Continental Airlines, Inc. Business Information, Profile, and History
Houston, Texas 77002
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History of Continental Airlines, Inc.
Continental Airlines, Inc. is the fifth largest U.S. airline, based on 2001 revenue passenger miles (RPMs). The company carries passengers, cargo, and mail throughout the world. The company serves more than 200 airports worldwide, with the majority of them located in the United States, and has extensive service to Latin America. Domestic flight services are operated mainly through its business hubs in Cleveland, Houston, and Newark, from which the carrier has attained a market leading position in the New York area's transatlantic traffic.
Demoralized by bitter labor relations and a takeover by corporate raider Frank Lorenzo in the 1980s, Continental became a poster child for turnaround management in the 1990s. After almost a decade of financial losses and declining sales, Continental finally turned a profit in 1995. Regional unit Continental Express was spun off in a 2002 initial public offering (IPO) as ExpressJet Airlines, Inc.
The Early Years
The beginnings of Continental Airlines, Inc. can be traced back to 1934, when Walter Varney founded an airline company that he named Varney Speed Lines. Varney Speed Lines was the fourth airline created by its founder; the first had been purchased by Boeing's United Aircraft, and the other two had failed. Varney operated his newest business alone until 1937, at which time a man by the name of Robert Foreman Six used $90,000 to purchase a 40 percent interest in the company.
Six had a background as a pilot and flight school instructor, having dropped out of high school to work odd jobs and take flying lessons in the mid-1920s. In 1929, at the age of 22, Six earned his pilot's license and was running the Valley Flying Service in Stockton, California, which sold scenic air tours of the California countryside to area residents and tourists. When the effects of the Depression halted his flying service, Six worked at a Boeing Air Transport flight school in San Francisco, training airline pilots. He later left the United States and worked for the China National Aviation Company in Shanghai. Upon his return to the United States the following year, Six convinced his new father-in-law to lend him the money that was used to acquire his interest in Varney Speed Lines.
Six's $90,000 investment was used mainly to pay debts that Varney had accrued during the company's first three years. After the company's financial standing was restored, only a small portion of money remained to purchase new or upgraded equipment. Therefore, Six used his negotiation skills to convince the Lockheed Corporation to sell Varney Speed Lines three L-12 planes on credit. Soon thereafter, Six led the company in changing its name from Varney Speed Lines to Continental Airlines, contending that the young airline would never be successful with a name like "Varney." Such efforts soon earned Six a position as the company's president.
Following his appointment to the presidency of Continental Airlines, Six led the company through a period of rapid expansion. First on his agenda was the task of enlarging the airline's fleet of planes. At that time, the DC-3 was the most popular, practical, and durable plane on the market; unfortunately, it was also the most expensive, and Continental could not afford it. Instead, Six decided to purchase a number of L-14 Lodestars from Lockheed, and then hired 12 of the company's first stewardesses to staff the new planes. Meanwhile, the company also was working to expand its flight route network, which had previously consisted of a circuit that ran between Denver, Colorado, and El Paso, Texas. First to be added were services to Wichita, Kansas, and Tulsa, Oklahoma.
In the midst of his expansion efforts, Six left the company in August 1942 to enlist in the U.S. Army, leaving Continental in the hands of a lawyer named Terrell Drinkwater. The Japanese had attacked Pearl Harbor, and the country was mobilizing for World War II. Six was sworn in as a captain and stationed in New Caledonia. He was later transferred to the Caribbean, where he was able to use his flight knowledge to aid in maintaining a military air conduit between the United States and Brazil. Meanwhile, Continental had earned several government contracts during wartime and was left with $900,000 in cash and a tiny debt of only $60,000.
Postwar Expansion Efforts
Following the war, Six returned to Continental and immediately helped the company acquire a number of DC-3s from military surplus. Although the planes represented an upgrade of the airline company's fleet, DC-3s were no longer the top-of-the-line aircraft that they had been in the 1940s. During the war years, new planes had been developed that were more efficient, many of which had four engines instead of two. These newer planes were designed to carry more passengers greater distances, but were too large for Continental's purposes. Continental was still a small airline when compared with the country's other major airlines, even though its route network had been expanded greatly by the addition of Kansas City and San Antonio, Texas, as flight destinations. But regardless of the company's flight expansion, Continental decided to purchase seven two-engine Convair 340s from Douglas and only two four-engine DC-6Bs, at a total price of $7.6 million. The expenditure represented Continental's gross income for the entire year of 1951, but also made clear Six's commitment to investing in the company's future.
