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Big Airlines' Paths Diverge

The differences between business styles at Continental and American are clear.
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Continental Airlines

(CAL) - Get Caleres, Inc. Report

, which is expanding, and

AMR's

(AMR)

American Airlines, which isn't, displayed their contrasting styles at the JP Morgan airline conference Thursday, disagreeing on everything from strategy to pricing to negotiations on the Open Skies agreement.

While Continental forecast 8% growth in 2006, American said domestic shrinkage would cancel out the impact of international expansion. Continental also mocked the

Delta Air Lines

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simplified pricing plan, which American successfully adopted. And the two carriers clashed over the effects a proposed Open Skies pact would have on access to London's Heathrow airport.

The differences were in evidence despite strong similarities between the two carriers, who are alone among the six major legacy carriers in seeking to restructure outside of bankruptcy court.

Both Continental and American are committed to securing premiums on ticket pricing, and both have won labor-cost reductions through consensual agreements with unions. To this point, Continental has been more successful in terms of improving the margins between revenue per available seat mile and cost per available seat mile.

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"We have a laser-like focus on margin," Continental President Jeff Smisek said Thursday.

Continental CFO Jeff Misner said American "has a margin about half of ours at this point." Misner also noted that, on a margin basis, Continental compares favorably with low-cost carriers. He said such carriers, often referred to as "LCCs," ought to be known as "LRCs," for low-RASM carriers.

Smisek said Continental sought $500 million in cost reductions from labor only after reducing other expenses by $1.1 billion annually. "We didn't have to take the company to the brink of bankruptcy," he said.

Meanwhile, Beverly Goulet, American's treasurer and vice president of corporate development, said her company continues to face severe cost challenges. Plus, she said the company must continue to improve labor productivity and efficiency.

"It's not a secret that on a relative basis our costs are not where they need to be," she said. "We can't allow this to persist for the long term.

For a company that has $20 billion worth of debt, with record fuel prices, clearly the challenges are there."

Goulet said American has reduced costs by $5 billion since 2002 and has identified $700 million more in 2006 cost reductions, not including the potential additional impact from a third round of hub restructuring. The airline also expects $300 million in 2006 revenue improvements.

Continental and American are at odds on the benefits of the simplified fare structure introduced by Delta in January 2005. American subsequently adopted, in part, its own new fare plan. Delta filed for bankruptcy protection in September.

Smisek didn't mince words about his feelings. "I still think simplified fares are stupid, (and) I think Delta got what it deserved." He said Delta's move to stop requiring a Saturday-night stay for passengers to get a lower fare was "criminally insane."

American has benefited from its simplified fare structure, which has enabled it to lure back business travelers who had fled for low-cost carriers.

On Heathrow, Smisek said a revised Open Skies agreement is pointless without improved access to the airport. But Goulet said that airlines who want slots at Heathrow will have to find ways to secure them.

"I don't think we expect it to be quite the skies-falling scenario that some people envision," she said.