It's A Wing And A Prayer At Continental

Hollis Harris was determined: The December flight of Continental Airlines Holdings Inc. into Chapter 11 wasn't going to be another dispiriting airline bankruptcy. Free from Frank Lorenzo and protected from its debts, Continental would fly high enough to attract new investors. With a new logo and a freshly polished image, the airline would survive.

Yet eight months later, Harris' utopian vision of bankruptcy somehow dissolved into a bizarre voice-mail appeal to Continental's 42,000 employees. Beset by board pressure and executive infighting, Continental's new CEO on Aug. 20 exhorted his troops to pray "three times a day" for survival. "We're at war with forces within and outside the company," Harris intoned mysteriously. The next day, the board ousted him.

Turmoil is nothing new at Continental. But with Harris' departure, pressure is building to dismantle the airline, not preserve it. While Continental's board is searching madly for a savior, its creditors already are nervous about getting short shrift in a board-sponsored reorganization plan. Given the current state of the capital markets and the company's labyrinthine debt, finding a single buyer seems a long shot at best.

'THE RIGHT THING.' Nothing in Harris' 36-year tenure at Delta Air Lines Inc. could have prepared him for Continental. Reluctant to cut costs and abandon his growth strategy even in the face of $290 million in first-half losses, Harris gradually lost the confidence of both the board and creditors, say sources close to both groups. Harris, a minister's son, responded to the carrier's sinking fortunes with his call to prayer. That only increased his isolation. "I just thought it was the right thing to do," he says, declining further comment.

His replacement is former Lorenzo lieutenant Robert R. Ferguson III, a grizzled veteran of bankruptcies at Eastern Air Lines Inc. and Braniff Inc. A hard-nosed financier, Ferguson has already been working behind the scenes to wrench millions of dollars in concessions from Continental's airplane lessors. He also crafted the carrier's Aug. 20 plan to cut 600 jobs, 6% of its fleet, and 6% of its daily flights. More cuts are expected.

Ferguson can't slash forever, though. Continental's wages are already low, and airlines have heavy fixed costs. Chase Manhattan Bank lent the carrier a much-needed $120 million in June. But barring a roaring economic recovery, Continental may have trouble making it through the slow winter season without selling such assets as its Pacific routes.

STALL TACTICS. The airline may end up being sold piecemeal. While Northwest Airlines, USAir Group, and Los Angeles financier Marvin Davis are all talking to Continental, there's a lot working against a single buyer. The carrier's nonunion work force would create big problems for unionized Northwest and USAir, which both have their own financial troubles. And its assorted debts--some of them contingent liabilities left over from the Eastern mess--pose a problem for anybody. For instance, Eastern's creditors claim Continental wrongly diverted more than $400 million in assets from Eastern. Even Continental admits that number could escalate.

That's why Continental's creditors are getting restless. With no concrete solution emanating from the board, the unsecured creditors petitioned bankruptcy court on Aug. 20 for the right to present their own reorganization plan. The judge turned them down. But count on the group to call on all bidders to get the best deal they can.

Arguing against the creditors, Continental corporate counsel Barry Simon said a plan couldn't be structured until the right investor surfaces. "You can't write Hamlet without the Prince of Denmark," he told the court. Many of Continental's creditors got their fill of such stall tactics in the disastrous Eastern bankruptcy. Given that sour experience, don't expect them to believe in princes any more than they believed in prayers.

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