This information is no longer current - it is for reference only. It is an archive review of events that took place during United Airline's Chapter 11 Bankruptcy from December 9, 2002 - February 1, 2006.

His Airline Didn't Skimp on the Cheese

Date: January 7, 2006
Type: Media Article

Source: New York Times
Author: Joseph Nocera

CAN the airline business really be this simple?

"You need to be consistent and reliable," said Gordon M. Bethune, the best unemployed airline executive in the United States. "You need to control your costs, but you can't let cost-cutting take over your business. You need to gain the trust of your employees. You need to treat your customers well. Other guys always wanted to talk about market share. They'd lose your bags but they'd show great movies. We always focused on the fundamentals: get Joe Nocera to New York, on time, with his underwear. There's no secret formula for this #%&*."

Hmmm. Perhaps I should rephrase the question. With United, Delta and Northwest currently in bankruptcy; with soaring fuel prices; with fierce competition from low-cost upstarts; with customers embittered by the disappearance of amenities like legroom; with the need to extract painful concessions from the various airline unions - and with not a single one of the so-called legacy airlines turning an annual profit these days - can running an airline really be as simple as Mr. Bethune makes it out to be?

Actually, to judge by what he did at Continental from 1994, when he became its chief executive, until Jan. 1 of last year, when he retired at the age of 63 under rather odd circumstances, the answer would appear to be yes.

Surprised? You shouldn't be. Mr. Bethune's essential message - that the airline business has been mismanaged by executives who do not really understand what matters to customers - is the dirty little secret of the industry. "If you are going to be in the watch business," he likes to say, "it helps to know how a watch works." There is something almost criminal about seeing Mr. Bethune on the sidelines at a time when so many airlines are struggling, including Independence Air, which quit operating this week. True, he says he has no particular desire to jump back in the game: "I'm a retired employee and it feels good," he told me. And it's also true that he is not exactly a kid anymore, though when I met up with him during a recent visit to New York, he certainly did not appear to have lost a step. But as a former Navy airplane mechanic who rose through the ranks at Boeing before being tapped to run a deeply troubled Continental, Mr. Bethune sure knows how the watch works. He proved it by transforming a broken-down carrier, which booked a loss of more than $600 million in 1994, into what is unquestionably the best-performing airline this side of Southwest.

OF course, given his fierce pride in the Continental transformation, and his undisguised contempt for most of the airline's rivals, it's easy enough to understand why the boards of United, Delta and the rest have not come knocking. When I asked Mr. Bethune, for instance, what he would do right now if he were running United Airlines, which will still face plenty of problems even when it emerges from bankruptcy as it hopes to do in February, Mr. Bethune replied, "I think prayer would help."

That is a quintessential Bethune remark. A big, blustery, no-nonsense executive, Mr. Bethune swears profusely and has the timing of a stand-up comic. He is full of pithy remarks that he has refined to a fare-thee-well. ("Someone asked me once how come I knew so much about people." Pause. "I told him it was because I used to be one.") But in between the jokes, what he has to say is pretty serious, and Continental's competitors would do well to take it to heart.

Take cost-cutting. (Please.) "His pizza analogy is one I've always liked," said the industry consultant Robert W. Mann. Here is the pizza analogy, which Mr. Bethune told me three times in the course of a two-hour interview. (He wanted to make sure I got the point.) "If you are being rewarded for finding ways to make pizza cheaper, eventually you'll take the cheese off," he said. "You'll make it so cheap that people won't eat it."

That, in his view, is what the old-line airlines have done in eliminating "extras" like food. Continental still serves hot meals on lengthy flights, because, Mr. Bethune says, customers care about that. "There is value in serving muffins and a banana at 7 in the morning," he said. "There is value in keeping pillows and blankets, and in making sure the planes are clean. Why would you get rid of those things? By keeping them, we are giving customers a reason to pay us a few more dollars to get to Seattle." Makes sense, doesn't it?

