(FORTUNE Magazine) – COULDTHERE BE a business more ridiculous than aviation? Airlines aren't so much commercial enterprises as winged ATMs, spitting out cash to other constituencies--plane manufacturers, government tax collectors, and of course bankruptcy lawyers. The industry has cumulatively lost $5 billion over the past 65 years, with high fixed costs, volatile revenues, and a pricing system that only a mathematics Ph.D. could love and that its best customers hate. Those would be the people who pay $1,000 for a ticket and then sit next to a guy bragging about his $149 fare.

Not surprisingly, a great airline leader is as rare as a great ride in the middle seat. He must have extraordinary charisma to rally employees, like Southwest Airlines' Herb Kelleher. Or he must possess enormous powers of intellect and intimidation, like American Airlines' Bob Crandall, to stay one jump ahead of competitors and to keep multiple unions at bay.

So of all the absurdities afflicting the industry at this troubled time, perhaps none is greater than this: At year's end the best remaining CEO of a major "legacy" airline will be forced out of his job.

Gordon Bethune, chairman and CEO of Continental Airlines, in the space of ten years transformed that company from laughingstock to industry standard-setter. While Delta and US Airways are in death struggles with their pilots' union, Bethune has forged a nonaggression pact with his. So effective has Bethune's management been that this month the Wings Club, the elite aviation organization, will present him with its distinguished-achievement award, an honor it has given only two other living airline CEOs--Kelleher and Crandall.

And yet, as of Jan. 1, 2005, Bethune will be out of work. It's the result of a standoff between Bethune and Continental's former controlling shareholder, David Bonderman. Having battled off and on for years, the two men finally reached an odd armistice: Bethune agreed to leave Continental if Bonderman would leave the board. Bethune thinks he took one for the team, as will be explained, believing that Bonderman's departure would help ensure Continental's future. But what about Bethune's departure? Continental has a well-regarded management team at its Houston headquarters, to be led by 45-year-old Larry Kellner, now president and chief operating officer. But the Chicago Bulls were a well-regarded team too, until Michael Jordan left.

And what about Bethune himself? He should be a prime candidate to lead another airline, and he is unencumbered by noncompete restrictions. But he has been open as the clear blue sky in his contempt for competitors. He figures there are way too many airline executives who don't realize just how complex this business is and what it takes to survive. "They don't realize that while you're sitting here talking, someone is fucking you," says Bethune, "changing a fare, changing a flight, moving something. There's no autopilot, and that's why I've seen a lot of guys come and go."

The shakeout in the airline industry has not just multiple casualties but multiple dimensions. At one level it's an economic phenomenon: the legacy airlines' lemming-like rush to overcapacity, the Internet's disruption of ticket distribution, the factors in discounters' superior CASM (cost per available seat-mile). At another level it's purely personal: what turns workers on or off in the maintenance hangars, what turns people against each other in boardrooms. The story of Continental Airlines and Gordon Bethune plays out at all those levels.

CONTINENTAL'S blue-collar employees tend to be fond of Gordon Bethune, for he is one of them. He started out as a mechanic on Navy planes, and his early airline jobs were in maintenance. He cusses like the sailor he was for 20 years. Continental's pilots pretty much like Bethune too, and airline pilots normally can't stand CEOs. He's one of them also--a licensed commercial pilot, qualified to fly Boeing 757s and 767s. Female flight attendants may love Bethune most of all, for he's a shameless flirt and still a lean and vital 6-foot-3 at age 63. "Don't leave!" one recently beseeched him in a Continental terminal. "If I don't leave I'll be 80 years old in a wheelchair and drooling," he replied. "We'll push you!" the flight attendant said.

When Bethune arrived at Continental from Boeing in 1994, the company had gone through two bankruptcies in the prior decade and was in danger of going into Chapter 11 again. Employees were so ashamed to be associated with Continental that consultants suggested changing the company's name. Bethune thought not. "We don't need to change our name, we need to change us," he recalls saying.

To Bethune, the only way the traveling public was going to think better of Continental was for it to start delivering better service. And the only way to make that happen was to reward employees for providing it. The idea was basic enough to have escaped the consultants who'd been swarming over the airline. "Your measures have to be the customers' measures, and what do the customers want?" asks Bethune. "They want to get to Atlanta safely, on time, and with their underwear. Well ... why don't we do that? Now, there's a really novel idea."

At a time when Continental ranked last in on-time flights, Bethune promised to pay each employee a $65 bonus for every month Continental cracked the top half of airlines in on-time performance. The first month Continental shot up the list.

