Continental Airlines Inc - 2007

Submitted by: Pauline Mae L. Naranjo Submitted to: Prof. Rose Lacerona CASE #6 / MW / 10:30a.m. 12:00 n.n

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 transporting passengers, 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.

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 US Airways 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 global airlines, 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.

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 operations could 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

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 the United 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-ticket purchases. 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 the world's favorite airlines. Proposed Mission Statement To be recognized as the best airline in the industry by the customers, employees and shareholders.

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 Business Class 2007 Caribbean's Leading First Class 2007 North America's Airline 2007 North America's Airline Business Class 2007 North America's Airline Website Airline Airline Leading Leading Leading 2006 World's Leading Airline Business Class 2006 North America's Leading Airline 2006 North America's Leading Airline Business Class 2005 North America's Leading Airline

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 are unique 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 of employees quick access to key insight about its customers. The airlines initial objective is to enable the accurate forecasting of passenger booking levels. The ability to view travel 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 BUSINESS LEVEL No vice president specifically oversees international operations given its important at Continental. No young officer in a top management lines. All top management people are 50s and above. Slow to adopt online booking low market share Low market share 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

FUNCTIONAL LEVEL

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 it since 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

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 constraining elements 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

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 cost airlines 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

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.

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 could Continental 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 nofrills 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 the new routes.