Case Study

C A S E S T U D Y : C O N T I N E N T A L A I R L I N E S I N C - 2 0 0 7 | 1

BACKGROUND OF THE COMPANY

Continental Airlines, found by Walter Varney and Louis Mueller, began flying from El Paso,

Texas to Pueblo, Colorado in 1934 and the CEO of Continental Airlines Inc. is Gordon Bethune.

Continental Airlines is the world's fifth largest airline. The headquarters moved from El Paso to

Denver in 1937 and then to Houston in 1982 following a merger with Texas International.

Continental, together with Continental Express and Continental Connection, has more than 2,750

daily departures throughout the Americas, Europe and Asia, serving 133 domestic and 132

international destinations. More than 750 additional points are served through our alliance

partners. With more than 43,000 employees, Continental has hubs serving New York, Houston,

Cleveland and Guam, and together with its regional partners, carries approximately 67 million

passengers per year.

Goals of Continental Airlines

To use technology to improve the flow of information between aviation manufacturers and

Continental, and between Continental’s engineers and its 3,500 technicians in the field. The

ultimate goal was to improve efficiency of maintenance and repair processes, reduce error rates

and reduce and/or eliminate document management costs.


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 customer’s safety. Our international

flights cater to our customer’s 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. The use of high quality products

and services will create a decline in cost to us, therefore we will be able to pass the


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”. However the mission statement illustrates the role of this plan as the

premier guiding principle, “The Go Forward Plan” at Continental. Their Go Forward Plan

has four cornerstones-

I. Fly to Win (Market Plan)

Achieve above-average profits in a changed industry environment.

Grow the airline to where it can make money and keep improving the

business/leisure mix.

Maximize distribution channels while reducing distribution costs and

eliminating non-value added costs.

II. Fund the Future (Financial Plan)

Manage company assets to maximize stockholders value and build for the

future.

Reduce costs with technology.

Generate positive cash flow and improve financial flexibility by increasing its

cash balance.

III. Make Reliability a Reality (Product Plan)

Deliver an industry-leading product the airline is proud to sell.

Rank among the top of the industry in the key DOT measurements: on-time

arrivals, baggage handling, complaints, and involuntary denied boarding.

Keep improving the product.

IV. Working Together (Employees)

Help well-trained employees build careers they enjoy every day, Treat each

other with dignity and respect.


Focus on safety, make employee programs easy to use, and keep improving

communication.

Keep pay and benefits competitive in a changed industry environment.

However, the overall mission statement of the organization is better because the mission

statement have more than four components

Mission Statement Components:

A. Customer

B. Product and services

C. Market

D. Concern for survival growth and profitability

E. Concern for public image- The Continental is committed to reducing greenhouse

emissions.

F. Employees


SITUATIONAL ANALYSIS

THE EXTERNAL FACTOR

PEST ANALYSIS

A PEST analysis is an analysis of the external macro-environment that affects all firms.

P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the

external macro-environment. Such external factors usually are beyond the firm's control and

sometimes present themselves as threats. The PEST Analysis that Continental Airlines Faced

was:

I. Political Segment

Terrorism fear and political instability

Fear of further attacks caused lower demand both domestic and international

Airspace closed for 4 days because in fear of the terrorism attack.

So the discussion about the relationship between the airlines and terrorism are the

airlines don’t have control over the size of the market and security cost burden.

II. Economical Segment

Nearly impossible to achieve capacity growth.

Demand for air travel is not growing.

Business travel budgets were slashed by as much as 20% - 40%.

Delay in delivery of new Boeing 787s.

Causes the cost-savings in fuel to be delayed. Delay of aircraft delivery damages

Continental’s long-term planning.

Increase in federal and airport taxes.


III. Sociocultural Segment

Ageing Population (in developed countries): provisions/services for disabled pax,

needing medical care and help at airport.

One-day trip as opposed to a two day trip (influences the flight times).

