One-On-One: CO CEO Bethune Bets On Tough Race Ahead

Continental Airlines chairman and CEO Gordon Bethune in January said, "On a relative basis, we are beating the hell out of the competition. On an absolute basis, we have never lost so much money." BTN editor David Jonas late last month spoke with Bethune about that dichotomy, as well as the industry prognosis, the ramifications of a war in Iraq and three-legged horseracing.

BTN: Business travel once was thought to be inelastic, but developments and strategies now seem to suggest that airlines think it is much more elastic. Is it somewhere in between?

Gordon Bethune: If you have to be in San Francisco for a presentation tomorrow, you are going. If I say it's $1,200 or it's $800, you are still going. There may be some discretionary travel where you might go at $800 and not at $1,200, but if it's business and you don't go, someone else will get that business. We have tried that a million ways till Sunday and found you lose more than you get. If I give up $10 on one side, I have to get $10 on the other. If I can't get it somewhere else, then I just gave up $10.

BTN: Should economic conditions in this country improve, would there still be an outcry for airfare reform?

Bethune: No. Did you ever hear anyone say the fares are too damn cheap? Everyone says the issue is price, but that is bull. The issues today are capacity related. Christmas, Thanksgiving, we made money. Come January, we have 40 percent of the people staying home and we can't give all the seats away. It says that we are out of whack with supply and demand. Simply, we have too many seats in the sky given the market conditions we have faced since Sept. 11, 2001. And when I park an airplane, I save on direct operating costs, but I don't get any revenue and my payments still are there. Except for these guys in bankruptcy. You cough up your keys and now it is not a fixed cost anymore.

Before 9/11, we were taking in about $10 billion a year in revenue and were going to make $500 million pre-tax. That means we were spending $9.5 billion. All of a sudden, the $10 billion goes to $5 billion or $6 billion coming in, but the $9.5 billion still is going out. This is not high-order math. We can't get that $9.5 billion down to the revenue level because of the fixed costs. Then you have the Southwest model: If they don't grow 10 percent, their costs grow pretty rapidly. They are running about a 10 percent load factor deficit to us, so they just keep throwing seats out there to keep the average costs down and hope to fly through it. So people say, why not cut capacity? Well, we are! You are a tomato farmer in a year when tomatoes are coming out the gazoo and nobody is making money on tomatoes. So, a few tomato farmers die. Then the supply and demand for tomatoes comes to equilibrium and you can make money on tomatoes.

BTN: At least the transatlantic still looks strong.

Bethune: Only because you did not look at March numbers. Everyone thinks there will be a war in March, so we are off 15 percent year over year on traffic. I'd like to get this thing over with tomorrow. But we think June and July will be good. We did make some money on the Atlantic last year. We have way too much capacity in the domestic market, so shoot, let's throw it into the Atlantic. Now, we'll probably have too much capacity there and screw everything up. You are right, though, the Atlantic is looking stronger. We are noticing the offshore bookings are increasing. We usually have a disproportionate number of onshore bookings, but now with the strength of the euro, we may have more traffic from Europe coming this way. That's okay with me!

BTN: Another element of revenue recovery is the trilateral alliance between you, Northwest and Delta. Where are you in that coordination process?

Bethune: It will get done. What we offered is the same thing the Justice Department said is pro-competitive and actually pro-consumer. Somehow, thinking got off the track and all distorted to say bigger is bad, but the alliance is not a merger. We are just holding hands. If we can have an inbound on Northwest show up at Houston at 11:30 a.m., so we can conveniently get you to Lima, Peru, on a noon flight, that is good. If we can do that with Delta, why wouldn't that also be good?

BTN: It seems as if DOT's proposal almost precludes joint corporate contracting in many instances.

Bethune: That is because the little guys don't want us to be able to give corporate customers worldwide service and availability. Why would you want three different outbounds when you can get all your travel needs with a uniform product? And then you give your travelers a club card that is good worldwide. The internal documentation we saw from United, and the representation to their creditors most recently posted on the Internet, said they were going to take $300 million out of the marketplace. That is our $300 million, or some of it anyway. So here are three carriers trying to hold hands and stay alive, not asking the government for help. We are doing things that have been documented as pro-competition and pro-consumer. Get out of our way and let us do it. Let the market settle it. Not all of us are going to survive, period. If there is a war, even fewer will survive. I think our government is going to do the right thing with this alliance. We have a good one with Northwest today.

