Continental Airlines 1
Running Head: Continental Airlines Case Study 2003
Continental Airlines Case Study 2003
Anthony Jow
University of Maryland University College
TMAN 614 – Fall 2003
Anthony Jow
Continental Airlines 2
Abstract
Continental Airlines, Inc. is perhaps the best comeback story for an airline today.
The man behind the comeback is Gordon Bethune, Chairman and CEO of Continental
Airlines and the author of "From Worst to First: Behind the Scenes of Continental's
Remarkable Comeback". In 2003, Fortune magazine ranked Continental Airline as
number 55 of the "100 Best Companies to Work for in America" (Levering, Moskowitz,
Harrington, & Tkaczyk, 2003).
Continental Airlines is the fifth largest airline in the U.S. and the seventh largest
airline in the world. Continental flies to over 200 destinations spanning five continents
and operates major hubs in Newark, Houston, Cleveland, and Guam. In 2002,
Continental on average had over 2,200 daily departures carrying more than 120,500
passengers per day. The company headquarters for Continental Airlines is located in
Houston, Texas. The company employs over 42,000 people and its fleet consists of
Continental's 352 jets plus Continental Express's 218 regional jets. Continental is a
publicly traded company on the New York Stock Exchange under the symbol CAL
(Continental, 2003, p. 3, 11).
As many airlines including Continental continue to struggle in a weak, post 9/11
environment, what strategic issues will they face? This case study will attempt to explore
some of those issues involved in Continental's decision-making process.
Anthony Jow
Continental Airlines 3
Continental Airlines Case Study 2003
History
Continental's (www.continental.com) roots began in 1934 when Walter Varney
and Louis Mueller founded Varney Speed Lines. Two years later in 1936, Mueller sold
40% of the company to Robert F. Six and the name changed from Varney Speedy Lines
to Continental Airlines. In subsequent years, Continental went on to merge with Pioneer,
Texas International, Frontier, People Express, and New York Air Airlines.
In 1983, Continental filed for Chapter 11 re-organization. At the end of 1984, the
company recorded a $50 million profit and emerged from Chapter 11 protection in 1986.
Continental again filed for bankruptcy for the second time in 1990. Only a $450 million
investment by Air Partners/Air Canada allowed Continental to emerge from bankruptcy
in 1993. The company was on the verge of another bankruptcy and then in August of
1994, The Board of Directors elected Gordon Bethune as the new chairman and CEO.
Bethune unveiled the four-point "Go Forward Plan" in January of 1995 and by
December, Continental posted its largest annual profit ever at $224 million. The success
continued as they announced a new all-time record annual profit of $640 million for
1997. The accolades summarized by a Continental Airlines press release (Jan. 26, 2001):
Continental is in the top quarter of FORTUNE magazine’s "100 Best Companies
to Work for in America," and is ranked the nation’s No. 1 airline in customer
satisfaction for long and short-haul flights by Frequent Flyer Magazine and J.D.
Power and Associates. Continental has received numerous awards for its
BusinessFirst premium cabin (Condé Nast Traveler, OAG, Entrepreneur and
SmartMoney magazines), OnePass frequent flyer program (InsideFlyer’s Freddie
Awards) and overall operations and management (Air Transport World’s 1996
and 2001 Airline of the Year).
Vision and Mission
There are no impressive statements of vision or mission that can be found
anywhere on any corporate publication or website. Instead, the company follows the "Go
Forward Plan". Gordon Bethune and Greg Brenneman, a consultant to Continental at the
time, created this blueprint for Continental's future. Bethune said, "No short-lived
management mumbo jumbo, the "Go Forward Plan" was a complete restating of how we
would do business at Continental" (Bethune & Huler, 1998, p. 12).
The "Go Forward Plan" is a four-pronged plan that helps the company define its
strategies and focuses its goals. Since 1995, the "Go Forward Plan" has been the basis
for the company's strategies. Brenneman (2000) describes it as "…a four-part strategy
focused on the fundamentals" (p.97). The four-parts are titled "Fly to Win", "Fund the
Future", "Make Reliability a Reality", and "Working Together".
"Fly to Win" is the airlines marketing plan. The airline will focus on where it can
make money...the business traveler! They will focus on the needs of the business
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Continental Airlines 4
travelers rather than on vacationers. They revised their marketing relationships with
travel agents, corporations, and frequent fliers. The goal here is to increase revenues and
profit margin.
