Getting Airborne

The United States was in the Great Depression, but from coast to coast vibrant entrepreneurialism bubbled, especially in aviation. New technology, combined with a generation of pilots trained during World War I, produced a rush to grab lucrative routes, mainly for flying mail.

Continental dates its beginning to July 15, 1934, when Varney Speed Lines — founded by Walter T. Varney — began flying a route that served Albuquerque and Santa Fe, in New Mexico, as well as El Paso, Texas; Pueblo, Colo.; and Las Vegas. In July 1934, flying for just two weeks in that month, the airline carried nine passengers (for fares totaling $261.69) and 859 pounds of mail.

Early on, the airline exhibited a flair for marketing. Varney adopted the slogan "The Trail of the Conquistadores" and began calling his airline "America's Fastest," which, indeed, was the case since its new Lockheed planes clocked in faster than the DC-2s flown by competitors.

In 1937, Robert F. Six — the man who created Continental Airlines — was executive vice president

of Varney Speed Lines. Six bought a 40 percent share of the company and took steps to expand the airline, acquiring Wyoming Air Service, which flew out of Denver. On July 1, 1937, the company was renamed Continental Airlines.

Six moved the company's headquarters from El Paso back to Denver, where Varney had started the business. He believed that a major airline needed to be based in a major city because that would provide a built-in customer base of potential passengers.

Bring On the Customers

Steady, if unspectacular, growth characterized Continental in the 1940s, as the airline added employees (it had 400 by 1945) and new routes, primarily to smaller cities such as Socorro and Las Cruces, N.M., and Wichita, Kan. The company also kept busy during World War II modifying planes for use by the military. (To that end, Continental built a $5 million Denver Modification Center, which opened in 1943).

Perhaps the most important event in Continental's early history occurred in 1944, at the so-called Battle of the Biltmore. Bob Six had joined the Army Air Transport Command in 1942 and was serving full-time in the war effort. Back home, executive vice president Terry Drinkwater was running Continental, and he wanted to be named president. He didn't prevail. Six (who was named president in 1938) won his discharge from the Army in 1944, and at a meeting at the Biltmore hotel in Los Angeles, the board of directors unanimously voted to keep Six as Continental's president. (Drinkwater eventually left the company.)

That same year marked another important milestone for Continental. In 1944, for the first time, passenger revenue ($846,000) was greater than revenue from carrying mail ($687,000). The meaning was clear: Continental's future lay in building up passenger traffic. Six stepped up the company's airplane fleet, purchasing five Convair 240 twin-engine aircraft — which could carry 40 passengers — for $2.4 million in 1946. These were also Continental's first pressurized aircraft, promising passengers enhanced comfort. Another first: Continental installed radar on every plane, becoming the first airline to do so. And in 1948 Continental opened its first flight service kitchen, in Denver. Six was determined to not only win passengers, but also to make sure they were happy with the airline's service.

 

An Expanding Service Network

It was called the ABC Interchange, but the real meaning of the 1951 agreement, in which American, Braniff, and Continental agreed to jointly service a route from Houston to Los Angeles (much like today's "code sharing" arrangements), was that a passenger could buy one ticket for a Houston-Los Angeles trip involving multiple carriers. That was huge, and Continental's balance sheet showed the effect of adding more routes: in 1951 revenues rose 54 percent and profits totaled $400,000, the highest in the company's history.

A glance at a route map from the early 1950s shows that Continental was serving Houston, Seattle, Portland, San Antonio, San Francisco, Los Angeles, and a big chunk of the Midwest (including Kansas City and St. Louis) and Southwest (Phoenix, Santa Fe, and El Paso). Little by little, Continental was becoming a national airline, not just a small regional flyer.

In 1953, Continental grew further, merging with Pioneer Airlines in a deal that added 16 new cities in Texas and New Mexico to the route map. This deal gave Continental a very strong position in Texas: it now served every city with a population over 100,000.

Even bigger news came in 1955: the Civil Aeronautics Board (CAB, a federal agency that regulated air service) awarded Continental long-haul flights between Chicago and Los Angeles. Bob Six responded by upgrading the airline's aircraft, placing $60 million in orders for new Boeing 707s, DC-7Bs, and Vickers Viscount turboprops.

The 707s were Continental's first true jets, and Bob Six capitalized on the marketing opportunity, painting the planes' tails gold and dubbing them the Golden Jets. Advertising promoted the airline as "First in the West with Jet Power." Continental now ranked among the big boys.

