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What I want to do is just give you some background about the company and then open it up for questions.
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And talk about, well, I'm talking, it will be some background about the company, something about leadership.
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But of course, I know who pays my salary.
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So let me ask you a quick question.
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How many of you have flown Continental in the last year?
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I knew I was in the right place.
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Now, how many of you have flown, but not flown Continental in the last year, but flown somebody?
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I need all you to get on a Continental flight next year.
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I'm sure you all go to New York at some point, or maybe go to Houston.
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And so I'd appreciate it.
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We want to do a good job for you, but I always feel good when I got a lot of customers in the room.
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I want to take you back to 1995 when I came to Continental, and it's interesting and Professor Parker gave a little overview of it.
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But when I arrived, and I knew this when I came, it wasn't like it was a big surprise.
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First day I got there and they told me, by the way, we have $2.
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3 billion in default, not just in debt, in default.
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And it was a pretty broken company.
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And so if you sat down and you looked at it from a financial perspective, I would have told you we should file bankruptcy if we had less than 300 million in cash.
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We had about 300 million in cash, so we didn't have any cushion.
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We had a ton of debt and default.
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But I think, most importantly, and I think what people miss when you talk about a business is you tend to look a lot at the financial side.
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I came to Continental not because I'm a cost guy, candidly, I'm a guy who likes to spend money.
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I'm interesting for a finance guy who likes to spend money.
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No, I like to spend a dollar and get somebody to pay me $1. 10 for that.
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Because if you don't spend any money, you'll never make any money.
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And so the trick isn't how do you cut costs that are value added, it's how do you cut inefficiencies?
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How do you cut places where you aren't getting a return?
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But as you step back and just looked at the business, when I got there, it was interesting.
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We had finished 1994 as tenth of ten major airlines in on time, we were the worst in on time.
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And I always remember my interview with Gordon Bethune, who was the CEO before me and who's actually, I think, spoken to this group.
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And Gordon said, Gordon was a big guy, spoke in generalities.
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And so he was looking for, I think a lot of times in management.
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We've been friends now for 12 years and sat next to each other for years.
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But he's looking for somebody who had some different views than he did.
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He was pretty broad and general, I'm okay and comfortable with details.
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So he said, and we've been not only lasting on time, heck, we're tenth in customer complaints, we're tenth in losing the most bags.
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I mean, we're the reverse cripple crown.
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Southwest Airlines had won the triple crown the year before.
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They'd been first in bags, first in fewest customer complaints, not most customer complaints fewest, and first in least bags lost.
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We had been, according to Gordon, tenth, tenth and tenth.
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So when I got back to Southern California that night, I said before I go, I want to just see how bad they really are.
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This was while I was still interviewing.
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And the Internet wasn't then what it is today, because if it was, I'd just gotten on the Internet and found the data.
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So I had to go over to the library at the University of California at Irvine.
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Now I realize it's a public UC school, but still it had a good library.
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And it was close to my house in Orange county, and I couldn't easily get to the Stanford library.
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So I went over there and Gordon talked about the fact, by the way, that not only had we been worst.
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He mentioned, he said, man, if you look back, we've been ninth or tenth ever since they kept keeping stats in on time in 1987.
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Well, that's a really crappy company, really crappy.
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So let's see how true that is.
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What surprised me when I got to the library was I found out that Gordon had left out a thing or two while I was covering it.
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What he left out was that yes, we were tenth in on time in 94, and we were tenth in bags and we were tenth in customer complaints.
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But the only way we ever got to ninth was when somebody was in bankruptcy and there were only nine major airlines.
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I mean, we have been dead last every year since they kept keeping stats.
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So this wasn't a one off problem, this was a culture.
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It was, how can we make it cheaper?
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How can we do it with less?
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And so an interesting perspective to come into.
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And what I tell you is that if you want to be successful in any business, it isn't the airline business, it's any business that there's a couple of key elements that leaders give you.
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First of all, you need a plan.
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If you don't have a plan, you won't get anywhere.
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Because if you don't know where you're going, any road will take you. So you need a plan.
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Secondly, you need to communicate that plan.
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It doesn't do you any good if you know the plan, but your senior team doesn't know the plan, or more importantly, in my case, your 45,000 co-workers don't know the plan.
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And you need a plan that you can kind of explain to everybody.
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So it can't be like you see so many of these mission statements in my mind, Fancy, and you say, okay, what does this really mean?
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And you could have an hour debate about it.
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I mean, my view of planning, one of the things we put in a first-year plan was when the plane arrives at the gate, have the jetway driver on the jetway ready to meet the plane.
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It's that simple but very basic.
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The guys who drive the jetways in the airports, they can understand that piece of the plan, it's really important.
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Think about it, when you get to the airport, you've been on the plane for three hours, you're in a small seat, it's been a long flight.
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And you sit there for ten minutes while you're waiting for somebody to get the jet way up to the plane. Isn't that frustrating?
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We did it all the time, because we were low, we were staffed-low and it was a way to kind of try to be more efficient, they thought.
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And what we were doing was pissing off our best customers.
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And so as you looked at it, you got to have a plan, you got to communicate that plan.
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And last of all, you got to treat your people with dignity and respect.
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You got to treat them just like you want to be treated.
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And it can't be lip-service and it can't be insincere.
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And if you doubt that, let me tell you about our on-time performance and how we fix that.
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And then I'm going to come back, talk about the plan, talk about where it brought us, and then I'll open it up for questions.
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So if you looked at it, we said on time, we need to fix that.
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What would you do, think about it in your own head.
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You're all here, Graduate School of Business.
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What would you think about it?
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You'd say, okay, we're going to get a committee, we're going to figure out the root cause, we're going to start to define these causes and where we are.
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We looked at it, and I give Gordon all the credit here, because this was Gordon's move.
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But I'll tell you how we fixed it, and I learned so much from this.