Two years later, as the company continued its push to increase its route network and its flight capacity, Six also engineered the company's first major acquisition. Continental purchased Pioneer Airlines, including its rights to fly into Dallas/Ft. Worth and Austin, Texas. With the purchase came a Pioneer manager by the name of Harding Lawrence, whom Six soon placed in charge of Continental's finances.
Lawrence was an instrumental factor in the success of Continental's next expansion effort, which was the biggest and most ambitious in the company's history to that point in time. In 1955, the Civil Aeronautics Board granted Continental service rights between Denver and Los Angeles, Denver and Chicago, and Chicago and Los Angeles. Operation of the three new cross-country routes put Continental in direct competition with the other major airlines, such as American, United, and TWA--each of which possessed the financial resources to put Continental out of business in a price war.
Continental knew that it would have to purchase several new airplanes once again, including a fleet of the latest jetliners. Therefore, the company invested $60 million in new aircraft: DC-7s, Viscount 810s, and Boeing 707s. The challenge to Continental was then to use its limited jet fleet to cover all of its capacity needs. The problem spurred the creation of Lawrence's "progressive maintenance" program, which routinely called one of the five 707s out of service on a rotational basis. This plan reduced the actual maintenance time spent on the airplanes and allowed the company to identify and correct any problems before they became serious. Thanks to Lawrence's idea, the company was able to use its five 707s for an average of 15 hours a day, which was the longest period of use in the industry at that time. His plan was crucial to Continental's early survival of its entrance into the cross-country flight market.
In 1959, another important player appeared at Continental when Alexander Damm left his job at TWA and was brought aboard by Six. Damm's first contribution was to end Continental's practice of leasing items such as aircraft, trucks, and equipment from other companies. He noted that the country's two most profitable airlines, Delta and Northwest, each used the lowest percentage of leased equipment. He convinced Six to cancel as many leasing arrangements as possible and begin instead to focus the company's resources on purchasing more equipment of its own.
The 1960s: Merger Attempts and Expanded Services
Entering the 1960s, Continental was enjoying a period of relatively good prosperity. In early 1961, a group of bankers in charge of the now financially troubled TWA approached Six with a lucrative offer to become the company's president. When he turned them down, making clear his loyalty to Continental, the group began making offers to merge the two companies. Six still refused, stating that a merger was not in the company's best interest at that time. Therefore, it was somewhat of a surprise later that year when Six and Ted Baker of National Airlines announced a merger of their two companies. The merger, however, was quickly canceled when Six found out that Baker also had secretly negotiated the sale of National to Maytag's Frontier Airlines.
The following year, Continental experienced the first plane crash in the company's 24-year history. The crash occurred on May 22, 1962, and was caused by a bomb that exploded aboard one of the company's 707s. There were no survivors. Continental had already planned on gradually replacing its 707 fleet with new Boeing 720s, a shorter and faster version of the 707. After the bombing, the company increased its original order from four new 720s to five.
In 1963, the Civil Aeronautics Board finally released Continental from its obligation to operate a number of unprofitable rural air services that fed passenger traffic into larger air terminals. Therefore, Continental was able to sell off its smaller aircraft and reassign the pilots and flight staff to its larger and more profitable routes. The following year, the company received a contract from the U.S. government to carry out military transportation services in Southeast Asia. A new subsidiary was formed, called Continental Air Services (CAS), and operated alongside Air America, the Central Intelligence Agency's covertly run airline. CAS, however, did not engage in any CIA activity.
Meanwhile, TWA's chairman, Howard Hughes, had fallen out of favor and was offering to sell his controlling interest in TWA to Continental and make Six the newly formed company's president. But Six knew that the deal would require the approval of TWA's new board of directors, who were happy with the company's performance under Charles Tillinghast at that time. Six once again declined the merger proposition, feeling that the management at TWA did not trust Hughes and that they would be unlikely to go along with any of his ideas.
Later that year, Continental suffered a blow to its management team, as Harding Lawrence left the company to accept a position as president of Braniff Airlines. Initially, no attempt was made to replace him. A year later, however, Six brought aboard Pierre Salinger, the late President Kennedy's press secretary, as a member of Continental's board of directors.
