Online NewsHour: Continental Airlines' Turnaround -- March 19, 1998

TOM BEARDEN: It's fun for Continental Airlines' CEO Gordon Bethune to make the rounds at Houston's George Bush Intercontinental Airport, which is something he does on a regular basis.

TOM BEARDEN: It's not just employees who clamor to shake his hand; so do customers.

WOMAN: I have truly seen this airline turn around, people's enthusiasm and pride in who they work for, and I really believe you're the cause, and I just--

TOM BEARDEN: It's a radical turnaround for a company whose employees not long ago were ashamed to admit they worked there. Back in the 1980's Frank Lorenzo ran Continental. He'd taken over what had been known as a Tiffany airline with one of the best service reputations in the industry but was teetering on the brink of financial ruin. Continental had high labor costs and couldn't compete with the very low-cost discount airlines that sprang up after the industry was deregulated and ticket prices could be changed without government approval. Lorenzo's solution was to make every possible effort to reduce costs. He moved to cut wages. The unions went on strike. Lorenzo declared bankruptcy and abrogated all the union contracts. He explained the strategy in this 1988 NewsHour interview.

FRANK LORENZO, Former Chief Executive Officer: (1988) We were small, a small company. We did not have markets. We did not have any market share. We certainly didn't have any profitability, and we really were trying to give the consumer some real value. And that's what it was all about.

TOM BEARDEN: To some, Lorenzo was Continental's savior. To industry analysts he was a visionary, a man creating the model for airline operations in the post-deregulation era. To the unions he was a demon. Carla Winkler was a union flight attendant back then.

CARLA WINKLER, Flight Attendant: When you went to work for Frank Lorenzo, there was no compassion. The employees, they were a commodity like a file cabinet, like a desk, or a chair. They just moved the pieces around, and you weren't to have any feelings, or they didn't care if you liked the job.

FRANK LORENZO: (1988) Most people that know me would hardly think I'm cold, and my record has shown we look for a lot more than the bottom line.

TOM BEARDEN: Eventually, Lorenzo built what was briefly the largest airline company in the free world. He merged New York Air, People Express, Frontier, and Texas International into Continental and acquired bankrupt Eastern Airlines. But the relentless pursuit of ever lower labor costs proved disastrous. Continental plummeted to the bottom of everyone's list, the worst airline for lost baggage, late departures, and most customer complaints. The product was cheap, but so bad that nobody wanted to buy it. Lorenzo left Continental just months before the company declared a second bankruptcy in 1990. When Bethune was hired in 1994, a third bankruptcy was imminent.

GORDON BETHUNE: Well, I think it's the value system that was in place, the over kind of focus on lowest cost is the way to win, when it certainly hadn't won in 10 years. Obviously, it had the makings of a good company, but it was what you'd have to characterize as dysfunctional.

TOM BEARDEN: Bethune hired 33-year-old Greg Brenneman as chief operating officer. Brenneman says it was pretty obvious to both men what had destroyed Continental.

GREG BRENNEMAN, Chief Operating Officer, Continental Airlines: People were focused on pitting the pilots against the mechanics and the gate agents against the flight attendants to see if you could beat down labor costs by getting them fighting with one another. And, of course, this is the biggest team sport in the world. You have to get everybody working together.

TOM BEARDEN: Bethune and Brenneman tried several strategies to try to get people to work together. For example, Continental was spending about $6 million a month rebooking passengers on other airlines because their flights had arrived too late to make connections. In January of 1995, Bethune decided he would pay each employee $65 every time Continental placed among the top five airlines in the Transportation Department's monthly on-time performance rating. A month later, Continental had moved from last place to fourth. The following month it ranked first. And the cost of the bonuses was more than offset by the reduction in payments to other airlines.

GORDON BETHUNE: 65 bucks was a nice way of saying thank you to a bunch of people who learned that the only way to get the 65 bucks is when they all work together. And it's been working for us ever since. It's not a lot, but it doesn't sometimes take a lot to show that this is like an appreciative change in the way we behave.

