"Continental CEO dreams of a United merger"

Tuesday, October 12, 2004 

Continental CEO dreams of a United merger
BY SCOTT MCCARTNEY
The Wall Street Journal


In the future, airline passengers will pay more to fly, suffer longer delays
and have fewer carriers from which to choose. It is 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
chief executive in what he calls "the most dysfunctional industry I've every
seen," Mr. Bethune has strong views about what is 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 eventually will 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 now are 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 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 during the past four years
undoubtedly have 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 rights 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 turnaround, 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 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 sh-y."


 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/dcfp/dcboard.php


*****************************************