Some have time and no money; some have money and not enough time.

Change in marketing advertisement.

IV. Technological Segment

The usage of the internet such as internet bookings and electronic tickets (e-

tickets).

Enables companies to hold conferences and meetings without travel.

Due to heightened security measures, i.e., the implementation of full-body

scanners.


PORTER 5 FORCES

The following Porter 5 Forces Model in Continental Airlines is as following:-

No Porter 5 Forces Components High/Low Discussion Profit

1 Threat of New Entrants :

The Entry Barriers in the airline

industry.

High Airport and government

regulations, High Capital for

entering market.

4

2 Bargaining power of suppliers High Few suppliers support the large

number of established airlines,

High switching costs in

changing supplier

4

3 Bargaining Power of Customers High Deregulation, Technology and

customer loyalty.

4

4 Threat of Substitute Products Medium For short distances, airplanes

will be substitute with

automobiles.

3

5 Competitive Rivalry within an

Industry

High High exit barrier, Industry is

cyclical

4

* Notes: Profit Figure

5- Strongest

1- Lowest

CONCLUSION


The profit for the barrier to entries shows the strongest point because high regulations in

airport and by government and the airlines consume high capital for entering the market. The

profit of supplier r is in strongest point as it has high bargaining power. This is because few

suppliers support the large number of established airlines and have the high switching cost in

changing the supplier. Besides that, the bargaining power customers is high and its profits is also

in strongest point as the carriers compete on low price the consumer retain some power in the

purchase process and business consumers seek for the brand that they are loyal to so they are

willing to pay any price.

Meanwhile, the threat of substitute product is medium and in moderate level of profit which

not to say high or low. This is because, for short distances, airplanes will be substitute with

automobiles or the consumers may use train or marine. Finally, the existing rivalry of

Continental Airlines is high with strongest profit as the airline industry is cyclical and high exit

barrier.

COMPETITIVE PROFILE MATRIX (CPM)


CONTINENTAL AIRLINES

DELTAAIRLINES

SOUTHWEST AIRLINES

Critical Success Factors

Weights Rating Weighted Rating Weighted Rating Weighted

0.0 to 0.1

1 to 4 Score 1 to 4 Score 1 to 4 Score

Domestic Market Positioning

0.08 2 0.16 2 0.16 3 0.24

International Market positioning

0.1 4 0.4 4 0.4 4 0.4

Consumer Loyalty

0.09 3 0.27 3 0.27 3 0.27

Service Quality 0.1 3 0.3 4 0.4 3 0.3

Price Competitiveness

0.07 4 0.28 3 0.21 3 0.21

Product Quality 0.07 3 0.21 3 0.21 4 0.28

Customer Service 0.09 4 0.36 4 0.36 4 0.36

Financial Position 0.05 2 0.1 2 0.1 2 0.1

Management Experience

0.1 3 0.3 3 0.3 4 0.4

Organizational Structure

0.09 2 0.18 3 0.27 4 0.36

Fuel and Labor 0.06 2 0.12 2 0.12 2 0.12

Global expansion 0.1 3 0.3 3 0.3 4 0.4

Totals 1 2.98 3.1 3.44

Overall it seems that Southwest Airlines has best product quality, management experience,

organizational structure and global expansion compare to Continental and Delta Airlines.

Meanwhile, Delta Airlines has best service quality and Continental has best price

competitiveness by ratings.

EXTERNAL FACTORS EVALUATION


An External Factor Evaluation (EFE) Matrix allows strategist to summarize and evaluates

economic, social, cultural, demographic, environment, political, government, legal,

technological, and comparative information.

