Chapter 6: The Jaws of Victory

Continental Airlines approached deregulation with cautious skepticism. On the one hand, it opened up vast opportunities for expansion, but on the other, it allowed rivals to do the same. Competition was intensifying from every direction. In Houston, Continental was battling for dominance against Texas International and National Airlines. Denver was no easier, with United, Western, and Frontier all jockeying for position. Over in Los Angeles, the situation was even more chaotic, as a swarm of airlines fought for a slice of the lucrative coastal market. Holding onto its market share in this new, unpredictable landscape was going to be a serious challenge.
But Continental had an ace up its sleeve: Western Airlines. Since 1978, the two carriers had been working toward a merger. The first round of talks, though, ended in a way no one expected—over a coin toss. Western’s CEO, Terry Drinkwater, and Continental’s CEO, Bob Six, had agreed to let fate decide the name of the merged company. If the coin landed on heads, it would be called Western Continental. If tails, it would be Continental Western—a nod to Continental’s iconic “Golden Tails” branding. But when the coin landed heads, Six was so frustrated that he abruptly called off the deal.
By 1980, both airlines were feeling the weight of deregulation more acutely. The industry had become a battlefield, and both companies knew they had to adapt or risk being swallowed by the competition. Realizing that their futures depended on it, the two airlines revived merger talks. The Civil Aeronautics Board (CAB) began scrutinizing the potential impact of the deal. On paper, it seemed like a natural fit. Although the airlines shared key hubs, their strengths were complementary. Western dominated the West Coast, while Continental had solid footholds in Denver, Houston, Hawaii, and the South Pacific. Even more so, they shared a similar fleet of aircraft. Together, they could form a more formidable airline, better equipped to withstand the turbulence of deregulation. After months of scrutiny, the CAB found no reason to block the deal.
On March 20, 1981, the CAB gave its blessing, and the merger was set in motion. Eleven months later, Western Airlines ceased to exist as an independent company. Continental became the surviving brand, although the holding company retained the name Western Airlines Holdings. The merger strengthened Continental’s position, particularly in the crucial intrastate California market and at Denver, where it became the second-largest airline, standing neck-and-neck with United. By the time the merger was complete, Continental had climbed to become the sixth-largest airline in the United States by passenger count.
But despite this newfound size and scale, Continental’s problems were far from over. The airline operated on a higher-cost model than its competitors, which, in an era of fare wars, left it vulnerable. Continental prided itself on offering a higher level of service than most rivals, justifying its higher ticket prices. However, this strategy backfired as low-cost airlines increasingly gained favor with budget-conscious travelers.
The real trouble began in Houston, Continental’s historical stronghold. National Airlines, revitalized under Frank Lorenzo after merging with Texas International, had aggressively cut costs and slashed fares. Continental found itself struggling to keep up. As National’s market share in Houston soared, Continental began scaling back its operations, reducing the number of routes from over 20 to just 10 by 1985. It also shuttered its El Paso hub in an effort to consolidate resources. Realizing it couldn’t outcompete National in Houston, Continental shifted its focus to defending its positions in Denver and Los Angeles.
Denver, however, was a grueling battleground. Continental and United were locked in a dead heat, neither airline able to gain a decisive edge. Los Angeles presented an even greater challenge, as new airlines flooded the market, threatening Continental’s once-secure foothold. Although Continental maintained a strong presence in L.A., it was forced to abandon Western’s former California intrastate routes by 1984 due to mounting pressure from low-cost carriers.
Yet even these efforts proved difficult. In Denver, Continental faced fierce competition from United in a race that neither airline could decisively win. Los Angeles was even more challenging, with new entrants flooding the market and putting pressure on Continental’s remaining routes. By 1984, Continental had been forced to abandon Western’s former intrastate California routes, unable to keep up with the surge of low-cost competitors.
Internally, things were deteriorating as well. CEO Al Feldman, who had led the company through the merger, was increasingly absent, struggling with depression after his wife’s death in 1980. His withdrawal created unease among investors and executives alike, and by the mid-1980s, Continental was on shaky ground. The airline had implemented cost-cutting measures, including service reductions and a switch to a chrome finish on its aircraft to save fuel, but the situation remained precarious.
By 1985, it became clear that Continental would soon become a takeover target. The airline’s prospects for growth were stifled by mounting losses, and its higher-cost business model was no longer sustainable in a deregulated, price-sensitive market.
On June 2, 1985, Frank Lorenzo made his move, purchasing 10% of Continental’s shares and publicly expressing his desire to merge the airline with National. Lorenzo’s ambition was to expand National’s reach on the West Coast and acquire Continental’s coveted Hawaii and Micronesian routes. But his reputation preceded him, especially among labor unions. Stories of wage cuts and harsh cost-cutting measures at his other companies had spread, and Continental employees were understandably alarmed. In a letter to Lorenzo, the unions made it clear that they would fight any takeover attempt, fearing that their wages and working conditions would suffer under his leadership.
Feldman also opposed the merger, describing the combined airline as "weak" and fearing the fallout from inevitable labor disputes. Desperate to avoid a union battle, Feldman sought a white knight to save Continental from Lorenzo’s grasp.
Enter David Garrett Jr., CEO of Delta Air Lines. Delta had been navigating deregulation successfully and was looking for a way to expand westward. Continental represented the perfect opportunity for Delta to become a truly nationwide carrier. Just two weeks after Lorenzo’s announcement, Delta made its own intentions clear, purchasing 12% of Continental’s stock and signaling a potential merger. Lorenzo lashed out, accusing Delta of attempting to block a beneficial merger, but Continental appeared to welcome Delta’s interest, refusing to engage further with Lorenzo. With Lorenzo refusing to back down, the bidding war to decide Continental’s fate began.
A little over one month after Lorenzo submitted his bid, Delta and Lorenzo had acquired a combined 71% of Continental’s stock. Feldman still tried to facilitate Delta’s offer as much as possible. One potential issue about a Delta-Continental merger that irked Garrett was the unions themselves. Delta, with the exception of the pilots, was a non-union airline. Continental, on the other hand, was unionized. Delta had an advantage in the market due to its non-union status and was not keen on dealing with the effects of Continental’s unions. So, in meetings with Continental union leaders, Garrett promised that as long as the unions at Continental were dissolved, the employees would be entitled to the same payscale as Delta’s employees, which were higher than Continental’s.
It was all the Continental employees needed to hear. With employees and management aligned behind Delta, Lorenzo realized he was backed into a corner. In a meeting with Delta and Continental executives, Lorenzo agreed to withdraw his bid, provided Delta offered a superior bid and purchased his shares. Delta complied, and Lorenzo walked away with a $24 million profit, which he soon used to acquire another airline. On November 13, 1985, the Department of Justice approved the merger between Delta and Continental. By October 1986, the Continental brand disappeared as the airline officially merged into Delta.
Delta enjoyed having an expanded presence in the West Coast following the merger. Like Continental, Delta was a powerhouse at Los Angeles and was able to compete with the myriad of other carriers there. At Denver, Delta’s more nimble and less bureaucratic workforce proved to be effective against United, and though the battle at Denver benefited neither airline, Delta proved to be a formidable opponent.
Another quirk of the merger was the inheritance of Air Micronesia. Delta had gained nearly full control of the airline, and instead of the Saul Bass meatball, the Delta Widget flew over the small Pacific islands. Over the following decades, the aircraft of “Delta Mike” would fly milk runs to the islands under the Delta brand.
Delta came out of the merger a bigger and stronger airline. Though Lorenzo had failed to seize Continental, his sights quickly shifted to his next target.