Case study

Submitted by: Sibeesh Sreenivasan

200700091

Case study: Continental Airlines

Table of contents

Executive summary.....................................................................................................................................4

Introduction.................................................................................................................................................5

Company Background..................................................................................................................................5

Mission and Vision Statement.....................................................................................................................6

Vision:......................................................................................................................................................6

Mission:...................................................................................................................................................6

Strategies.....................................................................................................................................................7

External Opportunities................................................................................................................................8

External Threats..........................................................................................................................................8

Competitive Profile Matrix (CPM)................................................................................................................9

Financial Position.....................................................................................................................................9

Customer loyalty...................................................................................................................................10

Market share......................................................................................................................................10

Management..........................................................................................................................................10

Advertising............................................................................................................................................10

Price competitiveness............................................................................................................................10

Global expansion...................................................................................................................................10

Product quality......................................................................................................................................11

Financial Ratio Analysis..............................................................................................................................12

Current Income Statement in US $............................................................................................................13

Industry analysis: External Factors Evaluation MATRIX.............................................................................17

Internal Strengths......................................................................................................................................19

Internal Weaknesses..................................................................................................................................19

Internal Factor Evaluation (IFE) Matrix......................................................................................................20

Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix.................................................................22

SWOT MATRIX ANALYSIS.......................................................................................................................23

SO Strategy:.......................................................................................................................................23

ST Strategy:........................................................................................................................................24

WO Strategies:...................................................................................................................................24


WT Strategies....................................................................................................................................24

Strategic Position and Action Evaluation (SPACE) Matrix..........................................................................25

Internal-External (IE) Matrix......................................................................................................................27

Boston Consulting Group (BCG) Matrix.....................................................................................................28

Relative Market Share...............................................................................................................................28

Industry growth rate= (15.5) %..............................................................................................................28

Grand Strategy Matrix...............................................................................................................................30

Evaluation of Strategies from Matrices.....................................................................................................31

Quantitative Strategy Planning Matrix (QSPM).....................................................................................32

Advantages and Disadvantages of Strategies............................................................................................34

Merging with United Airlines:............................................................................................................34

Developing a strong market in Japan and China:...............................................................................35

Strategy recommendation.........................................................................................................................35

Long term objectives.................................................................................................................................35

Objectives and Policies..............................................................................................................................37

Policies.......................................................................................................................................................38

Resource Allocation...................................................................................................................................39

Income Statement after Implementation..................................................................................................40

Recommendations.....................................................................................................................................40

References.................................................................................................................................................41


Executive summary

This report entails an analysis into Continental Airlines, and how it has evolved over the years.

In the following report, a brief introduction will be given for the company and the report will

then go on to take into account various matrices that will help us identify which strategies need

to be adopted by Continental Airlines, their pros and cons will also be assessed. The vision and

mission for the company has also been identified, in addition, the objectives and strategies have

also been put forward. Moreover, as mentioned already, matrices such as external evaluation

matrix, internal evaluation matrix, competitive profile matrix, SWOT matrix, BCG matrix, IE

matrix, SPACE matrix and the Grand Strategy matrix have all been identified. Lastly, the report

will formulate and recommend alternate strategies for Continental Airlines and assess in order to

find out which will and will not be effective for the company.


Introduction

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

world’s 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 colors to retain the company’s strong brand image (Schlangenstein &

Jane, 2010).

Company Background

Continental Airlines Company was integrated in the early 80’s of the 20 th 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.


Mission and Vision Statement

Vision:“To be recognized as the best airline in the industry by our customers, employees, and

shareholders”

By carefully analyzing Continental Airlines vision statement we can clearly construe that they

hope on becoming the best in what they do. Continental Airlines aim to attain the ultimate level

of satisfaction from not just its customers, but also from its employees and shareholders. Its

vision statement places importance on both its internal and external customers, carefully

highlighting their significance to their success. Continental has discovered the fact that many

companies tend to overlook; that is, in order to be triumphant in the airline industry they will

have ensure the satisfaction of its employees, who In turn will deliver quality services to their

customers that will drive them to come back for these services time and again.

Mission:

Even though Continental Airlines forms an evident name in the airline industry, it does not have

a predefined mission statement. It has instated a vision, as mentioned above, and it has various

strategies that it adheres by that make it possible for it to work towards this vision. However,

from a careful study done on its overall business operations and its guiding principles and values,

we can deduce that Continental Airlines mission is to be the sort of airline customers want to fly

on, and the airline people want to work for. This is also clearly depicted in their vision, and

hence is a perfect fit as Continental Airlines Mission statement.