OPPURTUNITIES:

1. Online booking ticket up to 24%

2. Major competitor recently ceased operation

3. Purchase plan for new fuel-efficient 78

4. Emerging market and expansion abroad

5. raise money thought debt up 6.89% in 2006

6. moving aircraft from the gate

7. using ground equipments rather than aircraft engines

8. electronic ticket save time and reduce cost of airline ticket counter

THREATS:


1. Rival merger from bankruptcy

2. Increasing fuel cost to 29.4%

3. Economic slow down between 2001-2005

4. Rival operating under bankruptcy protection

5. Increasing labour cost up to 24.5%

Assign each of factors a weight that range from 0.0 (not important) to 1.0 (very

important). The weight indicates the relatives’ importance of the factor to being success

in the firm’s industry. Opportunities often receive higher weight than threats, but threats

can receive high weight if there are especially severe of threatening.

Assign a 1-4 to each key external factor to how effectively the firm’s current strategies

respond to the factor, where 4 = the response is superior, 3 = the response is above

average, 2 = the response is average and 1 = the response is poor. Ratings are based

on effectiveness of the firm’s strategies. Ratings are thus company-based, whereas the

weights in step 2 are industry-based.

Regardless of how many factors are included in an EFE Matrix, the total weighted score

can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total

weighted score well below 2.5 characterize organizations that are weak internally,

whereas scores significantly above 2.5 indicate a strong external position


EFE Matrix

Key external factor Weight Rating Weighted

score

Opportunities

1. Online booking ticket up to 24% 0.12 4 0.48

2. Major competitor recently ceased

operation

0.08 3 0.24

3. Purchase plan for new fuel-

efficient 787

0.07 2 0.14

4. Emerging market and expansion

abroad

0.09 4 0.36

5. raise money thought debt up

6.89% in 2006

0.09 3 0.27

6. moving aircraft from the gate

using ground equipments rather

than aircraft engines

0.08 2 0.16

7. electronic ticket save time and

reduce cost of airline ticket counter

0.12 2 0.24

0.65 1.89

Threats

1. Rival merger from bankruptcy 0.08 1 0.08

2. Increasing fuel cost to 29.4% 0.08 3 0.24

3. Economic slow down between

2001-2005

0.07 2 0.14

4. Rival operating under bankruptcy

Protection

0.06 4 0.24

5. Increasing labour cost up to

24.5%

0.06 3 0.18


0.35 0.88

Total 1.00 2.67

In general, we can say that Continental Airlines Inc is effective because more than 2.5

that is 2.67.

TWSO (total weight score for opportunities) 1.89

=

TWO (total weight opportunities) 0.65

= 2.91

TWST (total weight score for threats) 0.88

=

TWT (total weight threats) 0.35

= 2.51

Further analysis, it seem that Continental Airlines Inc is more effective in addressing

opportunities but not effective in addressing threats.

Period EndingChanging in

(%) 2007 2008Assets Current Assets


Cash and Equivalents 21.12 2,892,000 3,503,000Short-Term Investments 3.19 373,000 390,000Net Receivables 6.61 796,000 847,000Inventory 1.92 221,000 225,000Other Current Assets 3.68 431,000 447,000Total Current Assets 36.52 4,713,000 5,412,000Long-Term Investments 0.72 81,600 82,200Property, Plant and Equipment 55.39 6,310,000 6,360,000Goodwill - - -Intangible Assets 5.34 636,000 670,000Accumulated Amortization - - -Others Assets 2.04 236,000 241,000Deferred Long-Term Asset Charges - - -Total Assets 100 11,976,000 12,765,000LiabilitiesCurrent LiabilitiesAccounts Payable 29.90 4,392,000 5,705,208Short/ Current Long-Term Debt 5.08 603,160 633,801Other Current Liabilities - - -Total Current Liabilities 4,995,160 6,339,009Long-Term Debt 42.97 3,880,209 2,645,956Other Current Liabilities 17.53 2,329,450 2,737,803Deferred Long-term Liability Charges 1.46 167,410 169,854Minority Interest - - -Negative Goodwill - - -Total Liabilities 11,372,229 11,892,622Stockholders' EquityMisc Stocks Options Warrants - - -Redeemable Preferred Stock - - -Preferred Stock - - -Common Stock 1000 1000 1000Retained Earnings (0.10) (10,989) (10,978)Treasury Stock - - -Capital Surplus 12.12 1,536,000 1,722,163Others Stockholders' Equity (8.96) (922,240) (839,607)Total Stockholders' Equity 603,771 872,578Total Liabilities and SE 100 11,976,000 12,765,000