TOM BEARDEN: Continental also started holding drawings to give vehicles to people who had perfect attendance for the previous six months. And for the past two years employees have gotten a profit sharing check and a party to celebrate the company's reversal of fortune. Last year, Continental reported record profits of $640 million. The high paying business travelers have come back. The airline is winning awards for customer service, including two consecutive J.D. Power awards.

TOM BEARDEN: And Continental is now consistently among the top three airlines on the Department of Transportation's ranking for on-time performance and customer satisfaction. Judy Mensinger has worked for Continental for 11 years. She's now the director of customer relations.

JUDY MENSINGER, Customer Service Director: The realization is finally that you don't have a positive bottom line unless you have happy employees who do enjoy coming to work and who will take good care of our customers.

TOM BEARDEN: Now, Continental is embarking on a new business strategy that many analysts believe will be the model for airline operations in the 21st century. The airline is entering into a partnership with Minneapolis-based Northwest Airlines. The companies will code share, that is, a passenger would buy a ticket from Continental, but part of the route might actually be flown by Northwest. Code-sharing allows airlines to offer service to more destinations by connecting passengers to their partner airline, theoretically attracting more business for both. Bethune believes the alliance will avoid the serious problems that have arisen in the past when airlines have merged in order to create larger route structures. But some observers are skeptical. Airline analyst Paul Stephen Dempsey says the alliance with Northwest could bring about some of the same kinds of problems that arose when Lorenzo merged all those airlines back in the 80's.

PAUL STEPHEN DEMPSEY, Airline Analyst: And the difficulty that you have is two corporate cultures, one of which Continental is a very high service carrier. The other, Northwest, is deteriorated in terms of service levels in recent years. Trying to put those companies together and integrate their operations is very difficult without a command structure model. This is going to be a cooperative model. They're going to ask each company to come together and try to cooperate. It's very difficult to do.

GREG BRENNEMAN: I think it is a new paradigm in that we figured out a way to get the scale of putting a couple of big companies together in a way that's beneficial to consumers because you can use your frequent flier miles in more places and earn 'em more places, and you just have more options as a customer.

TOM BEARDEN: Dempsey agrees code sharing probably is the wave of the future. But he says it won't be good for customers.

PAUL STEPHEN DEMPSEY: For the life of me I can't understand why the Department of Transportation is so enthused with this notion that airlines should not compete; that they should cooperate. I don't think that that's in the best long-term interest of the consumer. But, nonetheless, this is the track we're on; this is the way the game is being played. And, yes, we will have these massive alliances spread with its tentacles--with their tentacles reaching around the globe.

PILOT: I think that's what a lot of people don't understand, is that this is our careers.

TOM BEARDEN: Continental's pilots staged informational picketing at various airports to draw public attention to their concerns about the alliance. They're suspicious it would jeopardize their job security and that a true merger is really in the works. Bethune adamantly denies that. Union President Captain Len Nikolai says pilots are worried that Northwest would get most of the new routes, leaving Continental pilots with fewer job opportunities.

LEN NIKOLAI, President, Pilots' Union: If they really want this pilot group, this employee group, to buy off onto this transaction, they need to provide us with the information we need to make decisions about our careers. And if they won't share that information with us, that raises doubts. That raises suspicions. And they have nobody to blame but themselves.

TOM BEARDEN: But Bethune was apparently successful in allaying those suspicions. The pilots reached a tentative agreement on a new contract on February 24th. But a final agreement is expected until the end of April. For all of the good news, Bethune says the airline isn't entirely out of the woods yet. He acknowledges the company needs to lower its debt levels and reduce interest payments on loans and aircraft leases. Meanwhile, the entire airline industry is racking up record profits, thanks to the booming economy. Bethune says he isn't worried about an economic downturn pushing Continental to the edge of insolvency, as has happened many times over the past 20 years. This once nearly deadbeat airline now has a billion dollars in the bank.

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CONTINENTAL AIRLINES' TURNAROUND

March 19, 1998

The NewsHour with Jim Lehrer Transcript