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We looked at it and said, okay, we've never been higher than seventh any month at on time since they started keeping stats.
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We're really lousy on an annual basis, but we haven't even had a good month.
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So the question is, finance guys, what would it be worth to us if we could get to fifth?
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Well, why is it worth something?
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Because you lose less bags because you'll have less hotels.
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You'll put people on other airlines.
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You won't have to do that.
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You'll save all that money.
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So we went through it, we were about $7 billion company at that point.
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We said, it's worth about $6 million a month to us to get the airline on time.
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And we decided that if we could get the airline on time, our bag and complaint numbers by themselves would get better.
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So let's put all our focus on on time, because we were losing bags because we were late.
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And we were getting tons of complaints because we were late and lost your back.
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It was really pretty simple.
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>> [LAUGH] >> This is not higher math.
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So let's get the thing on time.
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And by the way, on time only means within 14 minutes.
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Doesn't the winds change?
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These are long flights, maybe we were ten minutes early coming to San Francisco today.
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I'm sure it had nothing to do with the fact that Katie and I were on the plane, but it did help.
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So we looked at it, we said okay.
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We'd save 6 million bucks a year, a month.
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6 million bucks a month if we could get in the top five at on time.
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And we weren't taking a lot of risk here because we never got there otherwise.
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So we said, let's give the employees 3 million bucks a month to be on time.
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Now, remember, this is a company with 2.
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3 billion in debt and default, no cash, had been bankrupt twice and staring at its third bankruptcy.
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And we're going to the employees saying, hey, one thing's important, be on time.
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And by the way, we'll put our money where our mouth is.
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We'll give you 65 hours every month we're in the top five and on time.
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Well, you got two reactions.
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First reaction was, well, gosh, is 65 bucks a lot of money?
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How many of you would walk by three twenties and a five on the street and not pick it up? Every one of us would.
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So 65 bucks is a nut that it says, hey, this is significant.
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And so we rolled that out and we had all these task forces.
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We'd all say, we rolled this out on the 17th of a month.
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Where do you think we finished the next month 4th?
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Where do you think we finish the next month first?
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We never firsted anything in our lives.
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Where do we finish the next month first?
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All of a sudden, the employees who were ripping their Continental patches off their uniforms so that when they went to Walmart or Target after work, nobody knew they worked for Continental, were in the company store buying Continental hats.
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So everybody knew they worked for Continental.
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And that's the key, that you can have all this planning all the systems.
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Our folks knew how to run the airline on time.
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What you need to tell them is this is the most important thing we're doing.
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And we're going to put incentives behind that because you'll find a heap correlation between where you put your incentives.
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What you tell people is important.
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They gotta understand what it is you want to do.
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All of a sudden, it made sense to that Jetway driver to be there waiting for that plane, because you know what counts as on time when you get the door open.
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And so if the plane's there parked at the gate, but the Jetway's not attached, you're not there yet, you gotta get the door open.
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And it's not like what hand does Mickey say it's on a computer.
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So I mean, it's very heavily measured.
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And the DOT posts these stats in USA Today, so there's no gaming.
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People know it's credible. Hey, this is credible.
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Coz candidly, we'd have preferred to pick all our flights, but the reason we picked the DOT flights was coz our employees could see it in the USA today.
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Hey, right here's where we are.
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Here's where we did last month. This is published. This is real stuff.
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And so it had credibility is the most important thing we do.
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If you look at the business, we said, you need a plan.
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Go back to that, need a plan.
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Gotta communicate that plan, and gotta treat people right.
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If you slot this in, the plan was get the place on time.
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Communicating it was, hey, we're rolling out this program.
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And the dignity and respect side had a lot to do with the fact of telling people it's important and letting them share in the benefits.
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If you look at the broader plan.
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There's four key parts to the plan at Continental.
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There should be four key parts to the plan at any business.
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There's a product plan, a financial plan, a people plan, and a marketing plan.
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Now a lot of companies do the marketing plan.
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We call that fly to win at Continental and the financial plan, we call that fund the future.
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Why do we call it fund the future? Coz we had 2.
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3 billion of debt default and if we didn't get some funds, we wouldn't have a future.
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We called the whole thing the go forward plan coz we thought it was better than the this year plan or go backward plan.
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Let's talk about going forward.
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Let's talk in simple terms.
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Fly to win, fund the future.
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What did we call the operating plan? The product plan.
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Make reliability a reality.
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We weren't a reliable airline.
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We lost your bags, we were late, people hated us.
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And then we called the people plan, a term we borrowed from the Boeing company working together.
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And we took each of those four things and we said, okay, you can list four or five objectives and that's it.
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You can't list 100 things.
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You gotta be able to get this on 18 and a half by 11 piece of paper turned landscape, drop draw four columns, have marketing plan, financial plan, product plan, people plan.
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And I will tell you, so many businesses stop at the marketing plan and financial plan.
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And I just encourage you, as you say, okay, that's a God.
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How many companies do you know that are successful, that have employees who hate their job and a lousy product, people who hate coming to work, lousy product? That's a zero set.
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There's nobody out there.
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Now there are companies that are unsuccessful, that have a great product and people who love coming to work.
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They also have no business plan.
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They were like an Internet startup in the late 90s and it was a great place to work, but nobody ever made any money and there wasn't any long term success.
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So you've gotta have that marketing plan and that financial plan to keep you on the right track.
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It's really important to do that.
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But if you look at your business in about year three into this, we do this once a year.
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We distribute it, the entire company.
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We have two meetings a year, the top 500 people, just to talk about the plan, where we are, how we're doing, where we're going, bring everybody into Houston.
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We have huge focus and this all fits on one sheet of paper.
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It looks very sophomoric.
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If you stood here at the Graduate School of Business and said, wow, I think you guys go graduate business school, GBS.