In the late 1960s, the Civil Aeronautics Board invited bids for a commercial air service to link the United States to the approximately 2,500 islands in the South Pacific that make up the American Trust Territory. Continental had wanted to operate a trans-Pacific route for years, and it saw this as the perfect opportunity to demonstrate its ability to do so. In November 1967, Continental was awarded routes to various islands in Micronesia and Northern Mariana. A subsidiary called Air Micronesia was created in partnership with Hawaii's Aloha Airlines and an investor group called United Micronesian. A fleet of 727s was obtained, airports along the route were modernized, and a number of hotels were constructed for tourists.
Declining Profitability in the 1970s and 1980s
Unfortunately, Continental faced numerous obstacles as it entered the 1970s, and its financial standing began to suffer. The first blow came just after Richard Nixon took over the presidency of the United States. In one of his very last acts as President, Lyndon Johnson had awarded air traffic rights to Hawaii, Australia, and New Zealand to Continental. To accommodate its increased capacity demands, the company purchased a fleet of four 747s. Barely a month later, Nixon took office and canceled Continental's rights to the three destinations. Later, the routes were awarded again to the company, but then revoked again. Continental was forced to put the four new planes into storage in a hangar in New Mexico, at a cost of $13 million per year. The routes were finally awarded to the company a third time, but three of the 747s had been sold to Iran in 1975.
That year, Continental posted a loss of $9.7 million, marking its first annual loss since 1958 and only the second in the company's 41-year history. The high cost of fuel in the mid-1970s and a poor economic climate in the United States caused the airline industry as a whole to experience a steady decline, and Continental was no exception. The Airline Deregulation Act of 1978 only exacerbated Continental's problems. The Act opened up some of the company's most stable and profitable markets to competition from other airline companies. The final hit came as Continental was obligated to honor a number of different labor agreements that were almost too expensive to maintain, because of the agreements' built-in provisions for inflation.
In 1980, Six stepped down from the day-to-day operations of the company and appointed Alvin L. Feldman as his replacement. Feldman took control of a company that was in serious financial trouble. He immediately attempted to negotiate a merger between Continental and the struggling Los Angeles-based Western Airlines, believing that a combination of forces potentially could lift both airlines back into the black. The merger plans were cut short, however, by the announcement that Texas Air Corporation had decided to increase its stake in Continental from 4.24 percent to more than 50 percent.
Instead of a merger with Western Airlines, Continental's employees made moves to purchase the airline themselves, led by two company pilots named Paul Eckel and Chuck Cheeld. Employees approved the plan by a large margin, and nine different banks agreed to help finance the $185 million employee acquisition. But months later, just before the purchase took place, the banks withdrew their support and Texas Air was able to purchase a 50.84 percent majority stake in Continental. At the company's annual meeting in 1982, Robert Six retired from Continental at the age of 74, after expressing his confidence in Texas Air Chairman Frank Lorenzo to carry Continental back into profitability.
Texas Air completed the full acquisition of Continental Airlines in October 1982. Just a year later, Lorenzo filed Chapter 11 proceedings for the company. Labor contracts were invalidated by the courts, new work rules and pay scales were created, and just 56 hours later, Continental was back in the air. It was the first time that an airline had attempted to continue operations while in bankruptcy. Workers went on strike and formed picket lines. Management worried that travel agents would stop writing tickets for Continental and that passengers would be lost because of bad publicity surrounding the company's financial situation.
To counter the bad publicity, Continental offered a $49 fare for any nonstop flight that the airline ran. The idea was to bring passengers aboard and let them see that the airline was capable of functioning as usual, with the hope that most would then return again. The promotion was a success; not only did it earn the company return passengers, but labor opposition dissolved and employees elected to return to work. Questionable strike tactics led the pilots to repudiate their union. Soon 4,000 of the original 12,000 employees were rehired at reduced pay with an increased workload. In response, by 1985 Continental's labor costs had been reduced significantly. The following year, the company emerged from bankruptcy as a nonunion airline that sported low fares due to the industry's lowest labor costs.
