Continental Airlines Corporate History
Mueller remained with Varney and its successors until 1965. Mueller moved the airline's operations from Denver to El Paso and adopted the marketing slogan "Trail of the Conquistadors." He sold a minority interest in Varney in 1936 to Robert Six, another aviation pioneer. Six soon became president and remained in that position for the next 46 years.
Varney Speed Lines operated Lockheed Vega aircraft which seated a maximum of six passengers. Four of the five Vega aircraft in Varney's fleet crashed by mid-1937. Mueller and Six then mortgaged their homes, bought three Lockheed 12s, renamed their airline Continental and moved headquarters back to Denver. Hardly, so far, the stuff of legends. But Mueller and Six had staying power and government contracts.
Continental, operating under the slogan "Fly the old Sante Fe Trail," became the first scheduled airline to file a route application with the Civil Aviation Authority (CAA) created in 1938. Yet the CAA was slow to respond to Continental's requests for more routes, and Continental was providing service to only seven cities by the end of 1940. Then World War 11 brought the airline its first taste of financial stability when the company received a government contract to modify military aircraft. Continental primarily was a mod shop in the years 1942 to 1945, modifying 2,000 B-17s, 400 B-29s and numerous P-51s. The company did establish routes into Kansas, Texas and Oklahoma in 1944 and 1945, but Continental entered the postwar period still a small airline.
Growth remained slow. Stymied in its attempts to generate passenger revenue, Continental entered an agreement with Sears Roebuck & Co. to ship merchandise between Kansas City and Denver.
Continental used the 1950s to mature. Its 1954 merger with Pioneer Airlines helped since this gave Continental access to Dallas/Fort Worth and Austin. It already flew into Houston. Continental received authority in 1955 to fly between Chicago and Los Angeles. To support its service expansion, the company ordered four B-707s, five Viscounts and five DC-7Bs. Arrival of the B-707 in 1959 ushered in the Jet Age for Continental. Arrival of the DC- 7Bs brought a marketing campaign called "Gold Carpet Service" which called for white-gloved supervisors to meet flights and roll out a gold carpet for the passengers.
Continental still was a small airline entering the 1960s, albeit a jet airline with some truly "Continental" routes. The 1960s brought more government largesse and a more rapid expansion than Continental had yet achieved.
The Civil Aeronautics Board (CAB) in 1961 granted Continental authority to fly nonstop between Houston and Los Angeles, and Continental moved its corporate headquarters to Los Angeles two years later. In 1964 the company received an Air Force contract to fly from Travis Air Force Base, Calif., via Honolulu or Anchorage, Alaska, to Tokyo, Okinawa, Taipei, Clark Air Base, Saigon, Danang, Cam Ranh Bay and Bangkok. This contract lasted until 1973 when U.S. military involvement in Southeast Asia finally wound down.
Continental established a subsidiary in 1965, Continental Air Services, headquartered in Bangkok, Thailand with flight operations based at Vientiane, Laos. This subsidiary supported U.S. military operations in Indochina during the Vietnam War and lasted until 1975.
Continental, capitalizing on its new Pacific experience and desiring expanded operations, combined with United Micronesia Development Corp. and Aloha Airlines in 1966 to form Air Micronesia. This Continental affiliate originally served nine islands in the Trust Territories of the Pacific using two B-727s. It added service to Guam and Saipan. Air Micronesia supported a new tourist industry with direct links to Japan. The airline also was the only transportation link between these small islands and was important to the Trust Territories government and U.S. military facilities for movement of cargo, mail and passengers. It was not profitable, however, and lost money in 11 of its first 13 years of service.
While Air Micronesia brought red ink to Continental, almost everything was in the red at Texas International. TI experienced serious financial difficulties about the time Continental had its headiest success.
Trans-Texas Airway/Texas International
Trans-Texas Airways, the forerunner of Texas International, began service Oct. 11, 1947, with two DC-3s and 96 employees. The brainchild of R. E. McKaughan, Trans-Texas Airways flew to eight cities in Texas. Trans-Texas extended its service to Arkansas, Louisiana, Tennessee and Mississippi in the early 1950s.