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So if you stood here you'd say, wow, this is really simple stuff.
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It is, we need 45,000 people understand most of business isn't so hard.
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It's find the right thing to focus on and then make sure everybody understands it and doing it and executing. And that carries well.
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Now, about three years in, people started getting smarter and said, hey, can we reduce the font size so we can get more stuff on this page? No, you gotta pick.
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A big part of the planning process is to say what are the four or five most important things we're going to do this year as a company?
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Sure, every division, every group's going to have its own set of objectives.
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But when we talk company wide plan, we tell our people.
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When somebody says we want you to work the weekend, we tell our people, if it's not on the plan, you've got every right to say that.
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Now why do you want me to work the weekend?
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This is key, what do we need to do?
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How do we communicate that out?
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We've only ever changed that plan once.
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We've only ever, in the middle of the year said that plan was a bad idea.
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Anybody got any idea when that was 911.
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We went out on 912 and said, by the way, forget the business plan, we're going to have a new one here shortly.
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But you can't do that every year.
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But you need the confidence as a leader to know when you've had an earth shaking event to change the plan.
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If you go back and read after 911 and you'll get a lot of communications experts as you get out in the business world, lawyers and other people who say, be really careful what you're saying, what you're doing.
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We went out on the Saturday after 911 and announced that we're cutting our flight schedule 20% and eliminating 12,000 jobs.
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This is in a 45,000 person company that is a staggering hit to the company.
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We needed to do that because we needed everybody to understand the crisis we were in. What was the result?
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The result was we were from the White House to every place else, our phones were ringing off the hook saying, what are you guys doing?
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You're overreacting, you barely been back to flying for a couple of days.
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No, we knew how bad it was.
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We knew what was going on.
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We needed to communicate that to our team.
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What you also read in the paper, which was very disturbing for your employees and for your customers, is Continental must be in the worst shape.
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They must be about to go bankrupt.
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They're the ones taking the most drastic immediate action.
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The crisis is worse at Continental?
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No, actually, the crisis was worse at several other carriers.
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They just weren't doing anything about it.
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We, meanwhile, weren't going to stand still and end up in a position where we died without trying.
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And it was a very tough time and then we came out of that.
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And you had sars, you had the second Gulf War, you had the spike in fuel prices.
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And gradually, by about the third hit, as Professor Parker pointed out in his opening, everybody but us and American had gone bankrupt.
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But I'll tell you the reason we're a little different than American, the reason we didn't go bankrupt wasn't the same reason American.
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American had a very strong financial background, as did, candidly, Delta.
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The combination we had was we had enough money to get by, but we also had people who were working incredibly hard.
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We took between 2001 and 2004 in what was then about a $9.
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5 billion business, will be about 14 this year.
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But in what then was a nine and a half billion dollar business, we took a billion won out of our cost structure without significantly affecting the product.
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We didn't take the pillows off, we didn't take the blankets off, we didn't start charging for food.
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What we told our people is, look, it's easy to make it cheaper for lower cost.
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We gotta make it cheaper but hold the same quality.
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We gotta look at everything we're doing. What are we doing? Throwing away. What are we wasting?
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How can we re engineer this?
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How can we do more work with less people?
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How can we be more efficient?
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How can we use computers here? What are we not doing?
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We gotta work night and day to get this stuff done.
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We took a billion won out of our cost structure.
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It was very disappointing, because in the fall of 2004, it became apparent, that that wasn't enough, and that was all we had.
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We were going to be totally into muscle, beyond that, and that we didn't have anything else we could do.
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Our people were tired, it's like we'd been running a marathon for three years.
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We kept getting things thrown at us.
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What do we do to recover?
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And so, we went to our employees in November 2004, and said by the end of February, we need to get agreements to take $500 million out of our wages and benefits.
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Heavily unionized business, very short-time frame.
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If you go back and look, we didn't quite make it, we got about 80% of it done.
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We got a little over $400 million of it done by the end of February.
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We actually got it all 500 done by the end of February.
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One of our union groups didn't ratify the contract in March.
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And so, we only got 400 and some of it.
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And we worked through with them and ultimately got the whole 500 though the 400 gave us enough to get us there.
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And it was because we had a very open culture, and we could go to people and we could talk about them.
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So if you look at our competitors, they got into these huge drawn-out fights and ultimately ended up in bankruptcy.
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Partially, is a way to deal with labor, it's a very bad answer.
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We're a service business, we're a people business.
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If the flight attendant serving you is unhappy, the odds go up dramatically that you will be unhappy.
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>> [LAUGH] >> Speaker 1: If the flight attendant's happy, the odds go up dramatically that you'll be happy.
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My job isn't to keep the customers happy.
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My job is to keep our employee group happy, and do it in a way in a business plan that works.
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Because if they keep you happy and we have a good business plan, our shareholders will be happy.
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Our stock has gone from when I took over as CEO at the end of 2004, has gone from the 1,112 range to the 36, 37 range.
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And so, we've seen good shareholder returns, while doing the right thing.
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But last year, when we finally turned around, first real profitable year after 9, 11, we made about $343 million, not too good for a $13 billion business.
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If you look at margins, just compare that to Microsoft.
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I know Ballmer was here last year.
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Their margins are just a tad better than ours. [LAUGH].
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But we paid $111 million in profit sharing last year.
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The average employee got about $4,000 in profit sharing, because they'd all taken the pay cuts to help us get there, you bet they're going to share in the benefits.
18:28
Every one of those employees that participated, the US Based employees a little tougher offshore, has stock options that got struck at $11 to $20 depending on the time when they did the deal.
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The flight attendants were about $20, everybody else was 11 something.
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That stock's now worth $36, $37 a share.
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Every one of them got stock options.
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So if the stock goes up, you're going to win.
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If we make profits, you're going to win.
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We have by far the strongest profit-sharing program in the industry, and yet we get adequate returns.
