Up in the Air
How the CEOs of American, Continental, and Southwest Airlines are navigating the uncertainty of the world since 9-11.
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“YOU LIKE TACO BELL?” Gordon Bethune, Continental Airlines’ chairman and chief executive officer, asks me as he leads the way through bustling Terminal C at Houston’s George Bush Intercontinental Airport. Usually CEO lunch interviews are bland, catered affairs with finger sandwiches or something equally boring served in a stiff corporate setting. But Bethune—whom no one would ever accuse of being bland, boring, or stiff—likes his power lunches a bit spicier and more egalitarian. Not to mention cheaper, especially in the cost-cutting frenzy following September 11.
“Are things really that tough in the airline business?” I ask, only half-joking.
“Hell, I can’t even afford to buy my lunch anymore,” Bethune shoots back with a laugh, his ruddy complexion growing even redder under a fringe of gray hair. As flight attendants and pilots pass the tall man in the dark suit and the pink tie with comical little cows marching across it, they wave and call out, “Hi, Gordon.” Bethune stops to chat for a moment—he seems to charm them all—then he bellies up to the Taco Bell counter in the airport’s fast-food concourse and orders three crispy beef tacos. Sure enough, Ned Walker, Continental’s senior vice president of worldwide and corporate communications, whips out some cash to pay for them.
Bethune is only half-joking himself about needing a handout at lunchtime. After the terrorist attacks dealt a devastating blow to the airline industry and Continental announced that it was laying off more than a fifth of its workforce, he gave up his salary for the fourth quarter of 2001 (he had made a total of $966,000 in 2000) and kissed his bonuses good-bye (which last year totaled over $2 million). He was also the first airline executive to say flatly that the airline business was heading toward bankruptcy after 9-11 and to appeal to the Bush administration for financial assistance—a move for which he was applauded by some and attacked by others. “I’ve kissed so much ass in Washington that I need to buy Blistex by the barrel,” he says.
I sought out Bethune because he’s known for saying bluntly and publicly what other airline executives are only thinking. But I was also on a larger quest. I wanted to find out what was going on in an industry that seemed to find itself almost instantly insolvent in the aftermath of the terrorist attacks. Security lines were lengthening, millions of Americans were vowing not to fly, and revenues were in free fall. So I decided to interview the CEOs of the three major airlines based in Texas—Continental’s Bethune, Southwest’s Jim Parker, and American’s Donald J. Carty—and ask each of them three questions: First, when are their airlines going to start making money again? Second, how have their companies changed to cope with a crisis that has already caused them to cut 32,000 jobs? (American and Continental have cut 20,000 and 12,000 respectively; Southwest so far has resisted cutting any jobs.) Third, has the airline business been irreparably harmed? It was a testament to just how chaotic the industry has been lately that it took me a full three months to set up those interviews.
To the first question, the three had different answers. Bethune is the optimist. He predicts that Continental will start showing a profit again as early as March. In December the airline was losing at least $3 million a day. Jim Parker, Southwest’s CEO, says he thinks it will be summer before the industry starts to turn a profit. He couldn’t promise that Southwest would make money in the fourth quarter; a quarterly loss would be its first since 1991, during the Gulf War. But the consensus among securities analysts, according to Thomson Financial/First Call, is that Southwest will be back in the black in this year’s first quarter, albeit with a slim profit of only 5 cents a share. Donald Carty is the most pessimistic, perhaps in part because his airline was hit harder than Continental and Southwest (American, of course, lost two jets in the terrorist attacks, in November lost another airplane in a crash in Queens, and in December had a bomb scare aboard a transatlantic flight). “I’m fairly hopeful that by midyear we’ll see some recovery in the economy,” he tells me. “But I’m more inclined to think it will take longer to get back to profitability.” American’s parent, AMR, reported its biggest quarterly loss ever in the third quarter of last year—$414 million. By the end of the year it was bleeding almost $10 million a day.
If the terrorist attacks proved anything, it was how quickly fortunes can turn in the airline business. Just over a year ago, Bethune, Parker, and Carty were all cruising at high altitude. Continental was racking up accolades and profits as one of the best-performing airlines in the business. Parker was piloting the industry’s most consistently successful airline along with president Colleen Barrett, who is now the top-ranking woman among the major airlines. And Carty, who had succeeded the abrasive but brilliant strategist Robert Crandall at American, was finally starting to put his mark on the airline with mergers, including the megadeal he spearheaded last year to buy ailing TWA. But because of the events of 9-11, Carty may be best remembered as the guy who steered American through its worst crisis ever.