 

Reaching Across the Pacific

In December 1961, Continental handed out a huge holiday present: it introduced rock-bottom, so-called "no frills" fares that created a low-cost economy class for passengers on a budget and, eventually, led to a three-tier fare structure (first, business, and coach).

Even bigger news this decade was Continental's push to eminence across the Pacific. This started in 1964 when Continental won large Defense Department contracts to fly to Southeast Asia, which prompted the airline to add long-range Boeing 707-320Cs to its fleet.

In 1967 Continental strengthened its presence in the Pacific when the CAB awarded it routes to service the Trust Territory of the Pacific, aka Micronesia. Continental unveiled its Air Micronesia

service, with flights to Tokyo, Okinawa, Saipan, Guam, Honolulu, and many points in between.

Continental notched a number of other firsts in the 1960s. In 1963, flight attendants wore a stylish black dress accessorized with a string of pearls (suggestions attributed to television star Audrey Meadows, the wife of Bob Six). A 1963 move of the airline's headquarters from Denver to Los Angeles underlined Continental's western and Pacific orientation. In 1964, movies were shown on the Chicago-Los Angeles route. And the following year, Continental introduced a computerized reservation system. A footnote to the 1960s: by 1964 Continental felt it had built enough of a history to celebrate, and in July of that year, on the airline's 30th anniversary, the company put a refurbished antique Lockheed Vega on a tour of the airline's route system. As the official history puts it, "The tiny Vega, in contrast to the airline's fleet of new jets, was a symbol of how far Continental had come."

Moving Our Tails into a Brave New World

Think better — that just might have been Bob Six's mantra when it came to delivering customer service, and he showed it again and again throughout the 1970s. Case in point: he kept secret how Continental's first 747 jet would be configured, right up until delivery. When passengers boarded they saw not one long cabin, as was the norm with other airlines, but a series of five cabins, each decorated to appear as a separate living room. A wide aisle allowed for easy movement around the plane even during meal service.

Continental also continued to win notice for its high-quality inflight service. The hostess program was studied by organizations as diverse as Playboy Enterprises and the Sisters of Social Service, among dozens of other entities.

Also during that decade, Continental adopted a new slogan, "We Really Move Our Tail for You" — and in the distant 1970s that line resonated with passengers. The airline kept expanding as well. Notably, in 1977, Continental won a new route from Los Angeles to New Zealand and Australia.

But then, everything changed, literally with the scrawl of a pen. In 1978, President Jimmy Carter signed the Airline Deregulation Act, which effectively ended the regulatory role of the CAB and thrust airlines into a free-for-all. In 1979, Continental's long stretch of profitability — extending back to 1937, with only one loss year (1958) — snapped as the airline recorded a $13.2 million loss. A new day had dawned for airlines, and suddenly, it was about survival of the fittest.

 

In and Out of Bankruptcy

In 1981, Continental was suffering growing losses and had found itself the target of entrepreneur Frank Lorenzo, who was then running Texas Air Corp., a holding company consisting of regional carrier Texas International and new carrier New York Air. For Lorenzo, it was about the art of the deal, and in 1982, the airline's board approved a merger with Texas International. Continental also shifted its headquarters to Texas International's base in Houston. But the losses kept growing. Labor unrest greeted management initiatives designed to lower operating costs, and passenger load factors — once the envy of the industry — fell as low as 40 percent.

With employees on strike, Lorenzo put Continental into bankruptcy, with the aim of reorganizing the company. Unprofitable routes were shed, operating costs were pared, and in 1985, Continental clawed its way back to profitability. That was followed by a gain-sharing program designed to reward employees with a slice of new profits and rebuild morale.

But it wasn't all about getting by with less. The same year also saw the biggest addition of international routes in Continental's history, as flights were added to Edmonton and Calgary, in Canada, as well as — importantly — from Houston to London. On February 12, 1986, Continental reported the highest one-year earnings in its history, $60.9 million.

In 1986, Continental successfully exited bankruptcy. That was soon followed by an announcement of intent to purchase the discount carrier People Express, as well as most of the assets of Frontier Airlines, a regional carrier primarily serving cities in the Rocky Mountains. Though the merger with People Express gave Continental a New York-area hub, it triggered a logistical nightmare that took years to smooth out. The official history puts it bluntly: "To say the new Continental performed poorly would be a gross understatement."

But hold on, because it gets worse. And then, happily, it gets better indeed.

 

Back in Business

On December 3, 1990, amid skyrocketing fuel prices, Continental filed for bankruptcy for the second time in seven years. Matters grew more tense when some competitors called for the bankruptcy court to forcibly liquidate Continental.