Organization Customers Products Services

Markets

Concern for Survival, Growth and Profitability

Technology

Philosophy Self Concept

Concern for Public Image

Concern for Employees

Continental

Airlines

Yes Yes Yes No No No No Yes Yes


StrategiesThe mission statement for Continental Airlines is quite diverse, and is broken into 5 key areas,

each of which clearly define what it plans on doing in the future, and how it plans on going about

it.

The “Go Forward Plan” is Continental’s rudimentary element for success. This ever changing,

four point plans enables the company to formulate and transcend its goals. Since it’s

development in 1995, this plan has led the company to much greater heights of excellence in

terms of service and finance.

The “Fly to Win” element highlights the need to attain top quartile industry margins. This means

that they hope to expand their international airline connectivity and go on eradicating non value

added costs.

The “Fund the Future” element focuses on developing Continental’s franchises and set the stage

for future growth. In addition, it focuses on their fleet plan and hub real state and ensuring strong

cash flow and financial flexibility.

The “Make Reliability a Reality” element puts forth the ideology of creating an industry leader

of a product that Continental is proud to offer. In addition, they aim on becoming at the top in

terms of on time arrivals, baggage handling, complaints and involuntary denied boarding’s. They

also hope to improve their product every chance they get, and in turn improving their overall

company image.

Finally, their “Working Together” element states that they want to encourage a culture where

people enjoy coming in for work every day and are recognized for their contributions in the

company’s success. In doing so, they want to place an emphasis on safety, employee programs

and communication. (Mission statements, 2010)



Following are the Major identified external opportunities and threats of Continental Airlines.

Identifying these factors help the company to evaluate the its current position in the competitive

market and convince the management to analyze the current market in order to set the strategies

and goals also these are the key points to evaluate the industry analysis, the external factors

evaluation.

External 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

External 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

Airline industry as a whole is vulnerable to economic cycles and big swings in bottom-

line performance


Competitive Profile Matrix (CPM)

Continental

Airlines

American

Airlines

Delta

Airlines

Critical

Success

Factors

Weight Rating Weighted

Score

Rating Weighted

Score

Rating Weighted

Score

Financial

Position

0.15 2 0.30 3 0.45 4 0.60

Customer

Loyalty

0.10 2 0.20 4 0.40 3 0.30

Market Share 0.05 2 0.10 4 0.20 3 0.20

Management 0.15 4 0.60 2 0.30 3 0.45

Advertising 0.20 4 0.80 3 0.60 4 0.80

Price

Competitiveness

0.15 3 0.45 3 0.45 3 0.45

Global

expansion

0.15 4 0.60 3 0.45 4 0.60

Product quality 0.05 4 0.20 3 0.15 4 0.20

Total 3.25 3.0 3.6

The competitive profile matrix for Continental Airlines categorizes the company’s crest

competitors such as American Airlines and Delta Airlines. Companies are then evaluated on the

basis of significant success factors of the airline industry and the success factors are weighed

from (0.0, not important” to 1.0 very important) and the ratings pass on to the strengths and

weaknesses by 4 being the major strength, to 1 for major weaknesses.


Financial Position

The financial position is given a value 0.15 as the financial stability is always altering in terms of

various reasons and Delta Airlines have the highest score among the competitors. Delta Airlines

have a very strong financial strength as they have the highest revenue in the competitive market.

Customer loyalty

The weight of 0.10 is given to the customer loyalty and the American Airlines have scored

highest as they have very strong customer loyalty rewarding programs and they were the first

airlines to introduce the customer loyalty programs and thereby leading to a new revelation in the

travel industry.

Market share

Delta Airlines and American Airlines have similar and larger market shares than continental

airlines and the value of 0.05 is given and lowers considering other critical success factors.

Management

Management is one of the success factors of the companies and given a value of 0.15, however

they differ in their management styles of different organizations. American Airlines rating is

lower among competitors since their incompetency to survive the crisis situation and heavy

customer complaints regarding the scandals during the economic downturn.

Advertising

The value for the critical success factor ‘Advertising’ is the highest of all other aspects as it

carries a significant role in the strategy planning. The score is 0.20 and the ratings almost

identical except American Airlines. The competition in advertising is really strong and

companies have invested huge amount of money in various advertising campaigns.

Price competitiveness

The pricing strategies are different among companies and the efficient strategy of offering the

right seat to the right customer at the right time is vital to the company’s strength of price

competitiveness and again it is one of the major critical success factors. The weight of 0.15 is

given and the ratings are equivalent for all the airlines as they have more or less pricing structure

offered to the customers.


Global expansion

Expanding a wide network of air transport operation through connecting diverse hubs globally is

the future vision of most airlines and capturing the domestic as a whole and then virtually

presenting at a snail's pace in all the continent’s air transport operations. Continental and Delta

Airlines are expanding their portfolio of airline operations from domestic to international airline

carriers with a middling rate. The value of 0.15 is given as it is another vital success factor and

ratings are same for continental and Delta airlines.

