THE INTERVIEW: GORDON BETHUNE! (PART 1 OF 2)

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If Morley Safer from the Television show "60 Minutes" was sitting in this chair this morning, I'd like to think that it wouldn't make much difference. You are about to meet a man whom I thoroughly enjoyed interviewing in March of this year on assignment for the magazine Airways. What follows is a heavily edited version for my BLOG. Even if you haven't the slightest interest in business, much less the airline industry, Gordon Bethune is considered by Business Week and others as among the Top 50 CEO's in America today. And he's one of the few "Mavericks" left in the commercial aviation industry. It is largely because of his no-holds barred personality that I felt you would enjoy hearing from not only a different sort of boss, but one that is beloved by employees and air travelers alike! Our visit took place at Continental Airlines' Worldwide headquarters in downtown Houston, Texas. Dressed in blue jeans and a safari shirt, Gordon is a man who genuinely "walks to the beat of a different drummer"; he is also the last airline CEO post-9/11 to step down from a major U.S. airline in 2004. Beyond his folksy-charm and steely resolve as a guy who knows how to get things done, Gordon is the author of the New York Times Best-Seller "From Worst to First" that details his arrival at Continental in 1994 and takes us through how he and the employees and staff brought the company back--literally--from the brink of death. Whatever business you are in, this book ought to be required reading in a corporate world that lacks common sense. By the time Bethune had stepped down ten years later as CEO, Continental Airlines went from being "the Worst airline in America" in 1994 to "the Best" and most revered among the "Legacy Carriers" in existence today in the United States. And he took a hell of a risk leaving behind a cushy job to begin what many business analysts said could not be done. First a few facts before we begin.

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Gordon Bethune is a Licensed Airframe and Powerplant Mechanic who rose to the position of Vice President and General Manager of Boeing Commercial Airplane Company's 737 and 757/767 programs. He is a licensed pilot of the Douglas DC-3 and Boeing 757 and 767 aircraft. In a bold risk, he accepted an offer to become the 11th CEO of a decimated Continental Airlines after notorious corporate raider Frank Lorenzo left the airline in an absolute financial and operational mess. The Continental that Gordon Bethune walked into was an amalgamation of several major airlines. Among them: Texas International, New York Air, People Express, original Frontier Airlines, assets from Eastern Airlines, and commuters: Britt Airways, Provincetown-Boston Airlines, Bar Harbor Airways and Rocky Mountain Airways. Bad management and unforgivable tactics in treating employees and customers with get-tough tactics ruined morale and led the company three times to the brink of collapse. Twice the carrier had to file for Chapter 11 Bankruptcy and as Gordon entered the scene, it was on the verge of a third Chapter 11 filing. Today, employees enjoy their jobs and are treated with the utmost respect. The airline has repeatedly won the J.D. Powers Award for Excellence for many years. Here are excerpts from my meeting with a man I sincerely came to enjoy immediately! And just so I don't get any e-mails, this interview contains adult language and is probably not always "family friendly". Here's how it went:

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MANNING: I wanted to ask you about your recent assignment as a consultant to the Creditors’ Committee at Delta Air Lines. You were evaluating the $10.2 billion takeover offer from US Airways. What were your impressions of Delta’s circumstances and what in your view is ailing that carrier?

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BETHUNE: Well, I mean Delta—obviously—if you go back to 1994 had the best balance sheet in the industry. Right? I mean no one had a healthier balance sheet with cash position, debt-to equity –all the things that you would want. And so, the erosion of Delta occurred over a ten to twelve year period where it was mismanaged. That’s the only characterization that you could give it. The board and management were incompetent as evidenced by their slide into Chapter 11. And so, Chapter 11 as you know won’t fix your company. It’ll fix your balance sheet with fixed debt and restructures things. But if you are a crummy company and you go into bankruptcy a crummy company, and you don’t change—you come out a crummy company. Just like Continental did in 1983 and went back into bankruptcy in 1991 because Continental didn’t change. So, Delta needs to change and hopefully they will. Otherwise, I don’t think they have a future.

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MANNING: Many have questioned how Delta can survive in the long-term as an independent carrier after they’ve eliminated fifteen percent of their domestic routes and expanded that amount into international flying. What would you have done differently?