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And so, when you pull all that together, what I tell you is that, it's important to have a plan, it's important to communicate it.
18:59
It's also very good business over the long-term to treat your employees with dignity and respect.
19:03
Our employees are why we're successful, without them, we wouldn't be.
19:07
It's too easy to forget that and say, it's the routes we fly, it's the planes we buy.
19:11
No, it's just like the hotel business, it's why I enjoy Marriott's board.
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You get that insight that it's a people and it's a service business.
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We're a lot like the hotel business, it's just a lot smaller space for a lot shorter time.
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But it's still about service and it's still about getting something you want.
19:27
If you look, I'll give you one other fact on that that's always surprising to people.
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Ties a little bit to yesterday's Boeing news.
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So Boeing launched the 787 in 2004.
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That's the new Dreamliner that'll come out next year.
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Got moved back from March to November yesterday, but it's going to come out next year.
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And we looked at that plane a lot.
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And at the end of 2004, Boeing was really pushing because they had under 100 orders for the plane, and they wanted to have over 200.
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And we're an all-Boeing fleet, we fly exclusively 737s, 757s, 767s and 777s.
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And we have an exclusive deal with Boeing that also gets us very good pricing.
20:06
Boeing came to us and said, we really need you to buy the 787.
20:11
Well, the easy answer was to say, yeah, well, we're trying to get our employees to give us $500 in pay and benefit reductions.
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And it would be a little hard to explain to them, that we need you to take a pay cut, and we're out buying this cool new airplane.
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Everybody agree, that would be a pretty tough thing to balance.
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We bought the plane anyway.
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We bought it in December 2004, right in the middle of that period between November and February.
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And that actually at the end of the day, not the day we announced it, at the end of the day, helped us not hurt us.
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Because people understood when we said, we can either follow the path of our failing competitors, or continue to grow and move forward.
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Because what people had to focus on was, they don't get the plane until 2009.
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These deals we're doing are over in 2008, they expire at the end of next year.
20:53
This isn't a short-term move.
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These are people who really believe in the future, and are really planning for the long-term and really planning to grow the airline.
21:01
But let me tell you, that message took me over a month and literally it seemed like 1000 meanings to communicate.
21:07
Because people needed to understand that our choice was, we could follow the path of United or US Airways or the path that Delta Northwest ended up taking and go bankrupt, or we could move forward, work together, build for the future.
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And we had growth plans, we were real about it, we were taking real steps.
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And meanwhile, when you order a plane that now has 700 orders, and they haven't delivered the first one yet, and you're in the first hundred to order it, you end up in a great position.
21:32
And I'll tell you, a plane's going to change aviation.
21:34
I'll give you a couple of quick facts about it because it's in the press a lot today.
21:37
The sidewalls are straighter, which will make a big difference.
21:39
This plane's going to fly 14, 15 hours on long haul trips.
21:43
They will put more humidity in it because it's a composite, that basically means heavy plastics, so, you can make it.
21:48
A lot of the problems on planes on long trips is the humidity is 1 to 2%.
21:52
It's like going very high up in the mountains with no humidifier the first night. And three planes today.
21:57
So this one will be 15%, which that's about the right humidity for inside the airplane.
22:01
And again, because it's not an aluminum body you can do that.
22:03
And three, we're going to reduce the pressurization in the plane, from 8,000ft to 6,000ft.
22:09
That doesn't sound like a lot.
22:12
It will make a dramatic difference, because if you look at the blood oxygen studies, these are very different than blood alcohol studies.
22:19
These are blood oxygen studies.
22:21
What it tells you is the body between 0 and 5,000ft really doesn't see much impact, think about going to Denver.
22:27
But between 5 and 10,000ft it's very dramatic, and over 10,000ft you need oxygen, that's when the little mass would drop down.
22:33
Well, 8,000ft was built to be a comfortable cushion, and hey, you're just sitting there.
22:38
But if you're on a long-haul flight and you're trying to sleep, 6,000ft will make a dramatic difference because you're 2/3 of the way down to that 5,000-foot limit that you'd really like to get to.
22:47
And so, it's going to be a great airplane.
22:49
But the trick was we were able to order, it in precisely the middle of the months, that we were doing a paying benefit cuts.
22:56
And there's one other piece I'd give you that tells you that makes companies successful and do this.
23:00
We had a lot of discussions with our board, and we were in a crisis.
23:05
And I commend Professor Parker, and everybody else on our board because as we sat down with them, and had the strategy, we had a board that was supportive and spent the time and spent the interest.
23:14
And so, if you ever serve on a board, I can't tell you how valuable it is to the management, to spend the time to study the issues so that when you're in the crisis, you can actually make the right decisions.
23:25
because so often, what conventional wisdom will tell you to do, or what looks obvious isn't the right answer.
23:31
And you got to really sort through the pieces and say, what's the key problem? What's the key driver?
23:36
What's the key thing that'll make a difference?
23:39
But I will tell you that for Continental, the key thing that makes a difference every day, we don't move a plane, we don't go anywhere without our people, they do a fantastic job.
23:47
We won't always be perfect.
23:49
I will also tell you that you'll read a lot in the press about our business, and there's a good piece and a bad piece to that.
23:55
The good piece is the reason the press totally seems to ignore safety.
23:58
And worries about safety is because they take it for granted. We can never do that.
24:02
If you think we ever want to sit on the Runway, I like Congress going to pass a bill that says after three hours you gotta go back.
24:08
Do they think we want to sit there for four hours?
24:10
There is zero benefit to our crew, zero benefit to us as an airline.
24:14
The problem is if you go out and survey our customers, we've actually taken a lot of flights that took long delays coming out of Newark and went back after people got there and surveyed them and said, would it have been better had we just canceled?
24:24
The percentages are overwhelming because if we cancel, you're going back to the terminal, you still gotta get home or make the trip.
