Continental Airline Arrangements
As a large shareholder, we are also extremely concerned by the manner in which the Company handled the Continental Airlines’ (“Continental”) contract negotiations in 2006 and 2007. It is our understanding that Continental approached the Company in 2006 to discuss its right to reduce its commitment under the Continental CPA, to discuss the Company’s proposed 2007 block hour rates and the components of cost that comprise them, and the overall relationship and pricing levels relative to the market. We believe that management mishandled the negotiations and miscalculated Continental reactions to the Company’s heavy handed negotiating tactics – which eventually unfolded in two ways. First, the parties initiated an arbitration regarding Continental’s dispute over the 2007 block hour rates and the underlying components of costs that the Company was advancing, and then the Company wasted $2.5 million in legal expense pursing its weak position which eventually illustrated that Continental was right and that the Company’s tactics were wrong. As a consequence, the Company’s contract with Continental has now been reduced by 69 planes – 25% of the Company’s entire fleet! While we understand that one of Continental’s primary objectives in the negotiation was to get the rates reduced or to get the planes back, the fact that the Company kept the planes rather than returning them to Continental, appears to be an expensive and spiteful mistake. With this unexpected, newly-created surplus of airplanes, the Company embarked on its ill-fated Branded Flying strategy, a decision which we believe cost the Company over $100 million in total costs and aggregate losses in 2007.
It is unclear what the Company intended to accomplish by its negotiating strategy, but it clearly did not work and, in fact, backfired. As you well know, the Company’s contract with Continental is significantly above market and every day that goes by only hardens Continental’s position. Continental will undoubtedly release an additional 51 planes at the end of this year which will further reduce the Company’s overall cash flows by at least another 25%. We recognize that the Company may be concerned about the Most Favored Nation (“MFN”) provision in your Continental contract and that to scale up with any other carrier on a fixed price agreement may jeopardize those arrangements. However, based on the current circumstances, now is the time to strongly consider re-negotiating those provisions in exchange for the long term certainty of that relationship.
If they were so concerned, why the hell did they buy the stock? All of those events unfolded WAY before June 2007. Any college business major doing a term paper could have added this all up. Why can't this inept firm just accept the fact that they screwed up?