Product quality

Product quality is not considered as one of the unique success factors of budgeted airlines

considering the international luxury airlines. Passengers who prefer these airlines are mostly

sensitive to the price and other more features. So the score given is 0.05 and the Continental and

Delta airlines have the similar ratings as they offer similar quality of products to their customers.


Financial Ratio AnalysisFinancial Ratio Analysis makes possible the company to spot trend in the competitive business

and to evaluate its performance and situation with the standard performance of similar activities

in the same industry. Following table analyze the major five ratios including the Liquidity ratios,

Activity ratios, Leverage ratios, Profitability ratios and the Growth ratios

Key Ratios Year 2008 Year 2009 Year 2009

Liquidity Ratios

Current Ratio 0.97:1 1:1 0.79:1

Quick Ratio 0.94:1 0.86:1 0.5:1

Leverage Ratios

Debt to Equity

Ratio

56:44 11:89 59:41

Debt to Total Asset

Ratio

46% 51% 60%

Activity Ratios

Fixed Assets

Turnover

2.08 1.06 1.5

Total Assets

Turnover

1.19 0.98 0.7

Profitability Ratios

Return on Capital

Employed

(5.56)% (4.95)% 4.0%

Return on Assets (0.8)% 4.7% 1.3%

Growth Ratios

EBITDA Growth 54.1% 42.8% 17.2%

Sales Growth (7)% (17)% (23)%


A liquidity ratio helps measure a company’s growth on the basis of its capability in achieving

short-term obligations. Liquidity ratios for both continental airlines and Delta airlines seem to

run along the unsatisfactory lines. Since, the ideal current ratio would be that of 2:1, both airlines

show that liabilities have taken over the assets in most years. However, Continental airlines has

progressed from 2008 to 2009 by 0.03 % , it still faces problems in relation to meeting its short

term payments and debts since the current assets depend upon its cash position. (Revenue from

the airline business). Therefore, seasonality can play a big role here in determining the accounts

payable and hence lead to inefficient operations.

Quick ratio which disregards inventories since it is the hardest to en-cash in time of debt

payment. Short term creditors prefer high current ratio since it reduces the risk of lending while

shareholders might prefer a lower current ratio since that shows that current assets within the

business are consumed for the growth and revenue of the business. The ideal quick ratio is 1.5:1,

which the financial figures of both Airlines don’t correspond to. It can be seen that continental

airlines is not only facing a negative lad but at the same has decreased further from 2008 to fiscal

year 2009. On the other hand, its competitor Delta Airline, manages a quick ratio of just 0.5:1

showing that Delta would have problems in paying short term debts since it has fewer assets that

can be easily turned into cash.

Leverage ratiosThe leverage ratio helps determine the extent to which the company has been financed by debt,

therefore the greater the ratio the more negative in terms of current assets and return on

investment. Financial leverage ratio provide a long-term solvency of a company unlike the

liquidity ratio.

Debt equity ratio is total debt divided by total equity, this figure as the formula suggests helps

investors and creditors analyze the capital structure and the solvency of the company. A high

ratio in the aviation industry is foreseen due to its equity-intensive formation. However,

Continental airlines has been able to keep this figure at a satisfactory level for its shareholders,

investors as there would be a high profit back on investment. A growth in its ratio from 2008 to

2009 indicates a growth and bounce back in the aviation, streaking out of the financial crisis.


While on the other hand, its competitor delta airline faces challenges with regards to the total

debt finances over its equity due to its higher ratio.

Debts to asset percentage indicates the financial strength/weakness of a company. With an

increase in percentage, continental airlines stand at 51:49, debt to assets, which wouldn’t be

considered as a weak financial position due to recent ongoing crisis and reduced airline fee.

Competitor delta, accounts to 60% of debt as compared to assets.

Activity RatiosActivity ratio determines how well a company is using its current resources. It measures a

company’s efficiency in areas of operations and maximizing the use of resources in such areas.

Fixed asset turnover notifies the revenue generated from fixed assets or resources. Singapore

airlines has faced a drastic decline in regards to this and shows the ineffective use of assets in

2009 compared to 2008. While, on the other hand delta airlines stands at a strong position with a

1.5 representing an efficient use of their current assets and resources. Total asset turnover

suggests the turnover ratio whilst including the inventory as well. Both airlines show declines in

this row suggesting an effective and excessive use of inventory.

Profitability ratiosProfitability ratios offer different measures of success of a company in the field of generating

profits.

