THE CHANGE OF CEO AND THE

TURNAROUND STRATEGY OF
CONTINENTAL AIRLINES
BEFORE 9/11

BY: HUSSAIN HAKIM ALI KHAN

ID CARD #: 2011-1-92-13523
 INTRODUCTION
 COO and President: Gordon Bethune
a. He was a licensed airline pilot, qualified to fly Boeing 757 and 767 jets
b. He had an airframe and power plant mechanic’s license
c. Maintenance facility manager at both Braniff and Western Airlines
d. Senior Vice President of operations at Piedmont Airlines in the 1980s

 Situation when he joined Continental Airlines (1994)

i. Though, it was fifth largest airlines in terms of revenue, it reported net
loss every year since 1985.
ii. Ranked 10th (last) among US airlines in operating profits and
customer satisfaction.
iii. Operating issues.

 Bethune thought that he lacked the clout to implement sweeping changes

that he thought were necessary.
 THE CRISIS AT CONTINENTAL
AIRLINES IN 1994
 Continental airlines had gone into bankruptcy protection twice i.e. in
1983 and 1993
 Shaky finances and struggling with profitability.
 Ranked 10th amongst airlines in on-time arrivals in 1993
 Highest number of baggage mishandling per 100,000 passengers.
 Complaints were thrice the amount of industry average.
 Passengers denied boarding due to overbooking
 CEO’s changed 10 times during the past 10 years.
 1993 – wages and salaries had to be cut as part of measures to rid of
unions
 Turnover and sick time were high.
 Low morale and motivation of workers.
 Blame game and infightings among employees
 Angry customers as gate personnel and ticket agents on receiving end.
 THE CRISIS AT CONTINENTAL
AIRLINES IN 1994
 Remove insignia

 In late October 1994,- After threat of Bethune leaving Continental, BOD

promoted him to the position of CEO, thus retaining him and allowing
him to implement his strategies, that was currently difficult to implement
due to distrust between Bethune and the current CEO.
 GO FORWARD PLAN
 Open Door Policy
 Hiring of Greg Brenneman, a turnaround strategy expert.
 Greg Brenneman manages the maintenance segment of the business since
it had the highest cost and the lowest dispatch reliability in the
industry.
 A new direction and plan was needed to guide Continental out of current
crisis.
 Go Forward Plan worked on four major areas:
i. Market plan to fly into more profitable routes
ii. Financial Plan to recover the company in1995
iii. Product Plan to transform the company’s culture
iv. People Plan to transform the company’s culture.

 These four parts were to be implemented in concert.

 THE MARKET PLAN: FLY TO WIN
 The guiding principle – stop doing things that costs or cause to cost money
to the organization and to concentrate on airline’s market strengths.
 Problem: 18% routes had low fares and point-to-point routes where it
had low market shares.
 Continental Lite - Low fares and no-frills operation was modeled after
Southwest Airlines, that was a money loser.
 Strategy before the Bethune’s era – Continental Lite:
i. Replaced first class seats with coach seats in 100 of Continental’s Boeing
jets
ii. Painting the planes with Continental Lite to identify the product.
iii. Point-to-point routes that were underserved, offering a number of flights in
each route
iv. Not serving meals on flights of less than 21/2 hours.
v. Flying planes from early morning to late night to generate as much
revenue per plane as feasible.
vi. Large Airbus 300 planes that were expensive to operate, required special
maintenance procedures and lease payments of up to $200,000 a
month.
 THE MARKET PLAN: FLY TO WIN

 Bethune’s diagnosis

 Moves by Bethune:
i. Hub-and-spoke operations – new spoke locations that attracted
higher traffic
ii. Drastic cutbacks in late flights
iii. Closing the company’s Greensboro, North Carolina hub due to stiff
competition from other airlines and focusing on Continental’s hub in
Newark, Cleveland, and Houston. Also, intra-Florida routes were cut
as wells as Kansas City to Omaha with flights direct from Houston hub
iv. Raise fares on Continental’s routes.
v. Disposing off A300 planes – the loss control due to lease was
incorporated into financial plan; the seat capacity was also reduced.
 THE MARKET PLAN: FLY TO WIN
 Advantage of Marketing Plan:
i. Better position the airline in higher traffic markets
ii. Allow maintenance to be performed more sensibly and economically.
iii. Make it possible to reallocate resources into strengthening Continental’s
hub operations
iv. Improve the company’s overall load factor.

