people are looking for value. No one will say, "I'll pay whatever you want me to pay." But people are usually willing to pay for a certain level of comfort. On the airplane, we are renting space and we are providing service. We can dial those services up or down based on what we hear from business travelers.

Considering the cost of sale for corporate travel--including the distribution systems, the sales force and all the other things that go into selling to the complex world of managed travel--and the declining revenue resulting from more stringent corporate travel policies and generally lower airfares, how do you determine that it is still worth it?

We listen to the corporations. Every time they look at the data, while there are always cases where people might be able to do something cheaper, when you take those processes out of the system, you end up not knowing where your folks are. But more importantly, most guys end up spending more in total because for every Joe who is very disciplined there is a Sam who is not very disciplined. When you open up the channel, they may make choices not in the best interest of the company. Many times, they think something else is cheaper because they don't understand the whole relationship. Corporate travel managers will continue to tell you they want a simpler, more holistic process, i.e., to deal with less entities more directly and understand where they are at. That is some of the magic of going to Star Alliancefor us. It is clearly a chance to say, "Here is a chance to deal across a broad range of carriers and make sure people get the right deals and good service."

What are the biggest challenges you are leaving Jeff?

The toughest challenge is the huge volatility in the marketplace, both from a demand side and from a fuel side. How you manage that volatility in a fixed-cost business is the single biggest challenge. How do you plan long term in a business where you can make seemingly simple decisions--and have it take a year to implement them--and yet the world can change? It's been only a year since Lehman Brothers declared bankruptcy. Think of all that has happened since then, the ups and downs of business travel, oil and everything else. If you think back just three months ago, we were battling swine flu and could not finance an airplane. Things change very rapidly, but the system doesn't change very rapidly. That is the toughest challenge, and there is no easy answer.

Will more mergers and acquisitions among major airlines occur in the next year or so?

I think M&A was last year. Maybe it will happen again with some other carriers. In my mind, you haven't seen the rewards outweigh the risks if you look at previous airline mergers. We're watching Delta very closely, but we made that decision [not to merge with another major carrier] a year ago. If the landscape changes again, or if we see that Delta is really successful [with its acquisition of Northwest Airlines], we'll ask if there is something we need to do differently. But we strongly prefer to be independent. There are a lot of things that look good on paper that are hard to execute. We'll continue to stay focused on organic growth and alliances.

Are you confident that a meaningful Federal Aviation Administration reauthorization can be achieved relatively soon?

I am confident that Secretary [of Transportation Ray] LaHood and FAA Administrator [Randy] Babbitt were very good choices. They have shown tremendous leadership since they have been in their jobs. I have tremendous confidence in them to move the process forward. It is difficult to predict what Congress will do and how priorities will shift. Just as you watch the healthcare process, you see how many transitions bills go through as they move forward. It is difficult for me to predict how they'll look at reauthorization. If you look at the air traffic control system, one of the big challenges is that things do not seem to get done if there is not a crisis. We need to get a plan and stick to that plan to get the ATC system modernized. That's key to the future of the airline business, and there definitely is the right leadership in the administration to do that.