Strategy seems to pay off as Continental mounts comeback

Strategy seems to pay off as Continental mounts comeback

By SUSAN TODD

Newhouse News Service

HOUSTON - To get a sense of why Continental Airlines is flying so high these days, go back to the fork in the road.

That's the metaphor Chief Executive Larry Kellner used in 2005 - only months into his job - to sell his employees on a plan to cut millions in costs, which required the delicate, unpopular task of undoing labor contracts to get hefty wage and benefit concessions.

At the time, the U.S. airline industry was struggling through turbulence created by the Sept. 11, 2001, terrorist attacks and exacerbated by record-setting oil prices. Some were worse off than others. Independence Air succumbed to the business difficulties. Delta Air Lines and Northwest Air sought protection in bankruptcy court.

Wall Street anticipated more fallout: Continental appeared on many analysts' short list of airlines likely to be in bankruptcy protection by the end of 2005, which is how the Houston-based carrier ended up at the fork in the road.

Kellner's cost-cutting strategy wasn't easy to execute. It took long, difficult negotiations to secure a whopping $500 million in concessions from the unions. Some employees, particularly the flight attendants, still question whether they sacrificed too much for the sake of the company's growth.

The plan required Continental to shrink in order to grow, and it had to be accomplished without compromising the airline's service (in-flight meals and pillows were exempt from the cost cuts) and without alienating thousands of employees and shareholders.

By most measures, Kellner's chosen path seems to have paid off: Last year, the company reported a profit - albeit slim - after five years of heavy losses. Continental's share price has skyrocketed 170 percent since Kellner took the corner office and, in Wall Street's eyes, at least, Kellner's management team is the strongest in the industry.

While his first two years in the pilot's seat have been downright bumpy, Kellner never seemed to take his eyes off the horizon. His restructuring plan was never just about pulling through the bad times; it was about getting through them without losing ground and positioning the airline to grow in spite of the tough business environment.

"It was a long slog from 9/11 to 2006, and none of it was particularly easy or fun," Kellner said during a recent interview in his office at corporate headquarters, surrounded by models of commercial jets. "It was a difficult time for everyone here."

The stormy business conditions that inspired the fork-in-the-road strategy have calmed during the past year. Oil prices have stabilized. More importantly, perhaps, the supply of airline seats has declined while passenger demand for air travel has shot up, enabling profit-starved U.S. carriers to push up fare costs.

Wall Street analysts, who once pegged Continental as a likely Chapter 11 candidate because of its low levels of cash, dramatically altered their forecasts for the carrier last year.

"They've made a remarkable comeback," said airline analyst Roger King of CreditSights.

Kellner, 50, did have some advantages coming in, according to King and other industry experts. His predecessor, CEO Gordon Bethune, who put Kellner on his management team in 1995, built a strong foundation, reviving morale, strengthening the Continental brand, modernizing the fleet and investing heavily in the airline's hub at Newark Liberty International Airport.

"They're reaping the benefits of what Gordon started years ago," King said.

Kellner paid close attention to how his former boss resuscitated employee morale and instilled a sense of the importance of customer service. Peter Cappelli, a professor at University of Pennsylvania's Wharton School of Business, said he thinks part of Continental's success is a result of the higher level of cooperation the company gets from employees.

"That good inertia benefits the whole company," Cappelli said.

According to people who know Kellner, he feels as strongly about getting out into the trenches to speak with employees as he does about spending time each morning taking his four young children to school.

In the past two years, he has made a near-mantra of the word "team. " While it would be easy to think of it as gimmicky in his weekly recorded messages to the company's 44,000 employees, with Kellner it's an essential principle.

Case in point: Last October, Kellner returned to his alma mater, the University of South Carolina's Moore School of Business, as a guest speaker in the school's annual lecture series, and he spoke of the importance of that cooperation.

"The companies that are successful," he said, "are the companies that get people to work together, to go in the same direction."

Bethune said one of Kellner's strengths is his understanding of the importance of customer service and employee satisfaction. "You can't have one without the other," Bethune said.

"I'm pretty simple about most of my approaches," Kellner said during the conversation in his office. "You've got to be focused. You've got to be concise. You will fail if people are wondering about what you're doing."

Kellner said he stays focused by keeping a short list of priorities. "I always have three things," he said. "Not 30. Not 300. There are always three things."

Kellner declined to specify the items on his list for strategic reasons.

QUOTE:

"The companies that are successful are the companies that get people to work together, to go in the same direction." - Larry Kellner, Continental Airlines

chief executive officer

CUTLINES:

CARLOS JAVIER SANCHEZ/Newhouse News Service

Continental Airlines Chief Executive Officer Larry Kellner talks about the company March 26 at the company headquarters in Houston, Texas.

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