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Running head: Continental Airlines, Iinc.

Continental Airlines, Inc.

Natalya Kashirina

Yanelis Hutchinson

Britney Mosley

Whitney Edden

MAN 3025-001

Dr. Barry Axe

February 2nd, 2010


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Continental Airlines, Inc.

Strategic Management

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Core Competencies

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S.W.O.T. Analysis

Strengths

Continental employs a flexible fleet plan that provides the ability to adjust the fleet to

meet market demands. As of June 30, 2009, the company operates a fleet of 351 mainline jets.

Strong fleet enabled the company to serve 120 destinations across the US and 121 destinations

internationally (Airfleet, 2010). It also offers the flexibility to add and serve more destinations.

Diverse set of fleet operations allow the company to improve its returns by effective utilization

of its asset base. Therefore, strong fleet operations of Continental help the company to attain a

competitive advantage over its peers.

Continental has a robust route system. The company operates its domestic route system

primarily through its hubs in the New York metropolitan area at Newark Liberty International

Airport (New York Liberty); in Houston, Texas at George Bush Intercontinental Airport

(Houston Bush); and in Cleveland, Ohio at Hopkins International Airport (Cleveland Hopkins)

(Beaulieu, 2010). Each of the company’s domestic hubs is located in a large business and

population center, contributing to a large amount of ‘origin and destination’ traffic. The hub

system allows the company to transport passengers between a large number of destinations with

substantially more frequent service than if each route were served directly. The hub system also

allows the company to add service to a new destination from a large number of cities using only

one or a limited number of aircraft. Therefore, the advantageous location of its major hubs has

helped Continental to capture a large part of the US domestic and international traffic.

Continental leverages its strong technological capabilities to retain old customers and to

attract new ones. The company uses the internet to provide travel-related services for its

customers and to reduce its overall distribution costs. The company’s website is its lowest cost
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distribution channel and recorded approximately $3.9 billion in ticket sales in 2008, an increase

of 11% over 2007. The site offers customers the ability to purchase and change tickets on-line, to

check-in-online and to have direct access to information such as schedules, reservations, flight

status, frequent flyer account information, and continental travel specials. In 2008, the company

along with Transportation Security Administration (TSA) launched paperless boarding pass

program that allows passengers to receive boarding passes electronically on their cell phones or

PDAs. This technology increases the ability to detect fraudulent boarding passes while

improving customer service and reduce paper use. Therefore, e-services help the company to

attract more customers which in turn enables Continental to generate more revenues (Snyder,

2010).

Weaknesses

Continental witnesses high debt obligations in 2009. The company has a high proportion

of debt compared to its capital. The company has significant amount of fixed obligations,

including debt, aircraft leases and financings, leases of airport property, and pension funding

obligations. As of December 31, 2008, Continental had $5,872 million of total debt, including

$5,353 million of long term debt. In 2008, The company’s debt increased by 17.7% over 2008

(King, 2010). Company’s current credit ratings limit its financing options. Therefore, high debt

obligations make it more difficult for Continental to pay principal and interest with respect to its

debt obligations. It requires the company to dedicate a substantial portion of its cash flow from

operations for interest, principal and lease payments. It also reduces the company’s ability to use

cash flow to fund working capital and other general corporate requirements. In addition, high

financial obligations also limit Continental’s flexibility in planning, and in reacting to changes in

business and industry.


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Continental has witnessed sluggish profits and margins in 2008. The operating profit of

the company decreased from $687 million in 2007 to an operating loss of $314 million in 2008.

Similarly, the net profit of the company decreased from $439 million in 2007 to a net loss of

$586 million in 2008. The company witnessed a net loss in 2008 which was primarily the result

of higher fuel prices. The net margin of the company also declined from 3.1% in 2007 to -3.8%

in 2008. Therefore, sluggish profits and margins indicate that the company has not been able to

manage its cost structure efficiently, which can adversely affect the long term financial position

of Continental (King, 2010).

Continental depends heavily on the US market for its revenues. The company derives

about 54.6% of its revenues from the US, reflecting a heavy dependence on the market (Lawson,

2010). Overdependence on one geographic region makes it susceptible to changes associated

with the economic and political situation of the country.