INTERNAL FACTOR

FINANCIAL ANALYSIS

Budgeted Balance Sheet for Continental Airlines

Pro Forma Income Statement for Continental Airlines


Period Ending 2007 2008

Total Revenue 15,376,826 18,010,876

Cost of Revenue 7,456,703 6,491,319

Gross Profit 7,920,123 11,519,558

Operating Expenses - -

Research Development - -

Selling General and Administrative 6,236,000 8,796,000

Non-Recurring 26,600 26,2000

Others 393,000 395,000

Total Operating Expenses - -

Operating Income or Loss 1,264,523 2,066,558

Income from Continuing Operations

Total Other Income / Expenses Net 199,000 114,000

Earnings Before Interest and Taxes 1,463,523 2,180,558

Interest Expense 368,000 353,000

Income Before Tax 1,095,523 1,827,558

Income Tax Expense - -

Minority Interest - -

Net Income from Continuing Operations 1,095,523 1,827,558

Non-Recurring Events - -

Discontinued Operations - -

Extraordinary Items - -

Effect of Accounting Changes (26000) (26000)

Other Items - -

Net Income 1,121,523 1,853,558

Preferred Stock and Other Adjustments - -Net Income Applicable to Common Shares 1,121,523 1,853,558

Financial Ratio Analysis

A. LIQUIDITY RATIO


2005 2006

Working Capital

Current asset (– ) Current liabilities

3,427,000 - 3,399,000 = 28,000

4,129,000 – 3,955,000

= 174,000

Current Ratio Current asset / Current liabilities

3,427,000 / 3,399,000 = 1.01 times

4,129,000/ 3,955,00

= 1.04 times

Quick Ratio Current asset (-)Inventory / Current liabilities

3,427,000-201,000/3,399,000 = 0.95 times

4,129,000 – 217,000 / 3,955,000 = 0.99 times

B. LEVERAGE RATIO

2005 2006

Debt to Total Assets Ratio

Total Debt / Total Assets

10,303,000 / 10,529,000 = 0.98

10,961,000 / 11,308,000 = 0.97

Long term Debt to Equity Ratio

Long-term debt / Total Shareholders’ Equity

5,057,000 / 226,000 = 22.38

4,859,000 / 347,000 = 14.00

Times Interest Earned Ratio

EBIT / Total Interest charges

330,000 / 398,000 = 0.829

752,000 / 383,000 = 1.963

C. A CTIVITY RATIO


2005 2006

Inventory Turnover Sales / Inv. of times good

11,208,000 / 201,000 = 55.76

13,128,000 / 217,000 = 60.50

Fixed Asset Turnover Sales / Fixed Asset 11,208,000 / 6,086,000 =1.84

13,128,000 / 6,263,000 = 2.10

Total Asset Turnover Sales / Total Asset 11,208,000 / 10,529,000 = 1.06

13,128,000 / 11,308,000 = 1.16

Acc. Receivable Turnover

Annual credit sales / Acc. Receivables

11,208,000 / 687,000 = 16.31

13,128,000 / 747,000 = 17.57

Average Collection Period

Acc. Receivable / Total credit sales / 365

687,000/ 11,208,000 /365 = 22.37 day

747,000 / 13, 128,000 / 365 = 20.68 day

D. PROFITABILITY RATIO


2005 2006

Gross Profit Margin Gross profit / Sales

1,533,000 / 1,208,000 = 13.678%

4,562,000 / 13,128,000 = 34.75%

Operating Profit Margin

EBIT / Sales 330,000 / 11,208,000 = 2.944 %

752,000 / 13,128,000 = 5.73%

Net Profit Margin Net Income / Sales

(68,000) / 11,208,000 = (0.607%)