 Efforts to attract passengers:

i. Focus on business travelers
ii. Going hat in hand to all the travel agents, apologizing to prior mistakes – due
to abolishment of favorable features such as One Pass frequent flyer program
and arranging for coupons and other inducements that would get the travel
agents board Continental flights – promising them on-time performance
and passenger satisfaction level improvement.
iii. Reintroduction of One Pass frequent flyer program.
 THE FINANCIAL PLAN : FUND
THE FUTURE
 Condition before Bethune’s era:
 Strapped of cash and burdened by debt
 $2 billion hangover from the bankruptcy proceedings in 1993
(Chapter 11)
 Owed considerable money on aircraft fleets.
 Hence financial upliftment entailed a robust financial plan, that
was formulated by Bethune in 1995.
 Financial plan:
i. Renegotiation of aircraft lease payments
ii. Refinancing some of the debts of Continental at lower interest
rates.
iii. Postponing some debt repayments and,
iv. Raising fare on certain routes.
 Projections: Profit of $45 million in 1995 and sufficient cash
inflows.
 THE PRODUCT PLAN : MAKE
RELIABILITY A REALITY
 Three-pronged objectives:
Quantum improvement in:
i. airline’s on-time performance – rewarded employees $65 bonus
each month that Continental was in top 5 rank in the on-time flight
performance category, as per the US. DOT
ii. Baggage handling
iii. Overall flying experience
The People Plan : Working Together
 Bethune was convinced that a successful turnaround at Continental
hinged on getting Continental’s employees (i) working together and (ii)
creating a positive work environment.

 They ran the idea of changing the corporate culture in a board meeting
by Continental’s chairman, coworkers they trusted, and by friends and
family.

 Culture changing effort was general and conceptual rather than list of
specific action proposals.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 BETHUNE’S FIRST STEP AS CEO:
 Setting alight the company’s manuals containing strict rules and
regulations to be followed to be replaced with freedom to operate airline
management and operations in any way but within rules.
 Closing of Los Angeles maintenance operations – 1800 personnel worked
at Los Angeles
 September 1996 - Bethune appointed Brenneman as president and
COO, with himself appointed as CEO and chairman.
 Open door policy and casual dress Fridays
 No Smoking flights
 Fresh paint job on all the airplanes operating.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 EXECUTING THE ‘FLY TO WIN’ MARKET PLAN
I. Collaborative efforts with the travel agents
◦ Upon reaching a certain trade volume of tickets sold or sales target reached, the
agents would be compensated above the level of commissions.
◦ Programs involving upgrades to first class and discounts for certain trade volumes
were created for travel agents to use in marketing Continental to large corporations.
II. Targeted leisure and business travelers
◦ As Brenneman used to call them “backpack and flip-flop” crowd and “coat-and-tie
crowd” – they are willing to pay higher charges in order not to take chance with their
comfort and convenience
◦ Letters to CEO, middle managers and sales representatives
III. Growth of hubs
o Addition of more units from its hub and addition of more flights to destination
o Expansion in international markets
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
IV. Distribution channel for marketing tickets
o E-ticketing to 95 percent of its destination
o Continental partnered with United, Delta, American, and Northwest to create a
comprehensive travel planning website called Orbitz (www.orbitz.com) that offered
airline tickets, hotel reservations, car rentals, and other services.
 Continental Express:
o After 1996, Continental Lite was phased out and management decided to form a feeder
hub called Continental Express
o It operated as a distinct subsidiary with its own president.
o By 2000, it expanded its operation to include 1000 daily flights to 70 cities in US, 10
cities in Mexico and 5 cities in Canada.
o Frequent services to small cities
o Phasing out of turboprop aircrafts and using regional jets exclusively by 2004.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 Bethune’s Row 5 Test
◦ Aimed for “better performance” and “better services”
◦ Did not mind costs unless it provides “value for money”
◦ Hypothetical 5th row passenger
◦ Keeping the floors clean
◦ Preferred clean, safe, reliable service from well-managed hubs
◦ Convenient flight schedule to places customers wanted to go
◦ Amenities that makes the travel experience
◦ Desirable frequent flyer benefits.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 EXECUTING THE FUND THE FUTURE FINANCIAL PLAN
 Aftermath of the risk of bankruptcy
 Strategies followed:
i. Renegotiate aircraft lease payments
ii. Refinance some of Continental’s debt at lower interest rates – saving
$25 million annually.
iii. Stretch out debt repayments on loans from 3 years to seven or 8 years
and,
iv. Raise fares on selected routes
 1994 - $202 million in interest costs
 1996 – $117 million interest costs and expected to go lower
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 Refund of $70 million Continental’s deposit from Boeing - $29 million got
returned.
 Cash flows were further enhanced by the efforts of the company’s vice
president of purchasing and materials services to sell excess parts
inventories and renegotiate maintenance contracts.
 Code-sharing agreements
 Appointed Larry Kellner to overhaul the finances
 Under Kellner
 Developed system that allowed regularly updated estimates of revenue,
costs, profits and cash flows
 Hedging (Fuel)
 1996-1998 – (i) reduction of training and maintenance cost by reducing
the number of different types of aircrafts making up its fleet
 It was further reduced by purchase of Boeing
 Employee benefits scheme and wage raise
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 The Alliance with Northwest Airlines
 Northwest Airlines purchased 8.7 million common shares of
Continental Airlines giving it voting rights and forming a basis of global
alliance between the two airlines.
 Features of the partnership:
i. Code sharing
ii. Sharing of executive lounges
iii. Reciprocal frequent flyer programs
iv. Joint marketing activities
v. U.S Department of Justice filed suit against the violating companies, that
supposedly violated Section 7 of Clayton Act and Section 1 of
Sherman Act
 The Alliance was continued while the case was pending.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 EXECUTING THE MAKE RELIABILITY A REALITY PRODUCT PLAN:
 Boosting on-time performance
 Bethune reckoned on-time performance as the sole measure of customer satisfaction.
 $65 bonus was awarded to employees who did better in on-time performance.
 $5 million spent on taking care of the customers missing flights – including bonuses
to employees
 Rankings according to on-time performance earned by the company:
 7th – Jan 1995 (the year of introduction of the scheme)
 4th – Feb 1995
 1st – March 1995
 1st – April 1995
 May, June and July – worker slowdown by pilots that got solved after negotiations with
pilot unions
 2nd – August 1995
 3rd – October 1995
 4th – November 1995
 1st – December 1995
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 Bonus increase to $100 if they attain rankings of 3rd or higher
 Other airline’s on-time performance ameliorated and thus Continental
changed the prerequisite for gaining $100 bonus by setting a standard of
above 80% or above on-time performances.
 In 2000, that bonus pay structure changed - $100 on 1st position and $65
bonus on 2nd or 3rd position or on-time performance of 80% or above
 Total cost to company in bonuses in 2000, where the company paid
bonuses in 11 out of 12 months - $39 million
 During 1995-2000, employees were paid $157 million bonuses (on-time)

