Bethune cannot be accused of knowingly underselling the problems that Continental is facing. When he rages about the many inefficiencies he took on in assuming the hot-seat last October, he doesn't spare the profanities and a look of sheer incredulity regularly spreads across his face, whether he is aiming a broadside at the carrier's past reliability record or at the strategic planning behind the late, unlamented Continental Lite.
Bethune has already played brinkmanship with most of the airlines' major creditors - and won. One of his major coups was pushing back the delivery schedule of 40 Boeing aircraft, due for delivery in 1996 and 1997, by a year and then getting the manufacturer to return the deposits. No doubt his six years at Boeing, where he ended up as vice president and general manager at the Renton division before joining Continental in February 1994 as president and chief operating officer, helped him secure the unusual concession of returned deposits. Bethune's decision to retire the carrier's entire fleet of Airbus aircraft (21 A300s) early would also have contributed to the convivial mood in Seattle.
Neither does Bethune hide the influence his time at the world's largest aircraft manufacturer has had on his management style. He clearly brings Boeing thinking into running an airline.
In this interview with Airline Business, Bethune flinched only once - at the mention of bankruptcy. But typically he countered the suggestion with one of the stock of allegories that he favours to communicate a serious message.
Bethune stresses that the core of the 'Go Forward Plan' initiated during the last quarter of 1994 is aimed at changing Continental's corporate philosophy and restoring employee confidence. But one Continental manager indicates that the message is not getting through to the employees as 'loud and clear' as Bethune claims, pointing to resistance from the middle management ranks. And with the structural changes envisaged in the 'Go Forward Plan' progressing well, curing the hangover from the union-busting Frank Lorenzo era could prove Bethune's biggest challenge.
Improved morale and employee cooperation are central to Bethune's aim of boosting the revenue side of the business. He acknowledges that as one of the lowest cost airlines in the US, there is little prospect of reducing the base any further, if at all, and indeed ridicules the company's almost pathological preoccupation with costs in the past.
Aside from cajoling 80 per cent of creditors and lessors into giving the airline more breathing space which led to a writeoff of $446.8 million in 1994, the Go Forward Plan envisages 4,000 redundancies this year - by the end of March this figure has already reached 3,250 - and an 18 per cent capacity cut by the end of June. Continental Lite has not only lost its name, but most of the point-to-point services it operated have been pulled and the aircraft redeployed.
Many non-core assets are due to be offloaded. The System One CRS was sold to Amadeus in April, in a deal which left Continental with 12.4 per cent of Amadeus. The recovering feeder operation Continental Express will almost certainly be sold before year-end.
With all the problems at home, Continental's international strategy is far from complete. The carrier's current partners are either inactive or looking elsewhere, Alitalia excluded. And Bethune appears content to continue with the struggling Italian flag carrier as he turns his attention to finding a partner for the profitable Continental Micronesia in the Pacific, and to bolstering the mainline's strong operation to Mexico and Central America with South American feed.
Continental reported a net loss of $30.2 million in the first quarter of 1995, compared with $71.6 million in the same period in 1994. The improvement in the carrier's operating performance was even more marked, with a profit of $27.5 million against a loss of $55.2 million in the first quarter last year. With a cash balance of $417 million on 31 March, Continental is starting to win over the financial community. But unless Bethune really does have a surprise first-half result in store, the 'high risk' label will continue to stick with the carrier.
Airline Business: You are trying to turn round a carrier which already has unit costs among the lowest in the industry. Where can you go from here?
Gordon Bethune: Do you know who the best proponent of revenue management is? Me. I'm the guy that said you can't run this goddamned company through costs. Cost is an operational concern. Now businessmen have to think about the product and think like the customer. You've got to think like the Boeing Company. When we were designing airplanes we'd go and ask the guy in row five 'Would you give me 20 cents more for the ticket so the pilot can have a sidestick controller?' and the answer was 'absolutely not'. What's the value of a sidestick controller? Absolutely zero.
How do we get a good product? One of the four cornerstones of the Go Forward Plan is 'Working Together', which is a term I took out of Boeing. A good company needs lots of different parts working together and this company has been divisively led. We're going to let the people who run the business run the airline. We've put together a small incentive plan. We set $2.3 million a month aside and distribute $65 per person every time we're in the top half of the DOT list. Since we did that - February, March and April - we've been in the top half.
Look at our reservation system: we had the lowest costs per call buy-in of any company in the United States, because we'd taken the sales training out to save costs. It's like a farmer eating all his seed corn - you don't eat your seed corn, that's for next year's crop. So we had gone through and worked cost without regard for the value-added component of costs. You should only focus on the non value-added costs.
We had an inter-Florida fare with Lite - anywhere for 49 bucks. From Tampa to Miami is only half the length of the state; from Jacksonville to Miami is twice as far for the same fare. Another Lite fare across the board was 'at a penny at a pound' - that's $24.50. That's you and me travelling Jacksonville-Miami for 49 bucks but with an introductory fare now it's $24.50. Six months later we're still at these fare levels, so I said, 'how long does it take to introduce us?' We have these fares at $119 now and the elasticity of the market is very low. As a matter of fact USAir just exited intra-Florida. 'At a penny at a pound' is now only in those markets where Southwest competes directly with us on that particular fare basis, and then only on a limited number of seats.
We've pulled capacity on the scheduling side. We put a new person in scheduling and we have now reduced capacity by taking those A300s out, [and we have] exited markets and exited frequencies. And so we've decreased the number of available seat miles we fly but we've kept most of the revenue. RASM reached 0.92 in March, because we took the capacity out, kept the revenue and worked the shit out of the prices.
Now in the meantime we had a little problem with balance sheet and liquidity. We have 30-year assets with a three year amortisation on the mortgage. . .
We had a large order with the Boeing Company with deliveries in 1995, 96 and 97 and we had to make significant progress payments which we couldn't make for the 96/97 order base. So we pushed the 96/97 order base out to 98/99 and Boeing returned us the deposits that we'd made for 96/97, which was a healthy cash infusion for us and relieved us of a large obligation to pay. The same with GE when we negotiated a better way to pay them over a longer period of time.
We were heading for disaster. We weren't there but we could see it from where we were. We went to the American General Corporation which owns the LA facility and said we can't do this. Our operation is east of the Mississippi. It costs $63 to produce a maintenance man-hour in Los Angeles and it costs me $47 to contract for that same maintenance man-hour in North Carolina, where my airplanes are.
We had DC-10-30s with lease rates up to $500,000 a month and you can go out and lease one on the open market today for $250,000. Do you know of any horse that can win a race with a 300lb jockey on its back? So we told these guys we would be glad to pay you $250,000 and we could lease your airplane and we still owe you the $250,000.
When I put out the $65 per person [bonus], that's manager and below, it was not meant to try to pay
people, it wasn't meant as an alternate form of compensation for the pilots. We need to treat the pilots fairly, we need to pay them fairly. And I am sure the agreement which we are very close to achieving will achieve that to our mutual satisfaction. We should not rely on our low labour costs, which we have in the past; we need to capitalise on them.
We are still looking for partners in the Pacific for our Micronesia operation. Same thing in Central America - Houston is the favoured gateway to Mexico and Central America. So we are starting to look to work with a Central or South American partner, maybe to codeshare on into Lima or Buenos Aires.
Source: Airline Business