343,000 / 13,128,000 = 2.61%

Return on Total Asset (ROA)

Net Income / Total Assets

(68,000) / 10,529,000 = (0.646%)

343,000 / 11,308,000 = 3.03%

Return on Stockholders’ Equity (ROE)

Net Income / Total Stockholders’ Equity

(68,000) / 226,000 = (30.01%)

343,000 / 347,000 =98.85%

INTERNAL FACTOR EVALUATION


A summary step in conducting an internal strategic-management audit is to construct an

Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and

evaluates the major strengths and weakness in the functional areas of business, and it also

provides a basis for identifying and evaluating relationships among those areas. Intuitive

judgments are required in developing an IFE Matrix, so the appearance of a scientific

approach should not be interpret to mean this is an all-powerful technique.

STRENGTHS:

1. Average yield per revenue passenger mile up to 12.29% over last two years

2. Company assets up $ 10,529,000 to $ 11,308,000

3. Poorer on-time performance = (73.4% 2006) compared to (76.9% 2005)

4. Fifth largest airline = serves 148 domestic and 134 international destinations

5. Customer complaint rate reduce from (0.92 in 2005) to (0.88 in 2006)

6. Improved flight over the last 3 years = 77.8%

7. Denied boarding rate reduce from (1.92% in 2005) to (1.74% in 2006)


WEAKNESSES:

1. low employee morale

2. slow to adopt online booking

3. decrease employee incentive

4. increase mishandled baggage rate per 1,000 passengers = (4.76% in 2006) compared

to (4.12% in 2006)

5. losses a net income of $ 343 million in 2006 after 2 previous years

6. low market share

Assign a 1-4 to each factor that indicate whether the factor represents a major weakness

(rating=1), a minor weakness (rating=2), a minor strength (rating=3), or major

strength (major=4). However, that strength must receive a 3 or 4 rating and weakness

must receive a 1 or 2 rating. Ratings are thus company-based, whereas the weights in step

2 are industry-based.

Regardless of how many factors are included in an IFE Matrix, the total weighted score

can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total

weighted score well below 2.5 characterize organizations that are weak internally,

whereas scores significantly above 2.5 indicate a strong internal position.


IFE MATRIX

KEY INTERNAL FACTOR WEIGHT RATING WS

STRENGTH

Average yield per revenue passenger

mile up to 12.29% over last two

years.

0.10 4 0.40

Company assets up $ 10,529,000 to $

11,308,000 0.10 4 0.40

Poorer on-time performance =

(73.4% in 2006) compared to (76.9%

in 2005)

0.10 4 0.40

Fifth largest airline = serves 148

domestic and 134 international

destinations

0.05 4 0.20

Customer complaint rate reduce from

(0.92 in 2005) to (0.88 in 2006) 0.05 3 0.15

Improved flight over the last 3 years

= 77.8% 0.05 4 0.20

Denied boarding rate reduce from

(1.92% in 2005) to (1.74 in 2006) 0.05 3 0.15


KEY INTERNAL FACTOR WEIGHT RATING WS

WEAKNESES

Low employee morale 0.05 2 0.10

Slow to adopt online booking 0.05 2 0.10

Decrease employee incentive 0.05 2 0.10

Increase mishandled baggage rate per

1,000 passengers = (4.76% in 2006)

compared to (4.12% in 2006)

0.15 1 0.15

Losses a net income of $ 343 million

in 2006 after 2 previous years 0.10 1 0.10

Low market share

0.10 1 0.10

TOTAL 1.00 2.55





SPACE MATRIX

The axes of the SPACE Matrix represent two internal dimensions (financial strength [FS]

and competitive advantage [CA] and two external dimensions (environmental stability

[ES] and industry strength [IS]). These four factors are perhaps the most important

determinants of an organization’s overall strategic position.

