ANALYSIS: November 5 2009

Continental Airlines is in the throes of major changes. It has just joined Star Alliance from SkyTeam and in January a new ceo Jeff Smisek takes over. He tells ABTN of his plans for the carrier.

There is not a second's hesitation when Jeff Smisek is asked what his plans for Continental Airlines are: "Return it to profitability," he says.

Despite the flurry of activity now surrounding the Houston-based carrier, Mr Smisek's focus is clear. "We have lost $1bn since 9/11. You can't really do that," said the 54-year-old lawyer. He is currently president and chief operating officer for Continental but will take over as from Larry Kellner as ceo and chairman on January 1.

Mr Kellner announced his decision to step aside for his long term deputy a few days after the US department of transportation granted his airline anti-trust immunity to join a joint transatlantic venture with Lufthansa, United Airlines and Air Canada in July.

Mr Smisek, who joined Continental in 1995, is also very clear on one of the ways a return to profitability can be achieved: unbundling the product. This is far more of an issue in the States than in Europe. There most carriers do it while in Europe it is mainly done by low cost carriers. BA has gingerly poked its toe in the water by announcing charges for passengers who wish to book a particular seat in advance but Lufthansa has said it will not go down this path.

He said Continental could achieve revenue growth by "more unbundling and offering customers more choice." He said he just wants passengers to pay for the product that they want. "If I checked in two bags and you checked in one, why should you pay the same as me? Why should you subsidise me?

"People should be charged for what they want and if they don't want it, they should not pay," he said. There was also the money side. If 40% of passengers checked in bags, it meant that 60% did not which opened up space for cargo for which Continental could charge.

There is also a more direct reason. Checked in bags bring the airline an extra $200m a year in revenue. At a time of low demand for air travel, this would be hard to replace. "I can't predict what other carriers will do about it but it has been very successful for us," Mr Smisek said.     

It would be a fair bet to say that Mr Smisek will expand unbundling and with Continental the only US  carrier to prove meals on domestic flights, that could be an early target with others likely to follow.

But he stressed that business class travellers and customers on loyalty programmes with Continental would not be charged for these services. "We are careful to exempt them," he said.

Continental has just become the first major airline to switch from one alliance, SkyTeam, to another Star Alliance with its full membership of the latter being announced last week. This has taken months of detailed planning but seems to have go off without any hitches.

The next stage is likely to be the formal signing of the joint transatlantic venture between Star Lufthansa, United Airlines, Air Canada and Continental early next year. While there has been some criticism of alliances and ATI this year from both Congressmen and the US department of justice, Mr Smisek is adamant that they are in the public interest.

"In Star, we do 19,000 flights a day to 1,000 destinations. We could never do that ourselves. We also do complement each other. There is very little competition or overlap between us and United. We are strong where the Star Alliance is weak.

"It did not have New York (Continental has a London-New York service) and no real access to South America whereas we have a hub at Houston. We are quite weak on the West coast (of the States) but United has a lot of strength there," he said.

What Mr Smisek also hopes will help this is a range of new offers for the customer, starting with three new destinations out of Houston, including a daily flight to Frankfurt which complements Lufthansa's also daily service.

Continental is also installing DirectTV on domestic services which will provide a choice of some 80 channels. It is also installing lie flat beds in its business class sector. The first flight with the new beds was last weekend on the Hong Kong-New York service.

Mr Smisek said this would be extended to all long haul flights. Interestingly, the seat has been in part designed by the passengers, "the people who use it," said Mr Smisek.  It should be coming to Heathrow and the rest of Europe soon.

Continental is also preparing to launch a service called KiteLine which will enable passengers to send and receive e-mails while in flight "at the price they want to pay which is free," he said. This will be in America first of all but if it is a success could be extended, both in term of routes and what is on offer.

These moves are despite Mr Smisek's view that there is not much to indicate that demand is about to improve for flying, including among business travellers.  "The early green shoots seemed to have been fertilised by something I had best not name but we are seeing a number of our corporate customers easing up on the restrictions on their travel policy for commercial reasons.

"If you are not going to meet, you are going to lose sales. If you don't get out there and sign a deal, you could be facing the loss of a $3m contract. We are seeing something positive but it is not yet something to get excited about."

www.continental.com