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BETHUNE: I would have started years ago. Maybe I wouldn’t wait until you were in bankruptcy to address the fact that you’re failing. Obviously, Delta needs to find its niche. It has a very good hub operation in Atlanta; I think Cincinnati’s a very secondary hub as is Salt Lake City. And they need to diversify their sources of income. and management at Delta is doing something now that they should have done years ago. They can make a dent in the New York market. L.A. seems like a smart move for them.

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MANNING: There are rumors that you will be asked to take them over. How would you respond to that offer?

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BETHUNE: Well, I wouldn’t do it! I mean, first of all I’m a Continental guy. All my friends are here. If you look at what Mr. (Gerald) Grinstein made last year—I think I read it in The Wall Street Journal—he made $350,000 a year? Why would you work for that kind of money, and take all the heartburn, crap and the negative publicity and the hard work? there are plenty of people they can find out here that can do the job.

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MANNING: Many analysts would disagree and say you’re one of the few guys left anymore who can fix Delta.

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BETHUNE: I think you find, Michael, that you can say that as an objective observer, the people who make those kind of decisions are not objective. They have their own agendas. And so I think the people who now run the place, kinda like running it and want to keep on running it. So, I’m not sure that company’s always do what’s best for the company. They often do what’s best for the incumbents inside the company.

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MANNING: On this BLOG many of my readers fly regional airlines. Many people predicted that Delta would spin-off Comair as they did with ASA (Atlantic Southeast Airways). And again, going back to your success at salvaging Continental Airlines, what do you see as the answer for regional airline ownership in terms of whether to keep them separate or for the main airline to continue to own them?

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BETHUNE: As you saw with Continental Express, we spun them off and divested ourselves one hundred percent. You don’t need to own your regional feed carriers. Well, the regional markets and the main line markets are two very different markets and they have very different costs and pay structures. So, if you get yourself burdened with main line pay structures at a regional carrier, you’re certainly at a disadvantage. We spun them off because when we needed money. As an independent company, they have to compete with other independent companies. I saw Delta buy Comair just at the time we’re selling (Continental) Express. I said ‘How dumb can you be! You’re going the wrong way’. It’s almost like a tape worm. It goes where you go, eats what you eat, die’s when you die. How do you extricate yourself? You need an independent source of regional services to supply you, and you don’t need to own it.

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MANNING: Overall, where are the ‘Legacy Carriers’ (American, United, Delta, Northwest, US Airways) running amuck? What are some common mistakes as you see it among these carriers that land hem in such hot water?

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BETHUNE: Well, I tend to think they do things that are more window dressing than they are fundamental. At the end of the days, airlines ought to be really good at something; you ought to pick something—whatever airline you are be something. You say 'why don’t you give me an example of American, Delta, United, Northwest—what one thing would one of those be good at? What one thing would they excel at? In other words, are they best at something?' I can’t tell you what they are. They all seem kind of mediocre to me. Continental decided they were going to be the best at reliability, and customer satisfaction is measured by reliability. So, getting there on time safely would be something that we could excel at; we’re going to beat you at that measure—and we did. That drove the J.D. Powers Awards, that drove customer recognition—that drove a lot of revenue. It also reduces your expenses because you don’t have overtime, you don’t have disruptive operations. You actually do the plan and you’re not catching up. So, Continental became known as the most consistent product. Well, why wouldn’t you want to do something like that if you were a United, Northwest, Delta or American? What wouldn’t you want to be known as when you say ‘American’, you own the world—the best food or, the best service or the most punctual or whatever? Be good at something! Don’t just be mediocre.

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MANNING: There doesn’t seem to be any marketing differentiation…

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BETHUNE: (interrupts and becomes animated) ...They’re not innovative people! Mostly I think for the large part, most people who can’t cut it in the pharmaceutical industry come to our business because it’s easier to compete because the lower level of intelligence and the expertise is kind of low. That’s the only reason I was able to do something! (mutual laughter). The competition wasn’t that tough. Otherwise I’d have been a failure.

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MANNING: In 2001, you testified before a Senate subcommittee and you stated that you were opposed to the mega-mergers on the table at that time such as America with TWA and DC Air, and United and US Airways. What are your views on airline consolidation today?

