Case #6 Airlines

7/29/2019 Case #6 Airlines

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Submitted by: Pauline Mae L. Naranj

Submitted to: Prof. Rose Lacerona

CASE #6 / MW / 10:30a.m. 12:00 n

Continental Airlines Inc - 2007


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COMPANY BACKGROUND

Continental Airlines Company was

integrated in the early 80s of the 20th century and

presently one of the major airlines operated in US

along with a business portfolio of transportingpassengers, cargo and mail handling operations.

Voted as the fifth best airline by passenger miles,

Continental along with Continental Micronesia

operates regional flights and international flights

throughout the different hubs in the world.

TIME CONTEXT

MINNEAPOLIS, MN -- A timeline of significant events in the histories of United Airlines and

Continental Airlines:

April 6, 1926 -- Entrepreneur Walter Varney launches a contract air mail service in Boise, Idaho,

with company that would become United Airlines.

March 28, 1931 -- United Air Lines Inc. incorporated.

1934: Varney and partner Louis Mueller found Varney Speed Lines, the earliest predecesor to

Continental. The first flight, on July 15, goes from Pueblo, Colo., to El Paso, Texas, with stops in

Las Vegas and Santa Fe and Albuquerque, N.M.

1936: Robert F. Six buys a stake in Varney. He changes the name to Continental Airlines in

1937, and leads the company for more than 40 years.

1959: Continental operates its first jet flight on a Boeing 707.

1978: Congress deregulates the airline industry.

1982: Continental combines with Texas International, led by Frank Lorenzo, and offers flights to

four continents.

1985 -- United buys the Pacific routes of Pan American World Airways, making the nation's

largest airline a major international carrier for the first time.

1986: Continental emerges from bankruptcy protection. It would file for bankruptcy again in the

1990s.


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1987: Continental swallows Frontier, People Express and New York Air.

July 12, 1994 -- UAL shareholders approve an employee stock ownership

plan, creating the world's largest majority employee-owned corporation.

July 27, 2001 -- United calls off its planned $4.3 billion acquisition of USAirways Group when the Justice Department threatens to block it.

Sept. 11, 2001 -- Two United airplanes are among the four hijacked and

crashed by terrorists.

Sept. 20, 2001 -- Continental and others begin furloughing thousands of employees during the

travel downturn that followed the terror attacks.

Feb. 1, 2002 -- United announces $2.1 billion loss for 2001, a record for any airline.

Dec. 9, 2002 -- United files for Chapter 11 bankruptcy protection.

Jan. 21, 2003 -- Continental, Northwest and Delta announce an alliance.

Feb. 1, 2006 -- United emerges from bankruptcy protection after slashing annual labor costs by

more than $3 billion.

April 27, 2008 -- Continental says it will not pursue a merger with United.

Oct. 27, 2009 -- Continental joins United in the Star Alliance, one of three major teams of globalairlines, leaving the SkyTeam alliance that includes Delta. April 2010 -- United and US Airways

break off merger talks; talks between United and Continental resume.

CASE FACTS

- The airline industry is highly competitive.

- Additional terrorist attacks or international hostilities may further adversely affect

Continental Airlines financial condition, results of operations and liquidity.

-

Additional security requirements may increase Continental Airlines operation cost.- The airline industry is too vulnerable to price discounting

- Expanded government regulation could increase operation cost.

- The airline industry is greatly taxed.

- The airline industry may experience further consolidation that may affect Continental

Airlines business strategy.


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- Increase in operating costs will restrict Continental Airlines ability to conduct their

business and decrease their traffic.

- Insurance costs could increase materially or key coverage could become unavailable.

- Public health threats affecting travel behavior could have a material adverse effect on the

industry.

-An economic downturn could result in less demand for air travel.

- Continental Airline results of operations fluctuate due to seasonality and other factors

associated with the airline industry.

- Unstable and volatile fuel prices or disruptions in fuel supplies could have a material

adverse effect on Continental Airlines.

- Continental Airlines labor costs may not be competitive.

- Labor disruptions could adversely affect Continental Airlines operations.

- Delays in scheduled aircraft deliveries may adversely affect international growth.

- High leverage may affect the ability to satisfy significant financing needs or meet

obligations.- Credit rating downgrades could have a material adverse effect on Continental Airlines

liquidity.

- New fuel efficient fleet could help reduce the fuel operational cost to airliners.