The return on capital percentage is the bottom line par level for shareholders who measure

profits earned for each dollar invested in the firm. Return on equity is the net income divided by

shareholder equity. There has been seen a reasonable growth in 2008 but a fluctuating decline

towards 2009 for both airlines. With Singapore airlines standing a 4.7 % and delta at 4.0%, it is a

reasonable equation for shareholder and investor interests.

Return on assets is the measure of how effective is the company’s assets being used to generate

profits. Different from the total asset turnover, this demonstrates figures representing profit

margins on assets. A great increase was noted for continental airlines in 2009 climbing nearly

4% while delta airlines decreases down 1.3% which Is comparatively a lower figure with regards

to asset management.


Growth ratiosThis determines the company’s ability to maintain economic position and possibly grow in the

market industry and economy. This is compared to the prior performance of the company.

EBITDA growth indicator represents the amount of sales a company makes before it deducts

money for expenses. With regards to continental airlines, there has been seen a plummet in

EBITDA growth possibly because of the loss of revenue due to the financial crisis and

competition from international market and low-cost airlines. However, it has maintained itself at

a stable position, not the case with delta airlines which faces trouble standing at 17%, showing its

weak financial outline hindering investors and shareholder interests.

Sales growth ratio determines the growth or decline in the company’s sales rate over the past

years. Sales growth compared to the last fiscal year has plummeted as well, with a 10% decrease

in continental airlines. Delta airline is facing a minus 23% less sales growth, meaning lesser

revenue which is a big thing to consider in its future strategies.


Current Income Statement in US $ Dec 09 Dec 08 Dec 07

Revenue 12,586.0 15,241.0 14,232.0Cost of Goods Sold 5,779.0 8,713.0 9,992.0Gross Profit 6,807.0 6,528.0 4,240.0Gross Profit Margin 54.1% 42.8% 29.8%SG&A Expense 6,314.0 4,786.0 682.0Depreciation & Amortization 494.0 438.0 413.0Operating Income (146.0) (314.0) 687.0Operating Margin -1.2% -2.1% 4.8%Non operating Income 95.0 (103.0) 102.0Non operating Expenses (388.0) (267.0) --Income Before Taxes (439.0) (684.0) 566.0Income Taxes (157.0) (99.0) 107.0Net Income After Taxes (282.0) (585.0) 459.0Continuing Operations (282.0) (585.0) 459.0Discontinued Operations -- -- --Total Operations (282.0) (585.0) 459.0Total Net Income (282.0) (585.0) 459.0Net Profit Margin -2.2% -3.8% 3.2%


Industry analysis: External Factors Evaluation MATRIXOPPORTUNITIES WEIGHT RATING WEIGHTED SCOREContinental airlines should consider researching the international markets, as they face intense competition from the local market.

0.07 3 0.21


0.10 4 0.40

The “EU-US Open Skies” provides Continental with an opportunity to broaden its base in terms of connectivity.

0.09 4 0.36

Merger with the United Airlines in October 2010

0.10 4 0.40

Growing demand for travel at 3.2% growth in 2011

0.04 2 0.08

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

0.08 3 0.24

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

0.03 2 0.06

THREATSRise in fuel costs and domestic competition. 0.09 2 0.18

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

0.08 3 0.24

The fact that it’s rivals have recovered from bankruptcy and recovered back much stronger due to their ability to reduce their costs.

0.06 1 0.06

The introduction of new aircrafts by the rivals and the fact that this would directly contradict Continentals young and more fuel efficient aircrafts.

0.07 2 0.14


0.08 2 0.16


Ongoing pricing competition of budgeted airlines in the market

0.08 3 0.24

Airline industry as a whole is vulnerable to economic cycles and big swings in bottom-line performance

0.03 2 0.06

TOTAL 1 2.83

The matrix above recapitulates and estimates the external factors that give a considerate view of

how effective the company’s strategies are used in the capitalization of their opportunities and

disclose the point of threats that are active. The weights are set between “0.0 and 1.0” depending

on its level of importance depending on how well the Continental Airlines responds to the above

factors considering its current objectives and strategies. The total weighted score of this matrix

reveals that Continental Airlines have a strong score of 2.83 which is higher than norms.


The strengths and weaknesses are the major key points of company’s internal position analysis

and they are identified and utilized in order to make the internal investigation, which is the

internal evaluation matrix.

Internal Strengths The fact that the airline provides customized services in accordance to the destination it’s

travelling to.

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

It’s young management team that has been supporting it since the mid 90’s.

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 Boeing’s 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

Internal 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


Internal Factor Evaluation (IFE) Matrix

STRENGTHS WEIGHT RATING TOTAL WEIGHTED SCORE

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

0.10 4 0.40

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

0.08 3 0.24

It’s young management team that has been supporting it since the mid 90’s.