Financial Strengths Ratings

1. The Continental Airlines net income of $ 343 million in 2006

after two previous years of losses.

1.0

2. The Continental Airlines operating profit of $ 6 million. 1.0

3. The Continental Airlines improving the revenues generated per

revenue passenger mile flown $ 769 million and $ 6 million in

network carriers.

3.0

4. The Continental Airlines of inventory increase $ 16,000 in

2005 to 2006

4.0

Total 9.0

Industry Strengths

1. Grow the airline to where it can make money and keep

improving the business or leisure mix.

4.0

2. Achieve above-average profit in a change industry

environment.

5.0

3. Continental relies on its regional fleet for its domestic routes. 4.0

Total 13.0

Environmental stability

1. Continental reduces cost with technology -2.0

2. Continental operating costs are very close to the regional and

national carries, but significantly above the cost of the low cost

-4.0


carriers.

3. Facing stronger competitor from carriers operating under

bankruptcy.

-3.0

4. Fuel accurate for 25.7% of total expenses in 2006 at the largest

U.S carriers

-3.0

Total -12.0

Competitive advantage

1. Market share of Continental Airlines 7.7 percent -3.0

2. General decline in service quality in the industry for 2006

compared to 2005.

-3.0

3. Continental was slow to adopt online bookings and currently

has about 24 percent of its revenues from its web sites,

however its use of electronic tickets (e-tickets) that reduced

costs of online or travel agents to issue e-tickets.

-3.0

Total -9.0

Conclusion:-

ES Average is -12.0 ÷4 = -3.0 IS Average is 13.0 ÷3 =4.33

CA Average is -9.0 ÷ 3 = -3.0 FS Average is 9.0 ÷ 4 =2.25

Directional Vector Coordinates: x-axis: -3.0 + (+4.33) = +1.33

y-axis: -3.0 + (+2.25) = -0.750

The Continental Airlines should pursue Competitive Strategies


FS

CA IS

ES

-6 -5 -4 -3 -2 -1 +1 + 2 +3 + 4 + 5 +6

-1

-2

-3

-4

-5

-6

+6

+5

+4

+3

+2

+1

(-0.75, +1.33)


GRAND STRATEGY MATRIX

Weak Competiti

ve Position

Rapid Market Growth

Slow Market Growth

Strong Competitive

Position

Quadrant II (Conservative)

Quadrant IV (Competitive)

Quadrant I (Aggressive)

Quadrant III (Defensive)

Potential Strategies:-

Backward Integration

Forward Integration

Horizontal Integration

Market Penetration

Market Development

Product Development

Potential Strategies:-

Backward Integration

Forward Integration

Horizontal Integration

Market Penetration

Market Development

Product Development


MAJOR ISSUE

MAJOR ISSUE

CORPORATE 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 50’s 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.

Continental’s AQR score has declined for the last three years even though its ranking improved.

Continental’s on time performance shows that it has not meet the 80 percent of better standard for arrivals for the last fours years, of for departures for the last two years

Low employee morale


RECOMMENDATION

RECOMMENDATION FOR MAJOR ISSUE

CORPORATE LEVEL

BUSINESS LEVEL Hire employee that has skilled in computer or online

booking

FUNCTIONAL LEVEL Provide training for employee


Table above show the major issue that happen in Continental Airlines Inc. Major issue can be

divided to 3 types, that is corporate level, business level and functional level. For business level,

from the case study there is a weakness and major issue that company should eliminate in order

to smoothen the operation of company. As we can see on the table, the problem for business

level is slow to adopt online booking and low market share. The recommendation that we

suggest for Continental is hire employee that has skilled in computer or online booking.

Functional level is the each department in organization, for example human research department,

finance department and others. Major problem for this level is Continental’s AQR score has

declined for the last three years even though its ranking improved. The recommendation is they

must provide training for employee

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