Jeff Smisek: United Continental's king of the skies

jeff_smisek_united_continental.top.jpg Interview by Geoff Colvin, senior-editor-at-large


FORTUNE -- When United and Continental merged last year to create the world's largest carrier, the official announcements never came out and stated the deal's true rationale: to blend Continental's management with United's scale. That's one reason former Continental chief Jeff Smisek is CEO of the new company. While he's scrupulous about calling the combination a merger of equals, nearly all of top management hails from Continental, which was far more successful than United over the past 15 years, despite being smaller. United, with a history of nasty labor relations, even went through bankruptcy from 2002 to 2006.

Smisek, 56, is a former corporate lawyer who learned his airline skills the hard way as part of the team that rescued Continental from near death in the mid-1990s. That turnaround, one of the most dramatic in recent business history, has become a classic case study. Smisek now commutes between home in Houston, Continental's base, and the new airline's headquarters in United's (UAL) hometown, Chicago. He talked recently with Fortune's Geoff Colvin about running a company that spends $25,000 a minute on fuel, how to build a new corporate culture, being relentlessly honest with employees and customers, and much else. Edited excerpts:

Q: Your business is a barometer of the economy. What's it showing you now, in the U.S. and globally?

A: We're a business-oriented airline. We love all our customers -- we just love some more than others, and those are the business travelers. Business travel is coming back, and that's a show of strength in the economy. You see it across all geographic sectors. The tragedy in Japan aside, Asia's been very strong. Latin America has been good. Transatlantic has been strong, despite what you read about Portugal, Ireland, Greece, and Spain. And the domestic system has been coming back as well. So you can see the economy recovering through the growth of business travel and high load factors.

What did the recession teach you?

What we learned is the importance of capacity discipline. Ours has been an industry where it's very easy to add seats, through increased frequencies, flying the aircraft longer, or taking delivery of additional aircraft. In the recession we were very disciplined in getting our capacity down, and as we saw the recovery with high fuel prices, we've been very disciplined at United and across the industry in making sure we've got the right level of capacity and not supplying overcapacity, driving down pricing.

You pay a lot of attention to the price of oil. What's your expectation?

To say we pay a lot of attention to it is an understatement. That's our single highest cost. At today's prices we burn $25,000 of jet fuel a minute at United Airlines. For the amount of money we pay for fuel, we could buy a brand-new Airbus A380, the big airplane, every week and throw it away. I've got no more insight into where the price is going to go than any other person. If I knew that, I wouldn't be an airline executive, that's for sure.

Do you hedge it?

We do. We hedge it in a couple of ways. We hedge the short term through traditional derivative products, but that just lets you muscle through a period of crisis or high prices. Our best hedge is our fleet. We've got a modern and fuel-efficient fleet. We have great focus on operational efficiency. We've put winglets [upturned wing tips, which increase fuel efficiency] on over 300 of our aircraft. We just continue to go on and on focusing on operational efficiency.

We've seen a lot of big deals in this industry in the past few years -- Delta/Northwest, United/Continental, Southwest/AirTran. How close is the industry to being fully consolidated in the U.S.?

I don't think it's there yet. I think consolidation is a good long-term trend for this business. This business has had very low barriers to entry historically and has had high barriers to exit because everybody who touches us makes money, and they don't want us to die. And we've had a great deal of fragmentation, not only domestically but internationally as well.

There's more room for consolidation, even in the U.S., and there's considerable room overseas, not only in Europe but also in Asia and certainly in Latin America. There's a lot more consolidation to come. It's a natural product of a highly fragmented, capital-intensive industry, and certainly the merger efficiencies are real. That's why we merged. And in a network business you want a big network, and we have the biggest network in the world because of our merger.

Is there a threat to airline brands as a result of code sharing? I can go online and buy a ticket on United, but when I get to the airport, I'm on a US Airways airplane.

We need to be careful in the industry to make sure customers understand what code sharing is and what it is not. Code sharing is a way to, in effect, build a synthetic network that you alone would not build. There are basic standards of safety and reliability that we won't alter, but each company has its own service delivery and its own brand. There is a risk there, and we need to make sure people understand that when they're flying on a code-share flight operated by another carrier, they may not get the same quality of service, in the example you used, say, that you would expect from United.

You're now integrating a huge merger, creating the world's largest airline. In a J.D. Power customer satisfaction survey last year, Continental was above average in customer satisfaction, while United was below average. How do you make sure the combined airline doesn't just end up in the middle?

It's a great question, and a lot is going to be based on the culture we develop. I'm a big believer in culture, especially in a service business, and what we're creating is a culture based on what I like to say are the two things my mommy taught me: Treat other people like you'd like to be treated, and never tell a lie.

If you have a workforce that enjoys each other, they trust each other, they trust management, they're proud of where they work -- then they're going to deliver a good product. You can lecture and train, but unless they really believe in who they work for and are proud of who they work for, and trust each other and trust management, you won't get that.

My management team and I are spending a lot of time on developing the new culture. It won't be precisely Continental's culture, and it sure won't be United's old culture. It'll be something that takes what I hope to be the best of both. We're very focused on that because you do run the risk in any integration of ending up with mediocrity.

This was and is a merger of equals. That doesn't mean coin flips. It means picking the very best of each carrier and bringing them together.

United has a history of very contentious labor relations. Why should the old United employees believe that things are going to be any different now?