Trans-Texas added routes to New Mexico in 1963 and to Mexico in 1966. Minnesota Enterprises Inc., a Midwestern bus company, bought Trans-Texas in 1968 and changed the name to Texas International Airlines. The airline added service later in 1969 to Denver. Los Angeles and Salt Lake City became TI service points in 1970, and it added Mexico City in 1972.
But, Texas International was bleeding to death by 1971. Chase Manhattan Bank hired Francisco "Frank" A. Lorenzo and Robert J. Carney, principals in a financial consulting partnership begun on just $2,000, to devise a salvage plan for TI. Lorenzo and Carney quickly worked out a deal to take Texas International off Chase Manhattan's hands: a $35-million refinancing that gave Lorenzo and Carney (through Jet Capital Corp., their holding company) 59 percent of the voting rights in TI. The paper trail shows that the $1.3 million ostensibly paid by Jet Capital for TI was a paperonly transaction. The consulting fees paid to Lorenzo and Carney by Chase Manhattan permitted the two young dealmakers to recover the $35,000 they invested in the takeover. Chase Manhattan, TI's major creditor, deferred its claims, and the people at Texas International had a new future: Frank Lorenzo.
Lorenzo and Carney were as decisive at the helm of TI as in conference with Chase Manhattan officials. They eliminated unprofitable routes, raised fares and tried to slash costs. The cost-cutting ran head-on into TI's 80-percent union work force, but Lorenzo bored ahead. The Air Line Employees Association (ALEA) called a strike that had the potential to destroy the company, yet, fueled by $8 million in mutual-aid contributions from other airlines, Texas International sailed through 1975 with only a $4.2-million loss.
TI, to regain market share lost during the strike, started an aggressive low-fares marketing campaign to lure cost-sensitive passengers. Backed by considerable government subsidies on several routes, the strategy worked and TI showed a 1976 profit of $3.5 million. Profits continued to grow over the next three years, peaking in 1979 at $41.4 million.
The year of TI's peak was a watershed year for Continental. The crash of an American Airlines DC-10 at Chicago's O'Hare International that killed 272 people prompted the FAA to ground the nation's entire DC-10 fleet for investigation of flaws and corrective modifications. This move crippled Continental which had a large portion of its capacity tied up in the DC-10. This also was the year of fuel crisis because of an Arab oil embargo that the Carter administration could not break. Continental suffered a 1979 loss of $13 million. The next year, Robert Six retired as president of Continental and Alvin L. Feldman took over.
The change of guard looked promising: A mechanical engineer with stints at General Dynamics in San Diego and at Aerojet General Corp., a subsidiary of General Tire, Feldman had one resounding success behind him. General Tire placed Feldman in charge of its aviation subsidiary, Frontier Airlines, and in 1971 Feldman pulled Frontier out of a financial hole and restored its profitability.
Feldman initiated merger talks with Western Air Lines. The CAB began a mandatory administrative review that was expected to lead to approval by the spring of 1981. Then a double hammer stroke of fate changed Continental's future, The first stroke was the size of Continental's 1980 losses, aggravated by internal frictions that surfaced near the end of the year when the airline's flight attendants struck. Since the pilots and machinists did not join the flight attendants on the picket line, the main effect of the 12-day strike was to call attention to labor unrest, although the December turmoil did contribute to Continental's $21-million loss.
Frank Lorenzo activated the second stroke in early 1981 when he announced that Texas Air Corp. had acquired 9.5 percent of Continental's stock and intended to make an offer for a controlling interest.
The move was well-timed. TI's fortunes had changed radically, but the world did not yet know that 1981 would result in a $34.9-million loss. Causes for the loss: DOT subsidies, the magic carpet for TI, were reduced sharply at the same time that Southwest Airlines, a tough new competitor, cut into the margins. Even TI's famous "peanut fares," cut-to-the-bone interstate ticket prices started in the last months before the airline industry deregulated, could not blunt the onslaught of Southwest.
Lorenzo was convinced that TI had to expand to prosper. Already in the summer of 1978 TI made a bid for National Airlines with Eastern and Pan Am joining the chase shortly thereafter. Although Pan Am eventually acquired National, TI made a capital gain of $34.6 million from the sale of its 9.2 percent share of National stock. Lorenzo then followed the same pattern in an attempt to acquire TWA: Rebuffed, he nonetheless added millions to Texas Air's acquisition fund When TWA bought him off.
