=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2002/02/04/f= inancial1130EST0101.DTL ---------------------------------------------------------------------- Monday, February 4, 2002 (AP) Flight of fancy: Continental Airlines keeps little things, and it pays off = big _ After Sept. 11, competitors cut meals, pillows, clubs; Passengers did= n't like it _ Leaving cheese on the pizza SCOTT McCARTNEY, The Wall Street Journal (02-04) 08:30 PST (AP) -- After the Sept. 11 terrorist attacks, most airlines prepared for hard times by slashing traveler extras, eliminating many meals, pulling magazines off planes and closing some ticket offices and airport clubs. Not Continental Airlines. The Houston airline, heavy with debt and lacki= ng even a basic bank line of credit, instead took a jumbo-jet-size risk: It decided cabin comforts were more important than saving a few bucks. Shortly after the attacks, Continental Chairman and Chief Executive Gord= on M. Bethune helped lead the industry chorus calling for a federal bailout. But once Congress approved a multibillion-dollar cash infusion, he quietly went his own way, pushing ahead on projects intended to woo travelers. Continental spent aggressively to add security checkpoints and self-service check-in kiosks. While others pinched pennies, Continental offered free in-flight movies and free drinks in its airport clubs. A greatly expanded terminal at Newark International Airport -- crucial to Continental's gains in the New York market -- was completed in December, only after Continental decided to pay more than a month of overtime to construction workers. Recently launched commuter-train service at Newark will allow more people to get to the expanded terminal more easily. Meanwhile, UAL Corp.'s United Airlines and Delta Air Lines both have suspended terminal-construction projects in New York since Sept. 11. As he did with his mid-1990s turnaround of Continental, Mr. Bethune is again demonstrating that there can be a cost to too much cost-cutting. In December, Continental's traffic was down only 10.6 percent, the smallest decline among the six biggest airlines. In the fourth quarter, Continental's planes were more full than those of its competitors. Its losses were proportionally far narrower than rivals that, like Continental, funnel passengers through hub cities. UAL's record annual loss of $2.1 billion, reported Friday, capped a disastrous year for the airline industry. All told, the nine major carriers tallied net losses of $7.24 billion, even after the federal rescue. While Southwest Airlines, a low-cost carrier that flies passengers point-to-point, was the only major airline to remain profitable last year, Continental's annual loss of $95 million paled among the big full-service carriers. Four of the six biggest airlines each had annual losses exceeding $1 billion. Continental estimates that in the fourth quarter its higher percentage of seats filled yielded $100 million in extra revenue, far more than the $7 million or so that would have been saved by scrimping on meals last fall. "Now is not the time to take the cheese off the pizza," says Mr. Bethune, returning to the sort of slogan he used while engineering Continental's turnaround eight years ago. "If available business traffic gets scarce, wouldn't you put more amenities in to get them?" Travelers have noticed the difference at Continental. Howard Z. Brooks, travel manager at Sony Music Entertainment Inc., says Continental is picking up more of his business. Leslie Leventman, head of travel for MTV Networks, a unit of Viacom Inc., says workers have surprised her when they come back from trips with praise for Continental's food. "It's a big deal that they're still providing food," she says. Mr. Bethune is so confident of his company's position that he predicts Continental will begin making profits again in March, before any other big hub-and-spoke carrier, and will be in the black in the second and third quarters this year. "Who's going to be the first guy to make money again?" Mr. Bethune asks, with characteristic swagger. "You're looking at him." To be sure, Continental may have benefited in recent months from travele= rs staying away from United and AMR Corp.'s American Airlines, both targets of terrorist attacks on Sept. 11. If it existed, that advantage probably has faded with time. And Continental still faces other challenges. In New York, it must battle American and United for lucrative corporate contracts. Globally, both American and United offer far more reach, with more extensive ties to international partners. Continental has largely tried to go it alone overseas. Still, Continental has suffered less than most of its rivals, even though its flights are heavily concentrated on the East Coast, which has been harder hit than the rest of the country by the post-Sept. 11 travel slump. The company, like its competitors, was clearly in trouble after Sept. 11. It had $1 billion in cash, enough to weather a recession but not the severe Sept. 11 fallout. The federal bailout that gave the industry $5 billion in cash and $10 billion in potential loan guarantees brought $263 million to Continental, after taxes, and, just as significantly, reassured Wall Street. Since then, the nation's fifth-largest airline has rebuilt its cash position with stock and convertible bond offerings. Add in the $100 million revenue premium Continental associates with its strategy of not scrimping, and the carrier won't need federal loan guarantees, Mr. Bethune says. In response to their massive losses and bankruptcy-threatening cash drains, most airlines slashed schedules about 20 percent to reflect sharply lower passenger demand. Continental cut flights a bit more surgically than some competitors. When it saw Houston rival Southwest hold its flight schedule firm, Continental reduced its flying into the city by only 4.5 percent, compared with a system-wide average of 14.9 percent, for fear of losing market share. In November, domestic passengers boarding at Houston's Hobby Airport, where Southwest dominates, declined 14.7 percent, while domestic passengers at Bush Intercontinental, where Continental dominates, fell just 7.4 percent, according to the Houston Airport System. Since they were pleading for a federal bailout, most carriers thought it appropriate to tighten their belts in visible ways. US Airways Group Inc. removed all blankets and pillows from its planes to save on the laundry bill. American says its savings from removing food from some flights have been "substantial," although no airline will break out actual dollar amounts. "It was a time of economic crisis, and significant changes needed to occur," says Todd Burke, an American spokesman. Delta cut onboard service, including food on many flights, and closed 11 airport clubs, but says that hasn't cost it customers. The amenities "are satisfaction drivers, but they don't drive ticket sales and they don't move passengers from one airline to another," says Delta spokeswoman Catherine Stengel. =20 ---------------------------------------------------------------------- Copyright 2002 AP