One, there's been a wholesale management change. That's very visible: It's a different management style, and I think that makes a difference. Two, they understand what we're building here. These are airline professionals, and they understand that this is their chance in a lifetime to build a spectacular carrier that they will really enjoy working for, that'll provide them some career stability they've not had in the past, and will improve wages and benefits because of profitability. No amount of words mean anything if you're not making money, and they see this is the chance to have a business that makes money throughout the cycle and that can deliver great benefits to all our constituencies, including employees.

You were on the team that saved Continental in the mid-'90s. What did you learn from that experience that's applicable here?

A couple of things. Our business plan is the Go Forward Plan [a short statement of company objectives on marketing, finance, operations, and employees] we were using at Continental for 16 years. It's a really simple plan. It's easy to understand, no matter if you're a pilot or on the ramp or a tech-ops person. That focuses everybody on what's important. It's one piece of paper. I tell my co-workers, if you're doing something and you can't trace it back to the Go Forward Plan, stop what you're doing and do something else. What you're doing is not worthwhile if you can't trace it back to this plan.

Second, one of the things I learned in the Continental turnaround is to treat people like you want to be treated. You're honest and direct with them. If someone comes to you with a silly idea, you don't pat them and say, "Oh, yeah, that's interesting, I'll consider it." You say, "No, I disagree," and you tell them why.

When we closed the merger, I did 16 CEO exchanges around the system where I met with my co-workers. I'd stand up and answer any question they wanted. They were not used to that at United, I can assure you. They were at Continental.

I'm starting on a round in Europe next week. I'll do Asia, I'll do Latin America, and then I'll start more in the U.S. again, just being visible, answering people's questions, and being honest with them. "When are you going to snap me back to the wages I had in the year 2000?" Answer: never. That was a different time, and you will never be paid like you were in 2000. We're in a different business now. Low-cost carriers used to be a small percentage of the U.S. market. Now they're a giant piece. Business has changed, and people respect you when you're honest.

That's what I ask all our employees to do, and the same thing with customers. If we've got a delay and we don't know why, just say it. "I don't know why, but I'll try to figure it out, and as soon as I know, I'll let you know." Customers much prefer honesty to being given the runaround.

What are the most important issues facing United Continental now?

Certainly integrating these two carriers. Technology is a huge issue because we are functionally technology companies with wings. There are a lot of big systems we have to bring together. There are issues with bringing the work groups together. We're a highly unionized carrier. In some cases we have work groups represented by the same union; in some cases we have work groups represented by different unions, and we have to elect a union to represent all of them; and in some cases we have work groups where at Continental the co-workers did not have a union and at United they do have a union -- they've got to decide whether they want a union.

You mention the integration challenge. You have hundreds of airplanes, thousands of employees, millions of customers it's hard to think of a business with more moving parts. Integrating the IT systems must be a huge job. How's it going?

It's akin to changing the engine while the airplane's in flight. We're being thoughtful about it. We've broken the IT down into the basic set of about 15 platforms. We are not only understanding all the interdependencies and prioritizing the integration, but also not picking an industry-leading third-party system, because of the migration risk. What we're typically doing is picking one [airline's] system or the other and migrating that. We'll have plenty of time to go to the cutting-edge system later. I just want to make sure above all that we land safely.

An airline is more vulnerable to disruptions than many other businesses. So many things can go wrong. The snowstorms this past winter --

Volcanoes.

Volcanoes. You can't predict this stuff, and it can cost you millions of dollars. What have you learned about preventing disruptions when they can be prevented, and handling them when they happen?

A lot of things you can't prevent, whether it's fuel costs or the terrible tragedy in Japan or volcanoes or SARS -- there's nothing you can do to prevent it. What you can do is respond thoughtfully but rapidly. We are professional crisis managers in the airline business, and we're very good at it. We remain calm. We have great data systems to help us make good decisions. One thing we are very good at is making decisions and moving swiftly, because you can have all kinds of theoretical discussions, but the person at the gate says, "Do we push back or not?" And you have to be able to answer that question.

You were a partner at a big, famous law firm, Vinson & Elkins, which you left to join Continental in 1995. Things have turned out pretty well, but at the time, that was an enormous gamble. Why did you do it?

I was being offered a job as general counsel, and I had some preliminary discussions partly as a favor to a friend of mine who had set it up. The person who was talking to me asked if I wanted to meet the new CEO [Gordon Bethune]. Well, if you're a partner at a big law firm, and you have an opportunity to meet the CEO of a company that's really broken and in a mess, you get in sales mode. I thought, "Oh, this is great. I can sell lots of legal services to this guy." What I didn't realize is, Gordon Bethune was a far better salesman than I will ever be. He sold me on the dream of turning Continental around, and I must say I've had the time of my life. It's been enormously fun and very rewarding.

Would you advise young people today to plan their career, or take an approach more like yours?

Look, I started out -- I was going to get a Ph.D. in economics, and I went to MIT. I dropped out. I worked in New York for a bank for a couple of years. I went to law school, principally because I wanted to be near my girlfriend. Then she moved to Houston, and I followed her for love, and we got married. I was an M&A and securities lawyer for many years. I went into the airline business. I could never have planned this out -- trust me. I had an opportunity to move from a cushy job as a partner to a very difficult and at the time dicey company, but I took that opportunity, and I've never regretted it. To top of page

The leadership series Formerly called "C-Suite Strategies," this is the latest interview with top executives by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/leadership-- plus find Colvin interviews with Charles Schwab, the team of Jeff Immelt (GE) and A.G. Lafley (P&G), former New York City school chancellor Joel Klein, Pimco's Mohamed El-Erian, Humana CEO Michael McCallister, and many more.