0.05 2 0.10

It’s various incentive programs to keep its staff motivated to aim towards on-time arrivals.

0.07 3 0.21

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

0.08 4 0.32

Houston hub serves booming energy market; Newark hub serves huge New York market and is a major access point to Europe

0.07 3 0.21

It’s fleet comprises of mainly Boeing’s and is one of the youngest globally. This leads to increased efficiencies and major cost reductions.

0.07 3 0.21

Received an array of awards for service quality and overall reputation.

0.09 3 0.27

Increment in gross profits and reductions in overall costs.

0.05 2 0.10

WEAKNESSES


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

0.07 3 0.21

The airline has faced a decrement in its overall AQR scores. 0.03 2 0.06

Service quality has also faced a decline. 0.05 3 0.15

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

0.03 2 0.06

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

0.04 2 0.08

Lack of internal training for the employees

0.03 2 0.06

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

0.06 3 0.18

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

0.03 2 0.06

Total 1 2.92

After evaluating and analyzing the weights of strengths and weakness of the company, the total

weighted score is 2.92 which slightly higher above the average score 2.50 and it clearly indicates

that Continental Airlines has a well built internal strengths and minimal weaknesses. However

there needs to be significant improvements in their internal operational structure in order to

achieve competency.


Strengths-Weaknesses-Opportunities-Threats (SWOT) MatrixA scan of internal and external environment is important part of the strategic planning process.

The company’s internal strengths and weakness are related to external opportunities and threats.

The analysis provides information that is helpful in matching the firms’ resources and

capabilities to the competitive environment which operates.

Stren

1. The fact that the airline provides customized services in accordance to the destination it’s travelling to.

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

3. It’s young management team that has been supporting it since the mid 90’s.

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

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

6. Houston hub serves booming energy market; Newark hub serves huge New York market and is a major access point to Europe

7. Its fleet comprises of mainly Boeing’s and is one of the youngest globally. This leads to increased efficiencies and major cost reductions.

8. Received an array of awards for service quality and overall reputation

9. Increment in gross profits and reductions in overall costs

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

2. The airline has faced a decrement in its overall AQR scores.

3. Service quality has also faced a decline.4. It has been recorded that continental has

poor on-time performance, despite its efforts.

5. It also had the worst record in over booking and bumping passengers in comparison to other airlines.

6. Lack of internal training for the employees

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

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

Opportunities SO Strategy ST Strategy1. Continental airlines should consider

researching the international markets, as they face intense competition from the local market.

2. The installation of winglets in an attempt to lessen costs.

3. The “EU-US Open Skies” provides Continental with an opportunity to broaden its base in terms of connectivity.

4. Merger with the United Airlines in October 2010

5. Growing demand for travel at 3.2% growth in 2011

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

7. 42% increase in the Hispanic population in US over the last decade

1) Its fleet comprises of mainly Boeing’s and is one of the youngest globally. This leads to increased efficiencies and major cost reductions/ the installation of winglets in an attempt to lessen costs. (S7:02): Product Development.

2) The fact that the airline provides customized services in accordance to the destination it’s travelling to/ Being more technologically advanced and using the internet to reduce their costs. (S1:O6): Market Penetration.

3) Backward Integration: S3:S4:O3

1) Its fleet comprises of mainly Boeing’s and is one of the youngest globally. This leads to increased efficiencies and major cost reductions/ The introduction of new aircrafts by the rivals and the fact that this would directly contradict Continentals young and more fuel efficient aircrafts. (S7:T4): Product Development.

2) Received an array of awards for service quality and overall reputation/ Airline industry as a whole is vulnerable to economic cycles and big swings in bottom-line performance. (S8:T7): Market Penetration.


Strengths Weaknesses

1. Rise in fuel costs and domestic competition.

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

3. The fact that its rivals have recovered from bankruptcy and recovered back much stronger due to their ability to reduce their costs.

4. The introduction of new aircrafts by the rivals and the fact that this would directly contradict Continentals young and more fuel efficient aircrafts.

5. Entry of international airlines into the domestic services

6. Ongoing pricing competition of budgeted airlines in the market

7. Airline industry as a whole is vulnerable to economic cycles and big swings in bottom-line performance

1) 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/ Continental airlines should consider researching the international markets, as they face intense competition from the local market / Growing demand for travel at 3.2% growth in 2011

(W4:W5:W6:05:O1): Market development. Product development. Market Penetration.

1) It also had the worst record in over booking and bumping passengers in comparison to other airlines/ Airline industry as a whole is vulnerable to economic cycles and big swings in bottom-line performance/

Rise in fuel costs and domestic competition. (W5:T7:T1): Retrenchment.2) Minimal presence in major foreign

destinations such as London, Paris, Tokyo/ The fact that its rivals have recovered from bankruptcy and recovered back much stronger due to their ability to reduce their costs.(W8:T3): Horizontal Integration.

