Continental Takes Off With Ex-Mechanic at the Controls

By JAMES F. PELTZ

May 28, 2000 12 AM PT

TIMES STAFF WRITER

Gordon Bethune, chief executive of Continental Airlines, tells a story about the carrier’s ill-fated Continental Lite project in the early 1990s, a low-fare, no-food service that the carrier hoped would save money but instead alienated passengers and helped lead to Bethune’s hiring in 1994.

Noting that the airplanes had “Continental Lite” painted on their fuselages, Bethune says “there was just one problem: The passenger’s stomach couldn’t read the sign.” The result: Hungry and frustrated travelers simply remembered that they flew Continental and vowed never to do so again.

Continental Lite was just one reason Continental was a loss-ridden basket case in the early 1990s. Yet since then, Bethune--a former Navy mechanic and son of a crop-duster--has piloted one of the most remarkable comebacks in commercial-aviation history, and today Continental just might be the best airline flying.

And with United Airlines parent UAL Corp. last week agreeing to buy US Airways Group Inc. for $4.3 billion, Continental’s burnished service could make the company a potential merger partner itself if more airline deals follow, as some predict.

Once a hodgepodge of decrepit airplanes, the Houston-based carrier now sports the youngest fleet of jets among the big airlines. Continental’s credibility has been restored, and the airline keeps reaping customer-satisfaction awards. Earlier this month it ranked first for both long- and short-haul flights in a survey by J.D. Power & Associates and Frequent Flyer magazine.

After losing billions of dollars and going through bankruptcy reorganizations in the 1980s and early ‘90s, Continental has been profitable for five straight years. To be sure, Bethune came along just as the whole airline industry was pulling out of recession and entering the prosperity that continues today. But Continental now has $1.4 billion in excess cash, and 49% of its customers pay more-lucrative “business fares” compared with 32% five years ago.

And in the first three months of 2000, the nation’s fifth-largest airline overcame soaring fuel costs to post earnings that, if not spectacular, again exceeded Wall Street’s expectations.

“Continental ran a superb airline during the quarter,” analyst Candace Browning of Merrill Lynch & Co. said in a recent report.

Continental’s stock price has more than quintupled since Bethune arrived, and it outperformed its peers last year with a 32% gain. The stock drooped early this year but since early March has surged back 45%, double the gain of the average airline stock. Continental closed Friday at $44.25 a share, down 75 cents in New York Stock Exchange trading.

Employee morale--the centerpiece of success in a service business such as air travel--also has soared. One reason: Bethune’s program of awarding profit-sharing checks to the company’s 51,500 workers, along with bonuses based on Continental’s on-time performance and passenger-satisfaction marks. The workers have received more than $565 million since 1996.

Another morale boost: Bethune briefly talked to rival Delta Air Lines about merging the airlines in the late 1990s, but the talks failed in good part because Bethune wasn’t convinced that his workers’ jobs would be secure.

“Delta refused to guarantee in writing that there would be a fair, seniority-based integration” of the employees, and “that’s tantamount to selling your people down the river,” Bethune said in an interview.

Besides Houston, the carrier’s other hub airports are in Cleveland and Newark, N.J. Continental has 2,260 daily departures in 136 U.S. and 87 international cities, and its revenue last year totaled $8.7 billion. The airline has about 21 daily departures from Los Angeles International Airport and 10 from John Wayne Airport in Orange County.

Just who is Gordon Bethune? At age 58, he’s not a far cry from his legendary Texas colleague Herbert Kelleher, the brash, free-spirited chief executive of prosperous short-haul king Southwest Airlines.

Like Kelleher, Bethune has infused Continental’s work force with an esprit de corps, which is a key reason the carrier has recovered and why Bethune is widely admired at Continental even though the airline is mostly unionized. Bethune this month also was named one of the 50 best CEOs in America by Worth magazine--the only airline executive on the list.

He is constantly visiting employee sites to preach his gospel of working together to improve service. He holds open houses for workers to talk to him in person and often spends Christmas and Thanksgiving at airports to chat up flight-crew members on breaks.

He occasionally joins Continental baggage handlers to heave luggage onto aircraft and spends much of his corporate travel time on Continental flights listening to pilots’ and flight attendants’ concerns. For years now, he has also used e-mail and toll-free phone numbers to send a daily stream of messages that update employees on what’s happening at the carrier.

Employees “have to feel that they’re part of the equation,” Bethune said. “What we are doing is not a diet; this is what we do. So you spend a lot of your time not being a cheerleader but letting them know they’re appreciated.”

Bethune also impresses workers and Wall Street analysts alike with his conviction that it is ultimately people who make an airline fly straight.

“The difference between Bethune and many other airline CEOs is the very simple fact that the employees know who he is--and like him to boot,” said Samuel Buttrick, an analyst at PaineWebber Inc. “He’s shown the true value of leadership. It’s not about numbers, it’s about leading people.”

And like Kelleher, Bethune is a blunt, down-to-earth manager whose language and sense of humor are, well, what you’d expect from a man who spent years in the Navy. In his 1998 book, “From Worst to First,” Bethune noted that as a mechanic he learned early on “that you can’t bull---- an airplane.”

