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Blaming Sept. 11 

Questionable deals left Continental vulnerable before the attacks.

To recapture its soul, Continental paid dearly. - WALTER  NOVAK
  • Walter Novak
  • To recapture its soul, Continental paid dearly.
At Continental Airlines, the days of Frank Lorenzo seem long ago. In 1983, Lorenzo, who owned the company, declared bankruptcy chiefly to repudiate wage agreements. Continental slid into bankruptcy again in 1994.

But under Chairman Gordon Bethune's plainspoken leadership, it emerged to become regarded as one of the nation's best-run airlines. It posted 26 consecutive quarters of profitability and shared the wealth with employees, discounting day care and offering incentives for attendance and on-time arrivals. Fortune named it one of America's best employers three years running.

"We've really turned around," says Julie Frietchen, the union rep for the company's Cleveland-based flight attendants. "People love to work for Continental."

So why, after the September 11 attacks, was Continental one of the first airlines to plead poverty? Recent deals left the company vulnerable.

In 1998, Continental -- which accounts for 60 percent of the departures at Hopkins -- formed an alliance with Northwest Airlines, under which they would feed each other passengers. A few months later, Northwest bought a controlling stake in Continental from a partnership headed by financier David Bonderman. The purchase, for $430 million in cash and stock, protected the alliance and prevented Delta Air Lines from swallowing Continental whole.

The Department of Justice saw the transaction as a takeover. It filed suit, claiming the merger would lead to higher ticket prices and reduced service. "There was no way that deal was going to go through," says Richard Gritta, a University of Portland business professor who studies aviation.

But what the government sought to put asunder was not a blissful marriage in the first place. Last year, some Continental leaders began to see Northwest's ownership stake as a millstone. One executive complained to The New York Times that Continental was struggling to hire and retain good workers, who feared they would eventually toil for Northwest, where employee morale is less than model. (Phone calls to Northwest were not returned.) Shortly before the antitrust trial was to begin last November, Continental bought back the shares, and the feds retreated.

To recapture its soul, Continental paid dearly. The buyback cost $450 million, a price 29 percent above market value. Yet Northwest retained the marketing alliance and the power to nix a takeover by another airline. Bonderman, who still held the right to bid on the shares, received additional Continental stock and a $10 million fee for stepping aside. This summer, he cashed in most of his holdings. Between the stock deals and a slowing economy, Continental's financial position became much more tenuous.

Then came September 11. Planes were grounded for two days; when the skies reopened, passenger cabins went half-empty.

Airlines have enormous fixed costs -- planes, payroll, fuel -- and the drop in demand fell like an anvil. The industry announced 80,000 layoffs within 10 days. Continental finished the month flying 32 percent fewer passengers than it did in September 2000. Before Congress approved a $15 billion industry bailout, analysts said it would be one of the first airlines to run out of cash.

September 11's devastation was unforeseeable, though opinion varies on how much Continental contributed to its own problems. New York Times business columnist Floyd Norris ripped Continental's deals in articles before and after the attacks. Norris believed common shareholders were the losers prior to September 11; afterward, he suggested taxpayers got stiffed as well. "Perhaps Mr. Bonderman, who made a fortune from Continental, should join in its bailout," he wrote. "And Congress should ask whether a board that defied a government antitrust suit -- and then used needed cash to pay greenmail -- is fit to run a government-supported airline." (A Bonderman spokesman declined to comment.)

Gritta is equally scornful, though he reserves his shots for the industry as a whole. He describes airline executives as a "bunch of bandits" who leverage the hell out of their companies in good times and clutch a tin cup in bad. "If you or I financed our personal lives that way, we'd be sent to the loony bin."

Others aren't as quick to point fingers. Indiana University professor Clint Oster was to testify on behalf of the government in the antitrust suit. While spooked by the outright merger of Northwest and Continental, Oster says the marketing alliance has been good for both, and that Bonderman was bound to enjoy the spoils of Continental's rebirth. "Bonderman was being rewarded for financing the Continental turnaround," he says. "He made out, no matter what."

Continental spokesman Rahsaan Johnson waves away critics who say the airline was more fragile than its brethren. "Out of the 10 major airlines, there were 10 that were headed for bankruptcy," he says. As for Northwest deals, "I would not say that being able to control your own destiny hurt the company."

After the attacks, Bethune and Continental President Larry Kellner pledged to forgo compensation the rest of the year. Neither executive, though, will likely shop the generics aisle as a result: Bethune made $5.5 million in 2000; Kellner, $3.7 million. Gritta calls the gesture "a crock of shit." He wishes the government bailout had come with stipulations that encourage competition, such as reducing the near-monopolies of gate slots some airlines hold. "It's like football. You don't realize how good you are until you're challenged on the field."

And what of the workers? Continental says it will lay off 11,000 employees. Of those, about 1,200 are Cleveland-based, though only half actually live in the area; the rest commute in from homes as remote as Denver. Pilot Marty Shupp, a Medina resident, is still flying, though he's being reassigned to the regional carrier Continental Express. It's essentially a demotion from the major leagues to Triple-A, where he will command smaller planes on shorter routes for less money. He expects a 40 percent drop in pay. "We went from being the best airline in the industry to furloughing pilots," says Shupp. "We're shocked."

Shupp doesn't blame Continental; neither does Mark Frey, the secretary-treasurer of Teamsters Local 964, which represents Continental mechanics. Frey says the net reduction of his crew will be minimal -- between 10 and 15 mechanics from a staff of 340. "Continental is a very good company," he says. "They're well managed, and they stay on top of things."

Frietchen says 40 Cleveland-based flight attendants will be laid off, and 211 have accepted a one-year leave of absence. She also doesn't believe Continental could have weathered September 11, "no matter how much money you've made over the last year." Or spent on greenmail.

More by David W. Martin

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