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BETHUNE: Well in those days—for one—that was pre-9/11. And number two, we were looking at it from a field place where a United and US Airways clearly was not good for Continental. And my job was to represent Continental’s employees and shareholders. So, if I could thwart that, I should do that because letting those two guys become a 900 pound giant is not good for us. American and TWA—it was our intention as we put a bid in for TWA and opposed the then-American deal that not allow them to take over the pensions of TWA as part of the acquisition—we opposed that and they reluctantly accepted agreed to accept the pension costs. And we wanted to load American up with as much debt as we could because what’s usually good for American is bad for Continental. A lot of competitiveness in our business is to stop your competitor from getting a good deal—to stop your competitor from getting to big, or stop your competitor from gaining that advantage on you. In the regulatory arena, you try to stop whatever it is that he wants that would give him an advantage. If he’s buying something, make sure he’s pays too much for it. You don’t want him to use that against you. So, it’s a tough business. And if it’s good for Continental, I’ll be for it. If it’s bad for Continental, I’ll be against it.

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MANNING: Are there any current potential mergers that mike make sense?

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BETHUNE: Well, sure there are! United and Continental makes a lot of sense. I mean, you could do an American-Northwest and make a lot of sense. I thought US Air and Delta might make sense; I didn’t say it didn’t make sense. My job was to handicap the probability of success versus the handicap of Delta’s stand-alone success and give advice . But we don’t need fifteen to twenty air carriers. I mean if look at the last ten or twelve years, Michael, we keep adding. I mean we have Spirit, we have JetBlue, we got Frontier, we got Air Tran. Do we always add airlines and never get rid of any? Do we not consolidate? Why wouldn’t the big boys try to get some scale of economies to fight the ever-encroaching low-cost carriers? I looked at the statistics that said five or eight years ago, low-cost carriers were 10 percent of the market—now they’re 35 percent in every hub in America. So, it’s changed the competitive landscape. And I think that guys that can diversify their revenues, get scales of economies and keep their costs under control—number one: it’s good for the consumers, number two: it’s good for the shareholders and employees. They should do it.

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MANNING: David Segal (ex-Chief of US Airways) stated that he sees a shakeout where we’ll end up with three ‘Legacy Carriers’ and basically three Low-Cost/Low-Fare carriers. How do you see this industry shaking out?

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BETHUNE: But you see David—and I know David. David’s logical. But what’s ever happened in our industry that’s been logical in the last ten or fifteen years? So, that should happen. But what keeps that from happening—I was giving a talk yesterday. What’s in it for an executive at an airline to make an acquisition of another airline? Let’s say the CEO. What’s in it for the CEO? Well, he’s not going to get a raise. His stock won’t appreciate. He’s going to get all this trouble, all this heartburn, all this integration problem, and his net income won’t go up any at all. The guy who gets acquired—if he agrees to step aside, gets his severance, gets his options cashed out at the acquisition price, get’s his shit load of money and goes home. So, he may or may not be opposed. But why would the guy want to do it? Well, the guy who’d want to make the purchase would want to do it because it would be good for the company, in terms of strategically if it would work. But personally, he wouldn’t want to do it, because he could be a failure. And why not play it safe and get my check and go give a speech in Hong Kong and ride in limos? So, they don’t because there’s nothing in it for them. And there’s only the fear of failure. Now if they’re forced to do something –like the competitive e landscape’s changing and they’re going to die, then they will do the things they need to do because there’s something in it for them that’s called security and tenure. But absent the threat to their security and tenure, why would a guy want to take his comfortable job and his company’s making money and thing’s are just fine and go buy a competitor? They should but they don’t because it’s not in their best interest personally. And they’re not many guys that will do what’s in the company’s or the employee’s best interest over their own. Not many.

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MANNING: Not many, no I agree. What’s your view of a coherent aviation policy for the 21st century? Many say that we need to re-regulate. Others differ.