"Fund the Future" is the airline's financial plan to reduce debt by tracking cash
flow, restructure the balance sheet, restructure the fleet, and sell non-strategic assets.
Focusing on restructuring the fleet would improve maintenance and lower cost.
Developing hub real estate would allow for future growth.
"Make Reliability a Reality" is the airline's plan to improve its products and
services. To do this Continental would have to consistently perform and rank at the top
of the industry. The four key Department of Transportation (DOT) metrics are on-time
arrivals, baggage handling, complaints, and involuntary denied boarding. They also need
to improve the image of the fleet, improve aircraft cleanliness, and improve food service.
The goal here is to improve company's image and become an airline of choice.
"Working Together" is the airline's plan to improve company culture. They want
to restore the employee's confidence in management, they want departments to work
better together, and they want to develop a culture with a can do attitude. A place where
employees enjoy coming to work every day, a place where everyone is appreciated for
his or her contributions, treated with dignity, and respect. They will focus on safety,
make employee programs easy to use, and keep improving communication. They will
pay compensation that is fair to employees and is fair to the company. The goal is a new
corporate culture.
Since Gordon Bethune took control of Continental Airlines, Continental has
recorded record profits and has been the recipient of many industry awards. In return, it
has won the loyalty of the employees and has transformed itself into the airline of choice.
Since 1995, the "Go Forward Plan" has remained the primary focus of management.
"The Go Forward Plan wasn't the most important thing that we did—it was everything we
did. It's the difference between Continental in 1994 and Continental today" (Bethune &
Huler, 1998, p. 22). The lesson learned from Continental Airlines is that by remaining
focused on your goals, you can achieve great rewards.
The Airline Industry provides a product, which is safe and reliable air travel.
There is very little distinction between what one carrier offers over the other among the
all the major carriers. Another characteristic of the Airline Industry is its price-sensitivity
and relatively low prices. According to Michael Porter, companies in an industry can
follow one of two strategies, a cost leadership strategy, or a differentiation strategy. They
may narrow it down to a market segment for a focused cost leadership strategy or a
focused differentiation strategy (David, 2003, pp.174-176). The success of Continental
Airlines is a strategy mix of its focus within the Industry as well as focus within the
business traveler segment.
External Opportunities
The new winning attitude promoted by management creates a culture that will
attract new, experienced employees. Their improved reputation will create new markets
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Continental Airlines 5
and cities that desire their service will welcome them. This may also enhance the future
ability for them to raise capital. There is some restructuring within industry and
Continental has the ability to enter some of the lower-cost smaller markets. Continental
will continue its cost cutting programs and reduction of expenses to downsize operations
(Continental, 2002, pp.17-18).
External Threats
A weak domestic and global economy has reduced the amount of capital funds
available. Rising fuel costs due to war in Iraqi and political unrest in Venezuela.
Continental Airlines is highly leveraged with few assets left to support new debt. Weak
economies, security fears, along with reduced corporate spending resulting in industry
excess capacity are threats industry wide (Continental, 2002, pp.17-18).
Internal Strengths
Continental has built a strong brand name with a good reputation among its
customers. It has improved its fleet by reducing the number of types of aircraft from 13
to four, thereby reducing maintenance and creating some cost advantages. Continental
was able to gain a loyal customer base by focusing on the needs of the everyday business
traveler. As corporate spending habits change, Continental is reshaping itself to be
profitable and operate in a prolonged low fare environment. They will optimize flight
schedules with demand and capacity requirements. In Continental Airline's SEC form
10-Q, "The Management's Discussion and Analysis of Financial Condition and Results of
Operations" section shows Continental as having a $27 million higher liquidity in 2003
than in 2002. Continental also had a higher cash flow of $181 million in 2003 as
compared to $13 million in 2002 (www.edgar-online.com)
Internal Weaknesses
The discussion in Continental Airline's SEC form 10-Q, "The Management's
Discussion and Analysis of Financial Condition and Results of Operations" section
continues to further comment on Continental's belief that it will obtain mutually
acceptable agreements with the unions. Collective bargaining is an unknown at this time
and could potentially be precarious for Continental Airlines. The company is highly
leveraged and they have reached their credit limit with essentially nothing left for
collateral. They expect to fund their future capital requirements with internally generated
funds, general financing, and aircraft financing transactions. They cannot however
guarantee that there will be sufficient financing available for aircraft, or capital
expenditures, or be able to defer, or renegotiate their capital commitments (www.edgaronline.com).