BTN: Speaking of war, what is the game plan for dealing with Washington?

Bethune: What the government did after 9/11 was very smart, but that is behind us now. We don't need any more loans; we don't need any more help. Just go away. But if you are going to start a war, we are all going to go back into the tank because we are afraid of terrorism in this country, which will take the domestic load factor down and stop all the transatlantic traffic, and oil will go to $50 a barrel, that is it. You can't have revenue go down that much farther and costs go up even more. The first thing we'd all do is not go to small cities, or maybe we'd all stay in Lafayette, La., but all pull out of Corpus Christi, Texas, or vice versa. Maybe the government will say, "Let's all get in here together and talk about service. You can't talk about service to your hub cities, but for anything that is not a hub city, you should coordinate your schedules to make sure everyone is covered."

BTN: You mean, granting limited antitrust immunity?

Bethune: Yeah, and who is the benefactor? Lafayette, Corpus Christi. Number two, we don't need to buy $50 oil. The government could say, "We'll sell you guys oil at our price that we paid for it for the strategic oil reserve. Number three, we are currently taking about $40 to $50 on a $200 or less ticket. We'll just give you a holiday on that, you keep the $40 or $50, and we will suspend for a period of time the taxes on passengers that we take, because you are not going to have a lot and you will need every nickel." That's it. No checks are written. That is all the government help we need. Thank you.

BTN: Wouldn't that interfere with the market's own natural development and prolong the lives of financially weaker carriers, perhaps to the detriment of the industry at large?

Bethune: No, because they are going to fail anyway, don't worry. What the country doesn't need is all of us in the tank. The policy should be to let the marketplace work it out, but don't do something so egregious that we all fail.

BTN: If, as you say, the likes of United and US Airways fail regardless, what happens?

Bethune: Equilibrium returns to the marketplace. You'll have just enough seats out there to have a reasonable price and have the demand to buy it at that price, and everyone gets on with their business. At Continental, we'd be able to sell seats at a higher price than we are today. People can't get every seat at $99.

BTN: And the Continental strategy in terms of network?

Bethune: We have planes in the desert and thousands of people on furlough. Markets will be served: Heathrow will be served, Denver will be served, San Francisco, don't worry. For us, Denver makes a lot of sense because we used to be in Denver. You could talk about the Pacific, but we have a good Pacific partner in Northwest. Now they may want a Pacific gateway, so you can take a look at Los Angeles and San Francisco. Delta would always be interested in building back to where they were in Los Angeles. I am sure Delta would be interested in Heathrow. I know we are.

BTN: Considering the plight of United, and others, is there any way to strategize negotiations for the upcoming pilots union contract?

Bethune: What is the average? That currently is being defined. We will wait to see what it is and then get on with it. In terms of the Railway Labor Act, the current situation does not work. You are going to have to say, "I'll put my best offer on the table, and you put yours on the table."

BTN: Baseball-style arbitration?

Bethune: If you think about it, you don't hold a lot back because you could lose it all, so your offer is going to be pretty damn good. There won't be any of this cute crap, strangling each other. You have seen all the games that are played on both sides. It is time to knock it off. The status quo is not operable.

BTN: Speaking of cost control, do you have targets? What is left to be accomplished?

Bethune: Look at 2002 earnings for a competitor based somewhere in this state sort of like ourselves, but twice as big as we are. If you have twice as much revenue and twice as many available seat miles, you should lose about twice as much as us, comparatively. We lost $450 million. They should have lost $900 million, but they lost $3.5 billion. That's six times the amount. I told our board that winning and losing is defined as beating your competitor. We clearly are miles ahead of anyone in our business. Ever see a horse race where all the horses have just three legs? It is not real pretty, but there is a winner.

BTN: Since you mentioned a competitor based somewhere in this state sort of like yourselves, how do you handicap their odds at surviving without entering bankruptcy?

Bethune: I read the same papers you do, and they say they are not going to make it and I kind of agree with them, but they are smart people over there at American. They need substantial wage rate concessions to augment what they already have been able to do. They reported they lost $3.5 billion last year and also reported they have $2 billion in cash with no prospects of raising more. So, if you have 2 and you are losing 3.5, how long will you last? It ain't a year. And you don't go in when you are broke.