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This Time, Continental May Actually Fly


The Corporation

THIS TIME, CONTINENTAL MAY ACTUALLY FLY

For weeks, executives at Continental Airlines planned a blitz of television commercials and newspaper ads to trumpet the good news: The carrier emerged from two and a half years of bankruptcy protection on Apr. 27. But the airline's employees turned down a chance to toast the occasion with a gala celebration. Instead, worker councils accepted a low-key "thanks" from management and humble pins bearing the company's logo and the year of rebirth.

It's hardly surprising that the carrier's workers are in no mood to party. Many of them have been down this road before: Continental Airlines Inc. survived its first round of Chapter 11 in 1986, only to seek shelter again in 1990 when debt, recession, and the Persian Gulf war battered it. True, Continental is the only airline so far to emerge from the industry's recent round of bankruptcies. Pan Am, Midway, and Eastern were forced into liquidation, and TWA and America West are still struggling to reorganize. But employees know all too well that there will be little room for error if the economy falters, fare wars break out, or fuel prices spike. "We've been beaten up for so long," says one pilot, that "we just want to have a job and be able to pay our bills."

For a change, that goal seems realistic. Confounding skeptics who thought the airline might never leave bankruptcy, the "new" Continental holds tremendous promise. It boasts a strong route structure and costs that are up to 18% lower than its three largest U.S. competitors'. And the carrier is primed for action. On Apr. 27, Continental closed on a $450 million investment from Air Canada and Fort Worth investors Air Partners LP. The carrier is expected to announce shortly a $3 billion deal for nearly 100 Boeing jets, including 50 737s and 5 777s. Sources also say a major alliance may soon be struck with Air France. And flush with $600 million in cash, Continental is upgrading its planes and facilities, with bold marketing strategies under way to lure business fliers. "Continental has more money today than it's had in its 55-year history," says Chief Executive Robert R. Ferguson III. "This is the first step in the remaking of the company."

AFFORDABLE FLYING. The deal opens up immense possibilities for Air Canada as well. That airline holds a 24% voting stake in Continental, but it has an option to buy out the Texas investors should U.S. airline-ownership laws change. Air Canada Chairman Hollis L. Harris calls that "a very good potential transaction on our part." Air Canada has extensive routes throughout its home country and marketing links with Air France and United; Continental has links with SAS Scandinavian Airlines. Air France Chairman Bernard Attali has denied it, but industry rumors persist that Air France may soon invest in Air Canada and forge links with Continental.

Alliances aside, Ferguson has his work cut out for him at Continental. He must polish the carrier's image, which remains badly tarnished. He must modernize its fleet. And he must recruit a new cadre of managers to the airline to help pilot its growth. Continental's balance sheet, while in tune with the rest of the industry, is still heavily leveraged. The alliance with Air Canada will be a personal test as well: Ferguson, 44, and Harris, 61, were rivals at Continental. In 1991, Harris was ousted from the top spot at Continental and replaced by Ferguson (box).

A sullied image is the bane of Continental's existence. Its low-rent reputation dates to Frank Lorenzo and his efforts to mesh a hodgepodge of airlines, including People Express, New York Air, and Frontier. Over the past two years, business passengers have been reluctant to book flights on a carrier that might not pay off on its frequent-flier awards. The airline is now counting on its nonbankrupt status to boost bookings, and it's speeding up plans to refurbish planes, facilities, and service. But Continental's ratings remain low. In the most recent Transportation Dept. monthly filing, Continental had more customer complaints than any other major airline except TWA.

Now, Continental is spending more than $40 million on its "BusinessFirst" service for international travelers. Continental calls it "first class at a business-class fare." The goal is to win business travelers, who typically pay three times more per mile than leisure passengers. If Continental can snare its "fair share" of higher-paying customers, it could boost revenues by some $500 million a year, figures John W. Nelson, Continental's executive vice-president for marketing. Nelson says the airline did manage to narrow the gap in the late 1980s, but bankruptcy cut that short. Now, Air Partners figures it could take two to five years to finish overhauling the airline's image. But the group says that the success of its investment does not depend on closing that gap.

Assembling an attractive fleet is also critical. Simply to match its bigger rivals--American, United, and Delta--Continental must upgrade its aging 331-jet fleet. Last year, it began redesigning interiors and repainting exteriors with Continental's new blue-and-gold color scheme and logo. But the average age of Continental's jets in December, 1992, was about 14 years--more than four years older than the average for the Big Three's jets.

PLANE DEALER. So Continental is counting on a huge $3 billion to $4 billion plane deal, to be financed by General Electric Co., to replace many of its aircraft over the next several years. Industry executives also say Ferguson was in Toulouse, France, visiting with Airbus Industrie brass in early April and could strike a deal for additional planes from the consortium. Although the airline burned numerous creditors during its bankruptcy, bondholders and other lenders have "short memories," says one analyst, and industry observers say that the legions of plane makers and leasing companies hungry for business will assure the airline help.

The link with Air Canada could also play a role in Continental's growth. The airline's immediate interest in aligning with Air Canada has clearly been the hefty cash infusion it will bring. But for the Canadian airline, which lost $363 million last year, its $85 million equity investment must provide a payback. Air Canada's long-term strategy is to meld its services with Continental's and others' to form a worldwide system of alliances. Ferguson says he wants to ally soon with an Asian carrier as well as "somebody to our South."

But the two can begin together right away. On May 3, Air Canada is scheduled to start two flights daily into Continental's Houston hub, from which Continental can connect passengers to 21 cities in Mexico and Central America and 25 cities in the southwestern U.S. Harris estimates that revenues from coordinating flights will generate $400 million annually by 1994 for the two carriers combined. Ferguson says the two could even seek antitrust immunity one day if Canada and the U.S. can ever come together on an open-skies treaty.

Of course, airline synergies have tended to look better on the drawing board than in life. KLM Royal Dutch Airlines, for example, which put $400 million into Northwest Airlines Inc. in 1989, took three years to begin coordinating schedules with Northwest and to date has shown only losses for its investment. But Ferguson seems focused as much on the power of new money as he is on anything else. "This is really the first time, to my knowledge, that Continental has had the resources to go about trying to produce a quality company." Now all he has to do is make it happen.Wendy Zellner in Dallas, with William Symonds in Toronto and Andrea Rothman in New York


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