Continental Airlines

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Continental Airlines

America Tower
2929 Allen Parkway
Houston, Texas 77019
U.S.A.
(604) 641-2112

Wholly-owned subsidiary of the Texas Air Corporation
Incorporated: in 1934 as Varney Speed Lines
Employees: 13,500
Sales: $1.705 billion
Market value: $362 million

Robert Foreman Six, founder of Continental Airlines, was one of the few men to manage his own airline company from the birth of commercial aviation into the jet age. Over the years Six and other airline pioneers such as Juan Trippe, C.R. Smith, Pat Patterson, C.E. Woolman, and Jack Frye molded the commerical airline business within the U.S. into its current form.

Robert Six dropped out of high school after his second year and began a variety of odd jobs. He was fired as a bill collector for Pacific Gas & Electric when it was learned he was taking flying lessons on company time. In 1929, at the age of 22, he received his pilot’s license, purchased a small airplane, and founded the Valley Flying Service in Stockton, California. During the week he sold scenic tours of the countryside and on weekends competed in airplane races. Six later enrolled at a flight school in San Francisco established by Boeing Air Transport in order to train airline pilots.

A short time later the Depression financially destroyed his flying service. Six sailed for Shanghai where he worked part time for the China National Aviation Company. When he returned to the United States 18 months later, he accepted a job driving a truck for the San Francisco Chronicle during a newspaper strike. He married Hen-riette Erhart Ruggles whose father, William Erhart, was chairman of the Charles Pfizer Company, one of the nation’s largest drug companies.

In 1937 Six convinced his father-in-law to lend him $90,000 to purchase a 40% interest in Varney Speed Lines, the fourth airline company to be founded by Walter Varney (the first was purchased by Boeing’s United Aircraft and the next two failed). Most of Six’s investments was used to pay debts and little remained to purchase new aircraft. Six, however, convinced Lockheed Corporation to sell the company three L-12s on credit. Six later persuaded the company’s chairman, a man named Louis Mueller, to change the airline’s name to Continental, claiming that the airline could never be successful with a name like “Varney.” The following year Six was made president of the airline.

The most popular airplane in America at this time was the DC-3. While it was practical and durable, it was also too expensive of an airplane to purchase for Six. Instead, he favored a new airplane from Lockheed called the L-14 Lodestar. Continental purchased a number of Lodestars and hired its first 12 stewardesses to work aboard them.

Continental, whose network covered a circuit between Denver and El Paso, worked vigorously to add new routes. By the time Wichita and Tulsa services were opened, the Japanese had attacked Pearl Harbor and the country was mobilizing for World War II. Six placed Continental under the care of a lawyer named Terrell Drinkwater and enlisted in the U.S. Army. He was sworn in as a captain in August of 1942 and stationed in New Caledonia and later the Caribbean, where he was responsible for maintaining the military air conduit between the United States and Brazil.

After the war Continental acquired a number of DC-3s from military surplus. With the addition of San Antonio and Kansas City as destinations, Continental’s route system had grown by 300%. Government contracts during the war left Continental with $900,000 in cash and a debt of only $60,000.

In light of the newer, more efficient equipment being ordered by the other major airlines after the war, Six began to plan for the eventual replacement of the DC-3s. Airplanes such as Lockheed’s Constellation and Douglas’ DC-4 and DC-6 (all with four engines) were too large for Continental’s purposes. The company wanted to purchase twin-engine airliners, but could not decide between the Martin 202 or the Convair 240. Douglas recently cancelled plans to build its own two-engine airplane but had an employee named Ed Burton in whom Six placed a great deal of trust. When asked, Burton advised Continental to buy Convairs. Later, the Martin 202 would prove a disastrous mistake for those airlines that decided to purchase it.

Early in 1951 Continental placed orders for seven new Convair 340s and two DC-6Bs. The expenditure was $7.6 million, nearly the company’s gross income for the entire year. Updating the aircraft fleet was becoming more expensive because the newer airplanes were designed to carry more passengers greater distances. Continental was still a comparatively small airline. The decision to make such an expensive investment in the company’s future was typical of Six’s management style.

In 1953 Continental purchased all the stock of Pioneer Airlines which included the rights to fly into Dallas/Ft. Worth and Austin, Texas. When Pioneer was absorbed by Continental, Six gained a talented young manager and confidant named Harding Lawrence, who was placed in charge of the company’s finances.

