Continental Swaps Pilots: Airline Prepares For Kellner To Replace Bethune

Continental Airlines CEO Gordon Bethune at the end of the month will hand the carrier's reins to president Larry Kellner. Bethune is, by far, the longest-serving CEO of a major U.S. airline and Kellner has been with him much of that time. BTN editors last month spoke separately with each executive as they prepare to transition.

BTN: What were the biggest accomplishments in your 10-year tenure?

Gordon Bethune: I am giving my successor a lot better of an airplane than I got, and that is a major accomplishment that I am proud of. When you look at us, comparatively, we have a very good product. We have more cash on hand than at any other time in the company's history and brand-new facilities in New York and Houston that will fuel international growth. We also have hooked up with good alliance partners. I wish we were not in this business, but we are as well-equipped to be successful as I know how to make us, so I feel OK. We have come a long way and changing the minds of corporate buyers in America takes years. There is a certain amount of momentum built into this business. We are moving in the correct direction.

BTN: Do airlines still need to build the business around business travel?

Bethune: At the end of the day, large corporations still are controlling a huge percentage of the revenues. Their loyalty and repeat business is the backbone of the trade. We are a good airline as defined by corporate travel professionals which, by default, makes us an exceptional airline for leisure travelers because corporate travelers are much more discriminating.

BTN: Yet, business travel has changed so much in recent years. Has that changed your focus on the market?

Bethune: Not really. The business traveler has been able to take advantage of low fares on the Internet and close-in discounting, but they still are traveling and understand things like EliteAccess, boarding early, getting your bags first. These are things that take some of the sharp edges off travel.

BTN: How has Continental been able to keep the focus on the business traveler amid industry upheaval and massive cost-cutting efforts?

Bethune: We are unrelenting in attacking what we call non-value-add costs—back-office processes, insurance procurement—things that no customer cares about. We can afford, then, to spend the $2 to put food on the flight in the morning. What does a muffin and a banana cost? Not a lot, but it has a huge return. Larry feels the same way and our product will remain consistent.

BTN: You have focused for years on employee morale. Are you seeing that focus translated around the industry?

Bethune: I am not seeing it translated because most guys do not know how to begin. They are too enamored with advertising and slogans when it is more than that. I use a recollection from when I was a mechanic about how much faster I could fix an airplane when I wanted to fix it compared with when I didn't want to fix it. If you are ambivalent about your job, then things get in the way. Every day, for more than 10 years, we produce a daily news update that hits one thousand bulletin boards around the world. It says how our stock did, what our on-time performance was, who did what to whom in our company and in our industry. There is a source of communication. We show you the respect. You are worthy of us getting off our ass and reporting to you. We demand employees treat each other that way. The previous regime had pitted work group against work group, and they were all vying for scarce resources. If the left tackle is screwing over the quarterback, how is that going to work?

BTN: Are you encouraged by what you see in terms of declining labor costs around the industry (see story, page 1)?

Bethune: Many carriers have labor contracts that are permutations of contracts from the 1940s. Every three years, there is another layer of fat embedded in them, and it is not all about wage rates, but having 2.5 employees when you only need two. At US Airways, and apparently at United, some of that imbedded, nonproductive wasted cost is being attacked. You come out with a new agreement closer to those that have been signed in the past 10 years. They are starting with a blank piece of paper, or at least the threat of that. If they can do that, they are way ahead of the game and not carrying 40 years of history on their backs.

BTN: How can the U.S. government step in to resolve the issue of employee pension plans?

Bethune: From a societal standpoint, the government encouraged defined benefit plans. It is becoming clear that not only this industry, but others in America, are finding out they can't meet obligations. Congress needs to address that and help those of us with defined benefit plans to transition to defined contribution plans. I think Congress will do that because workers need security.

BTN: Switching to capacity, is the industry finally moving in the right direction to calibrate supply to demand?

Bethune: You see the big guys, at least, pulling back because they cannot sustain the losses, and the new entrants applying more low-cost pressure as they continue to grow. We are finally seeing that the bed of roses for the low-cost guys is coming to an end at $50 oil and nobody is going to walk away from a market and let a new entrant price them about of business.

BTN: Speaking of oil, must airlines simply wait out these high prices?

Bethune: The realistic thing would be to price to that, but we are so dysfunctional as an industry and we are only as smart as our dumbest competitor. There is a huge contest to see who will win that award each year, so we don't price to it, and all of us are dying. Even the price of bread has gone up a penny or two a loaf because delivery costs are higher. That does not happen in our business because we are dysfunctional.

BTN: Meanwhile, no major legacy carrier has yet disappeared in this current cycle. Will that soon change?

Bethune: US Airways is really struggling and probably has less than a 50-50 chance. I don't want to complain about the bankruptcy laws—we certainly have been a beneficiary—but they are a lifeline that let people linger longer than they should. United has been in bankruptcy two years and there is nothing that says the biggest can't fail. Either they will change or fail. I suspect they will change because it is a tremendously valuable franchise with good people. They just need the right leadership. They have gone through a lot of money and I would suspect that the employees resent all their concessions being squandered, as the record would indicate it has, but it is not hopeless. They have access to Heathrow, are a dominant player throughout Asia, have facilities and geography on the West Coast that are not replicable anywhere and own most of Chicago. If you could not make it with that, what is wrong with you?