24:31
And the next day the planes are booked full.
24:33
And so we're constantly, I mean, our crew in many cases would be happy to cancel, but they know that's not the right answer for our customers.
24:39
And when the weather's sitting there and the air traffic control system isn't working.
24:42
So just know when you're out there, if you don't have a perfect experience on us, let us know.
24:46
We'll work hard to fix it.
24:47
There's sometimes the weather and safety issues kind of come around that.
24:50
But it's our people who make us successful every day.
24:53
Whatever business you're in, I will tell you that's true.
24:56
And if you have a plan, you communicate that plan, and you treat those people well, you'll be amazed at what they can do for you.
25:02
With that, I'm delighted to be here, and I'll open it up for questions. Thank you.
25:08
>> [APPLAUSE] >> Yes, sir.
25:19
>> Could you talk to us a little bit about how Continental has responded to low-cost carriers in the industry?
25:24
>> Speaker 1: Sure, well, what were you going to ask on the second part?
25:31
Do you have a second part?
25:32
>> Speaker 2: Yeah, second part is what advice would you give managers who face competitors that play by a completely different set of rules?
25:41
>> Speaker 1: Okay, two questions.
25:42
One, what impact have low cost carriers had?
25:44
And two, what advice would you give managers who work against competitors who are playing with different rules?
25:50
Let me answer those in reverse order.
25:51
I tell you, competitors play with different rules.
25:53
If they're government rules, we'll fight very hard.
25:56
For instance, if you look at Virgin America, Richard Branson came in, and I have huge respect for Richard personally.
26:01
We've been partners with him for years at Virgin Atlantic.
26:04
But US Loss as a foreigner can't own a US Airline, and we can't own an airline over there.
26:09
And so when it's a legal issue we'll fight very hard when it's a strategy issue, and I think that's where low-cost carriers would fit in.
26:17
We got pretty good support of the government.
26:18
Meanwhile, take Virgin America.
26:19
The second they got legal, we stopped fighting them because we're always going to have new competitors, we recognize that.
26:25
When you have people who have an ability to do things differently because they're startups, so we pay our employees based on the number of years you've been there, you make more.
26:34
Well, if you're a startup carrier, you have a huge wage advantage.
26:38
If you're a startup carrier with new airplanes, you have a doubly huge wage advantage because you also don't have or cost advantage because you don't have the maintenance for the first few years on the plane.
26:48
And so we work hard to take advantage of our brand and our assets and what we do, and candidly, constantly remind our people that we can't ever take this for granted.
26:56
I think one of the huge problems in our industry is many of our competitors and sometimes us have taken for granted our position or where we are.
27:03
Hey, we've got a huge hub here in Newark, or we've got a huge hub in Houston.
27:07
And so we're going to do well. You can't ever do that.
27:09
And I think that anytime you think you got it figured out, you're about to get hit.
27:14
You've gotta constantly reinvent the business, reinvent the way you do it, keep your product fresh.
27:20
That doesn't mean you want to lose your advantages.
27:22
You don't want to throw away the good stuff.
27:24
But I fly our competitors on a regular basis.
27:26
I flew United just last week because I want to see what they're doing, how they're rolling out the service, what we could take from them.
27:33
I will gladly take anything anybody does smarter.
27:36
Same is true with the low-cost carriers in the US, the low-cost carriers domestically are much more our competition today than they were ten years ago.
27:44
So Southwest Frontier, JetBlue, Virgin America, Air Tran, they're the people I worry most about in the domestic market, not United, Northwest, US Air American.
27:53
So I think you've just gotta keep reinventing yourself.
27:56
The most important thing is don't ever kind of think you got this figured out.
27:59
Hey, we got a great franchise, and we're going to milk this thing.
28:02
The second you think you got a great franchise, you're going to milk it, somebody's going to come in and do it smarter than you do it. Yes, sir.
28:08
>> Speaker 2: The rail industry is obviously pretty cyclical, long haul hasn't really made much money.
28:12
>> Speaker 1: That's a fair statement.
28:13
We haven't made money since Orbital and Wilbur had their first flight.
28:18
>> Speaker 2: Change that, and if so what?
28:20
>> Speaker 1: I think two things.
28:21
One, if you had a blank sheet of paper, you wouldn't draw up six US Network international carriers.
28:28
But mergers are very hard to do in our business because of the product and people and safety aspects.
28:34
And so I think it's a long path.
28:37
We used to have eight when I came.
28:38
TWA and US Airways have kind of slid into America West and American.
28:41
So you had a couple kind of slide in.
28:44
So we're down from kind of eight when I started to 612 years later.
28:47
That means by the time Katie's out of graduate school, we might be down to four.
28:51
But it's a tough thing to have happen.
28:53
I don't see while there's a lot of talk about mergers, the mergers that have actually happened have happened when companies were about to go away.
28:59
TWA was about to go away when it sold itself to American.
29:02
US Airways was about to go away when it sold itself to America West.
29:05
So I don't see dramatic changes.
29:08
I do think that there's more rationality today in the capacity side of the business.
29:14
Both because the airlines are smarter, but as well because you're down to a couple of big manufacturers in Boeing and Airbus.
29:19
If there's anything that's different, it's that they're not escalating their production lines in the booms.
29:24
If you look to the old days, the airplane manufacturers would greatly increase production in the boom times and then shrink it.
29:29
There's a governing factor that's actually great business for them and saying no, we're going to make 32 of these every month for the next 10 years.
29:36
That will actually help smooth some of those out.
29:39
My goal is to figure out how we can make sure we make money over the long term.
29:42
The other thing is, I think all the trauma we've been to post 911, our employees are more open-minded about incentive comp for everybody.
29:49
Today, we are happy to pay people in the boom times.
29:52
Well, what we need to make sure is we've got a method that automatically adjusts when you go into the downturn.
