Magazine for Senior Financial Executives: Larry Kellner

Larry Kellner – CFO of Continental Airlines

Tim Reason



LARRY KELLNER DIDN’T REALLY BELIEVE the warnings about Continental Airlines Inc.’s information systems when he interviewed for the CFO slot in 1995. Although chairman and CEO Gordon Bethune and others were emphatic about “how broken a lot of [systems] were,” Kellner says, he viewed that as “a bit of a sales pitch” to convince him to take the job. After all, Continental still flew thousands of flights a day. How bad could the IT be?

He found out soon enough. On his first day, Kellner asked his new secretary for a PC with spreadsheet software and whatever E-mail system the airline used. “We don’t use Email, we use voice mail,” she told him.

“How,” he recalls wondering, “does somebody send you a spreadsheet over voice mail?” Adding insult to injury, Kellner found himself using two of the Houston-based airline’s nine unconnected regional voice-mail systems within a week. To forward a voice mail to a finance employee on a different system, he says, “I got my Dictaphone out, taped it over my speakerphone, and then played it back into his voice mail.”

“We were in the Stone Age in terms of information technology when Larry arrived,” recalls Bethune. “Today, we have some of the most sophisticated systems anywhere.” Kellner not only revamped Continental’s IT systems, he used them to help pull the airline out of its steep fiscal nosedive, earning him the 2000 CFO Excellence Award in the Information/Knowledge Management category and making the 41-year-old something of a flying ace: he is the first three-time winner in the history of the awards. Last year, he won in the Turnaround Management category, and in 1998 he received the award in the Managing External Stakeholders category, primarily for restoring Continental’s nonexistent credit and reducing the airline’s cost of debt.

Flying Blind

These days, it’s clear skies for Continental. The airline’s average cost of debt dropped from more than 12 percent in 1995 to 7.2 percent at the end of 1999. Revenues rose from $5.6 billion in 1994 to $8.6 billion in 1999, and shareholders have seen a 44 percent annual return during that same period. But when Kellner first took the controls, the company was flying blind.

Employees could not easily communicate between the company’s four Houston locations, let alone its global network of offices and reservation centers. Not only was there no money for new voice and data networks–Continental had no capital and a zero-investment policy in 1995–there were no people to install them. The airline had no chief information officer and only 20 employees devoted to technology–most of them managing a mainframe outsourcing contract with Electronic Data Systems Corp.

“One of the things I liked about Larry was his background in technology,” says Bethune. Kellner was responsible for information technology in both of his previous CFO positions, at American Savings Bank and The Koll Co. Within six months of stepping on board, Kellner had an E-mail system up and had hired the airline’s first chief information officer, Janet Wejman. Kellner gives Wejman most of the credit for implementing his vision for the airline, and says their reporting relationship exists only on paper. “I look at Janet as my peer,” he says. “We had huge investments to make in the technology area. Having finance and technology tied together allowed us to be more effective in getting them done.” Indeed, while the lack of E-mail and a unified voice-mail system were the most tangible signs that technology hadn’t been updated in 10 years, it was the core financial systems that were most sorely in need of an overhaul. In 1995, Continental’s finance folks could tell the profitability of a particular route-Houst on to Los Angeles, for example–but only on a monthly basis. “We had no idea what our profitability was by flight,” notes Kellner. Even data for a particular month took 30 to 60 days to compile.

It was known, however, that “18 percent of flying was before-ownership negative,” he says. In other words, almost a fifth of Continental’s flights cost more in fuel, crews, and food than they earned–and that’s not counting the cost of leasing the plane. “We could have parked those planes in the desert and made more money than flying them,” he says.

Top priority, therefore, was a flight profitability system (FPS) that showed individual flight performance. Once in place, the FPS quickly revealed that two flights left Houston for London with only about 30 passengers aboard, each within a four-hour period on Christmas Eve. “If those flights are blurred in with the whole month of December, they just don’t jump off the page,” says Kellner. Having data on the least-profitable flights allowed Continental to drop certain markets and design more appropriate schedules.

Once Kellner could look at each flight, he could also examine data from existing information systems more closely. For example, fuel and catering costs vary widely among airports, but Continental’s accountants typically applied average costs when calculating a flight’s profitability. Kellner commissioned a data warehouse to capture information from existing fuel management and catering systems. “If I already have that information in some other system, I want to tap in and get the actual cost rather than some allocation,” he says.

Daily Close

With Wejman’s help, Kellner got the FPS up in a year and a half, although they continue to improve it by adding supporting information, such as cargo revenue and labor costs, to the data warehouse.

It took twice as long–three years–to move the 600 people in revenue accounting from systems and processes designed for a year-end close to a system that could chart revenue daily. “Revenue was just a total black hole to us,” says Kellner. “We knew how many people were on the airplane, but we didn’t know what they were paying.”

At first, says Kellner, the Continental culture wasn’t very sympathetic to this goal. “A lot of people looked at me as if I were from Mars because I wanted daily financial information,” he says. On top of that was a practical problem: in 1995, all tickets were paper. “Tickets went into a bucket at the top of the jetway and were boxed and keypunched in Juarez, Mexico,” says Kellner. “We had a revenue forecast, but we had to wait with bated breath until the 15th of the following month to see if the forecast was right.” Today, thanks to Kellner’s improvements and the fact that about 50 percent of passengers use electronic ticketing, Continental can do a daily close with 80 percent of tickets processed.

The Squeaky Wheel

Kellner hasn’t neglected customers in his quest for revenue management, and IT plays a major role there as well. About 8 percent of total bookings are already done online, he says, and half of those come from Continental’s own site, which has been ranked number one in the industry two years in a row by Forrester Research Inc. “By 2005, you will see 50 percent of all tickets booked over the Internet,” predicts Kellner.

In addition to operational information, the data warehouse now stores data from reservation systems and the airline’s OnePass frequent-flier program. This forms the core of a customer information system that allows Continental to target-market high-profit customers–and bend over backward to keep them happy.

The system also weeds out chronic complainers angling for upgrades, says Kellner. “If someone complains 11 times in 11 flights, we might suggest another airline for them.” A customer who complains once in 11 flights, however, will get red-carpet treatment. “We want to avoid the squeaky wheel getting the grease,” says Kellner, who believes Continental’s best customers often vote with their feet. “They don’t call and complain, they just go somewhere else.”

As for Kellner, he’s staying put. Even though he’d be a top candidate for a corner office, he recently signed a new five-year contract as CFO. “I still find plenty to do 14 hours a day,” he says. In fact, he has a DSL line at home that connects him to Continental via a virtual private network that is “essentially as fast as my office desktop.” And it sure beats voice mail.

COPYRIGHT 2000 CFO Publishing Corp.

COPYRIGHT 2000 Gale Group