Larry Kellner to step down as Chairman and CEO of Continental Airlines

Press Release

On January 1, 2010 Larry Kellner will turn over control of the fifth largest airline in the world to Jeff Smisek, when he will return to the financial industry to lead a new private investment firm in Houston named Emerald Creek Group. Mr. Kellner has been the Chairman and CEO of Continental for the past five years. He took over for Gordon Bethune. Mr. Kellner has been a great leader through some very difficult times for the company. Since Mr. Kellner came from a financial background, he leaves behind a financially sound corporation. It is one of the best capitalized and most liquid airlines in the world.

Overall Continental is set up for success, and Jeff Smisek is set up to take Continental to the next level. He has great management skills and knows the industry inside and out. He has proven to be a great asset to the company since he came on board in 1995. With his operations background he is the perfect person to help the company reduce their operating costs and bring their Cost per Available Seat Mile (CASM) in line with the other airlines in the United States.

The CASM problem Continental has is rooted mostly in their over reliance on Regional Jets. Continental currently has 251 Regional Jets under contract with ExpressJet and Chautauqua Airlines. They operate 234 ERJ-145 and 17 CRJ-200 aircraft on behalf of Continental. (Continental Fleet Page).

How do Continental and Jeff Smisek solve this problem?

The first step is to find a way to remove some of the Regional Jet flying. Continental currently operates 14 Bombadier Q-400's, which are based at their hub in Newark. These airplanes are much more economical than Regional Jets since they have turbo-prop engines. They also have a total capacity of 74 passengers, which is 24 more than that of the Regional Jets Continental contracts. The Q-400's offer Continental reduced CASM due to the added capacity and more efficient engines.

Continental should deploy additional planes on all routes within approximately 600 miles from each of their hubs. By flying these planes to close in destinations from Houston, Newark and Cleveland, Continental will be able to remove some Regional Jets from service. Although there is a speed advantage, of almost 100 miles per hour, with the Regional Jets when compared with the Q-400's the shorter flights are approximately the same block time. This is because the Regional Jet gets its advantage at cruise speed and altitude. Shorter flights spend most of their time in assent and descent. This cancels any speed advantage the Regional Jet might obtain through its faster speed during cruise. These Q-400's are also able to operate from shorter runways, and can help reduce delays at the nation's conjested airports.

The other way to replace Regional Jets is to purchase jets in the 90-110 seat range. These could take the form of the Embraer 195's. The difficult part of this is that these planes would have to be flown with mainline crews because of the scope clause in the pilot contract at Continental. While this would increase the operational cost of the airplane, Continental would gain a huge benefit. They would be able to replace Regional Jet flying to destinations that are not large enough for their smallest mainline plane, the 114 seat 737-500. Continental is currently in the process of retiring their classic 737 fleet. Once this happens, and the 737-300/-500's are all retired the smallest plane in the fleet will be the 124 seat 737-700. By taking on planes in the 90-110 seat range, Continental will be able to right size markets and reduce some redundancy in service. This will help Continental save some of the additional cost of the mainline crews.

Continental can significantly reduce their CASM and increase the benefit to their bottom line by making these two moves. It is not an easy sell, and will not be an easy transition, but the faster Continental moves away from more expensive Regional Jet flying the sooner they will reduce their cost structure.

Overall Continental is a solid airline with sound financials. With a few small changes at the start of Jeff Smisek's induction as Chairman and Cheif Executive. With Mr. Smisek's solid operational background and knowledge of industry forces Continental should be poised to make a solid leap forward. Through the continuation of Gordon Bethune's "Go Forward Plan" Continental will continue to prosper for many years to come.