SWOT MATRIX ANALYSIS

SO Strategy:The fact that that Continental’s product portfolio consists mainly of Boeing’s and are the

youngest worldwide coupled with the fact that Continental airlines has introduced the installation

of winglets to cut costs will lead to an overall efficient product development. (s7:02)

The customized service element that Continental provides, in accordance with the destination it’s

travelling to mixed with the fact that technological advancements now make it easier to provide

these customized services would make it easier for Continental to penetrate into the market.

(S1:06)


WO Strategy WT StrategyThreats

Continental’s efforts to motivate its employees by providing them with efficient incentive

programs, plus the fact that it “Open Skies” policy that was developed to raise connectivity with

Continentals allies helps Continental achieve backward integration. (S3:S4:03).

ST Strategy:The introduction of new aircrafts by Continental’s competitors would lead Continental airlines to

focus primarily on developing new products, as its Boeing’s may become obsolete. (S7:T4).

As mentioned, the airline industry as a whole is very vulnerable in nature and tends to fluctuate

in terms of its operations. However, since Continental Airline’s has been awarded with various

service quality awards, it would enable them to penetrate the markets much easily. (S8:T7).

WO Strategies:It has been stated as one of the flaws of Continental’s Airlines that it has poor on-time

performance, also has problems with booking passengers in comparison with other airlines. It’s

training provided to its staff has also been recorded as being weak, hence, if Continental Airlines

were to target a new market all together and focus primarily on providing its services to this new

market they might actually be able to better their standards and service quality. This is where the

strategies of Market development, Product Development and Market Penetration come into play.

(W4:W5:W6:05:O1).

WT Strategies Continental Airlines is faced with a retrenchment possibility when we take into accounts the

various weaknesses and threats. These are highlighted in the SWOT matrix above.

It may also have the potential of integrating horizontally as its competitors have recovered from

the financial slump, so in order to meet the rise in competition it may need to take into account

the possibility of adhering by this strategy.


-1

-2

-3

-4

-5

Strategic Position and Action Evaluation (SPACE) MatrixThe strategic Position and Action Evaluation (SPACE) Matrix is one of the significant

techniques to recognize the type of strategy company has to choose. The matrix consists of four

different areas with a specific strategy in each. The axis of the SPACE matrix represent two

internal dimensions (functional strength and competitive advantage) and two external

(environmental stability and industry strength) which are important in order to identify

company’s overall strategic position.


FS

CA IS

ES

Calculated values

Average value for FS=3.83, CA=-2, IS=3, ES=-3.63

Point on X-AXIS = (-2+3) = 1

Point on Y-AXIS (3.83-3.63) = 0.20

5

4

3

2

1

-5 -4 -3 -2 -1 1 2 3 4 5

AGGRESSIVECONSERVATIVE

DEFENSIVE COMPETITVE

Financial Strength (FS) Environmental Sustainability (ES)

Return on Investment 4 Technological Changes -4

Leverage 3 Inflation rate -4

Liquidity 3 Demand fluctuation -3

Working Capital 5 Price bracket of competing products

-2

Cash Flow 4 Entry barriers into the market -4

Inventory Turnover 4 Pressure from competition -3

Total 23 Easy exit from the market -3

Competitive Advantage (CA) Price elasticity of demand -4

Market Share -1 Risk involved in Business -2

Product Quality -1 Total -29

Product Life Cycle -1 Industry Strength (IS)

Customer Loyalty -2 Growth possibility 5

Competition’s capacity utilization -3 Financial constancy 2

Technological skills -3 Technological knowledge 2

Control over distributors and suppliers -3 Resource consumption 3

Total -14 Ease of entry into the market 2

Productivity, capacity, utilization

4

Total 18

Continental Airline falls on the second quadrant of SPACE matrix, which is aggressive. In

overall the matrix shows that the company has competitive advantage if they adapt aggressive

strategies such as any integration and intensive or diversification.


4.0

3.0

2.0

1.0

Internal-External (IE) MatrixThe Internal-External (IE) Matrix is a strategic management contrivance that is used to analyze

the strategic position of a business. The IE matrix is supported by the total weighted scores of the

IFE matrix on the x-axis and the EFE matrix on the y-axis. The matrix spots an organization into

nine cells and the matrix can be divided into three major sections that have dissimilar allusion.