The Civil Aeronautics Board granted service rights between Chicago and Denver, Denver and Los Angeles, and Chicago and Los Angeles to Continental in 1955. In order to live up to its obligation of operating the new cross-country routes, Continental would have to purchase several expensive new airplanes, including jetliners. In addition, Continental would be directly competing against American, United, and TWA, three airlines with the financial resources to drive Continental out of business.

The airline invested $60 million worth in new aircraft which included DC-7s, Viscount 810s, and Boeing’s 707 jetliner. Continental’s 707s were flying a full year before United Air Lines’ DC-8 jetliners. Harding Lawrence established an imaginative 707 maintenance program which routinely called the jetliners out of service on a rotational basis. The program actually reduced maintenance time on the airplanes; major problems were identified and corrected before they became serious. As a result of Lawrence’s “progressive maintenance” system, Continental was able to utilize its five 707s for an average of 15 hours a day, the longest in the industry.

In 1959 Six offered a position at Continental to Alexander Damm. Damm had become upset with his career at TWA and was particularly disenchanted with the company’s chairman Howard Hughes. One of Damm’s first proposals at Continental was that the company end its policy of leasing equipment, such as aircraft, trucks, and machinery. He noted that the two most profitable airlines, Delta and Northwest, had the lowest percentage of leased equipment. Continental canceled whatever leasing arrangements it could and began to concentrate on purchasing more equipment.

The group of bankers that forced Howard Hughes into a non-voting stock trust at the financially troubled TWA approached Six early in 1961 with a lucrative offer to become the president of TWA. Six, however, was extremely loyal to Continental and, in spite of offers to merge the two companies, he refused the group’s offer.

On December 12, 1961, rather by surprise, Six and a man named Ted Baker of National Airlines (an East Coast competitor of Eastern Airlines) announced a merger of their two companies. The merger, however, was canceled as suddenly as it was announced when Six learned that Baker had already secretly negotiated the sale of National to Maytag’s Frontier Airlines.

In 1962 Continental ordered four Boeing 720s (shorter but faster versions of the 707). However, the order was increased to five after May 22 when a bomb exploded aboard a Continental 707. The bombing caused a crash from which there were no survivors. It was the first crash in Continental’s 24 year history.

Prior to 1963 Continental was under obligation to the Civil Aeronautics Board to operate a number of rural air services which fed passenger traffic into larger air terminals. The services were unprofitable and required government subsidization. That year, however, Continental was released from these obligations. This allowed the company to sell its smaller aircraft and reassign manpower to the profitable commercial routes. Furthermore, before the year was over Continental announced that it was moving its headquarters from Denver to Los Angeles.

Howard Hughes offered to sell his controlling interest in TWA to Continental and to make Six president of the new company (pending the approval of TWA’s new board of directors). Some people regarded this as an attempt by Hughes to regain control of TWA. Six, however, knew that TWA’s board was pleased with the airline’s performance under Charles Tillinghast. He also knew that the new management at TWA didn’t trust Hughes and was unlikely to go along with any of his proposals.

In 1964 Continental received a contract from the government’s Military Airlift Command to carry out military transportation services in Southeast Asia. To perform these duties the company created a new subsidiary called Continental Air Services (CAS). CAS operated in concert with Air America, the Central Intelligence Agency’s covertly run airline, but did not engage in any CIA activities.

Harding Lawrence, Six’s most trusted confidant, left Continental that year to become president of Braniff Airlines. While no attempt was made to replace Lawrence, the most notable addition to Continental came a year later when the late President Kennedy’s press secretary, Pierre Salinger, joined the board of directors. Salinger remained on the board for two years before he resigned during a leave of absence.

The Civil Aeronautics Board invited bids for a commercial air service linking the United States to the approximately 2500 islands in the South Pacific which comprise the American Trust Territory. Continental saw this as an opportunity to demonstrate its ability to operate the trans-Pacific services it had wanted for years. In November of 1967 Continental was awarded routes to various islands in Micronesia and Northern Mariana. A subsidiary called Air Micronesia was created in partnership with Hawaii’s Aloha Airlines and a local investor group called United Micronesian. A fleet of 727s was procured, airports along the route had to be modernized, and a number of hotels were constructed for tourists.