Bethune's mantra was simple: clean, safe, reliable. If Continental was all those things, the passengers would come. He didn't bring in marketing gurus; he hired crack operations people, most notably a Bain consultant named Greg Brenneman, who became his No. 2. After averaging $960 million in losses in the four years pre-Bethune, Continental in 1995 made $224 million. Profits took off from there, to $455 million in 1999. It was a big accomplishment, but the truth is that all the airlines were doing great then, as business travelers in the bubble economy took a "hang the expense" attitude toward air fares. Just book that night flight to San Jose--there are deals to be done!

But even as airlines minted money, the nation's two biggest ones were sowing dragon's teeth. United and American both made deals that infuriated their pilots and reverberated for years. In the case of American, it was the acquisition of Reno Air. American's pilots' union protested the handling of seniority with an 11-day sickout in 1999. In May 2000, United agreed to buy US Airways for $4.3 billion, touching off even worse strife. United's pilots worried that they'd lose their seniority in the combined company and fumed about an expected pay raise that now seemed to be back-burnered. They staged a slowdown that summer that bollixed up thousands of United flights. Management finally caved and agreed to give the pilots a mega-raise of 25%. The two airlines were left with poisoned labor relations and peeved customers.

No such problems festered at Continental, where Bethune worked hard to build trust and cultivate relationships. Each Friday, from his first year on, he has put out a three-minute, plain-talk "state of the company" voicemail. ("Hello, this is Gordon," began a recent one, followed by an update on Hurricane Jeanne, a plug for the company's Casino Night fundraiser, and the news that Continental has applied for a Newark--Beijing route.) But it's really Bethune's many informal encounters that bonded him with employees. You're apt to find him in Continental's flight-operations center on a Saturday, shooting the breeze with flight dispatchers. He frequently pops into pilots' lounges and onto hangar floors. He still has a jet mechanic's license, in addition to his commercial pilot's license.

"I've worked under a lot of presidents and CEOs," says Joe Caudle, a 53-year Continental employee, who this year gave Bethune that rarest of honors for an airline CEO: a ten-year service pin. "When the others came around, the employees would be ducking out. But with him, it's 'Hey, Bethune's upstairs!' They start smiling and want to shake his hand."

To Bethune, it's pretty simple. "When I was a mechanic, I knew how much faster I could fix an airplane when I wanted to fix it than when I didn't," he says. "I've tried to make it so our guys want to do it."

YES, ALL OF Continental loved Gordon Bethune--except for its biggest shareholder, David Bonderman, who'd put together an investment group called Air Partners to finance Continental's 1992 exit from bankruptcy. It was Bonderman who brought Bethune aboard, but they sure made an odd couple. Bethune was a high school dropout who didn't attend college until his 30s. Bonderman graduated from Harvard Law School. Bethune's world was black-and-white and boisterous. Bonderman reveled in complexities and was reserved. The only loud things about him were his outrageous socks and his 60th birthday party, where the Rolling Stones entertained.

"They appreciated each other at the beginning," says Tom Barrack, a Continental board member who's close to both. "David was thinking, 'I'm in the position of managing rock stars who think highly of themselves. Gordon can put his imprint on the company and turn it around.' Gordon was thinking, 'I've got one of the best financiers in the world, who has all the financial tools I need to lead.'"

The odd couple's relationship couldn't withstand success. The late '90s brought airline merger mania (witness the misadventures of United and American). With Continental's stock having zoomed from $3 to $65 over a three-year period, Bonderman began looking for a buyer who'd enable him to cash out. That turned out to be Delta Air Lines, which in January 1998 agreed to acquire Continental. Its CEO, Leo Mullin, would run the combined company, and Bethune would be out of a job.

Bethune was incensed, although in truth this moment was probably inevitable. Bonderman was just doing what dealmakers do: plotting an exit strategy and trying to maximize his return. He had made Robert Bass a lot of money doing that; now the Fort Worth investor was out to make a name for himself. But to Bethune, Continental wasn't a game of Texas Hold 'Em; it was a living organism. "An airline isn't a deal," he says. "It's a schedule of, like, 300 airplanes leaving at this time, getting there at that time, people loading the bags, showing up for work. If you've got a problem, the easiest way out is looking for the shortcut, with a lot of deals. But the business doesn't work that way."