Lorenzo then began acquiring numerous other airline companies facing bankruptcy, including Eastern Airlines, People Express Airlines, and Frontier Airlines. These new subsidiaries combined with Continental (which had since absorbed Texas International Airlines) to place Texas Air Corporation in more than $4.6 billion of debt. The number of passengers flying Continental had steadily increased since the strikes, however, and Continental was the only division to begin its debt repayment program. As of September 1986, Continental owed its creditors $925 million and was scheduled to break even in a decade.
In 1988, Lorenzo sold Eastern's "Air Shuttle" service to Donald Trump in an effort to keep the airline afloat. But a machinist's strike and an ever declining financial situation forced Eastern into bankruptcy the following year. The bankruptcy court then removed Eastern from Texas Air's control. Texas Air changed its name to Continental Airlines Holdings, Inc. to better reflect the amalgamation of businesses that it represented, and Lorenzo sold his stake in the company before resigning as chairman, CEO, and president. Hollis Harris, the former president of Delta Air Lines, was named as his replacement.
The 1990s and Beyond
In late 1990, fuel prices were at a high point and passenger traffic was at a low point, due to effects of the Persian Gulf War. Continental once again filed for protection under Chapter 11 of the federal bankruptcy code, joining fellow subsidiary Eastern. But Eastern could not recover and was forced to liquidate in 1991. Harris left Continental Holdings in 1991 and was replaced by former CFO Robert Ferguson. That same year, Continental sold its Seattle-Tokyo route to American for $145 million, and the following year, it sold most of its LaGuardia assets and six slots at Washington, D.C.'s National Airport to USAir for $61 million. Continental used the earnings to attempt to wrestle its way out of bankruptcy for a second time.
In 1993, Continental emerged once again from bankruptcy and underwent an extensive reorganization. All of the Continental Airlines Holdings, Inc. subsidiaries and divisions were merged into Continental Airlines, and new stock was issued to replace any previously outstanding publicly held interests in the former parent company. Ferguson remained at the new company's helm and began orchestrating plans to restructure the airline's business focus as well.
Under Ferguson, Continental went ahead with the rapid expansion of its Continental Lite operation, which represented the company's own version of Southwest Airlines' short-haul, no-meal, low-fare flights. In less than a year, the program was expanded from the use of 19 aircraft for 173 daily flights serving 14 cities, to 114 aircraft for 1,000 daily flights among 43 cities. The additional aircraft were made available by eliminating the Denver hub and redeploying planes and equipment to other locations. Unfortunately, Continental Lite proved itself to be unprofitable and contributed greatly to the company's 1994 loss of $613 million.
Going Forward in the Mid-1990s
Meanwhile, Gordon M. Bethune, a former Boeing Co. executive, had joined Continental as president and COO in early 1994. Continental Lite continued to lose money and Ferguson continued to push the program forward until he was ousted late that year. He remained as a director, but was replaced as CEO by Bethune, who immediately set in place a "Go Forward Plan" to turn the ailing company around.
First, Bethune renegotiated Continental's debt, arranged concessions from aircraft lessors, and got Boeing to agree to defer delivery of any new planes on order. He then completely cleaned house, sweeping out almost half of the company's high-ranking executives and replacing them with his own managers from businesses such as Northwest, American, and PepsiCo. He hired Gregory D. Brenneman, a former Bain & Co. consultant with no previous airline experience, as his new COO. He grounded 41 planes, slashed capacity, and cut almost 5,000 jobs in 1995. He abolished most of the company's loss-making Continental Lite services. Then, with a guided focus solely on improving the airline's service to its customers, Bethune saw results. The year 1995 not only saw the company turn a profit for the first time since 1986, but saw it turn a hefty profit of $224 million.
As the 1990s drew to a close, the company focused on the goal of luring more high-paying business travelers back to its flights. To do so, Bethune tied company bonuses to on-time performance, as a means of improving the company's dismal last place standing among major airlines for on-time performance in 1994. By early 1995, the airline had risen to a first place rank for the first time in the company's history. Bethune also brought back the frequent-flier program perks that had been cut during Ferguson's reign and spent $8 million to put food back onto some flights so that Continental would appeal to hurried business travelers.
Although Continental was clearly on the road to recovery as it neared the 21st century, it still faced many obstacles along its path to success. Namely, without a unique attribute to offer customers--aside from convenience in its three hub locations only--the airline was having a difficult time convincing passengers to stray from the other major airlines. Many analysts predicted that it would take a merger to give Continental the marketing capabilities and exposure necessary to pull itself to the top of the heap. But if the turnaround created by Bethune in 1995 and 1996 was any indication of the future, then the company seemed to possess the potential to regain the financial integrity that it had possessed during its early years.