In the wake of that turmoil, Continental kept innovating, and in 1992 it introduced BusinessFirst, a then revolutionary concept — now widely adopted throughout the industry — that effectively united business class with first class in one cabin. Comfortable seats were integral to the service level — BusinessFirst seats offered 55-degree recline — and there was also a six-channel in-seat video system, giving passengers personalized entertainment options. For 1992 this was all new, bold thinking, and passengers responded with extraordinary levels of bookings.

In 1993 Continental emerged from bankruptcy, but the future was uncertain, at least until 1994 when new CEO Gordon Bethune (previously a Boeing executive) took control.

Bethune knew that Continental's standing with passengers would be crucial to its future, and the airline he had taken over fared poorly in most surveys. At every juncture, with every employee, Continental focused hard on getting the job done right, right then, because that's what really mattered. Call it a back-to-basics approach, where what counted most was delivering good service. Period.

In 1996 Continental won its first-ever J.D. Power and Associates Award for long-distance service. That might sound ho-hum, but for scrappy Continental, after a decade of turmoil that had unquestionably impacted customer experience, it was a milestone. Back in business, Continental was growing. Houston had become a leading gateway to Latin America, and Newark Liberty International Airport, New York's gateway to the globe.

 

Turnaround Team

After languishing in bankruptcy for several years in the early 1990s, Continental needed a way out. Help came in the form of Air Partners (now known as TPG), a private equity investment firm headed by David Bonderman. In 1993, Bonderman got together with Air Canada to assemble a $450 million recapitalization package that enabled Continental to get out of Chapter 11.

Bonderman could crunch through tough financial and business issues, and he knew how to assemble a turnaround team. When he was chairman of Continental's board of directors he made key leadership selections, including naming Gordon Bethune as CEO.

Bethune's second-in-command was Greg Brenneman, who started at Continental in a consulting role but later served as president. In his book, Bethune describes relying on Brenneman at a series of October 1994 "last suppers" — so named because Continental could have run out of money at any time as the new pair tried to devise a strategy to save the company. The product of their efforts was the Go Forward Plan, which laid the groundwork for one of the most spectacular turnarounds in American business history. C.D. McLean, a former Piedmont Airlines executive, was brought in to run operations and was tasked with making reliability a reality.

Two other key executives joined the team in the spring of 1995. Jeff Smisek, who had a Harvard law degree and extensive business and legal experience, was brought in as general counsel to oversee the legal department, government affairs, and corporate communications. When Continental needed another strong, well-rounded executive with leadership and people skills, Larry Kellner was recruited to take the role of chief financial officer. These and other members of the team, backed by the enthusiastic support of the Continental workforce, got the airline to the top of the industry.

As the company's top two executives today, Kellner and Smisek continue to employ many of the practices and principles that helped Continental succeed so dramatically when they first joined the company.

 

Flying into Tomorrow

Operational excellence. Broad praise (including awards from Fortune, OAG, Condé Nast Traveler, and Zagat). Continued service expansion and innovations. A new, deep maturity and confidence have reshaped Continental, but along with the rest of the airline industry, the company faces challenges.

A major theme of this decade, from the perspective of any airline, has been security. Following the tragic events of September 11, 2001, every airline, Continental included, responded with stepped-up security and a determination to fly safely. Another challenge has been volatility of fuel prices, which have trended high and in summer 2008 hit all-time high levels.

But these years have also seen advances that have solidified Continental's status as a global carrier. There now are flights to Hong Kong, Delhi, Beijing, Shanghai, and many more cities that are new to Continental's route map. Continental also introduced the first scheduled nonstop service from the East Coast to Honolulu.

In 2002, Continental significantly upgraded its BusinessFirst seats to offer a 170-degree recline. But good things keep getting better, as Continental continues to improve the passenger experience. For example, in 2008 Continental unveiled new 180-degree flat-bed seats for the BusinessFirst cabin. Late in 2009, those seats will begin to show up in Boeing 777 and 757-200 aircraft that serve long-haul international routes. Some 767-400 aircraft will get the upgraded seats in 2010, and the seats will be standard on the latest-generation, highly fuel-efficient Boeing 787 fleet — aka the Dreamliner — as those planes are delivered to Continental in the years ahead.

By now, Continental has been at this business for 75 years. And it has a flight plan for the future, taking the company and its customers to places they have never been. — R.M.

Photographs: Terry Halsey (pins, buttons)