Lorenzo began his effort to acquire Continental with two competing theories about the airline industry. On one hand, he held to the "upstart" theory that small, never-regulated airlines like Southwest quickly could outmaneuver older companies configured to respond to a regulated environment. He tested this theory by creating non-union New York Air in 1980. On the other hand, Lorenzo began to feel that TI would need "critical mass" to survive.
Lorenzo created Texas Air Corp. in June 1 198O as a holding company for Texas International and New York Air, and in early 1981 he went after Continental. Continental's employees began a crusade to buy the company through an employee stock option plan (ESOP) to thwart the takeover. Simultaneously, Continental's management continued its attempt to merge the airline with Western. As tensions stretched to the breaking point during this period, Feldman, Continental's president, died.
Lorenzo won the takeover war and on Oct. 31, 1982, Texas International Inc. and Continental Airlines Inc. merged. Next, Lorenzo created Continental Airlines Corp. as a holding company for the Houston-based Continental and Texas International.
New ownership was not a magic cure for Continental. The carrier experienced a $41.8-million loss in 1982 and a $218.4-million loss in 1983. Blaming high labor costs for Continental's difficulties, Lorenzo requested $150 million in concessions from his employees by Sept. 19, 1983. Continental pilots already agreed to significant wage and work rule concessions in 1981 and 1982. A dispute continues to this day among pilots involved in that labormanagement confrontation over whether Lorenzo's conditions were issued as an ultimatum: ALPA's national leaders say yes; pilots who crossed the subsequent picket lines say no.
In any event, on Sept. 24, 1983, Lorenzo closed Continental's doors on an hour's notice and filed for protection under Chapter I I federal bankruptcy provisions. Then he fired all 12,000 employees. A scaled-down Continental Airlines was flying again within three days of the filing, offering reduced fares.
Continental rehired 4,000 former employees to staff its operations at 40 percent to 60 percent of their previous wages. It also invoked emergency work rules for its pilots. ALPA responded on Oct. I by calling a strike. The flight attendants' union, though spurned by the pilots during its own 12-day strike of December 1980, supported the pilots. Even so, the strike failed when 4,000 employees crossed the picket lines. A majority of pilots who crossed the line signed a petition to remove ALPA as representative, though ALPA maintained the union legally could not be decertified without an official election.
Continental remained in bankruptcy for three years and, shielded from its creditors, expanded. The carrier earned profits of $50.3 million in 1984 and $ 61.9 million in 1985. Cynics suggested that Lorenzo extolled the virtues of deregulation while using a form of "government subsidy" - protection from creditors and unions - to build Continental back to the competitive strength it enjoyed under the military and other government subsidies of the Vietnam War era.
Continental labored under a severe handicap in its comeback bid: It had no computer reservations system to match those of American and United. And Lorenzo continued to yearn for "critical mass." So, after making a second bid to acquire TWA and failing again (TWA's unions sided with Carl Icahn, a rival bidder for TWA), Lorenzo captured Eastern Airlines in February 1986. Financial circles regarded Texas Air's $640-million deal for Eastern and its 300 aircraft, multitude of routes and System One CRS operation as a steal. The purchase also included $3 billion in debt and a cash fund of $463 million. Texas Air resisted legal and political action by ALPA and the International Association of Machinists and Aerospace Workers to force the merger of Eastern with Continental. The merger would have brought Eastern's unions into Continental where they could have campaigned to represent Continental's nonunion employees. Texas Air quickly spirited System One away from Eastern, however, as well as numerous routes it gave to Continental.
Still, Continental was not growing fast enough, so Texas Air acquired non-union People Express on Dec. 30, 1986, a purchase that brought with it the bankrupt Frontier Airlines. Also acquired in this deal: 72 airplanes, about 1,000 non-union pilots and an additional $750 million in long-term debt.
