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Continental: Writing The Book On Chapter 11

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If ever there was a textbook case of how to manage a bankruptcy, the Chapter 11 filing of Continental Airlines Holdings Inc. is it. So far, at least.

Continental Chief Executive Hollis L. Harris is using the Bankruptcy Code masterfully to cut the carrier's lease costs, improve the fleet, and further strategic goals. Continental is still in dire financial straits. But the new CEO is clearly making Chapter 11 work for him.

Harris' main target so far has been Continental's $439 million in annual costs from its aircraft operating leases. These charges dwarf its $225 million 1990 net interest tab from ordinary debt. Lessors say the carrier is simply canceling leases on some old, inefficient airplanes. In other cases, it is asking lessors variously to cut lease rates, cover major maintenance work, and help pay for new paint jobs and interiors as part of a $50 million image-building campaign.

UPROAR. Ironically, Continental's clout in these dealings is enhanced by the same industry turmoil that pushed it into bankruptcy. Because the nation's airlines are so downtrodden, there's little market for aircraft, leaving lessors hard-pressed to take the jets and place them elsewhere.

Continental also got a big boost from federal Bankruptcy Judge Helen S. Balick. Until now, an airline in Chapter 11 had to resume lease payments 60 days after filing--or it had to give the plane back and make the lessor whole. But Continental persuaded Balick to distinguish between two types of leases: those used by airlines to add planes to their fleets and those used simply to raise cash by selling planes and leasing them back from the buyer. The judge ruled that the second type doesn't fall under the 60-day rule. And those lessors can't retrieve their planes.

Balick's ruling has caused an uproar in the industry. But since about 33% of Continental's leases are the second type, it immediately saved the company $54 million. The ruling has been vociferously appealed and may be overturned. Meantime, many lessors are dealing rather than waiting. Says banker Nils Hallerstrom of Credit Lyonnais/PK Airfinance: "It will be very difficult to resist renegotiating terms on older planes."

Integrated Resources Inc. has already buckled under. On three DC-9-30s, the lessor has agreed to reduce payments 5%, to $76,000 a month, and will throw in $150,000 per plane for new cockpit electronics. Some of its other leases have been affirmed. But Integrated expects Continental to reject some old 727-100s. "They're using the bankruptcy code to extract concessions," says Integrated's Jeffrey A. Brodsky. "It's working."

Despite the cost-cutting, Harris has also been shopping for assets--another luxury of Chapter 11. In February, he snapped up six gates and 64 landing slots at New York's LaGuardia Airport from Eastern Air Lines Inc. and landed six Airbus Industrie A300 widebodies. Continental will assume the airplane and real estate lease payments, but it's paying only $3 million up front.

LONG MEMORIES. The planes will need new paint, spruced-up interiors, and a big government-mandated maintenance overhaul. No problem. Amid an industry credit crisis, Chase Manhattan Bank agreed to pony up a $20 million loan. The reason: By lending to a "debtor-in-possession," Chase becomes a first-priority creditor in case of liquidation. Sources guess that Chase also has its eye on Continental's debt restructuring.

Continental's coup will eventually translate into improved presence at New York's most convenient airport and an upgraded fleet sporting new colors. That should help lure lucrative business passengers. Reducing lease payments and placing new widebody planes on overcrowded routes should lower costs and increase efficiencies, helping Continental to keep fares low. That's the plan, anyway.

But Continental's unsecured creditors, who have vivid memories of the disastrous Eastern bankruptcy, are wary. The moves make sense so far, they say, but they're watching closely. Continental is still bleeding badly and struggling to build traffic in a recession (page 30). Sources close to the company say it is losing as much as $30 million a month. "The chain's going to be a lot shorter on Continental" than on Eastern, says one creditor. But for now, Harris is using every link.



Since filing for Chapter 11 bankruptcy protection on Dec. 3, 1990, Continental has:


44 New York-area departures, replacing many of Eastern's Florida runs


$54 million by suspending lease payments on about 33% of its fleet


a new image campaign, with plans to spend up to $50 million to repaint planes and change corporate logo


64 slots and six gates at New York's La Guardia Airport and six Airbus A-300 planes from Eastern

DATA: BWMark Ivey in Houston and Michael Oneal in New York

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