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Back To `Coffee, Tea, Or Milk?'


The Corporation: STRATEGIES

BACK TO `COFFEE, TEA, OR MILK?'

For an airline that has bounced disastrously from one grand strategy to another, there's something almost quaint about Continental's new focus on the mundane. At dozens of airports around the country, Continental Airlines Inc. is finally painting over the red logo it officially dumped in 1991. Or consider the new blue carpet at the airline's Houston hub, part of a $3 million spruce-up. The old rug "looked like 15 years of spilled coffee," says COO Gregory D. Brenneman.

Small details, to be sure. But they represent a radical--and many say long overdue--change of thinking among top managers, most of whom are new since the ouster of CEO Robert R. Ferguson III last October. Contrast those moves with Continental's sweeping effort last year to emulate Southwest Airlines Co. with frequent low-fare service. Plagued by operating problems, Continental Lite cost the company an estimated $110 million before it was folded early this year.

WATER TO WINE? That has forced new CEO Gordon M. Bethune into a last-ditch effort to pull Continental out of its long stall. The straight-talking former Boeing Co. executive, who joined Continental in February, 1994, will ground 41 planes and slash capacity 9% this year. The airline has already cut more than 4,200 jobs, or 11%, since January, with an additional 700 to go by September. Bethune, 53, is also pushing hard to improve service, while abolishing cut-rate fares. And to avert a cash crisis early this year, he renegotiated Continental's debt, squeezed aircraft lessors for concessions, and deferred delivery of new planes. "If this doesn't work, you'll need that water-and-wine guy," he says. "You better get the prayer book out, because it's beyond human ability to change."

Already, there are signs of hope. Continental lost just $30.2 million in the first quarter, less than half its year-ago first-quarter loss. That has eased fears that it might be headed back to bankruptcy court. The Houston-based carrier expects to turn a profit in 1995 for the first time since 1986. Analyst Helane Becker of Smith Barney Inc. projects earnings of $75 million on $5.7 billion in sales, after 1994's loss of $613 million.

The moves have also lifted Continental's stock from around 8 to nearly 22 since February. "I think it's going to be an impressive next few quarters," says one big institutional shareholder. "They're doing the right things." Concedes one rival: "They've made a lot of progress undoing the stupid things done in 1993 and 1994."

But if Bethune has taken Continental out of intensive care, it is far from healthy. Most of the industry is experiencing its best year since 1989. But the economy is slowing, rivals may boost capacity, and Continental's untested new management faces tough labor talks. Add it all up, and some fear Continental is already peaking. "This is as good as it gets," warns Becker.

Indeed, for all the improvement, Continental's main shortcomings remain: a weak route network, an ailing balance sheet, and a poor reputation, particularly among higher-paying business travelers. It's still a second-tier player competing nationally with bigger, stronger rivals. "What they're doing is the same thing we've done year after year," says one ex-manager--selling assets, restructuring debt, and cutting costs. "Why is it going to work now?"

BLUNT. The answer, Bethune argues, is that this time, Continental is going to follow through with the day-to-day details. Bethune rose through a series of maintenance and operations jobs at Braniff, Western, and Piedmont before a six-year stint at Boeing. Along the way, he earned a reputation as a blunt, nuts-and-bolts manager. "Gordon challenges everything, and he thrives on controversy," says Ronald B. Woodard, president of Boeing's Commercial Airplane Group. "I know of no one who [has] a better chance of turning [Continental] into a thriving organization."

Bethune minces no words about Continental's past mistakes. The company had "too many bankers and lawyers" at the top, he says, and not enough people who understand the market: "I came in here and I could see what was wrong in 10 minutes." He wasted little time cleaning house. He's pushed out 30 of 61 vice-presidents, replacing them with 20 new managers from places like Northwest, American, and PepsiCo. And to the surprise of airline veterans, Bethune named former Bain & Co. consultant Brenneman, a 33-year-old Harvard MBA with no previous airline experience, as COO in May. Brenneman had won kudos for his consulting work slashing maintenance costs and improving Continental's reservations systems.

The two have their work cut out. Top priority has gone to luring more high-paying business travelers, so Bethune is pushing hard to boost Continental's abysmal on-time performance. The carrier ranked dead last among major carriers in 1994, but now Bethune has tied employee bonuses to the on-time record. The result: In March and April, Continental was No.1 for the first time ever.

But Continental's improvements could be short-lived, thanks to rancorous contract talks with its 3,800 pilots. The sides have been arguing about the size of pay hikes and whether increases should be base-wage hikes or profit-sharing. Union officials say frustrated pilots, who are paid just 60% as much as those at bigger rivals, have slowed operations. They predict Continental will soon be back near the bottom of on-time rankings.

"OBSCENE." The pilots are also incensed by the hefty severance pay Continental gave Ferguson and other departing executives, as well as the new Porsche and $1.5 million bonus it bestowed on Bethune last year when it feared he would go to United. "They're telling us the pot is dry," says Bob Wilson, president of Continental's pilots union. "To turn around and pay those types of bonuses is obscene." With no resolution in sight despite more than a year of talks, negotiations with a federal mediator will resume on June 26.

In the meantime, Bethune and Brenneman are pulling back on the penny-wise, pound-foolish cost-cutting that has hurt Continental. They've restored perks cut from Continental's frequent-flier program during the Lite frenzy, including upgrades to first class, and have sweetened incentives for travel agents. Bethune also plans to spend $8 million to put food back on some flights. While it had saved $33 million eliminating meals, Continental failed to consider the time of the flights affected or what competitors were offering. "We're not wildly adding costs back in here," adds Brenneman. "We're adding small slivers, but where the customer notices."

Continental won't find it easy to steal passengers from its bigger rivals. At best, it will offer a "me-too" product. Outside the hubs it dominates, such as Houston and Newark, passengers still have no compelling reason to pick Continental, say critics. "They're certainly not the carrier of choice for anybody," says Michael Roach, president of consulting firm Roberts, Roach & Associates in Hayward, Calif.

To prosper over the long term, some analysts believe, Continental will need to boost its network and its marketing clout by merging with another carrier--perhaps America West Airlines Inc. Continental already controls a 17% voting stake in America West as part of the deal that Chairman David Bonderman, whose investor group controls 47% of Continental's voting rights, put together to bring it out of bankruptcy. And former executives believe Bonderman would welcome a sale that would let him cash out. Both Bonderman and Bethune brush off such speculation. "I don't allow anybody to talk about deals here," says Bethune. "That's a [Frank] Lorenzo-type approach to fixing this place, and we're not going to do it." Not to say that Bethune will never think about deals. But for now, he's focusing on a simpler target: profitability. For Continental, that would be a welcome first step.By Wendy Zellner in Houston


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