Larry Kellner, Continental's numbers guy

Photography by Mark J Burns

Under Larry Kellner, Continental Airlines has overtaken Northwest to become the fourth largest US carrier, while simultaneously pleasing stock-pickers and business travellers

Everyone has to have a gimmick, as they say in retailing. And in the airline business, just about every thriving US airline has a gimmick, from trendy hipness to folksy humour to ubiquity - a product for every imaginable group or a flight to just about everywhere. At Continental Airlines, the catch is, there is no gimmick. Just on-time flying, clean aircraft and old-fashioned basics such as getting the bags on the carousel reliably or meals at mealtimes throughout the cabin. And the man who runs the airline is one without a touch of flamboyance or a hint of the unusual.

And that is the way Larry Kellner, who runs Continental as board chairman and chief executive, wants it. A self-declared "numbers guy", Kellner dodges the front pages, doing nothing to earn the blistering hostility that Continental's earlier chief, Frank Lorenzo, garnered. On his way to the top, Kellner worked in every area of the airline except public relations and government affairs, relying on his background in finance and technology. A business major in college, he likes numbers not for their own sake but because "they give people the tools they need to do their jobs".

Still, being a numbers guy is not on its own enough in as complex a business as airlines, even with modern technology that massages the numbers into meaningful reports. "Coming here a dozen years ago brought with it a very steep learning curve," Kellner says. But Continental had a resource for that, one it had had kept through the difficult years under near-legendary Lorenzo, whose 1980s confrontations with labour made him the most hated name in the business. "Even after all they had been through, all the strife, our people just wanted to be able to get on with the job. Certainly I knew something as a million-mile flyer on a competing airline, but it was our people who taught me this airline. I have never learned more - and rarely enjoyed myself more - than when walking around the airport talking to our people or riding back in the galley or up in the cockpit," says Kellner. He spends several days a month on Continental flights or at airports and had just returned from trips to Mexico City and the South Pacific, where Continental's Air Micronesia operates.

Kellner says the background of strife before he joined the Gordon Bethune team made personal development imperative. The team approach is one that Continental tries to build into its culture, and Kellner's first references are rarely to his shareholders or board but "to my fellow employees".

"When we cut costs and when we went to the employees asking for wage concessions, our guarantee was this - with the concessions we promise you that we will not shrink, we promise growth and with that growth will come promotion and advancement. We also tied it to profit-sharing. We also kept our word to our employees and protected their pensions." The airline announced in October that it had set aside more than $100 million for profit-sharing so far in 2006, and put more than $175 million into its pensions funds by October. It pays bonuses of up to $100 for each month it comes top in on-time performance.

Kellner's ascendance reflects a growing trend at US carriers to draw leaders from the once-neglected ranks of the finance officers. Other airlines led by former chief financial officers include Southwest, where Gary Kelly pioneered its fuel-hedging strategy, or US Airways, where former America West finance head Doug Parker is in charge of the merged airlines. At Delta Air Lines, one of the two most likely successors to chief executive Jerry Grinstein when he retires, most probably next year, is chief financial officer Ed Bastian.

Kellner insists that a chief financial officer is someone who knows the value of everything - not just the price. "It's all about giving people the tools, whether it's computer systems or new airplanes or something as basic as the right equipment to handle bags."

Traditional hub-and-spoke model
Continental's focus on the basics and its steadfast devotion to and reliance on its business model - a traditional hub-and-spoke carrier with full-service options both domestic and international - has made it something of a contrarian. Its peers and rivals, meanwhile, experiment with discount offerings such as United's Ted or Delta's now-defunct Song, or with "fare simplification" that customers see as anything but simple.

Not only did Continental make profits sooner after the September 2001 terror attacks than most peers, but it keeps winning enough frequent-flyer loyalty, as evidenced by its repeated travel-magazine awards, that it can command a revenue premium. The airline's unit revenues of 9.67¢ (adjusted for length of haul) for the year's first half were ahead of the eight largest carriers' average of 8.44¢ and ahead of all its rivals save United Airlines, which was at 9.92¢, the airline estimates.

Roach and Sbarra airline consultant Alan Sbarra says: "At Continental, they know what works and they don't get distracted. They focus on their plan and they understand their niche. They have two great hubs including their New York hub, one of the greatest in the world, and they don't do any flying that doesn't help out the hubs. They just keep going and growing." Revenue growth has been nearly double its capacity for the past two years, with first-half revenues coming in at an 18.2% growth rate while capacity grew just under 10%, the airline says.

In fact, Continental's steady growth pattern has put it on course to break out of the middle ranks where it had trailed Northwest. This year it has been outpacing the Detroit-based major in revenue and traffic terms. Its ability to continue to grow capacity and unit revenues has pushed it into a unique position among the US legacy carriers: growth that pays its own way rather than growth paid for by the shareholders. ­Kellner explains: "We're focused on the margin. We're not focused solely on the unit revenues and we're not focused solely on unit costs we're very focused on what we keep as the net of the two.

