Continental Airlines to cut 3,000 jobs, capacity

updated 7:38 p.m. ET June 5, 2008

DALLAS - Business travelers are likely to lose out when the fall off-peak season arrives and airlines that have cut flights slap more restrictions on the cheap fares that usually come that time of year.

Continental on Thursday became the latest airline to announce cutbacks, saying it will shed 3,000 jobs — more than 6 percent of its work force — and reduce capacity by 11 percent this fall.

The industry is battling record fuel costs that have pushed it into its worst crisis since 2001.

Amid that, Continental said its two top executives will forgo pay the rest of this year.

The Houston-based airline said recent fare hikes have not covered the cost of fuel, which has nearly doubled in the past year. Continental estimates it will spend $2.3 billion more on fuel this year than last — a difference of $50,000 per employee. Fuel has surpassed labor as Continental’s biggest expense.

In a memo to employees, Continental Chief Executive Lawrence Kellner and President Jeffrey Smisek said at current fuel prices Continental is losing money on “a large number of our flights.” As fares rise, fewer people will fly, and “we will need fewer employees to operate the airline,” they said.

The executives said they expect most of the 3,000 job cuts will be handled through voluntary buyouts to limit layoffs. They didn’t rule out more job losses.

Unions were positioning to limit layoffs. Mark Adams, a spokesman for Continental pilots, said he hoped the company would offer attractive buyouts to those near the previous retirement age of 60 so that younger pilots could keep their jobs.

Kellner and Smisek said they will not take salaries or incentive pay the rest of the year. In a regulatory filing, the company said Kellner, who was paid a salary of $712,500 last year, would get $296,875 this year, and Smisek’s salary would be cut to $240,000 from $363,300.

Kellner’s total compensation last year was valued at nearly $6 million, according to an Associated Press analysis, although about one-third was in stock and option grants that are now worth far less than they were when granted in February 2007 because of the slump in the company’s stock.

Many analysts consider Continental to be the healthiest of the six big network carriers, a group that excludes low-fare Southwest Airlines Co. But that did not make Continental immune from cuts — the airline still lost $80 million in the first quarter after earning a profit last year.

“If they did not do it they would be irresponsible,” said Ray Neidl, an analyst with Calyon Securities.

“At current fuel prices, the old economics do not work. Ticket prices have to rise dramatically, and the only way that can be achieved is by sharply reducing capacity,” he said. “The whole industry has to show this discipline or some big airline will have to go out of business.”

Continental is the latest airline to make sharp cutbacks.

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