THE INTERVIEW: AIRLINE CEO GORDON BETHUNE (PART 1 OF 3)

This interview took place prior to Delta Air Line's acquisition of
Northwest Airlines, Inc., which is now a Delta subsidiary. I have been
asked to reprint it for industry professionals and the flying public.
-MIchael Manning

Gordon Bethune is a character. His New York Times best-selling book "From Worst to First" is a bare knuckled explanation of how he took over Continental Airlines--then an absolute financial basket case after the tenure of the notorious corporate raider Frank Lorenzo who relentlessly focused on cost-cutting and acquisitions. With a lot of boldness and risk-taking, Bethune pulled off a stunning turnaround of Continental from a "Legacy Carrier" that employees hated to work at as much as passengers hated flying to becoming the best in the industry.

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From the son of a crop duster pilot father to Navy mechanic to holding senior management positions at Western Airlines (folded into Delta Air Lines in 1987) and the now defunct Braniff International (widely regarded as the first casualty of Airline Deregulation) Bethune became vice president and general manager of The Boeing Commercial Airplane Group's Renton Division where he was responsible for the 737 and 757 programs. A commercial-rated pilot and an A&P (Airframe and Powerplant) mechanic he is type rated on the 757 and the Douglas DC-3.

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I met with him on the 44th Floor of Continental Airline's world headquarters in downtown Houston. The Continental Airlines that Bethune inherited was an amalgamation of Frank Lorenzo's mercurial management style that witnessed no less than nine presidents in as many years. Continental was the first airline subjected to a hostile takeover by a then 32 year old Lorenzo, a graduate of Columbia and later a Harvard MBA. It was Lorenzo whose ruthless get-tough tactics with labor forced the most visible and widely felt strike in American labor history at Eastern Airlines. It also led to Lorenzo being declared incompetent (by The United States Bankruptcy Court in The Southern District of New York) to reorganize Eastern's estate. Eastern was shut down on January 19, 1991. To distance itself from the embarrassment of losing control of an airline it legally still owned to a court appointed Trustee, Texas Air Corporation (TAC) was quickly renamed Continental Airline Holdings. The airline is an amalgamation of the following mergers: Texas International, New York Air, Frontier Airlines, People Express, Eastern Airlines, and commuter airlines including Britt Airways, Provincetown-Boston Airways and Bar Harbor Airways. In 1990, Lorenzo who briefly owned the largest airline empire in the world, was forced to step down from the business for good. After two more CEO's came and went, Continental found itself in Chapter 11 a second time. Bethune gambled, leaving behind a stable position at Boeing to rescue Continental--a risky proposition. But the turnaround was remarkable and today, among the "Legacy Carriers" Continental is regarded as a Class Act. He served as Chairman and CEO.

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Last October 30, 2008 one of the oldest names in commercial aviation ceased to exist: Northwest Airlines. Northwest (itself an amalgamation of Southern, Republic, North Central and Hughes Airwest) merged with Delta Air Lines as the surviving entity. I sat down with Bethune just weeks after he was hired by Delta as a "Consultant" to advise their board on the proposed merger between Phoenix, Arizona-based US Airways and Delta. Bethune was re-hired as a Consultant when Delta courted Northwest Airlines (formerly Northwest Orient). His answers were quite revealing.

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Manning: You recently evaluated the $10.2 billion offer from Doug Parker over at US Airways to take over Delta Air Lines. Give us your impressions of Delta's circumstances and what was ailing that carrier?

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Bethune: Delta had the best balance sheet in the industry. No one had a healthier balance sheet with regard to cash position, debt-to-equity; all the things that you would want. The erosion of Delta occurred over a ten to twelve-year period when it was mismanaged. The board and management were incompetent as evidenced by their slide into Chapter 11. Chapter 11 won't fix your company. It'll fix your balance sheet and restructures things. But if you go into bankruptcy a crummy company and your don't change--you come out a crummy company. Just like Continental did in 1983 and went back into bankruptcy in 1990 because it didn't change. Delta needs to change. Otherwise I don't think it has a future.

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Manning: Many of us have questioned how Delta can survive in the long-term as an independent carrier after eliminating 15% of its domestic route network in favor of international routes. 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. Delta needs to find its niche. It has a very good hub operation in Atlanta; I think Cincinnati is a very secondary hub, as is Salt Lake City. And it needs to diversify its sources of income. Just as in your investment portfolio you wouldn't put all your eggs in one basket. Nor would you put all of your money in the domestic market. So, you'd use some of the international routes to hedge the economy domestically so when it goes into the tank, you don't go into the tank! Management at Delta is dong something that should have been done years ago. Delta needs to make a dent in the New York market; Los Angeles seems like a smart move and should be exploited.

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Manning: There are rumors that you will be asked to take the helm at Delta.

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Bethune: (starts laughing) I wouldn't do it! First of all, I'm a Continental guy. All my friends are here in Houston. (Gerald) Grinstein made---I think---$350,000 last year. Now, why would you want to work for that kind of money, and take all the heartburn, crap and negative publicity, and the hard work? I think the people who now run the place Michael, kinda like running it want to keep on running it. I'm not sure that companies always do what's best for the company. They do what's best for the incumbents inside the company.

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Manning: Many predicted that Delta would spin-off Comair as it did with ASA (Atlantic Southeast Airways).

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Bethune: As you saw with ExpressJet (Continental Express) we divested ourselves 100%. You don't need to own your regional feed carriers. When you do own them, often they use your pay and benefits to leverage themselves. Combining seniority lists from regional pilots to the mainline was always on the table at Continental while I was there. They (the unions) wanted to ave (pilots) progress through the ranks. That's an extension of Continentals costs. Regional and mainline are two very different markets and they have very different costs and pay structures. If you get yourself burdened with mainline pay structures at a regional carrier, you're certainly at a disadvantage. We spun them off because we needed the money. We didn't want to be that leveraged in paying more than we had to pay for regional services. As an independent company, they had to compete with other independent companies and can't leverage us because we have alternatives that if they won't give us services for a price we're willing to pay, we'll get it from someone else. When you own them, you don't have to pay that leverage---they have it on you. 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.

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Manning: A tape worm?

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Bethune: A tape worm. It goes where you go, it eats what you eat, dies 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. It's against your best interests.

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Manning: Okay, so where are the 'Legacy Carriers' (American, Delta, United, Continental, Northwest and US Airways) running amok?

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Bethune: I think they do things that are more window dressing than they are fundamental. Airlines ought to be really good at something. Take American, Delta, United or Northwest. What one thing would one of those airlines excel at? I can't tell you. They all seem kind of mediocre to me. Continental decided to be the best at reliability, and customer satisfaction is measured by reliability. Getting there on time safely would be something we could excel at---and we did. That rove the J.D. Powers Awards. That drove a lot of revenue. It also reduces expenses because yo don't have overtime, you don't have disruptive operations. Continental became known as the most consistent product. Be good at something! Don't just be mediocre.

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Manning: There doesn't seem to be any real marketing differentiation between those four airlines?

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Bethune: They're not innovative people! 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 kinda low. That's the only reason I was able to do something. The competition wasn't that rough. Otherwise I'd have been a failure.

We resume tomorrow!