- Failure to meet financial covenants would adversely affect Continental Airlines

liquidity.

- Interruptions or disruptions in service at one of

Continental Airlines hub airports could have a material

adverse effect on their operations.

- If Continental Airline experience problems with certain

of their third party regional operators, their operationscould be materially adversely affected.

- Possible significant failure or disruption of the computer

systems on which Continental Airline rely could

adversely affect their business.

- ICT technology such as online booking, ticketless

boarding pass and online baggage handling system

assists to lower the operational costs and pass the

savings to the customers

- Continental Airlines net operating loss carry forwards

may be limited.

SUMMARY OF THE CASE

October 1st, 2010 was an important date in the history of airline business industry as two

of the worlds best airlines United Airlines and Continental Airlines to form the new United


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Continental Airlines in order to deliver consequential prosperity and profitability while

maintaining a sustainable long-term significance to their esteemed stakeholders across the globe.

United Continental Holdings, Inc. is the investment company for United Airlines and

Continental Airlines served by more than 80,000 employees worldwide and operated worldwide

with the corporate headquarters in Chicago, while its core operations are from Houston in theUnited States of America. Both the companies have been in the industry for decades and

committed in providing the customers and employees best in class service. The new holding

company will continue to manage as two separate companies till they manage to get hold of the

single operating certificate from the Federal Aviation Administration. According to the

Continental airlines website, the airline will be operating under the United name, and aircraft

will be having the Continental logo and colours to retain the companys strong brand image.

VISION AND MISSION OF CONTINENTAL AIRLINES

Vision

Continental Airlines Inc. seeks to lead its industry in superior customer service,

innovative technology, employee satisfaction, and environmental advances, at home and

abroad.

Mission

At Continental Airlines Inc., we strive to obtain excellent customer service and

satisfaction through technological advances in on-line bookings and e-ticketpurchases. We have strict security measures to ensure our customers safety. Our

international flights cater to our customers cultures, with language, food choices, and

movies. We have committed to making the lives of our customers, employees, vendors

and as efficient as possible, through environmental advances we are dedicated to

reducing fuel waste by cost effective innovation of smaller jet fleets.

Proposed Vision and Mission Statement

Proposed Vision

Is to be theworld's favorite airlines.

Proposed Mission Statement

To be recognized as the best airline in the industry by the customers, employees and

shareholders.


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HONORS / AWARDS / RECOGNITION

Awards

2005 World's Leading Airline Business Class

2005 North America's Leading Airline Business Class No. 1 Most Admired Global Airline; Fortune Magazine (20042009)

No. 1 Most Admired U.S. Airline; Fortune Magazine (20062007, 2010)

No. 1 Greenest U.S. Airline; Greenopia (2009)

No. 1 Pet-Friendly Airline; PetFinder.org (2009)

Best Executive/Business Class; OAG Airline of the Year Awards (20032007, 2009)

Best Airline Based in North America; OAG Airline of the Year Awards (20032009)

Best U.S. Carrier Trans-Atlantic and Trans-Pacific Business Class; Cond Nast Traveler

(19992006)

Best Airline for North American Travel; Business Traveler Magazine (20062009)

Best Large Domestic Airline (Premium Seating); Zagat Airline Survey(2008)

Best Value for the Money (International); Zagat Airline Survey (2009)

Highest-Ranked Network Airline; J.D. Power and Associates (2007)

Airline of the Year; OAG (20042005)

Business Leadership Recycling Award; American Forest & Paper Association (2010)

Also nominated for:

2007 Caribbean's Leading Airline

Business Class

2007 Caribbean's Leading Airline

First Class

2007 North America's Leading

Airline


Airline Business Class


Airline Website

2006 World's Leading Airline

Business Class


Airline


Airline Business Class


Airline


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I. CENTRAL PROBLEM

Continental Airlines is the fifth largest airline in the United States. To win in todays highly

competitive skies, Continental has undergone an aggressive expansion which has included the

addition of new domestic and international routes. The airline and its competitors continually

face a mix of challenges in the areas of efficiency, logistics and consumers marketing that areunique to their industry. In such a hyper-competitive environment, domestic competition stands

out as the main challenge for Continental Airlines. Also, how will the airline improve everything

in order to have an edge with their competitors such as in terms of service quality in a low

costing.

