Gordon Bethune, the legendary CEO that turned Continental Airlines around when it was teetering on the brink of collapse, is one of the most acclaimed and colorful airline executives in U.S. history. Bethune left his operations executive position at Boeing in February 1994 and joined the troubled airline as Chief Operating Officer in the nick of time: at that point, Continental ranked dead last in on-time arrivals and lost baggage. They did rank #1 in one performance metric, however: customer complaints.
Prior to Bethune coming on board, Continental had ten chief executives over a two year period who all resigned or were outed from their positions. During that time, the airline filed for bankruptcy not once, but twice. Previous management employed a strategy of union busting and paying employees substandard salaries. Management was constantly at odds with workers and a former CEO went so far as to completely void union contracts.
Union Busting and Threats
At one of its lowest points, in January 1981, Texas International Airlines made a bid to acquire Continental. TIA made the offer even though Continental already had plans to merge with Western Airlines. TIA already owned almost 10% of Continental’s shares and threatened to vote its shares against the planned merger with Western. Meantime, the hostile situation with TIA CEO Francisco Anthony “Frank” Lorenzo grew worse. Lorenzo was feared by employees and for good reason.
Lorenzo was the former head of Eastern and was well known for instituting cost cuts, requiring pilots to fly excessively long hours, delaying aircraft repairs and outsourcing maintenance work to cheaper, less experienced outside contractors. Pilots, machinists, and flight attendants were often fired for not adhering to strict and arbitrary absenteeism rules and Lorenzo went so far as to fire some whistle blowers for allegations of insubordination and unsubstantiated claims of drug use.
Gunmen on the Ramp at the Miami Airport and a CEO’s Suicide
Eastern flight attendants and pilots unions went on strike in March 1989 after negotiations failed to produce labor agreements. Meantime, according to Eastern Airlines pilot James L. Caufman, private security forces entered the ramp at the Miami airport with guns and removed machinists from their jobs. Caufman witnessed the illegal lockout from the cockpit of an A-300 he was in at the time, parked on the ramp. Thousands of non-union employees were laid off.
Lorenzo was a known union buster who went head to head with Continental Chairman Alvin L. Feldman who strongly objected to TIA’s acquisition of Continental. An employee group lawyered up in an effort to halt the take-over but financing for the group fell through. Meantime, TIA wound up acquiring 49% of Continental’s shares. As Continental was preparing to publicly announce the acquisition, Feldman committed suicide in his LA office. In November, the legal battles were over and Lorenzo was elected to Continental’s Board of Directors. Even though TIA was the parent company, the merged airlines operated under the Continental brand name.
Post-Merger Bankruptcies Kept Continental Struggling
After the merger, Continental and its mechanics union could not reach a labor agreement after 19 months of negotiations and a strike ensued in August 1983. The airline continued to operate but filed for Chapter 11 bankruptcy a few weeks later and laid off 65% of its workforce. Of course, the bankruptcy filing meant any existing union contracts were null and void. Lorenzo and his management team claimed high labor costs would force Continental to go out of business; while the unions said the bankruptcy was a shady legal maneuver intentionally filed to void union contracts.
In 1984, Continental started to operate profitably once again but bankruptcy protections remained in place until 1986 and agreements had to be worked out with creditors to pay off debt over a decade-long period. At that time, Continental’s pilots received an average salary that was 30% to 50% lower than before the bankruptcy filing.
Continental emerged from bankruptcy on June 30, 1986 and in October of that same year, former American Airlines Senior VP Thomas G. Plaskett became CEO. Shortly afterward in early 1987, Continental merged with Frontier, People Express, New York Air, and several commuter airlines and became the third-largest U.S. airline with hubs in New York, Houston and Denver. The hasty mergers led to a very high number of customer service complaints, however, so Plaskett was removed as CEO and Lorenzo resumed his position as head of the airline.
Lorenzo consolidated the acquired airlines into one system and saddled Continental with mounting debt. By 1990, Continental was filing for bankruptcy once again, blaming its problems on the cost of interest on its debts and jump in fuel prices because of the Gulf War. Continental Airlines was $2.2 billion in the red thanks to Lorenzo’s fast growth now/pay later strategy. Later that year, Frank Lorenzo was forced to retire and sell his controlling stake in Continental Airlines’ to Scandinavian Airlines Systems.