Or take his explanation to Worth magazine about why service is crucial: “Who the hell wants to be stuck at 30,000 feet with a bunch of pissed-off crew members?” Then there was the headline on Continental’s first annual report under Bethune, which stated harshly: “It’s Time to Act Like a Real Airline.”

But while Kelleher was a lawyer by training, Bethune was a high school dropout, the son of divorced parents who as a teenager helped his father dust crops in Mississippi. He joined the Navy at age 17 and became one of its top mechanics. (He completed high school later in life.)

After the service he took jobs at now-defunct Braniff Airways and Western Airlines, and then at Piedmont Airlines (which was later bought by US Airways). Eventually he was hired by Boeing Co. and at one point ran one of its main factories, the Renton, Wash., plant that builds the 737 and 757 jets.

Along the way, Bethune became a pilot certified to fly Boeing’s airliners, and he is also fond of driving fast sports cars and motorcycles. (One bike is a Harley-Davidson that Continental’s employees bought for him.)

It was in 1994 that Continental came calling, after years of turmoil during which its then-owner, Frank Lorenzo, had melded Continental, People Express and some other airlines in a failed effort to create a mega-carrier.

Although Bethune was once quoted as saying he didn’t realize that the company’s “engines had died and the tail was falling off,” the challenge of pulling Continental from its nose dive was one he couldn’t resist.

Bethune got rid of Continental Lite, shut down unprofitable routes and shed costly jetliners, axed more than 5,000 jobs, jawboned his remaining, skittish employees to join together to improve service, expanded its hub airports and fought relentlessly to persuade travel agents and corporate accounts to again send travelers Continental’s way.

He made symbolic moves, too, like leaving the doors open to his executive suite. Bethune led a group of workers that took Continental’s old employee manuals to a parking lot and set the manuals ablaze. The message: Employees should do whatever they can to help customers rather than blindly follow rigid procedures.

He also recruited senior executives for help, and found a particularly strong one in Greg Brenneman, a turnaround whiz then working for the management consulting firm Bain & Co. Bethune promptly hired him as president, chief operating officer and his co-manager in developing Continental’s survival plan, which emphasized bringing Continental’s employees into the talks about downsizing the airline to keep it flying.

“He was very quick to surround himself with smart people with experience in the industry,” said Brian Harris, an analyst at Salomon Smith Barney Inc. “The other thing that impressed me . . . was that he then tackled labor [contracts] with extreme success. That became a No. 1 priority at the company” and “there haven’t been any labor disruptions since he’s been there.”

But Continental’s rebound also has drawn the attention of its rivals. After being rebuffed in 1996, Delta came back with another merger offer in 1998, but instead Continental accepted a strategic alliance with Northwest Airlines in what some called a “synthetic merger.”

The pact not only connected the airlines’ route systems and frequent-flier mileage programs but also gave Northwest 14% of Continental’s stock for $500 million. The stock also carries super-voting rights, thus giving Northwest majority control of Continental.

That control was placed in a trust limiting Northwest’s influence over Continental for 10 years, to help guarantee Continental’s independence for at least that long. Northwest bought the shares from financier David Bonderman’s Air Partners, which brought Continental out of its second bankruptcy in 1992.

But trust or not, now Continental is negotiating to buy back part or all of Northwest’s stake, even though it wants to keep the alliance because it helps feed passengers to both carriers. At the same time, a U.S. Justice Department suit aimed at blocking the whole deal is still pending.

“I’m OK with [Northwest’s] owning equity” in Continental, “but not controlling equity,” Bethune said.

Why? For one reason, Northwest’s influence is a cloud over Continental’s stock and a key reason the shares haven’t climbed higher in price, Bethune maintained. “That cloud is not value-added for anybody,” he said.

In fact, Bethune’s frustration with Continental’s relatively low valuation on Wall Street has prompted him to float the idea publicly that perhaps a management-led group should buy the carrier and make it a private company.

Is he serious? “I’m serious in the fact that if this stock price stays at those absurd levels we should take the damn company private and bring it back [to the public stock market] in three years or when things are better,” he said.

“But I think the market is smart enough to, over time, give us credit for the value we’ve created,” Bethune said. “This is not luck any more. This is a solid company with solid earnings . . . and a good future.”

And it’s likely Bethune will stay in the pilot’s seat. “I’m not going anywhere,” he said. “I’m not interested in working in a bigger company or making more money.” Besides, he said, he likes being “part of a team” where “my employees high-five me when I walk by. If I went to another company, I’d just be a suit.”

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Continental’s Comeback

After going through two bankruptcies and the ill-fated launch of a low-fare service, Continental Airlines has staged a remarkable recovery since it hired Gordon Bethune as chief executive in 1994. The carrier is now profitable, ranks high for customer satisfaction and has the youngest fleet among the big airlines. Here are some key facts about Continental, along with its monthly stock price closes and latest:

At a Glance:

Headquarters: Houston

Employees: 51,500 1999 revenue: $8.7 billion

1999 profit: $455 million

Stock ticker: CAL

Chairman: Gordon Bethune

Operations:

Daily departures: 2,260

U.S. destinations: 136

International destinations: 87

Major hubs: Houston, New York, Cleveland

1999 passengers: 46 million