Now Continental's fleet was too diverse and People Express' operations did not meld easily into Continental's. In 1987, Continental lost $258.1 million on revenues of $4.1 billion. The battle against red ink continued in 1988 as Continental lost $315.5 million, but in 1989 the carrier finally reported a profit, $3.1 million.
Continental's executive offices have had a revolving door. After Alvin Feldman's death, George Warde, a former president of American Airlines, served as Continental's president until December 1982. Stephen Wolf, a former vice president at Pan Am, succeeded him. Phil Bakes came next, taking over in April 1984 and staying until October 1986, when he left Continental to become president at Eastern Air Lines. Thomas Plaskett, who came to Continental from American, replaced Bakes. Plaskett stayed only nine months before he decamped for Pan Am to become president. Martin Shugrue replaced Plaskett in October 1987 after being removed from the Pan Am board of directors, but he lasted only until February 1989 when D. Joseph Corr succeeded him. Corr came to Continental from TWA where he was credited with turning TWA's operation around. But Corr left eight months later, replaced by Mickey Foret, previously the executive vice president for finance and planning at Continental.
Fresh air swept through Continental in August 1990. Scandinavian Airline Systems (SAS), renowned for its fine customer service and esprit de corps, bought the bulk of Lorenzo's stake in Continental Airlines Holdings Inc. for more than $17 million and Lorenzo turned over the helm of Continental to Hollis L. Harris, who retired as president and chief operating officer of Delta Air Lines on Aug. 9, 1990.
Some people felt the changes only could do Continental good. Yet when high fuel prices devoured the cash reserves that normally would service Continental's heavy debt, Harris had no choice but to take Continental into Chapter 11 in December 1990. The move accorded well with the carrier's checkered past.
Continental Airlines seized a high ground in public perception out of proportion to its economic importance when its fate became entangled with that of Texas International, Lorenzo's first airline. Continental until then always was a marginally successful-to-shaky airline that depended in one way or another on government largesse for its better years. An investor looking at the years from 1982 to the arrival of Harris might conclude that the more things change for this airline, the more they stay the same.
Continental Airlines had an operating profit of $8.8 million in the first quarter of 1990 and a total profit, including one-time gains, of $21.3 million. Continental's situation worsened as fuel prices rose and recession crimped sales, and by year's end the carrier had an operating loss of $427 million. Total 1990 sales came to $5.281 billion, compared to $5.077 billion in 1989.
Continental blamed erosion of load factors, RPMs and revenues on the economy, rising fuel prices, fears related to war and terrorism, and the Frank Lorenzo legacy which left Continental strapped with debt and sent Hollis L. Harris searching for the business flier who abandoned the airline.
Harris also sought a buyer for System One after Electronic Data Systems, a General Motors subsidiary, canceled its agreement to buy Continental's CRS. Atlanta-based Worldspan discussed with Continental Holdings its interest in buying the CRS part of Continental's System One in early 1991. System One formerly belonged to Eastern.
The largest part of Continental's debt load was from off-balance-sheet aircraft leases totaling $4.4 billion. Twelve aircraft companies agreed to defer, reduce or forgive lease payments on 98 airplanes in Continental's fleet in a restructuring package worth nearly $190 million in savings for the airline. The leasing debt agreement, while not solving Continental's debt problems, did shave $2 million a month from the carrier's debt service costs.
Continental already had a wisp of good news in January when the Department of Transportation approved the sale of its Seattle-Tokyo route to AMR Corp. for $150 million. And the airline's pilots agreed to forgo a pay raise and defer an incentive payment tied to fuel savings.
Other achievements of Continental after filing bankruptcy:
The carrier added 44 New York-area departures, replacing many of Eastern's Florida runs.
It bought from Eastern six Airbus A-300 planes and 64 slots and six gates at New York's La Guardia Airport.
It launched a new image campaign with plans to spend up to $50 million to repaint planes, change the corporate logo and put employees in new uniforms.
The bad news is that Continental lost $194.8 million in the first quarter of 1991 - $15 7.8 million on an operating basis (excluding costs related to bankruptcy-law proceedings). Continental's total first-quarter loss was only $1.2 million less than that of AMR Corp., parent of American Airlines, which is twice Continental's size.
