A large U.S. air carrier of passengers and cargo based in Houston, Texas.
From very humble beginnings, Continental has risen to become the fifth largest air carrier in the United States. Born in scandal, Continental survived the deregulation of the airline industry in 1978 only to face two bankruptcies that would leave the company’s employees demoralized and its customers angry over poor service. In one of the industry’s most successful turnarounds, a new management team came onboard in October, 1994, and returned the carrier to profitability and award-winning service.
Walter T. Varney learned to fly in the U.S. Army during World War I. He learned about the airline industry flying mail under contract to the U.S. Postal Service. A scandal involving the postmaster general, Walter Folger Brown, resulted in President Franklin D. Roosevelt canceling all airmail contracts on February 9, 1934. The new postmaster general, James Farley, called for new bids on April 20, 1934. Varney’s recently formed airline, the Southwestern Division of Varney Speed Lines, bid on one of these routes. The Pueblo, Colorado, to El Paso, Texas, route was not as long or as profitable as the routes awarded to the large U.S. carriers such as United Airlines, Trans World Airlines, American Airlines, and Eastern Air Lines, but Varney and his financial backer, Louis H. Mueller, planned to use the mail revenues to support their first air route from Denver to Pueblo, stopping in Las Vegas, Nevada, Sante Fe and Albuquerque, New Mexico, and finally, El Paso. Unfortunately, Varney and Mueller found that the sparsely populated areas of western Texas did not generate a high level of passenger traffic.
On July 5, 1936, Robert F. Six paid Mueller $90,000 for a 40 percent share of the company now called Varney Air Transport. On Six’s initiative, Varney Air Transport purchased the majority of the Wyoming Air Service network, moved the company’s headquarters to Denver, and changed its name to Continental Airlines. Six was elected president of the airline on February 3, 1938. He saw the passage of the Civil Aeronautics Act (1938), which created the Civil Aeronautics Authority (CAA) and gave it authority to issue permanent route certificates, as an excellent opportunity for Continental to expand. In order to do this, the company needed aircraft. To raise the money, Six arranged for Continental’s first stock offering in late 1938.
The United States’ entrance into World War II in 1941 interrupted Six’s plans for Continental. Six himself joined the Army Air Transport Command, where he devoted most of his time to administration and logistics planning. Meanwhile, Terry Drinkwater, who had joined Continental in 1938 as a legal expert, assumed the job of temporary president of the airline. Following the end of the war, Six returned to Continental determined to expand the airline. Unfortunately, the only major expansion during the early postwar years was to Houston, Texas. On July 15, 1949, Continental became one of the first carriers in the United States to offer a promotional low fare to expand its passenger traffic. This Skycoach service and a reputation for technical excellence earned Continental the respect of its fellow air carriers, but respect did not translate into the expansion that Six envisioned.
All of this changed with the adoption by the Civil Aeronautics Board, which had replaced the Civil Aeronautics Authority, of a new concept, interchange service. In the spring of 1951, Continental signed an agreement with American Airlines and Braniff. American agreed to provide service in California to San Francisco, Los Angeles, and San Diego, as well as to Phoenix, Arizona. Continental provided service in Texas from El Paso to San Antonio. Braniff initially flew the San Antonio-to-Houston segment. When Braniff withdrew from the agreement, Continental assumed this route as well. On February 1, 1952, Continental signed a second interchange agreement with Mid-Continental Air Lines to serve St. Louis. A third interchange agreement was worked out with United Air Lines in September, 1953. Under this agreement, Continental would fly between Denver and Tulsa, Oklahoma, while United would continue the route on to Seattle, Washington, and Portland, Oregon. During the period of the interchange service agreements, only Delta became involved in more agreements than Continental.
On July 22, 1958, Continental was authorized to operate service from Dallas-Fort Worth to El Paso, Lubbock, Midland-Odessa, Amarillo, Abilene, Albuquerque, and Santa Fe. This award, combined with the 1953 acquisition of Pioneer, gave Continental a full range of service in the state of Texas. Following Continental’s acquisition of its first true jet, the Boeing 707, Six was now ready for further expansion. Continental became the first U.S. airline to introduce economy class fares in December, 1961. They also introduced a system of progressive maintenance in which aircraft maintenance was broken down into self-contained work periods and then spread out at regularly scheduled times over the operating life of the aircraft. This system was later adopted by the airline industry as a whole.
During the 1960’s, Continental experienced three more firsts. On August 3, 1961, a Continental flight from Los Angeles to Houston became the first U.S. jetliner to be hijacked. On May 22, 1962, Continental recorded its first fatal accident in twenty-five years when what was presumed to be a bomb exploded in the lavatory of the same 707 that had been hijacked the previous year. A happier event occurred in May, 1964, when Continental entered the international market with a contract from the Military Airlift Command to fly troops to the western Pacific. Continental created a wholly owned subsidiary, Continental Air Services, in September, 1975, which served Vietnam, Laos, and Thailand. The service closed in December, 1975, when the Communists took over the entire region. In another Pacific venture, Continental invested in the newly formed Air Micronesia, holding 31 percent of its shares. Air Micronesia was to provide local service to the islands of the central Pacific.