TOWS Matrix Analysis
Table 1 is a TOWS Matrix analysis summarizing the Threats, Opportunities,
Weaknesses, and Strengths discussed above. The TOWS Matrix is helpful in matching
the company's resources and capabilities to both the external and internal conditions in
which the company operates (David, 2003, p. 200).
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Continental Airlines 6
Financial Ratio Analysis
The 2002 Annual report for Continental Airlines provided the basis for the
Financial Ratio Analysis on Table 2. In evaluating the statements of operation, balance
sheet, and statement flow of Continental, we can see some incremental improvements in
the liquidity ratios. However, the leverage, activity, profitability, and growth ratios are
all worsening (Continental, 2002, pp. 22-24).
Recommend Strategies
One of Continental's goals in the "Go Forward Plan" is to satisfy the needs of the
business traveler. Rather than competing with its competitors on price alone, they chose
a strategy of product differentiation. Continental has chosen to do this in the face of
reduced corporate spending on travel and technological substitutions such as virtual
meetings. Because of Continental's appeal to business travelers, the airline should
continue to promote and focus on this market segment.
Continental should continue with strategic alliances that expand their reach both
domestically and internationally. The alliances allow the partners to code share
bookings served by the other airlines. The most significant of these is Continental's
alliance with Northwest Airlines and Delta Airlines. The Continental, Northwest, and
Delta alliance controls 36% of the domestic market based on Revenue Passenger Miles
(Air Transport Association of America, 2002, p. 19).
Another cornerstone of Continental's "Go Forward Plan" is how it treats it
employees. This policy has led to employee loyalty, which in turn leads to customer
satisfaction and ultimately customer loyalty. The Continental corporate culture has
evolved into one that rewards the company with superior customer service as evidenced
by the long list of awards received.
Continental Airlines should continue its slow expansion of low fare domestic
routes. This strategy has worked well so far for point-to-point, smaller carriers like Jet
Blue. This market, long overlooked seems to have the best outlook for the future.
Continental should boldly move into the markets where its competitors have already
proven profitable. Fleet restructuring should allow for low barrier of entry into this
market. The bulk of Continental's fleet are 737s, which have a capacity of 100-150
passengers, depending on configuration, and seem ideal for these routes (Continental,
2003, p. 4). Maintenance would also be more efficient, allowing quick turn around time
for improved service.
Conclusion
The events of September 2001 and a weakened global economy have taken its toll
on the airline industry. United and US Airways have filed for bankruptcy. Continental
had to make huge cuts in capacity and initiate several cost-cutting programs in order to
survive. They have been fortunate to be able to raise capital, downsize operations, and
reduce expenses. Despite the economic slowdown of the economy that required
Continental to make these changes, they have stayed with their "Go Forward Plan".
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Continental Airlines 7
Their "Go Forward Plan" has been the basis for their remarkable turnaround, and the
airline hopes this will see them through the present crisis and beyond.
Many airlines along with Continental continue to struggle in many markets under
the current environment. Continental prides itself as an airline with values rather than a
budget airline. Bethune said, "Well, you can make a pizza so cheap nobody wants to eat
it. And you can make an airline so cheap nobody wants to fly it" (Bethune & Huler,
1998, p. 50). Clearly, Bethune believes that taking care of the customer is the only way
to keep them coming back. The focus has been on reasonable customer fees, cost
reductions in operations, and attrition before layoffs. Continental has been more
technologically efficient, reducing cost by eliminating some travel agent fees through eticketing. Continental boasts that over 90% of their customers worldwide use e-ticketing
(Continental, 2003, p. 7).
How will Continental adapt to compete with the low fare point-to-point carriers?
They probably will stay with their hub and spoke system but modify it on chosen routes
to compete with point-to-point carriers. How will it deal with the high fixed costs of
equipment, facilities, and bargaining agreements? They believe they can weather this
storm with their current finances as the economy is showing signs of recovery.
According to the 2002 Annual report, Continental said, "We expect to incur a significant
loss in 2003, regardless of such adverse factors" (Continental, 2002, p. 17). Therefore,
the real question is. How long can Continental lose money and continue to provide the
services that are the cornerstones for its success.
"…you can't win forever unless you excel forever", Gordon Bethune (Bethune &
Huler, 1998, p. 151).