Continental was the subject of much merger interest despite its less-than-attractive balance sheet. Northwest was one known suitor. President Hollis Harris quickly ended further merger speculation by informing employees in a taped message the company stopped any discussions that might lead to an acquisition by another airline. Also, Harris told employees, Continental no longer would consider selling major chunks of assets: it would remain independent, focusing on expansion, and on upgrading and enhancing its image.
Management's plans, however, were short-lived. Continental confirmed in May 1991 it was talking with several groups about buying part of the company. The carrier sought $600 million in capital and wanted to restructure its $4.5-billion secured debt and more than $2.5 billion in unsecured claims. Continental did arrange in June for $120 million in debtor-in-possession financing, principally from Chase Manhattan Bank.
In a sharp reversal from Harris' strategy, the company announced in August it would ground 22 planes, reduce its flight schedule by 6 percent and eliminate 600 jobs. "We are at war with forces within the company and outside the company," Harris told employees in a taped phone message. "I ask all the people of Continental and all the friends of Continental to join those already praying daily .... God will show us a way to survive." The day after his plea, Harris resigned, reportedly under pressure from company directors unhappy with the airline's spiraling costs. Robert Ferguson, formerly Continental's executive vice president and a lieutenant of Lorenzo, replaced Harris and became the airline's ninth CEO in nine years. Joining Ferguson at the top were two other Lorenzo allies: Lewis Jordan and Charles Goolsbee.
Ferguson and Co. bid a hasty retreat to Continental's "pre-Harris" days; they quickly set about cutting jobs and wages, and selling assets to reduce costs and raise cash. The first casualty: the bulk of the New York La Guardia operation, bought just eight months earlier from Eastern, sold to USAir for $61 million. Ferguson also eliminated 890 management and clerical positions, instituted a pay cut for company officers and imposed a six-month wage freeze on all non-contract employees.
Continental workers continued to bear the brunt of the ailing economy. Management reduced employee wages by $108 million-an average 10 percent reduction per worker-in response to American Airlines' fare initiative. Speculation that continued wage cuts would fuel union interest was tempered when the International Association of Machinists ratified a new collective bargaining agreement with Continental's 6,500 flight attendants in June, the first such pact in nine years. But, months earlier, a group calling itself the Independent Association of Continental Pilots petitioned the National Mediation Board to represent Continental pilots-among the lowest paid in the industry-and pilots at regional affiliate Continental Express.
Meanwhile, Continental began to attract serious investor interest despite its growing labor unrest. An October 1992 USA Today article described the carrier as "the Scarlett O'Hara of airlines" in reference to its "growing bevy of eager suitors What made Continental so attractive? Its three key hubs where it enjoyed a 35-percent market share in Denver, a 78-percent share in Houston and a 50-percent market share in Newark. Also enticing were its low labor costs and position as the fifth-largest U.S. airline based on revenue passenger miles (RPMs). Potential buyers included AeroMexico and Houston-based firm Maxxam's Charles Hurwitz who bid $400 million; Alfredo Brener, whose family controls Mexicana Airlines, who bid $385 million; Air Canada, led by former Continental CEO Hollis Harris, and two Fort Worth investors who bid $425 million; Lufthansa German Airlines and billionaire Marvin Davis who bid $400 million; and Florida Air president Jack Robinson, a former Continental executive, who offered $425 million.
Soon the investor field narrowed to just two. Continental accepted the bid from Air Canada and Air Partners in November 1992, and Continental's creditors approved the company's reorganization plan in February 1993. Continental emerged from Chapter 11 bankruptcy in April after Air Canada and Air Partners L.P. invested $450 million for a combined 54 percent of the company. Air Canada, due to U.S. foreign ownership laws, maintains a 24-percent voting interest in Continental while Air Partners retains a 41-percent voting interest.
Continental Airlines Holdings' net loss in the fourth quarter of 1992 was $14 million with yearend net losses totaling $125.3 million.
The senior executives responsible for Continental's decision-making, operations and maintenance at the time of publication are Robert R. Ferguson 111, president and chief executive officer; Charles T. Goolsbee, executive vice president of corporate affairs; John E. Luth, senior vice president of restructuring, and Donald Valentine, senior vice president of marketing.
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