29:57
So by having a huge profit sharing pool, that's also a cushion when you have tough times.
30:01
That's a better structure than having guaranteed high wages. Yes, sir.
30:06
>> Speaker 2: Can you talk a little bit about your thoughts on the 380 and sort of choosing to go with the 787.
30:14
>> Sure, they're two very different airplanes.
30:16
The 380 is kind of a 600-seat airplane.
30:21
And I think there's a few markets that Continental flies and a few markets in the world that that plane might fit.
30:27
I think overall it will be an engineering marvel.
30:30
I have huge admiration for the people at Airbus who designed it and are going to get it to fly.
30:35
And an economic not so good.
30:38
I'm not saying it's going to be a disaster, but it'll never be what the 787 is, which is it's too big.
30:45
And the way the business works, if you manage your business correctly, the last 150 people, if you got a 600-seat plane rather than a 450-seat plane, those last 150 people are paying you the lowest fares.
30:56
because otherwise you'll just target the 450 people who will pay you more.
31:00
And so you get very marginal returns on that additional size in almost every market.
31:05
And I think people don't understand the cost to build baggage systems and gate space and infrastructure.
31:10
And then you have long lines at customs.
31:12
I mean, imagine arriving with 600 people at customs and after a 15-hour flight, somebody won't have taken a shower before the flight.
31:20
I mean, it's going to be just a long line in customs.
31:24
>> [LAUGH] >> And so I think that the plane's too big to practically manage on a global basis.
31:29
787, meanwhile, ours will have about 228 seats.
31:33
The first one we have about 36 in front, 192 in the back.
31:36
That's about the right size, 767, 777.
31:39
We've already got baggage systems in place and terminal space in place.
31:43
And what you'll see is that plane allows you to go nonstop to a lot of places that you used to have to connect to.
31:49
And it will continue to cut up Asia and Europe.
31:52
We fly to 30 destinations across the North Atlantic nonstop.
31:56
When I started Continental in 1995, we flew. Flew to four.
31:59
And so we're just continuing to grow.
32:01
787 will just continue to help you do that.
32:04
I don't think the Airbus plane works on a long term basis if you look at all the costs.
32:09
And I think the 747 has got a struggle there as well.
32:12
Just when you look at the total cost structure for a few of those planes in your system yes, sir.
32:18
>> Speaker 2: How much do have you found customers care about the quality of the airport that you're operating out of?
32:25
I'm just thinking of newer head having a pretty rough reputation.
32:28
And what do you do to counter that issue?
32:31
>> Speaker 1: Well, there's two things.
32:33
One, Newark does have a lot of tough issues.
32:37
Thank God for us, so does JFK, Philly and LaGuardia, okay?
32:40
>> Speaker 1: [LAUGH] >> Speaker 1: So a little bit of life is just being the relative best.
32:46
I mean, we're operating in airspace that is way too full.
32:50
30% of the traffic on Monday morning is private jet traffic.
32:53
So you got Teterboro coming on the same departure fixes that Newark and JFK are trying to do when you're going north or west.
33:01
Jeff Smisek, our president's got a great analogy.
33:04
He says, when the government screams at us about over scheduling, that's a little bit like the mayor who complains about people are driving too much even though the streets haven't been improved in 50 years. You gotta build.
33:14
The government's job is to build the system to allow the traffic demand that's there to. It's not a runway issue.
33:20
I mean, the current government effort appears on the surface a little unusual in that they're focusing on JFK. And the issue isn't JFK.
33:29
The issue is the New York airspace.
33:31
And Newark's actually more delayed than JFK.
33:34
We just have a bigger position at Newark, so we're a little more effective at managing the process.
33:40
At JFK, it's chaos because there are so many airlines that have a few flights.
33:43
And so they're trying to figure out a better way to manage that.
33:46
But the problem's the New York airspace.
33:48
Two, we've done a lot of things.
33:51
We put a couple of billion dollars in Newark over the last ten years to vastly improve the facilities, to make it easier to park there, to make it easier to access, to get the train hooked into downtown Manhattan.
34:00
But at the end of the day, you're still competing in the New York area.
34:03
The good news is there's 30 million people there and they like to travel and there's nothing better.
34:08
And so we'll keep working out, but we think Liberty is the best airport in the New York area, especially for long haul international, yes, sir.
34:15
>> Speaker 3: My question is about, like, industry selection.
34:17
Airlines are such a tough industry, right.
34:19
Like you have high capex and the volatility in fuel prices, right?
34:25
And Warren Buffett once said, even the best airlines are not profitable, right?
34:31
So back in 1995, why did you make such a decision to join such a tough industry?
34:36
And to a large extent, you were like, very lucky because you have a very supportive board and you have like a great team.
34:45
But still, luck is very important.
34:46
You could have been just, you could have just failed, right?
34:49
>> [LAUGH] >> So I think for me, I think the issue is, I get up in the.
34:59
And this may be different than many of you will probably tell you something about the airline business.
35:02
I'm competitive, I like to make money.
35:05
But I get up at the beginning of the day and say, as long as I'm comfortable, I just want to have fun. I love the business. I love what we do.
35:12
I love how I've learned about the world from my side.
35:16
I mean, we started Mumbai service last week and sitting in my current chair, I had a big pic.
35:21
Jeff Smisek, our president, who is actually, I think, going to be out in your class in early December.
35:25
Professor Parker's class and I were talking earlier this year.
35:28
We were starting two big routes, Athens and Mumbai.
35:30
I said, you know what, Jeff?
35:31
I'll do Athens, you do Mumbai.
35:33
And so you get a chance to go see a spot of the world you haven't seen and kind of open that up.
35:39
And I think that I like working with people, and airlines are the biggest team sports in the world.
35:43
Most people think of a finance guy differently than I do.