Anthony Jow
Continental Airlines 8
References
Air Transport Association of America, 2002 Annual Report. Retrieved November 2,
2003, from http://www.airlines.org/econ/files/2002AnnualReport.pdf
Bethune, G., Huler, S. (1998). From Worst to First: Behind the Scenes of Continental's
Remarkable Comeback. Retrieved October 31, 2003, from
http://www.netlibrary.com/
Brenneman, G. (2000). Right Away and All at Once: How We Saved Continental.,
Harvard Business Review On Crisis Management: Harvard Business Review
Paperback Series (pp. 87-118). Boston: Harvard Business School Press
Continental Airlines, Inc. (2002) 2002 Annual Report. Retrieved November 1, 2003, from
http://www.continental.com/company/investor/docs/continental_ar_2002.pdf
Continental Airlines, Inc. (2003). FACTS: A quarterly digest of interesting information
from Continental Airlines. Retrieved November 1, 2003, from
http://www.continental.com/company/profile/pdf/continental_2003q4_facts.pdf
Continental Airlines Website. (n.d.). About Continental. Retrieved November 1, 2003,
from http://www.continental.com/
David, F.R. (2003) Strategic Management. (9th ed), Prentice Hall, Saddle Ridge, NJ.
Edgar Online Website. (n.d.). Retrieved November 1, 2003, from http://www.edgaronline.com/brand/eol/glimpse/glimpseframe_vnav.asp?sym=CAL
Levering, R., Moskowitz, M., Harrington, A., Tkaczyk, C. (Jan 20, 2003). 100 Best
Companies to Work for. Fortune, p. 127. Retrieved November 2, 2003, from
Business Source Premier database. (Accession no.:8846117).
Anthony Jow
Continental Airlines 9
Table 1
TOWS Matrix
Strengths
Weaknesses
1. Strong Brand
1. Over leveraged
2. Fleet restructuring
2. Collective bargaining
3. Loyal customer base
3. Future funding
4. Adapt to low fares
4. Lower profits
5. Improved liquidity
5. Lower growth
Opportunities
S-O Strategies
W-O Strategies
1. Corporate culture
1. Increase advertising (O2;
S1, 3)
1. Reputation improves
bargaining and future
funding (O2; W2, 3)
2. Good reputation
2. Move into low fare
markets (O3; S2, 4)
3. Reduce Expenses,
improve cash flow (O5; S5)
2. Find alternate funding
(O3; W1)
3. Improve profit and
growth (O5; W4, 5)
Threats
S-T Strategies
W-T Strategies
1. Weak economy
1. Low fare markets (T1;
S2, 4)
2. Increase promotions (T4,
5; S1, 3, 4)
3. Optimize demand to
aircraft (T6; S2)
Optimize schedules to
routes (T1; W4, 5)
2. Find alternate financing
(T3; W1, 3)
3. Ability to raise capital
4. Industry restructuring
5. Cost cutting program
2. Rising fuel cost
3. Less funding sources
4. Security fears
5. Reduced corporate
spending
6. Excess capacity
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Table 2
Financial Ratio Analysis
2002
2001
Current Ratio
0.78
0.73
Current Assets/Current Liabilities
Quick Ratio
0.69
0.64
Current Assets-Inventory/Current Liabilities
0.91
0.86
Total Liabilities/Total Assets
12.67
7.22
Total Liabilities/Stockholder's equity
0.90
0.82
Long-term debt/Long-term debt + Stockholder's equity
(1.03)
0.56
Operating profit/Interest expense
1.21
1.46
Net Sales/Net property, plant, equipment
Gross profit margin
26.0%
25.5%
Operating profit margin
-3.7%
1.6%
Net profit margin
-5.4%
-1.1%
Net earnings/Net Sales
Return on assets
-4.2%
-1.0%
Net earnings/Total Assets
Return on equity
-58.8%
-8.2%
Net earnings/Stockholder's equity
EPS, diluted
$(7.02)
$(1.71)
Net earnings/shares
Sales
-3.0%
-22.4%
Sales in Final Period / Average Sales in Base Period
Net income
-3.3%
527.4%
Net Inc. in Final Period / Avg. Net Inc. in Base Period
EPS
-5.1%
533.1%
EPS in Final Period / Average EPS in Base Period
Liquidity Ratios
Leverage Ratios
Debt to total assets
Debt to equity
Long term debt to equity
Times interest earned
Activity Ratio
Fixed assets turnover
Profitability Ratios
Gross profit/Net Sales
Operating profit/Net Sales
Growth Ratios
Anthony Jow