By the late 1970’s, Continental had grown to become the tenth largest domestic carrier in the United States. Unfortunately, its size did not protect it from the results of airline deregulation following the passage of the Airline Deregulation Act in 1978. The Airline Deregulation Act freed carriers to enter new routes and charge fares based on “market considerations.” In other words, airlines were free to select routes based on their judgment of its potential profitability and to charge competitive fares that would attract necessary customers. The result was an expansion of low-cost, no-frills service that seriously weakened the higher cost, prederegulation carriers such as Continental.
In 1972, Frank Lorenzo purchased a debt-ridden regional carrier named Texas International. With deregulation, Texas International, which had introduced its Peanut Fares in 1977 as a way of appealing to cost-conscious leisure passengers, was set for new growth and prosperity. After the creation of Texas Air Corporation in 1980 as a holding company for Texas International, Lorenzo formed New York Air to compete in the northeast markets of New York and Washington. Lorenzo began his takeover bid for Continental in 1981. The takeover was bitterly opposed by the management and unions of Continental, who finally conceded on November 25, 1981, when Texas Air assumed control of 50.8 percent of the stock. The two airlines agreed to merge in July, 1982, and the headquarters was moved to Houston, Texas. Amid mounting losses, the machinists union went on strike on August 13, 1983. After failing to reach agreement with the striking union, Lorenzo and Continental declared bankruptcy on September 24, 1983, and ceased all domestic operations. The company furloughed two-thirds of its workforce and resumed operation three days later. The pilots and flight attendants joined the striking machinists on October 1, 1983; however, Continental continued flying a reduced schedule. The old labor contracts were declared void and employees were given a “take it or leave it” option to work at reduced salaries and forfeit all seniority rights. These cost savings helped Continental to emerge from bankruptcy on September 2, 1986.
Intent on expanding, Texas Air took over Eastern Air Lines and People Express in 1986. People Express and New York Air were merged into Continental on February 1, 1987. Eastern Air Lines continued to fly under its own name, filing for bankruptcy in March, 1989, and ceasing operations on January 18, 1991. Stressed by these acquisitions and plagued with service problems, Continental was again in financial difficulty. In the summer of that year, Frank Lorenzo sold all of his assets in the company. Continental filed for bankruptcy a second time in December, 1990.
Continental again reduced service and began to sell assets to raise cash, including its Seattle to Tokyo and Australian routes. However, it was not until Air Canada and a group of private investors headed by David Bonderman, of Air Partners, agreed to invest $450 million in the company that Continental was able to emerge from bankruptcy in April, 1993. Unfortunately, by the fall of 1994, Continental was once again faced with a serious shortage of cash. Earlier that year, Gordon Bethune had left the Boeing Aircraft Company to become the president and chief operating officer of Continental. He assumed the duties of chief executive officer in October, 1994. Under his leadership, Continental began what was called the “Go Forward Plan.” The plan called for Continental to review its flight schedule and eliminate money-losing routes, restructure its balance sheet, improve its service performance, and restore employee morale. The plan was a tremendous success. By July, 1995, Continental had posted the largest quarterly profit in its history. In January, 1997, it was named the Airline of the Year by the industry journal Air Transport World.
In 1998, Continental announced the beginning of an alliance with Northwest Airlines. The agreement called for code sharing on all Continental destinations from Cleveland, Newark, Houston, and Los Angeles and on all Northwest destinations from Detroit, Memphis, Minneapolis, and Tokyo. A code-sharing agreement occurs when two airlines offer a flight under the flight designation of a single carrier. Each carrier agrees to fly one segment of the larger route. For example, on a route from Houston to Tokyo, Continental would fly the segment from Houston to Minneapolis while Northwest would fly the segment from Minneapolis to Tokyo. In effect, code sharing allows an air carrier to offer flights to destinations that it does not serve directly by placing its passengers on the aircraft of another airline. They also agreed to consolidate ramp, cargo, and ticketing activity in selected cities. In a more controversial move, Northwest also purchased the stock interest of David Bonderman, giving the airline a 14 percent share of Continental stock. Because the deal would have given Northwest a 51 percent share of Continental’s voting stock, a trust was established for this stock and Northwest agreed to retain only a veto over any potential merger of Continental with another carrier. It was announced in 1999 that Continental would join the Wings Alliance, whose major partners were Northwest and the Dutch carrier KLM.
Although Northwest agreed to sell its controlling interest back to Continental in an effort to settle a lawsuit filed by the U.S. government, the marketing aspects of their alliance continue and have helped Continental to expand to serve over 220 destinations worldwide. Continental also continues to rank as one of the best airlines in the United States in terms of on-time performance, baggage handling, and customer satisfaction, while posting some of the best financial performances in its history. Despite financial crises and bankruptcy, Continental has become the transcontinental and international carrier that Robert Six dreamed of creating.
Bethune, G. From Worst to First: Behind the Scenes of Continental’s Remarkable Comeback. New York: John Wiley & Sons, 1999. A very readable book about the efforts of Continental’s new management team to turn around a struggling, debt-ridden airline. Davies, R. E. G. Continental Airlines: The First Fifty Years, 1934-1984. The Woodlands, Tex.: Pioneer Publications, 1984. An interesting look at the early history of Continental. The book includes early photos as well as route maps of Continental’s expansion. Jones, G. The Big Six Airlines. Osceola, Wis.: Motorbooks International, 2001. An excellent pictorial history of the six largest U.S. carriers. Serling, R. J. Maverick: The Story of Robert Six and Continental Airlines. Garden City, N.J.: Doubleday, 1974. An excellent account of the Six years, a period that spanned forty-six years of Continental history.
Airline Deregulation Act