35:47
Again, I like to spend money, I like to work with people.
35:49
But I'm analytical enough to say, okay, how do we get this in a package that makes money?
35:53
And if you went back and looked at the stats in 1995 at Delta or United and their balance sheets and their net worth versus Continental, you'd say there's no way Delta and United could ever go bankrupt.
36:05
And if we looked the wrong way, we'd go bankrupt.
36:08
And so in ten years, we were really able to change that. We got a ten year plan.
36:11
Today we're working ten years out with 787 whether it's our facilities and how we invest, I just like what we do.
36:17
So it's a tough business.
36:18
But there's very few places where you get organized labor capex heavy retail influence and and weather and oil are just variables.
36:25
So I like all that, >> Speaker 1: [LAUGH] >> Speaker 1: You said that your competitors are doing something superior to what you're doing, that you would imitate them.
36:33
And you also said that even though you're a legacy airline, you view JetBlue and Southwest as competitive.
36:39
So what I'd like to hear from you is do you think that the hub list system is superior?
36:44
And if so, could you and would you shift to that model?
36:49
>> Speaker 1: Sure, the question is we look at everybody's competitors, we look for smarter people with the hub list system be better.
36:55
The answer is resounding not even close.
36:58
If you look at how the business works, it works around hubs if you're running for large volumes of traffic.
37:04
Even Southwest, which claims, while they do a lot of point to point has a staggering amount of connecting business.
37:11
And what happens is we're actually a very big point to point carrier in New York, very big point to point carrier in Houston, very big point to point carrier in Cleveland.
37:19
Nobody there's airline miss but nobody went out in Kansas in the middle of nowhere and built an Airport for 100% connections to be a hub which you could find a place that had great weather, that would be a good thing to do.
37:30
You need that local traffic, but you also need the ability to connect all the small cities in the world.
37:37
And if you don't have a hub, take our flight to Barcelona.
37:39
Half the people on it from New York aren't from New York.
37:41
We wouldn't have a Barcelona flight, we wouldn't have a Lisbon flight, we wouldn't have a Copenhagen flight, we wouldn't have a Cologne flight.
37:47
The people in New York love it because they get nonstop service.
37:50
And the people who connect find an easy way.
37:52
I mean go from Charleston, South Carolina to Copenhagen with one stop of about two hours is truly phenomenal.
37:58
Charleston will never have that service.
38:00
So they're always going to have to get into some bigger airport.
38:02
And the hub structure allows you to do that.
38:05
What you see is that point to points work it's no different than my 380 example.
38:09
We want to go nonstop from those cities to as many spots as possible.
38:13
We've greatly increased the number of destinations, but you still need the hub aspect to make the business work.
38:19
And you don't see anybody in my mind that's hugely successful over the years because if you start up going back to my JetBlue or other comments.
38:26
You have those low labor costs and low maintenance costs when you get to the point.
38:29
You got a mature workforce.
38:30
There's no question you get a revenue premium for having a good connecting business.
38:34
Southwest would tell you that as quick as we would, yes, sir.
38:38
>> Speaker 1: You mentioned before that this is a cyclical industry.
38:41
What do you think about cargo airlines complementing passenger airlines to be balance it out?
38:47
>> Speaker 1: We have looked at cargo a lot. We do a lot of cargo.
38:49
We have about 400 million a year worth of cargo business.
38:52
And so there are people who will say, well, gosh all the profit was in cargo because if you hadn't had that last 400 million bucks, you wouldn't have made any money.
38:58
That would also be true for the last 400 million worth of business first passengers or anybody else.
39:02
It all fits together to run individual cargo operations.
39:06
We've looked at many times.
39:08
UPS, FedEx, DHL are awesome at it.
39:10
The challenge for us has always been we see a huge volume one way, but not a huge volume on the return.
39:16
And you got to do it with enough scale, you can really be in the business.
39:19
The only big commercial carrier that runs a big cargo operation is Northwest.
39:24
They do that because they had certain route rights out of Japan that allowed them to build basically a cargo hub up in Anchorage.
39:30
And they have some 4 7s that do Asia cargo.
39:32
But cargo is an important part of our business, but not on a one off basis.
39:35
And even the airlines in the old days that had said we're going to fly Combis, which is a 747 that's a mix of passenger and cargo.
39:42
KLM was probably the biggest user of those. Air France used them.
39:45
All those guys are getting out of that business today and going to straight passenger planes or straight cargo planes, only using the belly of the plane for cargo.
39:53
Because what you find is directionally by day of week.
39:56
The problem for us isn't Mondays Isn't Fridays, it's Tuesdays, Wednesdays and Thursdays, it's September, October, January 15th to March 15th.
40:06
It's periods where there's not nearly as much travel, and we still got to pay the rent on the plane, we still got to pay our people.
40:12
And so the challenge for us in the business are so many places where we have limitless demand and we can't fill it.
40:17
People say, why didn't you apply more supply there?
40:20
Well, Saturday night from Houston to Tokyo, we could sell three times the seats we sell.
40:24
The problem is on Tuesday, we're begging to sell just the seats we sell, and so we can't have that plane to only fly once a week.
40:30
And so we work through a lot of those issues, I don't see a good mix.
40:34
And I think more and more you'll see the DHLS, the FedExs, the UPSs, continue to control the cargo business, and that's a little specialized business, different than the passenger business.
40:43
We're going to do the stuff that's so sensitive real time, that people are willing to pay us quite a premium to get it in the belly of the airplane. Yes, ma' am.
40:50
>> Speaker 1: And just curious about capital allocation, how do you think about when you open new routes and what metrics do you provide?
40:58
>> It's interesting in the business because you can look at a route that itself is, I'll repeat the question, thank you.
41:04
Is how do we look at new routes and how do we look at capital allocation in the business, and how do we kind of do that in.