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BETHUNE: Well, you know I don’t look to the Congress to do anything but get re-elected and whatever that takes they’ll do that. We’re the most ‘regulated-deregulated’ industry I’ve ever seen. If Congress would take the word ‘airline’ out of their vocabulary, we would be better off. If you never heard from Congress, you would be better off. Congress is not here to help you, they’re here to meddle and to make life much more difficult for you—and they have! And they haven’t helped the consumer. When they said that there were too many flights scheduled into the New York area, the flights were full of people. How could there be too many flights if they were full? Who do we tell can’t go to New York today? Who get’s to decide? Airlines are in the business of taking people where they want to go. So, we were accommodating that but there was too much traffic for them. Blaming the airlines for that was foolish. It’s still foolish. I think we need an aircraft control system that’s user-based, fee-based, stand-alone outside of the budget process like anybody, borrow money and make the investment they need to make in the technology to optimize the traffic control system so that the people who want to go there can get there. That’s the kind of policy we need—get out of the way of the company’s that want to fulfill the public demand for safer travel and to help them do that and give them the tools—the infrastructure to accomplish it. I mean, you know what? If you screw up and leave your people stranded on the runway for ten hours at a time, they’ll quit flying and come over to us. We don’t need a law that it’s against the law to lose your bag; we don’t want to lose your bag. In other words, we lose a bag, it takes 25 to 50 bucks depending on where we have to deliver that bag to you the next day. We didn’t make that much on the ticket. So, we’re already motivated not to lose the bag because we’ll lose the whole profit of the ticket. So, making it against the law and fine to lose your bag is like whipping the horse when he’s running flat-out. That’s the Congress’ way of addressing the issue. Make the fines bigger; make it against the law.

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BETHUNE CONTINUES: Why don’t you make it against the law to have cancer? See if that stops people from getting it! People don’t want it; we’re already trying not to get it. They actually came to Bush (International) Airport and counted the number of people and said we had too many people in line. And I asked, ‘How long were the people in line?’ He said 'we didn’t notice that'. There were a lot of people in line but the lines moved very fast. I was only there for three minutes. So, what difference does it make how long the line is versus how long you had to stand in line? I said, ‘Did you ever try to get a Passport? How long is that line?’ Ever try to visit the Statue of Liberty at the Park Service? How long is that line? You’re a line-measurer; we’re in the customer satisfaction business'. If you leave people in line, they just go someplace else. The government ought to stay out of it. First of all, the government’s no good. They’re the worst at customer satisfaction.

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MANNING: What about the Chapter 11 Bankruptcy process and how it relates to the airline in bankruptcy protection? It’s enormously expensive with every creditor constituency group with legions of investment bankers, lawyers, accountants, meeting rooms in hotels that have to be rented, catered lunches, limousines. What is your view on reforming all of this?

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BETHUNE: You hire consultants to give you advice.

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MANNING: But why does an airline need 300 lawyers and CPA's telling them what to do instead of keeping the structure lean? If I'm a Trustee I report to a Court Judge. Why do I need all of this...

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BETHUNE: ...Well, you know from a company like Continental that was in there (in Chapter 11) twice to say that bankruptcy doesn’t have a place in American business would be wrong. Because Continental wouldn’t be here today if it weren’t for that. It’s a second chance. So, bankruptcy is an opportunity to fix yourself, get a time-out. But it won’t fix your company. It does give you a chance to reorganize your thoughts and your product. And if done wisely, you can come out and be a Continental and be at the top of the industry again from the worst to the first (Bethune’s best selling book on Continental’s turnaround is titled “From Worst to First”). But you need to fix the company. The courts have an obligation to look at everyone’s rights. And it’s it’s difficult and I wish it were simple. The guys who run company’s into bankruptcy just wish everybody would go away and leave them alone. So somebody’s put the thing in the tank and now everybody’s paying the price for that. So, my advice to others is ‘Don’t screw it up’.

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MANNING: That was a tough guy that you followed at Continental (Frank Lorenzo).

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BETHUNE: (narrow his eyes and pauses): You know where “Peanut Fares” came from in 1983? Frank Lorenzo and Texas International had the cheapest fares—tore up all the labor contracts, tore up all the airplane contracts, had the lowest cost product in the industry—absolutely the lowest cost. What happened? They went bankrupt again in 1991. So, it says: ‘Wait a minute. It ain’t all about the lowest cost'. Let’s say that you would reduce the cost of your pizza by doing something smart like taking the cheese off? How many pizzas are you going to sell? Can you make a pizza so cheap that nobody will eat it? Can you make an airline so cheap nobody will fly it? We did it. Still went bankrupt. Came out in 1993 and almost went bankrupt again in 1995. Why is that? Lowest costs, but still a shitty company, still a shitty product, crummy morale. People don’t want to buy that. That isn’t the type of pizza they want to eat. That’s not the kind of airline you want to fly. We at the same time needed to be on-time because we needed a good product. And we needed to treat our people well. But the facts are that the marketplace will decide whether you’re a big company or not. They get to decide what good is.

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{We conclude our memorable visit with Gordon tomorrow!}