"We believe some costs earn us additional revenue that is actually positive, so we've still got pillows, we've still got blankets, we don't charge for meals and wireless access is free in our clubs." From its earlier plans of a 4% domestic mainline growth, set while the rest of the industry was set to shrink by about 2%, Continental now anticipates ending the year with full-year growth of about 9%, with double digit-growth in Latin America (13%) and transatlantic routes (17%).

It has two strong assets in its Latin push: its Houston hub allows it to saturate Mexico with regional jets and Central America with narrowbodies, while its codesharing pact with COPA gives it feed to and from some 30 destinations in 20 countries through COPA's Panama City hub.

Its mainline growth of about 5% has held steady through the year while its international growth has boomed. Here Continental faces its most significant challenge going forward. Delta has mounted a major European push from the New York City area, where its claims have been at the heart of a feisty advertising campaign, while other midtier carriers such as Northwest are also focusing on more profitable overseas and European route growth. But Continental, with its enormous domestic feed at Newark Liberty with a 70% share of departures, is ahead here.

More importantly, Kellner says, "the network by design has extraordinary regional and geographic balance". A key word in describing the Continental network is balance, balance of domestic and international, and of business and leisure destinations. For a decade it grew its international capacity at 9%, and now has 138 cities, many of them secondary destinations such as the UK's Bristol or Barcelona in Spain. Kellner insists its strategy of flying medium-size twin-jets such as the Boeing 767 to smaller cities such as Belfast and Birmingham in the UK would continue even if "we get real, meaningful open skies and access to Heathrow".

The airline was the first US carrier to order the Boeing 787, with 20 on order that it hopes to use for Heathrow flights but which would fit its other heavier routes such as Newark-Paris or Newark-Hong Kong. Of the carrier's $8.3 billion in annual mainline passenger revenue last year, some $4.7 billion came from domestic routes, while trans­atlantic routes contributed $1.7 billion and Latin America $1.1 billion. Transpacific routes, where Kellner hopes to expand with SkyTeam alliance partners, contributed $768 million.

The growth plans date back to bankruptcy restructurings of more than a decade ago, and Kellner has been part of every major phase of growth since. Bethune had joined Continental in 1994, bringing Kellner in from a bank in 1995 as chief financial officer. His first project after completing the post-bankruptcy refinancing involved the airline's fleet replacement - a challenge given the fleet's complexity and age - coming from merger partners.

Kellner calls that and other such teams "the most satisfying times at Continental, the times when we had people from all the different disciplines, all the different parts of the airline, and because we were able to share the facts, we could see what the other guy's job was and we could reach a consensus decision. With the fleet type, when we could see what the operations people needed, what the marketing and customer service people needed, what the maintenance people needed, it was easier to reach a consensus decision."

Kellner is proud of the way he pioneered the use of very large Enhanced Equipment Trust Certificates (EETC) financings for aircraft. Essentially bonds backed by aircraft, EETCs allow an airline to borrow at low spreads above prime that keep debt costs down. It is its cleaned-up books and balanced finance sheets that have allowed Continental to go to the kind of conservative capital markets closed to most other carriers.

Diverse background
Working with a trio of executives with similarly diverse backgrounds and similar ages has helped Kellner, who turns 48 in January. The airline's number two, Continental president Jeff Smisek is 52, while executive vice-president and chief financial officer Jeff Misner is 53, and operations vice-president Mark Moran is 50. Each has had roughly the same tenure at the carrier. It is perhaps a fitting fact that the Kellner team is a relatively young team, since, as he puts it: "I plan to be around here for some time."

He also plans for Continental to be around for some time despite the reports and rumours of consolidation that have been sweeping the US airline industry. He says: "We may hear a lot about consolidation but what we don't hear that much about is people asking what is the value of consolidation, versus what is the importance? There has been a lot of talk about consolidation for 20 years, but there has not been a lot of consolidation. It's certainly our preference to remain as a strong stand-alone competitor and to grow profitably in line with our plan. We've got the plan, we've got the planes and above all we've got the people."

Growing up in South Carolina, the 6ft 6in (2m) tall Larry Kellner thought about becoming a professional basketball player - until he realised the talent pool he was up against. Now he plays against other giants such as American and Southwest Airlines, also headquartered in Texas.

But he is confident that Continental's workforce, reinvigorated by the carrier's growth and profitability, will keep it on a par with - if not ahead of - its peers. The proud father of four school-age children, Kellner says: "My kids' idea of my job is that I walk around a lot and talk to a lot of people and go to a lot of lunches and give speeches. That's a pretty good description."

After executive posts in real estate and in banking, Kellner joined Continental in 1995 as senior vice-president and chief financial officer, and was named executive vice-president and chief financial officer in November 1996.

In May 2001, he was elected president of the airline and to the airline's board of directors, and in March 2003 was named chief operating officer. He became chairman of the board and chief executive officer in December 2004.

He holds a business administration degree from the University of South Carolina.

The cover interview in the December issue of Airline Business will be with Pedro Heilbron, the chief executive of Panama's COPA Airlines, Continental's Latin American partner

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Source: Airline Business