Texas History 101

December 2004By Comments

For an airline that’s been a part of the commercial aviation market since 1934, Continental Airlines has aged rather well. But the Houston-based company has seen its fair share of financial turbulence. The Airline Deregulation Act of 1978 opened commercial air travel to fierce competition and fueled the need to lower fares and cut costs to stay in business. The airline filed for bankruptcy twice within an eight-year period during the eighties and mid-nineties. And it suffered financially, along with the rest of the airline industry, after the September 11 attacks. Despite all of these obstacles, Continental was named Airline of the Year by Air Transport World, a respected aviation trade publication, in 1996 (just five years after the second bankruptcy) and in 2001. Retiring Chairman and CEO Gordon Bethune was named one of the fifty best CEOs in America by Worth magazine from 1999 to 2001. Bethune perhaps best described the company’s progress in the industry in the title of his book, From Worst to First.

When it first started, the airline was called Varney Speed Lines, after Walter T. Varney, its owner. Operating out of El Paso International Airport, it became Continental in 1937, when Robert Six took over as the company’s new owner. The overseer of the airline for forty years, Six moved the headquarters to Denver, where the company converted military airplanes during WWII. While the majority of the airline’s routes were based in the southwestern U.S. for many years, numerous mergers with other commercial air carriers eventually allowed for Continental to move its center of operations to Los Angeles in 1963. Continental flew American soldiers to Vietnam during the war, and after recognizing the potential for a strong market in the region, founded Continental Micronesia in the late 1960’s.

The first setback to Continental’s success was the Airline Deregulation Act of 1978. Until that point, the Civil Aeronautics Board (CAB) monitored commercial airlines to ensure reasonable fare rates, maintain high safety standards, and regulate competition. The argument for deregulation centered on the concern that the major U.S. airlines—United, American, Eastern, and TWA—unfairly monopolized the market, thus increasing fare prices and shutting out smaller carriers from the competition. Those opposed to the legislation wanted to maintain the monopoly; they were also concerned that nonunion employees and cutting corners on safety to reduce costs would diminish the quality of service if the act was passed. After Congress enacted the law, fierce competition among commercial airlines caused fares to drop and the number of passengers to increase. In 1979, a record 317 million airline passengers traveled in the U.S.

But the high didn’t last for long. Despite the increase in business, deregulation bred conditions for low employee morale and thus a decline in service, just as detractors had feared. Continental’s debts increased. Airline business magnate Frank Lorenzo, the head of Texas International, acquired Continental in 1982, merged the two carriers, and moved the airline’s headquarters to Houston Intercontinental Airport. He took over at just the right time to implement change within the airline—the company’s labor agreements were soon to run out. After failing to negotiate with the airline’s labor unions, he filed for bankruptcy in 1983. This move allowed him to fire union employees and rebuild the staff with non-union employees; he cut wages in half, increased working hours, and denied guaranteed vacations. While his aggressive business practices brought Continental out of debt by 1986, Lorenzo damaged the company’s reputation, both within the industry and among potential passengers. He sold his share of investments in Continental in 1991.

Gas prices rose because of the Gulf War, and Continental filed for bankruptcy for a second time in 1991. Two years later, Air Canada, Air Partners, and Texas Pacific Group invested $450 million in Continental, bringing it out of debt. Bethune signed on in 1994, and under his leadership the airline downsized, closed its expensive Denver hub, acquired its first Boeing 777, expanded international routes, and created new partnerships.

Then the events of September 11 all but crippled the commercial aviation industry. Within Continental, long-term flight schedules were altered and the airline stopped operating in ten of its cities. The government gave Continental $400 million as part of the Air Stabilization Act in an attempt to compensate for lost business, but it still wasn’t enough. Later that month, Bethune, along with President Larry Kellner, volunteered their salaries for the rest of 2001 to help the company stay afloat. Despite the financial trouble, Continental offered discounted fares to New York to assist family members of victims, relief workers, and volunteers. By the end of the year, the company was named the official airline of the New York Knicks and announced a third-quarter profit.

Air Transport World currently ranks Continental fifth in its 2004 top twenty airlines list; American Airlines is first, United is second, and Delta is third. This past September, Continental joined SkyTeam, an airline alliance of nine international companies that offers 14,320 departures to more than 650 destinations every day. When Bethune retires at the end of this year, Kellner will take his place.

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