 Route revisions made

 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 Improve Baggage Handling
 Baggage mishandling increased concurrently with improved on-time
performance
 Bethune emphasized the importance of baggage handling
 Soon thereafter baggage handling improved
 The motto of Make Reliability A Reality Product Plan was to depart
passengers with a full supply of meals, all its passengers, and all their bags
– and then should arrive on time.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 To expedite answering of phone calls from customers, three measures
were taken
i. Adding more agents
ii. Upgrading reservation software system
iii. Calls involving flight status and other standard questions that did not
require speaking directly to a reservations agent were automated.
 The Survey results according to customer preferences were factored
in while offering their products
 In-flight phones
 Bigger overhead bins - $12 million dollars spent
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 EXECUTING THE WORKING TOGETHER PLAN:
 The managers believed that employees would “give away the store”
by pressing to purchase new airplane parts and give them free reins to do
anything post burning of the manuals.
 Bethune believed looked at the positive side.
 Profit-sharing bonuses shared with employees will result in a positive
attitude in the employees.
 Continental paid employees $545 million during profit-sharing
agreements
 Checklists made for pilots, crews, and maintenance technicians.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 Open Communications and Teamwork
 800 voice-mail number directly to Bethune’s office to employees to
address their problems.
 Another 800 line was set up for technical operations problem that
provided 24/7 services.
 Hotline employees could call for information about pay, benefits and
their 401 (K) programs.
 To keep employees updated company intranet and email system was
in place.
 Furthermore three-minute voice mail message from the CEO, a
newsletter called Continental Times, and company publication called
Continental Quarterly was mailed to employees’ homes
 600 bulletin boards in employee break rooms, high traffic hallways
and common rooms and posting of newsletter on same area of
bulletin board.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 Open Communications and Teamwork (Contd.)
 Streaming LED display message
 All the plans i.e. Fly to Win, Fund the Future, Make Reliability a
Reality, and Working Together – were always discussed in the same
orders at employee meetings, in company publications, and bulletin
board postings
 Agenda at the bi-weekly management committee meetings were
also structured according to four elements of the Go Forward Plan.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 The Culture-Changing Effort
 According to Bethune, the keys for changing corporate culture were for
management to act differently, for the company to treat its people
differently, and for the management to look closely at what it was like
to change things that were unpleasant for the employees
 Employee evaluation on 1 to 4 ranking.
 Fluid ratings
 October 1995, middle managers were laid off with a 4 rating
 Outside managers were introduced into the organization that replace
disgruntled or retired managers.
 Attractive salary and bonus package
 Continental executives got bonuses based on Continental’s overall
performance and partly on achievement of individual goals.
 Another vision of Bethune for departments to work cooperatively, esp.
in the areas of scheduling, flight operations, and aircraft
maintenance., something that was lacking pre-Bethunes’ time.
 THE IMPLEMENTATION AND
EVOLUTION OF “GO FORWARD
PLAN”, 1999-2000
 The Culture-Changing Effort (Contd.)
 Perfect attendance incentive – company saved $20 million in
absenteeism
 Employee morale was highest in the industry, according to managers.
 Business philosophy: “What gets measured is what gets managed”
CONTINENTAL AIRLINES IN 2001
 RECOGNITION AND AWARDS:
 1996 and 2001 – Airline of the Year award – First airline to receive
this award twice within a five year period.
 OAG declared Continental Airlines as Best Trans-Atlantic Airlines and
Best Airline Based in North America
 Marketing Information firm J.D. Power and Associates had named
Continental as top in customer satisfaction for four of the five years.
 In 2000 and 2001, Continental was named 2nd most admired US
airlines by Fortune magazine.
 Worth magazine, in its April 2001 issue named Gordon Bethune one
of the 50 best CEOs for third consecutive year.
 In June 2001, Aviation Week and Space Technology gave
Continental its highest rating for “outstanding management”