Or take goal-setting. "I asked an executive at an energy company once what he rewarded, and he said R.O.E. - return on equity," Mr. Bethune told me. "I told him that if you asked someone on the second shift what roe was, he'd probably say fish eggs. When I came to Continental, we defined success as getting the planes to their destination on time. You should tell people how to keep score, and reward them for it. But you better make sure you're using the right score card."

Or take labor relations. When Mr. Bethune first got to Continental, its relations with its unions were awful. Continental's unions had suffered mightily under the former chief executive, Frank Lorenzo, who, says Michael Boyd, an industry analyst, "had trashed the place and walked away." Specifically, Mr. Lorenzo had put Continental into bankruptcy to abrogate its union contracts and force employees to work for less. (Mr. Lorenzo has always insisted that he did what he had to do to save the airline.) Things had become so bad that Continental was close to its third round of bankruptcy not long after Mr. Bethune arrived on the scene and discovered how bad things were.

"We could have turned it into something like Southwest," Mr. Bethune said. "But that would have meant firing two-thirds of the people. You can't walk into the middle of a 60-year-old airline and make it into something it's not." And while he did not give the unions their old pay and benefits back, he did give them something they had not had before: straight talk. "He told the unions that as the business improved, Continental would pay more," Mr. Mann said. Which it did - or at least it did until 2001, when, in Mr. Mann's words, "the lid blew off the industry."

Here is something else Mr. Bethune did not do. He did not try to offload Continental's pension onto the federal government. Indeed, Continental has both a pension plan and a 401(k). When I asked him if that put Continental at a competitive disadvantage with the low-cost airlines, Mr. Bethune gave me one of those "what planet were you born on" looks.

In 2002, he replied, Continental lost $388 million. "Our chief financial officer re-ran the numbers using the assumption that every employee had only been here for two years," he said. "We would have made $420 million. So, yeah, all I have to do is fire my people every few years, and I'll be on the cover of Fortune. But that's not how to run an airline. In fact, that's not how to run any business."

Given the extent to which he was admired, both by his own employees and by airline industry observers, why isn't Mr. Bethune still running Continental? The sad answer is that he left as a result of a power struggle with David Bonderman, the financier whose firm, Texas Pacific, had at one time been Continental's largest shareholder. Indeed, Mr. Bethune and Mr. Bonderman first crossed swords when Mr. Bethune and his management team, in effect, blocked an effort to merge Continental with Delta because the Continental employees would have gotten the short end of the stick.

From then on, the relationship only grew worse until finally Mr. Bethune and Mr. Bonderman made a strange sort of peace. Mr. Bethune agreed to leave his post at the end of 2004, if Mr. Bonderman left the board. And that's what happened. One of Mr. Bethune's protégés, the former chief financial officer, Lawrence W. Kellner, is now running the show, using the same principles that Mr. Bethune first brought to Continental. Indeed, Continental's current management has all been around for years - like Mr. Bethune, they know how a watch works.

The post-9/11 era has been rough on the big airlines, of course. Continental, which was highly profitable through the latter half of the 1990's, has lost money recently, just as its competitors have. But it has lost considerably less and has not come close to bankruptcy. Mr. Bethune's essential belief is that when things turn up again, his old airline will be poised to make real money. But for now, he is happy just to see it beat the competition. "I used to tell the board," he said, "if we have six three-legged horses and we put them in a race, one of them is going to win. It's not pretty, but you're still beating those other five horses."

In the third quarter, in fact, despite all the problems facing the industry, Continental made $61 million. (For the year, however, it expects to post a substantial loss.) Last year, it also went back to its unions and asked for nearly $500 million in concessions. You may have missed this. The Continental negotiations lacked the histrionics that usually accompany labor givebacks in the airline industry. But the company told its unions that if they agreed to the givebacks, Continental would be able to go into "growth mode" to prepare for a better future - and that is what it has done, buying new airplanes and expanding into places like Beijing and New Delhi. And because of the trust that had been engendered between management and labor, the unions agreed. In some ways, that may be Mr. Bethune's most important legacy.

"You know," Mr. Bethune said as we departed, "I get $35,000 for the lecture I just gave you." He laughed. "For an hour of %$&#*& work! It sure beats running an airline."

I hope he doesn't mean it.

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