April 16, 1995 in Business

Continental Admits Flub, Turns Off Lite Struggling Airline Decides To Halt Ill-Conceived No-Frills Operation

Charles Boisseau Houston Chronicle
 

Continental Airlines is officially turning out the Lite.

The carrier said last week it will eliminate all no-frills Continental Lite flights by July, closing the book on what undoubtedly will go down as one of the Houston-based airline’s biggest blunders.

Continental will remove the “Lite” name from planes so as to not confuse customers about quality of service, Continental Chief Executive Gordon Bethune said.

It also will restore meals on some of the flights where passengers previously got only peanuts or pretzels and put back first-class cabins in all jets.

Bethune made the announcement during a conference call with reporters in which he and other executives discussed the airline’s admittedly “dismal” 1994 financial results, which included a whopping $613.3 million loss.

The big loss was expected: Continental in January warned that it would take a huge write-off for one-time costs associated with grounding 24 wide-body jets and closing airport facilities, including a maintenance base in Los Angeles. Continental said those costs amounted to $446.8 million, about three-fourths of the 1994 loss.

For the fourth quarter, not counting the write-off, it reported an operating loss of $37 million, compared with a $8.5 million profit in the same period of 1993.

Even so, executives expressed optimism about the airline’s 1995 outlook, citing initial success from a sweeping restructuring program - dubbed the Go Forward Plan - designed to pare costs, fine-tune operations and generate a profit this year.

The restructuring includes cutting 4,000 jobs this year and eliminating 18 percent of seating capacity.

Continental said it expects to report significantly better first-quarter results than industry analysts predict, although the airline will fall short of a profit.

In a positive sign, the company’s cash position - which had fallen to $400 million as of Dec. 31 from the $766 million it had upon leaving bankruptcy in April 1993 - improved to $420 million as of March 31 and “is growing daily,” Bethune said.

One reason Continental has more cash is it stopped making some payments on leased aircraft and other obligations. Importantly, it has been busy negotiating with creditors and lessors to restructure payments that will save or defer several hundred million dollars over the next few years.

Its main lender, General Electric Capital Corp., agreed to defer all principal payments during 1995 and 1996, saving about $140 million. Boeing Co. will defer 38 jets scheduled for delivery in 1996 and 1997, saving about $200 million.

Also, five Boeing 767 aircraft scheduled for delivery this year have been sold to an unnamed third party and replaced by five 767s that will be delivered in 1998.

The city and county of Denver recently agreed to reduce Continental’s lease obligation at Denver International Airport, saving about $20 million a year for five years.

Lessors of 25 Continental aircraft have initially agreed to accept in lieu of rent debentures convertible to Class B stock at $26 per share, potentially representing 20 percent of the company’s equity.

“We have achieved a significant change in our obligations,” Bethune said. “I am still very confident we will make a profit” in 1995.

Brian Harris, an airline analyst with S.G. Warburg in New York, believes Continental is the airline “turnaround story for 1995.”

“Basically, they’ve gotten behind them now all the horrific news of the fourth quarter. But looking forward, it’s the complete opposite story, and the news is much more positive than people thought,” he said.

Harris noted the airline’s “massive talent raid” of executives from other airlines. In recent months, the airline’s hirings include: Holden Shannon as staff vice president of properties and facilities from Northwest Airlines; Ben Baldanza to head pricing from United Parcel Services and previously with Northwest; and Jim Ream, vice president of finance, who was hired from American Airlines to oversee the revamping of the fleet.

The elimination of Continental Lite doesn’t come as a complete surprise, since the carrier had distanced itself from the service under Bethune, who last fall replaced Robert Ferguson, the ex-CEO who was the father of Lite.

Unveiled with great fanfare in October 1993, Continental executives now talk about Lite as being illconceived with too many flights in too many small markets.

The operation, which at one time consisted of 1,000 flights a day, cost the airline about $100 million to $120 million last year, Chief Financial Officer Dan Garton said.

Continental plans to even discontinue handing out peanuts for a while starting in July to distance itself from the negative connotation passengers may have of the service associated with its Peanuts Fares, Bethune said.

“We will try a different snack for a while,” he said. He said that after taking $33 million worth of food off flights last year, Continental plans to put $11 million back on this year.

ILLUSTRATION: Photo


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