Skip to main content

Updated from Nov. 19

Shares of

Continental Airlines

(CAL) - Get Caleres, Inc. Report

fell Friday amid higher oil prices and the company's announcement late Thursday that it would seek $500 million in annual concessions from employees.

Continental says it's the last of the traditional U.S. network carriers to seek companywide pay cuts since the Sept. 11 terrorist attacks. In a news release late Thursday, the airline said current market conditions require the cuts if Continental is to have a chance at returning to profitability.

"This is a difficult and painful decision, but we need to take this action now, before we find ourselves in a severe crisis," said Gordon Bethune, the company's chief executive. "While a competitive financial analysis would support our asking for substantially larger reductions, $500 million is the absolute minimum we need to be a survivor. As always, we will work together to identify solutions that treat each employee fairly as we achieve the necessary savings."

Continental shares fell 28 cents, or 2.5%, to $11.07. Most other airline stocks declined as well, with the Amex Airline Index down 2.7%.

About half the savings is expected to come from productivity and benefits changes, with the rest from wage cuts. Continental will begin meeting with various employee groups to discuss the changes. Wage reductions will be progressive, with lower-paid employees being asked for a lesser amount, the airline said.

Continental said its pay cuts will begin in the executive suite. President Larry Kellner, who will take the CEO reins from Bethune at the end of this year, has agreed to reduce his base salary and performance pay by 25%, while the company's president-elect, Jeff Smisek, has agreed to a 20% reduction. Both executives will decline to accept annual bonuses this year. Three other senior executives have also agreed to reduce base salary and performance pay 20%. The executive pay cuts will take effect at the end of February, which is when Continental hopes to have all the concessions in place.

Like other U.S. network airlines, Continental has found itself struggling with high fuel prices and overcapacity. Tough price competition from low-cost carriers like

Southwest Airlines

(LUV) - Get Southwest Airlines Co. Report


Scroll to Continue

TheStreet Recommends

JetBlue Airways

(JBLU) - Get JetBlue Airways Corporation Report

has made it tough for airlines to pass higher fuel costs on to customers.

Given the current industry environment, many observers had expected Continental to move to reduce employee pay and benefits. In September, CEO Bethune said the airline would have to seek cuts if revenue trends didn't improve "dramatically."

What was surprising, however, was how soon the announcement came, according to Jamie Baker, an analyst at J.P. Morgan. "We thought Larry Kellner would have spent the first several months of his tenure building new bridges with labor," Baker wrote in a research note. "Apparently, we were mistaken. Kellner has instead come out swinging."

The analyst added that Continental's move will likely apply further pressure on the managements of American Airlines parent




Northwest Airlines


to seek to further cut costs.

Baker characterizes the falling wage bar at network carriers as a positive for their stocks, because lower expenses will allow the companies to compete better against low-cost rivals.

Continental's pilots, flight attendants, mechanics and dispatchers are represented by unions; about 60% of employees are non-union.

In a statement, the Air Line Pilots Association, which represents 4,100 Continental pilots, said it would try to determine whether management's proposed concessions "come from a true 'need' -- not just a 'want.' ... If the need is established, this process must include securing appropriate returns for the pilots' investment when the airline returns to profitability."