Continental’s Recovery – Going Forward
When Gordon Bethune assumed control in 1994, Continental Airlines had several black eyes and was on the verge of filing for bankruptcy a third time. Bethune had completed an Advanced Management Course at Harvard Business School and laid out a plan before the Board of Directors, but at first, the Board was reluctant to make him Chief. After six months in a high-level operations position, Bethune won them over with a plan developed with Continental consultant Greg Brenneman. The plan outlined complete change instituted by a new leader, not an interim manager or committee. It was called the Go Forward plan and included product, finance, people and marketing changes.
Go Forward was put into action and Bethune opened the door of his executive suite to all employees, as a way to eliminate the “us-versus-them” culture that had developed under previous managers like Lorenzo. Bethune says, “We sent word into the field that henceforth we wanted our employees to use their judgment, not follow some rigid manual. When faced with an atypical situation, employees were instructed to do what was right for the customer and right for the company.”
The newly minted Continental CEO took control of cutting costs, controlling pricing, and implemented new marketing programs. The “Fly to Win” marketing plan focused on achievement and involved apologizing to travel agents for past regressions and offered them fair commission payments so they would start booking passengers on the airline again. Part of the new marketing plan involved dropping unprofitable routes and a general stance against anything that didn’t make money.
Under “Fund the Future,” the new financial plan, Bethune updated the financial system so he was always aware of how much money was being earned or lost daily. He renegotiated leases, postponed payments, improved Continental’s pricing structure and refinanced debt to avoid bankruptcy. He stated, “The first step in making a profit is to stop doing the things that are specifically causing you not to make a profit. Stop doing the things that lose money. To stop losing money, one of the things we had to do was stop flying that 18% of our routes.”
The star CEO also implemented the “Make Reliability a Reality” program aimed at improving service. Basic improvements were implemented, like prompt baggage service and on-time arrivals. Bethune used on-time percentages from the Department of Transportation as measures of reliability.
The Turn Around Plan
On a very basic level, Bethune simply treated people better and was able to overcome in-fighting between employees and departments. Reflecting on his predecessor years later, he said, “to be honest, the deal culture that had started with Frank Lorenzo still existed at Continental. Deal makers look at problems and think deals. To deal makers, the solution is always more deals.” To counter the negativity, the new management team went so far as to open up the company’s books to employees so they could see the truth, including why there may be layoffs and why pay raises might be delayed due to iffy finances. He then offered employees a $65 bonus every time the airline was ranked in the top five for on-time arrivals and performance as measured by the government.
Under the Go Forward Plan, the airline began to turn around. Customer service complaints turned into glowing reviews. All 200 planes in the fleet got a sleek new look and were painted the same way. Prior to that, Continental was flying five different liveries from the merged airlines. The result of the new uniform look for all Continental aircraft was a visual message that said the carrier had become professional and a better operator.Bethune got rid of 18% of Continental’s routes because they were cash negative and shifted the airline back to a hub system, which means rather than flying from smaller cities to large ones, he placed focus on popular destinations and increased fares. In no time at all, Continental was earning more revenue while flying fewer planes.
A path towards success
The result was a resounding success. By making major changes in the day-to-day operations and corporate culture, Bethune helped Continental turn the corner toward profitability. He tried to make Continental a place where employees would be happy to work, placed real emphasis on customer service, streamlined the carrier’s image, and made hard decisions to cut unprofitable routes. Continental’s stock price rose from $2 to over $50 per share under his leadership. Fortune Magazine named Continental Airlines among the 100 Best Companies to Work for in America for six years in a row.
Gordon Bethune retired from Continental at the end of 2004. Today he is the lead director for Park Corp. Hotels and Resorts, an emeritus board member for New York Academy of Art, and serves on the Board of Directors of Sprint Corporation. Previously, he served on the Board of Directors of Honeywell and Prudential Financial. In May 2010, a merger agreement was reached between Continental and United Airlines. Its stock now trades under the UAL ticker symbol.