His problem with the Delta deal was the raw deal being served Continental employees. (He was none too happy either about losing his job to Leo Mullin, who was just in from the utility industry.) At airlines seniority is everything. A worker's pay, advancement, and layoff vulnerability all depend on his place on the seniority list. One of the trickiest aspects of an airline acquisition is equitably merging the two companies' seniority lists. But not in this case. Bonderman had agreed to terms that would have Continental employees, in union parlance, "getting stapled to the bottom" of the Delta list. They would, in other words, be shoved way down the seniority pecking order. Bethune went before the board, saying, as he recalls, "I always told the employees, 'I'll never sell [the company] and you get screwed.' I have to honor that."

When Northwest Airlines emerged with a competing bid, Bethune urged directors to give it equal consideration. Delta helped make their choice easier. Given a chance to develop a more Continental-friendly seniority-list plan, it did not. On Super Bowl Sunday in 1998, the board picked Northwest, which paid Air Partners $383 million in cash and stock to become Continental's new controlling shareholder.

The arrangement was supposed to leave Continental free to run autonomously. In practice, Bethune found it didn't. In 2000 he started pressing Northwest to let Continental buy back its stock. Northwest didn't care to sell, and Bonderman, still a Continental director, didn't care for Bethune's actions. Though Bonderman declined to comment, people familiar with his thinking say simmering discontent with Bethune came to a boiling point then. Bonderman felt Bethune had grown full of himself because of Continental's success. To him, the problem wasn't just Bethune chafing at being under Northwest's control but his chafing at being accountable to anyone.To him, Bethune was a man of the people with Continental's workers but an imperial CEO in his dealings with Continental's board.

Bethune saw the problem as just the opposite, according to associates. The board members had all preceded him at Continental and looked to Bonderman for airline expertise. Though Bethune had more than proved himself as CEO, he felt the directors still took their cues from Bonderman. Bethune didn't enjoy feeling like the hired help, particularly when, in the midst of his Northwest buy-back quest, he felt he got a clear message from Bonderman: You can be replaced. He discovered that Bonderman had spoken to Greg Brenneman, his No. 2, with the purpose, he believed, of seeing whether he'd be willing to replace Bethune as CEO. Both Bonderman and Brenneman, through spokesmen, say there was never any putsch attempt. But Bethune believed there was, and his once-close relationship with Brenneman was ruptured. Brenneman left Continental in May 2001 because, according to his spokesman, he'd seen the beginning of the industry's decline and wanted to move on to opportunities in other industries. Brenneman is now CEO of Burger King, which is partly owned by Bonderman's Texas Pacific Group.

Bethune finally found leverage against Northwest in a Justice Department antitrust suit contesting the Northwest/Continental deal. Just as it was going to trial, Bethune jumped sides and began helping out the government. Northwest quickly came around to selling the stock back to Continental. When the $450 million transaction was completed, on Jan. 22, 2001, Bethune declared it Independence Day at Continental. For the first time since Frank Lorenzo's arrival in 1982, the airline wasn't under the thumb of a controlling investor. Every office and workroom in the company threw a celebration party; every employee got a $100 bonus.

NINE MONTHS later the whole world and the whole business changed. On the morning of Sept. 11, 2001, Bethune was conducting a board meeting. "We were going over the 2002 financial plans, which I promptly threw in the shit-can," recalls Bethune. "They were no longer relevant."

The best measure of what Continental accomplished after that day isn't necessarily what it did, but what it didn't do. It didn't follow the lead of every other legacy airline and cut out complimentary meals in coach. It kept serving food and strove to make it better. It didn't extract labor concessions, as did every other legacy carrier. Continental kept its pay scales intact.

"Our reaction was to be ourselves more than we ever were," says Bethune. "Didn't take away the movies, didn't take away the blankets and pillows, didn't take off the magazines. We talked about this a lot, and I said, 'Look, guys, if ever we were consistent and reliable, we have to be now. You have to be steady when the fucking sky is the shakiest. We've got to be clean, safe, and reliable, and let everybody know it. That's all we got. That's our edge in the business.'"

It may sound like common sense, but consider how badly things played out elsewhere. Jim Goodwin, the CEO of United on 9/11, spooked his troops with a doomsday letter about the company "hemorrhaging" money. He was already wobbly after the labor debacle of 2000 and was soon gone. Don Carty's shaky relations with his unions came back to bite him too. In the spring of 2003, as American Airlines contemplated Chapter 11 and Carty sought wage cuts, it was revealed that he and other top brass had taken steps to protect their rich pensions. Amid the ensuing uproar, he resigned. (Delta's Leo Mullin met a similar fate over his pay package.)