The IE matrix is almost similar to BCG matrix and it has two key dimensions including the

scores in the x axis and EFE total weighted scores on the y axis. Total IFE weighted score of

2.92 falls in X axis and the Total EFE weighted score of 2.83 fall in the Y axis and both the

whereas both the values are slightly above average. According to the IE matrix below,

Continental Airlines falls in the fifth cell and so as they should follow the strategy of “hold and

maintain”. This strategy mainly focuses on both market penetration and product development.

Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99


THE IFE TOTAL WEIGHTED SCORES

THE

EFE

TOTAL

WEIGHTED

SCOR

3.0 2.0 1.0

I II III

IV V VI

VII VIII IX

Boston Consulting Group (BCG) MatrixThe BCG matrix reveals the company’s market share position in the industry to the market share

detained by the largest competitor in the same industry. The matrix displays the companies on a

graph of the market growth vs. market share relative to competitors. The BCG Matrix is divided

into four types of circumstances, the Stars, Cash Cows, Dogs and Question Marks.

Relative Market ShareContinental sales in 2009=12,586mn

Delta Airlines sales in 2009=28,063mn

The relative market share is 0.45

Industry growth rate= (15.5) % Major Airlines Revenue 2009 in

millionsRevenue 2008 in millions

Average Growth Rate %

Continental Airlines 12,586.0 15,241.0 (17)%American Airlines 19,917.0 23,766.0 (16)%Delta Airlines 28,063.0 22,697.0 (23)%Southwest Airlines 10,350.0 11,023.0 (6)%Total (62)/4=(15.5)%

The following BCG Matrix shows the proportion between relative market share and industry

growth rate of Continental Airlines. With a relative market share of 0.45 and a industry growth

rate of (15.5) % the position lies in the fourth cell ‘Dogs’ which represents the strategies of

liquidity, divesture and retrenchment. The company has very Low relative market share &

compete in slow or no market growth with Weak internal & external position.


High Medium Low

1.0 0.50 0.0


Industry Growth Rate%

Relative Market Share

High +20

Medium 0

Low -20

STARS QUESTION MARKS

CASH COWS

DOGS

Grand Strategy MatrixThe GS matrix is one of the popular tools to identify and formulate alternative strategies and

companies can be positioned in one of the four quadrants which represent different strategies.

The following grand strategy matrix of Continental airlines evaluates competitive position and

market growth in the current similar market industry.

Rapid Market Growth

II I

III IV

Slow Market Growth

According to the Grand Strategy Matrix, the position of Continental Airlines lies in the fourth

quadrant which reveals that the company has above the average competitive position among the

competitive market and but very slow market growth as the industry growth rate is really below

the average. The strategies recommended are related diversification, unrelated diversification and

joint ventures.


Weak Competitive Position

Strong Competitive Position

Evaluation of Strategies from Matrices

STRATEGIES SWOT Matrix

SPACE Matrix

BCG Matrix IE Matrix Grand Strategy Matrix

TOTAL

Forward Integration

1

Backward Integration

2

Horizontal Integration

3

Market Penetration

2

Market Development

3

Product Development 2

Related Diversification 2

Unrelated Diversification 2Retrenchment

2

Divestiture 1

Liquidation 1

Joint Ventures1

By analyzing and evaluating all the matrices, the strategies more used are in all the matrices are

Horizontal Integration and market development. The alternative strategies developed according

to the two strategies accordingly and used in the QSPM.


Quantitative Strategy Planning Matrix (QSPM)

ALTERNATIVE STRATEGIES(HI)Merging with United Airlines”

(MD)Developing a strong market in China and Japan

STRENGTHS WEIGHT AS TAS AS TASThe fact that the airline provides customized services in accordance to the destination its travelling to.

0.10

2 0.20 3 0.30The company rose to profitability after being hit by severe losses for four years straight.

0.08

3 0.24 2 0.16It’s young management team that has been supporting it since the mid 90’s.

0.05

2 0.10 1 0.05It’s various incentive programs to keep its staff motivated to aim towards on-time arrivals.

0.07

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

0.08

2 0.16 3 0.24Houston hub serves booming energy market; Newark hub serves huge New York market and is a major access point to Europe

0.07

3 0.21 1 0.07It’s fleet comprises of mainly Boeing’s and is one of the youngest globally. This leads to increased efficiencies and major cost reductions.

0.07

3 0.21 2 0.14

Received an array of awards for service quality and overall reputation.

0.09

2 0.18 3 0.27Increment in gross profits and reductions in overall costs.

0.05

- - - -WEAKNESSES

The fact that its “Go forward” plan does not attend the environmental issues directly. 0.07

- - - -The airline has faced a decrement in its overall AQR scores. 0.03

1 0.03 2 0.06

WEIGHT AS TAS AS TAS


Service quality has also faced a decline.0.05

3 0.15 2 0.10It has been recorded that continental has poor on-time performance, despite its efforts.