Opportunities

The US regional airline industry has witnessed fluctuating growth rates in 2008 and in the

first half of 2009. The industry was affected by the global economic downturn. The industry is

expected to recover in 2010, posting strong growth thereafter. According to Federal Aviation

Administration (FAA), passenger traffic will pick up in 2010, with domestic boardings growing

2.3% a year to reach 690.2 million by 2025. International boardings on the big carriers and

smaller regionals will grow 4.3% a year from 2010 through 2025 (IATA, 2010). Continental is

engaged in the business of transporting passengers, cargo and mail. As of December 2008, the

company served 120 destinations across the US. Therefore, Continental is well positioned to

capitalize on the growing US regional airline industry.


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Threats

The airline industry has been severely affected by the economic crisis. The credit crunch

and the volatility in the oil price, then the financial crisis, all had direct consequences for the

airline industry. The airline industry is highly cyclical, and the level of demand for air travel is

correlated to the strength of the US and global economies. Healthy economic growth is therefore

a precondition for the positive growth rate of the business. An economic downturn poses

challenges for Continental. The financial turmoil and credit tightening has affected the global

transportation and logistics industry. Therefore, further global economic recession will delay

Continental’s ability to achieve and sustain profitability.

The airline industry has undergone substantial consolidation and is heading for more

because of the global recession and drop in air travel. Recent examples include the merger

between Delta and Northwest Airlines in October 2008; America West Airlines and US Airways

in September 2005; and American Airlines’ acquisition of the majority of Trans World Airlines’

assets in 2001 (King, 2010). Several of the major airlines are in discussions related to

consolidation in the industry. Other developments include domestic and international code-share

alliances between major carriers. At least eight airlines that operated from the US ceased

operations during 2008. Any additional consolidation or significant alliance activity within the

airline industry could limit the number of potential partners with whom the company could enter

into code-share relationships. This in turn may adversely affect Continental’s operations.

The airline industry is highly competitive. The principal competitive factors in the airline

industry are fares, customer service, routes served, flight schedules, types of aircraft, safety

record and reputation, code-sharing relationships, capacity, in-flight entertainment systems and

frequent flyer programs. Airline profits are sensitive to even slight changes in average fare levels
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and passenger demand. Continental competes with many airline companies, including AMR, Air

France, Alaska Air Group, British Airways, Cathay Pacific Airways, Delta Air Lines, JetBlue

Airways, Mesa Air Group, Northwest Airlines, SkyWest, Southwest Airlines, UAL, and US

Airways Group.

Competition in most of the company’s domestic markets from other carriers continues to

result in increased capacity and lower yields in those markets. In addition, several of

Continental’s domestic competitors have increased their international capacity, including service

to some destinations that the company currently serves, resulting in lower yields and/or load

factors in affected markets. In addition, the ‘open skies’ agreement between the US and the

European Union, which became effective in March 2008, is resulting in increased competition

from European and US airlines in these international markets (U.S. Department of State, 2009).

It may also give rise to additional integration opportunities between or among US and European

carriers.
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Leadership

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Strategic Alliance

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References

Airfleet. (2010). A Monthly Civil Aviation News Document. An Overview of

Continental Airlines. Retrieved January 4th, 2010, from

http://www.airfleets.net/flottecie/Continental%20Airlines.htm.

Beaulieu, K. (2010). Continental: The In-flight Magazine For Continental Airlines.

Retrieved January 4th, 2010, from http://magazine.continental.com/.

International Air Transport Association. (2010). Airline Industry Forecast: Continental

Airlines. Retrieved January 4th, 2010, from

King, M. (2010). Continental Airlines: Newly Released Company Financials and Credit

Information. Retrieved January 4th, 2010, from http://www.pr-

inside.com/continental-airlines-newly-released-company-

r1395160.htm.

Lawson, S. (2010). Continental Airlines Overdependence on U.S. Market. Retrieved

January 4th, 2010, from http://www.prlog.org/10415897-continental-wind-

power- in-partnership-with-drs-power-control-tech-for-alternative-energy-

solutions.html.

Snyder, B. (2010). The Go-To Place for Management. Continental Airlines Revenue and

Distribution. Retrieved January 4th, 2010, from

http://industry.bnet.com/travel/.

http://www.iata.org/ps/publications/airline-industry-forecast.htm

U.S. Department of State. 2009. Open Skies Agreement. Retrieved January 4th, 2010,

from http://www.state.gov/e/eeb/tra/ata/.
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