Continentals ability to present information regarding travel patterns throughout many sectors

of its organisations in various locations have become critical to increasing growth through

customer satisfaction. The company lacks a corporate data infrastructure which would allow a

broad range ofemployeesquick access to key insight about its customers. The airlines initial

objective is to enable the accurate forecasting of passenger booking levels. The ability to viewtravel patterns by the origin and destination of each customer in essence, getting a complete

look at a travellers itinerary would provide customer bookings, route scheduling, baggage

operations, and many other internal departments with essential information to further improve

results. Additionally the airlines purpose is to be able calculating the profitability of specific

destinations. The question is which seats on what routes are generating significant profit for the

airline.

MAJOR ISSUE

CORPORATE LEVEL

No vice president specifically oversees internationaloperations given its important at Continental.

No young officer in a top management lines. All top

management people are 50s and above.

BUSINESS LEVEL Slow to adopt online booking low market share

Low market share

FUNCTIONAL LEVEL Does not make its organizational chart known to others.

Continentals AQR score has declined for the last three

years even though its ranking improved. Continentals on time performance shows that it has not

meet the 80 percent of better standard for arrivals for the

last four years, of for departures for the last two years

Low employee morale


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II. OBJECTIVES

To increase operating revenue by 20 % by 2012 using Horizontal Integration strategy

To develop new technology to reduce the fuel consumption

To invent new ways of Online reservation and flight tracking system

To prioritize advertising activities for merging and developing campaign programs

about the new routes

To create a consolidated customer data base of both merged airlines

To forecast the future risks involved in the horizontal integration process and develop

risk management

To implement staff training and development program for new recruitments and offer

refreshment training every quarter

III. AREAS OF CONSIDERATION

Strengths

The fact that the airline provides customized services in accordance to the destination its

travelling to.

The company rose to profitability after being hit by severe losses for four years straight.

Its young management team that has been supporting itsince the mid 90s.

Its various incentive programs to keep its staff motivated to aim towards on-time arrivals.

The fact that it serves more international markets than any other U.S. aircraft

Houston hub serves booming energy market; Newark hub serves huge New York market

and is a major access point to Europe

Its fleet comprises of mainly Boeings and is one of the youngest globally. This leads to

increased efficiencies and major cost reductions.

Received an array of awards for service quality and overall reputation

Increment in gross profits and reductions in overall costs

Weaknesses

The fact that its Go forward plan does not attend the environmental issues directly.

The airline has faced a decrement in its overall AQR scores. Service quality has also faced a decline.

It has been recorded that continental has poor on-time performance, despite its efforts.

It also had the worst record in over booking and bumping passengers in comparison to

other airlines.

Lack of internal training for the employees

Little equity in planes, limiting ability to raise cash through sale/lease-back deals


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Minimal presence in major foreign destinations such as London, Paris, Tokyo

Opportunities

Continental airlines should consider researching the international markets, as they face

intense competition from the local market. The installation of winglets in an attempt to lessen costs.

The EU-US Open Skies provides Continental with an opportunity to broaden its base in

terms of connectivity.

Merger with the United Airlines in October 2010

Growing demand for travel at 3.2% growth in 2011

Being more technologically advanced and using the internet to reduce their costs.

42% increase in the Hispanic population in US over the last decade

Threats

Rise in fuel costs and domestic competition.

Elevation in security costs due to the risks of hijacking and terrorism.

The fact that its rivals have recovered from bankruptcy and recovered back much

stronger due to their ability to reduce their costs.

The introduction of new aircrafts by the rivals and the fact that this would directly

contradict Continentals young and more fuel efficient aircrafts.

Entry of international airlines into the domestic services

Ongoing pricing competition of budgeted airlines in the market

IV. ALTERNATIVE COURSES OF ACTION

Alternative #1: Merging with United Airlines:

ADVANATGE: An advantage of this merger would be the fact that mergers do not require

immediate cash. Also, a merger may allow the shareholders of smaller enterprises to own a

certain share of a much larger entity, thus increasing their overall net worth. In addition, a

merger may also allow Continental airlines to avoid many of the costly and time constrainingelements associated with asset purchases.

DISADVANTAGE: Disadvantages of the possible Merge wouldve been those of diseconomies

of scale, which generally occur when a business becomes too large for the owners to handle, thus

giving rise to higher unit costs. Also, the clash of culture, such as those of the organization, the

individuals and management as a whole, can occur. This may in turn reduce the overall


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effectiveness of the organization. Lastly, a contradiction of objectives may occur which may lead

the business to face severe consequences.

