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Continental Airlines (CAL)
Continental Airlines Makes some Serious Cuts
What started with fees assessed for standard amounts of baggage on flights and then escalated to denying passengers free snacks has now broadened to full blown company reorganization to limit costs. The rising fuel prices are taking their toll on the airline industry and Continental Airlines is trying to stay one step ahead of financial ruin. The company announced plans that will drastically cut costs and save money, but the reaction from Main Street and Wall Street has been mixed. While investors are cheering the news as a step in the right direction from a profitability perspective, airline customers are cringing at the latest realities of the costs to travel. Are the plans meant to benefit the customer in the long-term or is Continental just looking at the bottom line?
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Continental CEO Larry Kellner and President Jeff Smisek said it best, "The airline industry is in a crisis. Its business model doesn't work with the current price of fuel and the existing level of capacity in the marketplace. We need to make changes in response." This was stated in a letter to employees along with news of Continental's drastic plan to slash costs in order to remain afloat. The situation at Continental has gone from bad to worse. With the prices of fuel reaching record levels every day, Continental estimates that it would pay $2.3 billion more for fuel this year than it did last year, and that's at the current prices. If the $2.3 billion is correct, that amounts to $50,000 per employee.
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As a result, Continental will be cutting back its schedule and retiring some of the older, less fuel efficient p***s currently in service. Starting in the fourth quarter, domestic mainline capacity will be reduced by 11 percent which will cut around 3,000 jobs, or about 6 percent of the workforce. The job losses will mostly come from voluntary programs and company leaders Kellner and Smisek have agreed to do their part by cutting their salaries for the rest of the year and by opting out of 2008 incentive payments. The aircraft fleet will also face a reduction of about 100 p***s including 27 older Boeing 737-300s which will be removed from service by September of this year. The company aims to have all 737-300s retired by the end of 2009 in favor of the newer, and more fuel-efficient, 737-800s and 900s. The net result of the changes will be a decrease in the size of the mainline fleet from 375 p***s at the end of the second quarter to 344 p***s at the end of next year.
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Continental may be feeling the pinch in terms of costs but travelers are getting squeezed as well. The major U.S. carriers have already increased fares multiple times this year and passenger perks, like free snacks, have been limited or outright dropped as well. Continental has not yet announced which flights and destinations will be affected, but fewer flights mean more inconvenience for customers. In related news, Continental also announced today that the regional carrier, ExpressJet, will continue to operate the 205 regional p***s currently in service for Continental, but that Continental could reduce the size of that fleet next year. The deal also acknowledges the current state of the industry by allowing ExpressJet to fly for other carriers as well as gives permission for the company to consider strategic alternatives for itself.
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Investors are pleased with the news though, and are taking these announcements as a sign that the airline is taking action to counteract the weak state of the industry. The stock price shot up in trading on Thursday but has settled back down in early trading today. Similar news regarding cost-cutting changes from the other major carriers, such as American Airlines (AMR: Charts, News, Offers) helped give the entire sector a boost at yesterday's close.
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