The Middle Seat By Scott McCartney
The Wall Street Journal, Tuesday October 12, 2004
On Rising Fares and Airplane Food
Continental CEO Lays Out The Future of Air Travel; Dreaming of a United Merger
IN THE FUTURE, airline passengers will pay more 'to fly, suffer longer delays and have fewer carriers from which to choose. It's a certainty, says Gordon M. Bethune, chairman and chief executive of Continental Airlines. Mr. Bethune, 63 years old, will retire Dec. 31 from Continental. While he might end up running another airline, in the meantime, after 10 years as a CEO in what he calls "the most dysfunctional industry I've every seen," Mr. Bethune has strong views about what's ahead for travelers.
What he sees: More turmoil in the short term. Rising oil prices will drive ticket prices higher; fancy seat-back entertainment systems could quickly become a battleground and airplane food will eventually be back. His prescription for fixing the ailing industry includes a mix of mergers and failures of weak airlines. Someday, he says, he would even like to see UAL Corp.'s United Airlines merge with Continental - a long shot, he knows. But the first thing he says travelers can expect to encounter is higher prices. Noting that even discount carriers are now warning of financial losses because of high oil prices, Mr. Bethune says fares are going to have to go up. For several years now, travelers have, in effect, been subsidized by airline debt-holders. Their losses at bankrupt airlines have kept airlines going and allowed fares to stay low, he said.
Continental tried, several times to raise prices earlier this year, but ended up rolling back the increases when a competitor or two didn't go along. Now, $50 oil gets us all," he says. "Wouldn't you think that will change behavior in pricing?" It already has. A pair of $5 fare increases on most tickets, initiated by AMR Corp.'s American Airlines stuck in many markets in the past week. And the industry is likely to consolidate in the next 24 months, either by merger or attrition, he says. "Since we've all been in intensive care, it's hard to talk about dancing," he says, "But it should happen." Once labor contracts and pension issues are resolved, it will be easier for carriers to merge because many will end up with similar contracts. And more than $23 billion in U.S. airline losses over the past four years have undoubtedly weakened opposition to mergers among federal regulators and Congress. For a couple of years Mr. Bethune has thought that combining Continental with United Airlines would create a powerhouse carrier that could bring more stability to the industry - something that might appeal to, new investors at United or creditors; two groups capable of funding a merger.
United is strong to Asia; Continental to Latin America. United has fights to land at London's Heathrow Airport; Continental has extensive service to other parts of Europe. United is strong in the western U.S.; Continental in the East. Combined, the two could be very successful, he believes. "It would be, game over. Checkmate," Mr. Bethune says. He has mentioned the idea to UAL Chairman and Chief Executive Glenn Tilton and his predecessor, Jack Creighton, but neither was interested. No talks were held. Mr. Bethune is leaving Continental because of a bitter feud with financier David Bonderman, who reorganized Continental out of its second bankruptcy and brought in Mr. Bethune from Boeing Co. The two clashed over small details and major strategies, and once Mr. Bonderman and his investment group had sold all their shares in Continental and were negotiating for other airlines to turn-around, Mr. Bethune thought Mr. Bonderman should leave Continental's board. Mr. Bonderman, in turn, saw his role as "lead director" as an appropriate check to balance Mr. Bethune's bravado.
Neither would leave voluntarily alone, so, like Old West gunslingers, they shot each other. Mr. Bonderman and his associates left Continental's board last spring after Mr. Bethune agreed to step down at year end. "I'm leaving here because it's time to go. Maybe it's the wrong reason, but it's the right time," he says. Mr. Bethune says he will entertain offers from other companies, even airlines. When he came to Continental in 1994, the Houston-based carrier, fifth largest in the U.S. was like an airplane with only one engine running he says. It was in a dive, and no one knew how much fuel was on board because the gauge was broken. That was apparent one week when executives discovered cash was so low that the company couldn't make its Friday payroll. Continental avoided a third and probably final trip to bankruptcy court when Mr. Bethune convinced his old friends at Boeing to wire back $30 million in aircraft deposits.
After that, with an improving economy and rallying employees hooked on Mr. Bethune's mantra to provide "clean, safe, reliable" transportation, Continental began winning back customers. Though saddled with heavy debt like other airlines, it has weathered the storm of the past three years comparatively well. Last year, Continental posted an operating profit when American, United, Delta Air Lines, Northwest Airlines and US Airways Group Inc. didn't. Now, as he turns the yoke over to President Larry Kellner, Mr. Bethune says Continental has both engines running and adequate fuel on board. "Your airplane, Larry," he. says. "Unfortunately, the weather's real shitty."