BTN: Is there any reason to believe that Open Skies between the United States and the European Union will occur anytime soon?

Bethune: No. No one is going to turn over fifth freedom rights within the United States; it is not going to happen. Travel between points in the U.S. should never be open to anyone but U.S. carriers. We have plenty of competition. On foreign ownership, a 49 percent cap is appropriate and leaves a majority of ownership in the United States, but I don't know why we can't have above 25 percent voting interest so that equity is fully valued. Right now, our equity is impaired because it is only marketable to U.S. citizens, above a certain percentage. Should foreigners be able to bid on equity, our share prices would be higher because we are worth more than we are getting today.

BTN: In 10 years at Continental, what would you have done differently?

Bethune: I never had a disagreement with our board on a business issue. Ever. Sure, there are things we could have done differently, but I am happy with how things turned out.

BTN: What is next for you? Rumors abound that you'll stay in the industry.

Bethune: I don't know of any big vacancies out there. I only applied for one job in my life, when I joined the Navy at age 17. After that, people just called me. So, I will pick up the phone and say hello. I am not happy about saying goodbye right now and I may be leaving for the wrong reason at the right time, but the company is comparatively healthy and I feel OK about that.

BTN: Have you received any calls from Chicago?

Bethune: Maybe some hate mail.

BTN: Larry, can you discuss the challenges and opportunities of replacing an icon like Gordon Bethune?

Larry Kellner: Gordon never will be replaced. I have been Larry at Continental for 10 years and I will continue to be Larry on Jan. 1. Gordon and I both grew up in small towns. Neither of us has an MBA or a law degree or anything like that. There are a lot of similarities in how we grew up. I clearly won't be as colorful as Gordon and I am not as good in coming up with quips as he is.

BTN: As you prepare to take the helm, what are you expecting for 2005?

Kellner: I'd clearly like a better revenue environment and I'd clearly like lower fuel prices. I am hoping for both, but not planning for either. You will see a lot of evolution and a lot of shakeout in the industry next year. I am not expecting to see $25 oil and that is a dramatic change, so the industry still has a desperate period to work through.

BTN: How do you manage such dramatic change?

Kellner: The revenue environment can help offset this, but there are competitors out there providing a seat at a lower cost structure. To some extent, we need to continue to be competitive with them. We are watching very carefully what United does on the wage front because we have to stay competitive with them as well.

BTN: Continental recently added several international cities. Do you have aspirations for further development?

Kellner: We have had significant international growth this year and have more of the same coming. If you look at our facilities in New York and Houston, we have had a five-year plan that says we need to be more internationally focused. Now you are seeing some of the results. When you hear other carriers say they will grow internationally and shrink domestically, they are talking about more Tokyo, more Heathrow, more Paris, more Frankfurt. We did that growth this year to fill out the franchise. What we are doing next year is fairly unique stuff, not in the mainstream, but the lessons of TWA and Pan Am are apparent to me. We would not want to become too internationally focused.

BTN: Please discuss your efforts to create a global sales team.

Kellner: I have long believed that we needed to create a global sales network to serve both big multinational corporate customers and other international folks around the network. We have been evolving for several years to get to one global sales structure and we now have everything but Asia under [senior vice president of sales] Dave Hilfman and everything underneath [executive vice president of marketing] Jim Compton. We are watching our customers as they have become more global. In many cases, they may purchase in Europe for the whole world rather than in the United States for the whole world.

BTN: Can you attribute that particular development to the maturation of corporate travel management?

Kellner: Yes. It became clear that lots of our business comes from people who are not necessarily making their travel decision within the continental United States. As you see more people centralize their global purchasing, it will become even more important five years from now. Increasingly, the travel manager of a global firm will be housed in Paris or Frankfurt or London versus being headquartered in the U.S. It seems business is becoming more consolidated on a global basis and getting into the SkyTeam alliance was critical for us to build the global network.

BTN: On alliances, what is next for your domestic partnership with Delta and Northwest?

Kellner: The alliance with Northwest is pretty mature and most of the pieces are working. With Delta, there still is a lot of work to do with systems integration. If you look at Northwest, it was a four- or five-year process because it is not just the systems integration. It also is the marketplace recognition about having to ask for a joint deal. It will take a while for travel managers, but if we can create a system that creates value for them, they will figure it out. There will be more and more corporations in the U. S. requesting a joint proposal from Delta, Northwest and Continental. We see more activity as people realize the power of that combined network.

BTN: Are you concerned about inconsistency in the product offering?

Kellner: There is always a concern. In a perfect world, you would have a consistent product across everybody, but we are all going to make our own individual choices. Our job is to make sure the customers understand what they get and what they do not get, and what the differences are between the carriers. To get everybody to agree on individual standards would take a tremendous amount of flexibility out of the business. We have a different view of product than even some of our alliance partners in terms of meals at mealtime, for example. We are going to stick to that view.

BTN: What is next in terms of product enhancement at Continental?

Kellner: We are not going to live television and we are not going to satellite radio. Within the next 12 months, we will look to add more power ports on more of our aircraft. As it evolves, we are paying a lot of attention to Lufthansa's experiment with Internet on the airplane, but that is probably two or three years out. When you talk to the customer base we are after, they want the tools that help them do their jobs.