Alternative #2: Developing a strong market in Japan and China.

ADVANTAGE: The obvious advantages of this, for Continental Airlines, would be that since

Japan and China have faced an increment in their rate of tourism, developing a strong market

base in these regions would enable Continental Airlines to increase their market share, gain

further global recognition, increase their productivity and profitability and thus face an overall

rise in their efficiency.

DISADVANTAGE: However, certain problem may also arise in targeting these markets.

Researching and developing strategies that fit these regions may take time and money, and thus,

the problem of opportunity cost may arise. Also, a lot of resources may be wasted if policies do

not match the expected outcomes; this may be completely disadvantageous for the business and

may also lead it to bankruptcy.

Alternative #3: Continental should step into these small jets, low cost, less coverage areas niche

market.

ADVANTAGE: Continental is sound in its financial figures so it should acquire one of the low

cost no-frills airlines to gain its share in this domestic market.

DISADVANTAGE: Continental airlines cannot compete in terms of price, with the low costairlines like AirTran, JetBlue and southwest.

V. STRATEGY FORMULATION / RECOMMENDATION

I therefore conclude that the best solution to the problem is alternative course of action #

1. From the careful analysis of the strengths and weaknesses of both these strategies, it can be

seen that merging with United Airlines was a better option for Continental Airlines. This was

mainly because through this merger, Continental Airlines faced higher economies of scale,

economies of scope and an increment in their overall market power. Lastly, they may also have

also incurred a reduction in their long term costs as costs were distributed and tasks were also

spread across their much greater operations base.

The overall strategic analysis of Continental airlines reveals that current recommendation

for the horizontal integration strategy which in merging in this case would boost the sales over

the years and the company can have a significant control over the entire air transport operations


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in the domestic airline market of United States as well as in the international airline operation as

well. The expected growth of company will definitely become a threat for many of the domestic

air carriers in the United States and it will increase the overall market share of the company in

the coming years.

VI. PLAN OF ACTION

The Continental Airlines will have different plans under every branch to be specific in

implementing the plan of action. Here are the plans:

1. For Research and Development

Develop new technology to reduce the fuel consumption

The R&D Team should develop a model of technology practice by the end of this year in

which the company should be able to implement in the future.

2. For marketing

Marketing team has to develop new marketing plan within 3 months about the new routes

and by the year end a new way of online marketing system should be added onto the

company website.

3. For Management Information Systems

Create a consolidated customer data base of both merged airlines. Develop a combined

data base of existing customers and upload into the server system by end of October

4. For Finance

Forecast the future risks involved in the horizontal integration process and develop risk

management

5. For Personnel

Implement staff training and development program for new recruitments and offer

refreshment training every quarter

Human resources team should develop a new training and welcoming program for all the

new recruited staff before the recruitment process starts.

Develop and offer new refreshment training for all the employees in quarterly basis.


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VII. POTENTIAL PROBLEMS

1. What if the market became more unstable in terms of fuel costs that will affect a lot the

Continental Airlines? How they will address it?

2. What if the rivals became more aggressive in terms of innovations? How couldContinental Airlines discourse and be still on track?

3. What if the organizational structures of the airlines affect its operations?

4. What if some of their risk taking strategies fails especially they need to invest more in

new developments and innovations?

5. What if the target customers still not satisfied with their services? What will they do?

VIII. CONTINGENCY PLANS

1. Continental airlines cannot compete in terms of price, with the low cost airlines like

AirTran, JetBlue and southwest, so we recommend that continental should step into these small

jets, low cost, less coverage areas niche market.

2. Continental is sound in its financial figures so it should acquire one of the low cost no-

frills airlines to gain its share in this domestic market.

3. Recent mergers and acquisitions in the industry are threats for continental in the short

term, but it can face the threat by seeking the opportunities to expand its market and to improve

quality besides cutting the cost.

4. Invent new ways of online reservation and flight tracking system. The demand for

online reservation and mobile flight tracking system is increasing and by the period of 5 months,

company should be able to deliver these communicative systems in the responsive market.

5. Finance Management team should assess the various risks associated with the merging

and should develop a risk management program within 3 weeks of time starting by the beginning

of a month.

6. Prioritize advertising activities for merging and developing campaign programs for thenew routes.

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Case #6 Airlines

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