Lyndon Johnson, in one of his last official acts as President, awarded Continental air traffic rights to Hawaii, Australia, and New Zealand. Barely a month later President Nixon canceled all three awards. The routes were later re-awarded, revoked again, and re-awarded a third time. During the cancellation period Continental had accepted delivery of four 747s. Since they could not be used, Continental was forced to put them into storage at a hanger in New Mexico at a cost of $13 million a year. Three of the 747s were later sold to Iran in 1975.

At one time Continental was one of the most financially stable airlines in the world. Its measured growth was accompanied by consistent profits. In its first 35 years it registered its only loss in 1958. However, the high cost of fuel and poor economic conditions caused business in the airline industry to decline steadily through the mid-1970’s. Continental began posting losses in 1975 when it lost $9.7 million.

The Airline Deregulation Act of 1978 added to Continental’s problems by exposing some of its most stable and profitable markets to competition from other airline companies. In addition, Continental was bound to honor a number of labor agreements which, because of their built-in provisions for inflation, were becoming increasingly expensive to maintain. Six stepped down from the day-to-day operation of the company in 1980 and was replaced by Alvin L. Feldman.

Feldman took charge of an airline which was in serious trouble. The most promising strategy available to Feldman for the survival of the airline was a merger between Continental and another financially troubled airline, Los Angeles-based Western Airlines. The merger plans collapsed in March of 1981 when Frank Lorenzo announced that his Texas Air Corporation would be increasing its ownership of Continental stock from 4.24% to 48.5% as part of an effort to take over Continental. In response, two Continental pilots named Paul Eckel and Chuck Cheeld organized a plan which would allow the company’s employees to purchase the airline. Employees approved the plan by a margin of 8932 to 359, and nine banks were lined up who agreed to help finance the $185 million employee acquisition. By August, however, the banks withdrew their support. Feldman, who was still depressed over the recent death of his wife, shot and killed himself in his office at Los Angeles International Airport. A month later, Texas Air acquired a 50.84% majority of Continental stock.

At the annual meeting on March 30, 1982, Robert Six, at the age of 74, retired from Continental. He expressed confidence in Texas Air’s chairman Frank Lorenzo and said he regretted that he was leaving “on a note of red ink and not black ink.” It was an anti-climatic ending to his 43-year career at Continental.

Texas Air completed its acquisition of Continental on October 28, 1982. Texas International Airlines was later absorbed by Continental. On September 24,1983 Lorenzo initiated Chapter 11 bankruptcy proceedings for the new Continental. The company’s labor contracts were invalidated by the courts and new work rules and wage scales were imposed. 56 hours after winning bankruptcy protection, Continental was back in the air.

No airline had attempted to continue operating through bankruptcy. The company had to contend with striking workers and their picket lines, the possibility that travel agents would stop writing tickets for Continental, and the possibility of losing passengers from negative publicity. Management’s response to this was to offer a $49 fare for any non-stop flight on Continental. The fare was planned to bring passengers to Continental in order to demonstrate that the company was committed to remaining in business. The promotion also produced a significant number of return customers.

Continental’s labor opposition dissolved after only a few weeks when workers elected to return to their jobs realizing, according to Lorenzo, that “what they were getting from the unions was pure gibberish... The enemy isn’t Frank Lorenzo, but the new competitive environment.” Questionable strike tactics led Continental pilots to repudiate their union. 4000 of the original 12,000 employees were rehired at half-pay with an increased workload. By 1985 labor costs had been reduced from 36% of total operating costs to 22%.

The number of passengers flying on Continental has grown steadily since the strike. The Texas Air Corporation has acquired a number of airline companies as subsidiaries, including Eastern Airlines, People Express and Frontier. These airline companies were all acquired while they were facing bankruptcy. Together they have placed the Texas Air Corporation over $4.6 billion in debt. Continental, however, has started its debt repayment program. In September of 1986 Continental owed $925 million to its creditors. Under the current schedule Continental will be out of debt by 1997.

Continental and the other Texas Air subsidiaries have more potential to compete successfully together than separately. If it were not for Texas Air and the policies of Frank Lorenzo, Continental and the other subsidiaries would probably have failed and been dissolved. For the time being, Continental has a promising chance of regaining the financial integrity it possessed during its early years.