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.
• 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.
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:
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
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 DELTA AIRLINES SOUTHWEST AIRLINES Critical Success Factors
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
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.
• INTERNAL FACTOR FINANCIAL ANALYSIS Period Ending Changing in (%) 2007 2008 Assets Current Assets
Cash and Equivalents 21.12 2,892,000 3,503,000
Short-Term Investments 3.19 373,000 390,000
Net Receivables 6.61 796,000 847,000
Inventory 1.92 221,000 225,000
Other Current Assets 3.68 431,000 447,000
Total Current Assets 36.52 4,713,000 5,412,000
Long-Term Investments 0.72 81,600 82,200
Property, Plant and Equipment 55.39 6,310,000 6,360,000
Goodwill - -
-Intangible Assets 5.34 636,000 670,000
Accumulated Amortization - -
-Others Assets 2.04 236,000 241,000
Deferred Long-Term Asset Charges - -
-Total Assets 100 11,976,000 12,765,000
Liabilities Current Liabilities
Accounts Payable 29.90 4,392,000 5,705,208
Short/ Current Long-Term Debt 5.08 603,160 633,801
Other Current Liabilities - -
-Total Current Liabilities 4,995,160 6,339,009
Long-Term Debt 42.97 3,880,209 2,645,956
Other Current Liabilities 17.53 2,329,450 2,737,803
Deferred Long-term Liability Charges 1.46 167,410 169,854
Minority Interest - -
-Negative Goodwill - -
-Total Liabilities 11,372,229 11,892,622
Stockholders' Equity
Misc Stocks Options Warrants - -
-Redeemable Preferred Stock - -
-Preferred Stock - -
-Common Stock 1000 1000 1000
Retained Earnings (0.10) (10,989) (10,978)
Treasury Stock - -
-Capital Surplus 12.12 1,536,000 1,722,163
Others Stockholders' Equity (8.96) (922,240) (839,607)
Total Stockholders' Equity 603,771 872,578
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
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
Ratio charges
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%)
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
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 =
in 2005)
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
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 carriers.
-4.0
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
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 +1 + 2 +3 + 4 + 5 +6 -1 -2 -3 -4 -5 -6 + 6 + 5 + 4 + 3 (-0.75,
GRAND STRATEGY MATRIX
Rapid Market Growth
Slow Market Growth
Quadrant II (Conservative) Quadrant I (Aggressive)
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
Weak Competiti ve Position Strong Competitive Position Quadrant IV (Competitive)
• 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
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