Though Bethune also had to force some bitter pills on his employees--like laying off 12,000 of them, when Continental cut back its schedule 20%--accrued good will translated to effort. On the day of the big blackout last year, Northwest Airlines canceled 216 flights and American 141. Continental canceled 30. Travelers flocked from La Guardia and J.F.K. to its Newark hub, and Continental raked in a lot of extra revenue. "Why didn't they fly and we did?" asks Bethune. "Because our people wanted to. They said, 'Let's figure out how to get this shit out of here.' My advantage is: Our guys kind of want to do it."

Bethune also handled his pilots differently than other airlines did after 9/11. The final straw that drove US Airways back into bankruptcy was its pilots' union's refusal to make further concessions. Delta faced scores of pilots taking early retirement. Fearful that their pensions would be scuttled, they elected to take lump-sum payments and run. Continental, on the other hand, signed a bilateral treaty calling on the company to open its books to the union in exchange for a promise that the pilots keep their demands reasonable in contract talks. "We have a management that's being up-front with us, and I've got to give them credit," says Jay Panarello, the union local's chairman and a Continental pilot.

Even given all this, Continental didn't gain much financial altitude. The company turned a small profit in 2003, and it expected to break even in 2004. It won't, because $50-a-barrel oil has driven up jet fuel costs and discounters have kept downward pressure on fares. The measure of success at Continental became modest: losing less money than its peers--a $649 million deficit since the start of 2001. "Winning is about beating your competition," Bethune says, "not necessarily making a profit."

AS THE AIRLINE crisis deepened, of course, it presented opportunities for investors who thrive on distress--like Bonderman. That was how he'd gotten involved with Continental in 1992, and that was the problem now. He and partner William Price still sat on Continental's 14-member board, even though they now had few shares. But his Texas Pacific Group had gotten active again in aviation. It was known to have kicked the tires at United as a possible investor. Bonderman actually committed to financing US Airways' 2003 exit from bankruptcy. That fell through only when Alabama state pension chief David Bronner offered better terms. Texas Pacific was already the controlling investor in America West. All this made Continental's union leaders plenty mad, though the board's lawyers had declared it wasn't a conflict of interest. What the hell were Continental board members doing investing in Continental rivals? the labor chiefs complained publicly in press-release denouncements, and privately to Bethune.

They got a sympathetic ear, of course. "How could we keep telling our employees, 'Trust us,' when a board member is investing in competitors?" asks Bethune. "It's hard to keep everyone working hard when they think you're selling them out for 20 pieces of silver."

Proxy statements were being prepared at the time for the 2004 annual meeting. Continental was nearing the point when it had to finalize its slate of directors. That's when Bethune pressed the point--strongly. He and his No. 2, Kellner, and No. 3, executive vice president Jeff Smisek, went to director Barrack, according to people familiar with the events, and told him the conflict of interest was intolerable. They wanted Bonderman and his partner off the board. That set in motion events that concluded with both Bonderman and Bethune out.

Barrack, chairman of the board's governance committee, says, "This was probably the right time for them to move on and to allow the company to move on to the next place. The next generation has finished the potty training, and it's actually a perfect time for a change." But he adds, "My personal regret is that David Bonderman and Gordon Bethune are two of the smartest people in their respective spheres. I wish the focus was celebratory: 'Look what's been done here.'"

What's done is indeed done, and what's still to be seen is how Continental will fare come Jan. 1, 2005. Its management team is highly regarded, but as Jim Parker discovered in succeeding Herb Kelleher at Southwest, it's tough replacing a legend. Bethune's successor, Larry Kellner, will be sorely tested in this sorry environment.

Continental can't avoid being sucked into the vortex of sinking competitors. Four times this year it has tried to add $10 to $15 fuel surcharges, only to rescind them when other legacy carriers, fearful of losing traffic, wouldn't match them. And because US Airways and United are about to take another big whack at their labor costs in bankruptcy court, Continental may no longer be able to avert wage cuts and still stay competitive. If cuts must be made, Bethune wants it to be on his watch so that Kellner can start with a clean slate. "This is a shitty way to leave a job, doing things you don't really want to do," says Bethune. "But we are only as good as our dumbest competitor, and there have been numerous contestants for that honor."

And what's next for Bethune? He professes to have little idea and is quick to note that, at his level, there are few options or openings. "People say, 'Are you going back to Boeing?' Well, the guy running Boeing kind of likes running Boeing. They ask, 'Are you going to Delta?' The guy running Delta kind of likes running Delta. I don't know whether I'll ever do anything or not. I know people usually call you when they need help." He smiles slyly. "I'll answer the phone."