Flying to Win in the Late 1990s
Continental logged a record $319 million in earnings in 1996. "Fly to Win" initiatives were introduced to keep the company moving forward. The airline began standardizing the fleet, mostly around the Boeing 737 for the main line and Embraer EMB 145 regional jets for Continental Express. In 1997, Continental had $4.3 billion worth of orders (127) and options (90) for Boeing 737s.
Although salaries had risen an average of 25 percent since 1994, Continental employees were still paid less than their counterparts at other airlines. Morale and attention to detail were boosted by unique incentives, such as a payment of $65 to each employee every time Continental finished in the top three on-time carriers in the United States. The company reduced absenteeism by raffling off Ford Explorers twice a year to those with perfect attendance. On-time performance and motivated employees were key components in luring demanding (and lucrative) business travelers back to the airline. Part of what made Continental's renewed focus on quality so striking was the cutbacks other airlines were making at the same time.
With major markets in the United States nearly saturated, Continental aimed to increase feeder traffic from abroad through strategic alliances with the likes of Air France, Alitalia, and Virgin Atlantic. By the late 1990s, Continental had accords with 17 airlines. The carrier lobbied the governments of Argentina and Spain for a chance to invest in Aerolineas Argentinas, an opportunity it lost to rival American Airlines. Continental also had considerable operations of its own in Europe, Latin America, and the Pacific. Flying from Newark, Continental was flying more transatlantic flights than anyone in the New York area by 1999.
In 1998 Northwest Airlines acquired a 14 percent equity stake/54 percent voting interest in Continental from President and Chief Operating Officer David Bonderman. The move headed off an attempt by Delta Air Lines to acquire Continental. Northwest paid $519 million for the shares, an investment meant to launch a ten-year strategic alliance. An antitrust lawsuit from the Justice Department two years later pressured Northwest to sell its shares back to Continental. Continental sold its own minority stake in America West in 2000, and two years later ended a code-sharing agreement with the Phoenix-based airline.
Scaling Back in 2001
Continental was the first among major U.S. airlines to cut its staff in the wake of the September 11 terrorist attacks. It let go of 12,000 employees (20 percent of the workforce). Most of these, however, would be called back to work within a year. Bethune soon began lobbying the government for an industrywide federal bailout.
A fourth quarter loss of $149 million left the airline $95 million in the red for the year, a relatively small setback compared with those of other major airlines. The carrier parked 61 of its jets and 23 turboprops as it waited for traffic to return to normal.
ExpressJet Holdings Inc., the parent company for the regional jet unit Continental Express, was spun off in April 2002 in an IPO that raised $480 million. The IPO had been delayed several months due to the September 11 attacks. Continental owned 53 percent of ExpressJet after the offering.
Continental was reported to have approached Delta Air Lines about a possible merger in 1996. This did not happen, but in August 2002, Continental, Delta, and Northwest proposed a massive ten-year code-share agreement. This would allow the airlines to sell tickets on each other's flights, and to share frequent flier programs and airport lounges. Together the three airlines had a 36 percent share of domestic traffic. The alliance was a response to a pending pairing of United and US Airways.
Principal Subsidiaries: Continental Micronesia, Inc.
Principal Competitors: AMR Corporation; Delta Air Lines Inc.; UAL Corporation.
- Key Dates:
- 1934: Varney Speed Lines is founded.
- 1937: Robert Foreman Six buys a 40 percent interest in Varney.
- 1955: Three new cross-country routes are added in an expansion drive.
- 1967: Continental is first awarded Micronesian routes.
- 1982: Texas Air Corporation acquires Continental.
- 1983: Continental files bankruptcy.
- 1986: Continental emerges from bankruptcy; Continental absorbs other airlines facing bankruptcy, including Eastern, People Express, and Frontier.
- 1990: Continental declares bankruptcy again.
- 1993: Continental regains solvency, restructures.
- 1994: Continental ranks last among majors for on-time performance.
- 1995: Incentive-led Continental ranks first among majors for on-time performance and earns its first profit in ten years.
- 1998: Northwest Airlines acquires a majority of voting shares.
- 2000: Continental buys out Northwest's holding.
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