0.03

2 0.06 1 0.03It also had the worst record in over booking and bumping passengers in comparison to other airlines.

0.042 0.08 1 0.04

Lack of internal training for the employees 0.03

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

0.06

2 0.12 1 0.06Minimal presence in major foreign destinations such as London, Paris, Tokyo

0.03

3 0.09 1 0.03Total 1

OPPORTUNITIES

Continental airlines should consider researching the international markets, as they face intense competition from the local market.

0.07

- - - -


0.10

- - - -The “EU-US Open Skies” provides Continental with an opportunity to broaden its base in terms of connectivity.

0.09

2 0.18 3 0.27Merger with the United Airlines in October 2010

0.10 4

0.40 2 0.20Growing demand for travel at 3.2% growth in 2011

0.04

4 0.16 3 0.12Being more technologically advanced and using the internet to reduce their costs.

0.08

2 0.16 1 0.0842% increase in the Hispanic population in US over the last decade

0.03

3 0.09 1 0.03

WEIGHT AS TAS AS TAS


THREATS

Rise in fuel costs and domestic competition. 0.09

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

0.08

- - - -The fact that it’s rivals have recovered from bankruptcy and recovered back much stronger due to their ability to reduce their costs.

0.06

2 0.12 3 0.18

The introduction of new aircrafts by the rivals and the fact that this would directly contradict Continentals young and more fuel efficient aircrafts.

0.07

2 0.14 3 0.21


0.08

3 0.24 1 0.08Ongoing pricing competition of budgeted airlines in the market

0.08

2 0.16 1 0.08Airline industry as a whole is vulnerable to economic cycles and big swings in bottom-line performance

0.03

- - - -TOTAL 1

3.39 2.8

Advantages and Disadvantages of Strategies

Merging with United Airlines: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. Disadvantages of the possible Merge would’ve 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.

Developing a strong market in Japan and China: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.

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.

Strategy recommendationFrom 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.

Long term objectives

The Long term objectives of the company is to Increase operating revenue by 20 % by 2012

using Horizontal Integration strategy (Merging) in this scenario and the company expects a

significant growth in the future operation by extending its wide network of global and domestic

links. Strong marketing activities will be done in order to support the long term objective and the

goal of the company; the financial statements are expected to be beginning by the end of 2010


and the objective is believed to be achieved in two years which is 2012. The following chart will

give a glimpse about the annual objectives of the company’s different departments.


Objectives and Policies


Long term company objectives

Increase operating revenue by 20 % by 2012 using Horizontal Integration strategy( Meging )

R&D annual objective

Develope new technology to

reduce the fuel consumption

Invent new ways of Online

reservation and flight tracking

system

Marketing annual

objectivesPrioritise

advertising activites for merging and developing campagne

programs about the new routes

MIS annual objectives

Create a consolidated

customer data base of both

merged airlines

Finance annual objectives

Forcast the future risks involved

inthe horizontal integration process and develop risk

management

Personnel annual

objectivesImplement staff

training and development

program for new recruitments and offer refreshment

training every quarter

PoliciesResearch and Development

• Develope 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.

• 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.

Marketing

• Prioritize advertising activities for merging and developing campaign programs for

the new routes

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.

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

Finance

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

risk management


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 March

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.

Resource Allocation

The following table will shed some lights on the resources which will be allocated before

the implication of the recommended strategy. The financial resources will be required for

airport charges, government taxes, legislation fees, marketing activities and operational

expenses. The HR resources such as new recruitment and training programs will be

required as well. Physical and technological resources are the basic operational resources

required for the strategy to be implemented successfully.

FinancialmortgageCapitalRetained Profits & earningsinvestments

PhysicalAircraftsMaintenance & Service centresCorporate offices & BuildingsEmployee housingsEquipments & other assets

HumanRecruitment and training of employees

TechnologicalR&D development equipmentsOutsourcing of technology


Income Statement after Implementation Dec 09(mn) Dec 11(mn)

Revenue 12,586.0 13,959.0Cost of Goods Sold 5,779.0 7,745.0Gross Profit 6,807.0 6,214.0Gross Profit Margin 54.1% 44.5%SG&A Expense 6,314.0 7232.0Depreciation & Amortization 494.0 390.0Operating Income (146.0) (628.0)Operating Margin -1.2%Non operating Income 95.0 132.0Non operating Expenses (388.0) 37.0Income Before Taxes (439.0) (214.0)Income Taxes (157.0) (97.0)Net Income After Taxes (282.0) 23.0Continuing Operations (282.0) 23.0Discontinued Operations -- -Total Operations (282.0) 23.0Total Net Income (282.0) 23.0Net Profit Margin -2.2% 1.8

RecommendationsThe 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.


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