41:09
And you have to look at it on close to an overall basis because we're a network business.
41:13
And so a new individual route in itself may not be that profitable or may lose money, but if it feeds something else that's going to tie together and that some of the two is profitable.
41:23
And so we tend to look at a lot of those decisions on a network basis.
41:26
On capital, it's actually interesting for airplanes, we tend to lease a tremendous number of our airplanes.
41:31
And unless you plan to shrink the airline, which is pretty traumatic because you built huge facilities and airport, there's lots of other pieces between airports and employees.
41:38
And you built up this huge base, shrinking is not what we did after 911, not an easy decision.
41:44
What you don't want to do is be in a position where you focus just on low capital investment, that's Northwest mistake, they kept a number of DC9s that are now 40 years old.
41:53
And the problem is they have high maintenance costs and high fuel burn, and so as fuel costs have gone up, we tend to look at a little more holistically.
42:00
What's the rent, what's the maintenance, what's the fuel, what's the cheapest overall decision?
42:05
And how do we convince the marketplace that these are a little more like cars or houses that can be recycled to somebody else?
42:11
By operating an all Boeing fleet, we get a capital cost way below what we could get if we had to finance it on a continental's balance sheet.
42:18
Because what we're doing is leaning on the Boeing part of the plane, which is, hey, if they can't use that 737, somebody else will.
42:24
For instance, yesterday we just closed the first of 15, 737, 500s to a Russian airline.
42:30
because that plane's an older generation 737, we're moving to classics, but yet we're very easily able to sell that to somebody else and kind of rework our fleet.
42:39
So we look at capital for us isn't as simple as it is in a lot of businesses because again, we finance a plane, we're relying on the fact that it's a commodity type asset as well, even though you don't think of planes as a commodity.
42:51
And we get a much lower financing rate for that, and we have to offset that against fuel costs and maintenance costs, lemme go over here. Yes, sir.
42:57
>> Speaker 1: Can you talk about your decision about the all Boeing fleet?
43:00
>> Speaker 1: Sure, the question is, can I talk about our decision with all Boeing fleet?
43:03
In 1994, we tried to do a thing called cal light, which basically copied Southwest and was an unmitigated disaster is how I got there.
43:12
>> [LAUGH] >> Always say, there's always a silver lining.
43:16
But one of the things that was surprising to people when I came in, and so immediately because we tried to copy Southwest and field miserably, everybody said, okay, well, we shouldn't copy anything Southwest does.
43:25
No, no, no, what we need to do is copy the things that they do that work for our business, and simplicity is huge.
43:31
And people underestimate, because you sit in these rooms with these computer models and you try to down all this complexity, but some plane breaks and you got a plane with a different seating configuration or needs different pilots, and all of a sudden you got all kinds of issues because you got two pilots there, but they can't fly that 727, they can fly 737.
43:47
And so we looked and said, how do we get as consistent as possible, and then how do we do that in a smart money way?
43:53
And the answer is we went to Boeing and said, look, we'll go all Boeing if you'll agree to sell us every plane you sell us at the lowest cost you sell it to anybody.
44:01
So we're going to get the cost negotiations out of this, because once you commit to a fleet type, it's really hard to train people and switch and do the other things.
44:08
And so we went to it because Southwest had done it brilliantly, good consistency model, paid huge dividends beyond what we would have expected.
44:15
And meanwhile, Boeing's been a very good partner to us.
44:18
They don't treat us like we gotta buy the planes from them, because there will always be somebody having a tough negotiation with them, we get the price benefit of that tough negotiation.
44:25
So it works, it's a win, win. >> Last question.
44:27
>> Speaker 1: Yes, ma' am.
44:29
>> Speaker 1: How would you describe your guiding leadership principles?
44:33
>> Speaker 1: Two things, I go back to have a plan, clearly communicate it and genuinely treat people with dignity and respect.
44:41
And two, make sure as an organization that while we care a lot and we're competitive, it's not all about the organization.
44:48
Balance is incredibly important in all our lives, and so I'm also very active in the community, very active with my kids and my family.
44:56
And I think that's important to send that message down through the company that this isn't in the age of BlackBerries and cell phones and a global business, this is about results, not about effort.
45:07
I'd give you the simple analogy I use inside Continental Times, most people think it's mostly about hard work.
45:11
Hard work is really important, but think of a boat in the middle of a lake with two people rowing as hard as they can against each other. The boat's going where?
45:20
Nowhere, it's just sitting there and they're both rowing really hard.
45:22
That happens all the time in business, you just can't see it.
45:25
If you can get one of the people to stop rowing, you'll actually make progress.
45:29
So how do we get the team all going in the same direction, all working together, as a result of that, we might not have to work as hard as we would if we were always fighting each other.
45:36
If we got a clear plan, we communicate it and we treat people right, that helps them have some balance in their life.
45:41
And when you have a real crisis like 911, I got my first look at 911 at 4:40 in the morning of the 12th with a finance group that had been there running numbers all day long, trying to figure out what it meant.
45:52
Nobody even thought about going home, I can tell you I know for most of our competitors, everybody went home to watch TV because it was a traumatic thing that happened.
45:59
These people realized we were in a crisis, how do we do?
46:01
They sprinted for weeks, and so I think it's the mix of that, but it's have a plan, honest, direct, open communication of that plan.
46:09
Treat people with dignity and respect, but make sure you're sincere about it.
46:12
You gotta have balance in people's lives, you gotta care about people's lives if they're going to be successful working for you.
46:17
I know we're out of time, I just want to say thank you again, Professor Parker, I want to say thanks to you for getting me here.
46:22
I want to say thanks to you for coming, I appreciate it very much, I have huge admiration for Stanford.
46:26
I was amazingly impressed with your football victory last weekend.
46:29
>> [LAUGH] [APPLAUSE] >> Thank you very much. >> [APPLAUSE]