Whenever the airlines do recover, one thing seems certain. They won’t be the same, nor will their CEOs, whose management styles have been placed under a magnifying glass and who have added another role to their job descriptions: chief consoler and hand-holder. Bethune says he now spends more time listening to employees and communicating with them. Every Friday for the past seven years he has recorded a message that employees can hear by dialing a toll-free phone number. In the week after 9-11, he was doing it every day. “People didn’t expect us to have all the answers; they just wanted to know we had some direction,” Bethune says. “It made them feel better. And every day, I told them what I knew.”
Continental has trimmed its passenger capacity about 20 percent because of shrinking demand. But Bethune says he won’t cut costs so deeply that he eliminates amenities that customers want and will pay for. He thinks some competitors have made a big mistake by taking newspapers and food off some flights. “That’s like taking the cheese off the pizza,” he says. The airline is also going ahead with plans to expand its terminals at Bush Intercontinental and to improve its hub in Newark, New Jersey.
Southwest has weathered the storm far better than either Continental or American. It was able to quickly restore almost all of its flights after the attacks grounded the country’s planes. The most noticeable change is that the Dallas-based airline has toned down its famously offbeat style. No more in-flight antics, no more big company parties, and no more tongue-in-cheek commercials, at least for a while. But Southwest’s loyal customers are returning, Parker says, and are even reaching into their pockets to help out Southwest. “Some of them were sending us five-dollar bills and twenty-dollar bills, or turning in their receipts for ticket refunds and saying, ‘We don’t need a refund. We just want to be sure you guys are going to keep flying,'” Parker says. And Southwest’s formula for success—short-haul, high-frequency flights and quick turnarounds—has certainly been tested in the more cautious market. “Our number one priority right now is to be sure that people don’t have to stand in long lines when they go to the airport,” Parker says.
American, though, is the airline that stands to be the most transformed by tragedy. It has lost by far the most employees. Certainly Carty has had to deal with more catastrophes in one year than most airline execs deal with in an entire career. “I’ve always been someone who worries more about things I can control than things that I can’t control,” Carty reflects. “I think that disposition has been a blessing to me and helped me get through this.” One thing Carty has exerted control over is the relationship between management and employees during the crisis. American has had some bitter disputes with its labor unions in the past, but Carty and American’s officers and board of directors scored points with workers after the terrorist attacks by giving up all or part of their compensation for the rest of 2001. “Thousands and thousands of people in our company were being affected by this,” he explains. “We had almost forty people killed. An awful lot of employees lost their best friends. We had the layoffs, but in addition, thousands of our people who were full-time are now part-time. Our pilots’ take-home pay is less. As a management team we needed to participate in the economic pain and not be above it all.” And Carty isn’t about to write American’s epitaph. The airline has one of the strongest cash positions in the industry—$3 billion in cash and an additional $5 billion in unencumbered assets like airplanes that it could mortgage if necessary.
Of the three airline executives, Bethune seems to be the least ruffled by the industry’s nosedive. That may be because he’s used to hard times. After all, when the former airplane mechanic and Boeing exec took over Continental in 1994, the company was emerging from its second bankruptcy with a reputation as one of the worst carriers in the business. But Bethune says he at least had some steering power in that crisis. “This one is worse in that we didn’t have any control,” he says. Bethune caught flak from critics of the government’s $15 billion package to bolster the airline industry. He had been the first to request it, saying, without mincing words, that the airlines would go bankrupt without help. “When we took a look at our business plan and couldn’t figure out how the money we had was going to get us to next spring, then we said we ought to just stop right there—cut half of the staff, not twenty percent, and protect the remaining employees and remaining shareholders. ‘Cause you’re going to destroy the company just running it out of fuel at forty thousand feet.” Bethune bristles at the idea that he was claiming in September that the airlines were broke. “We said we were going to seek recourse in the courts,” he says. “And the guys in Washington said, ‘You must be broke.’ My answer was ‘We’re not broke, you stupid s——. We still have plenty of fuel, but we ain’t going to make it unless the government comes in.'”
Which brings me to my final question: Has the airline business been permanently harmed? “No way,” Bethune retorts without any hesitation. “This country, this world, doesn’t work without it. There is no economy without airlines. Airfreight runs the world. There is no Honolulu without an airplane. This is a very complex system. If you take it down, you can’t build it back up overnight.” Parker also answers no but says that the airline industry is still facing “the worst financial crisis of its history.” Southwest, he quickly adds, is “well positioned to survive this and to prosper.” And Carty says that American’s market research has concluded that consumers’ fear of flying after 9-11, while significant in the immediate aftermath, has dissipated.
Considering how bleak things looked in mid-September, that’s not bad news at all.