Case Study

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 to 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 not be effective

for the company.

Introduction

Continental Airlines, Inc., a Delaware corporation incorporated in 1980, is a major United States air

carrier engaged in the business of transporting passengers, cargo and mail. The terms "Continental,"

"we," "us," "our" and similar terms refer to Continental Airlines, Inc. and, unless the context indicates

otherwise, its consolidated subsidiaries.

It is the world's fifth largest airline as measured by the number of scheduled miles flown by revenue

passengers in 2007. Including its wholly-owned subsidiary, Continental Micronesia, Inc. ("CMI"), and

regional flights operated on its behalf under capacity purchase agreements with other carriers, we

operate more than 3000 daily departures. As of December 31, 2007, we flew to 148 domestic and 134

international destinations and offered additional connecting service through alliances with domestic

and foreign carriers. We directly served 26 European cities, 9 South American cities, Tel Aviv, Delhi,

Mumbai, Hong Kong, Beijing and Tokyo as of December 31, 2007. In addition, we provide service to

more destinations in Mexico and Central America than any other U.S. airline, serving 41 cities.

Through its Guam hub, CMI provides extensive service in the western Pacific, including service to

more Japanese cities than any other U.S. carrier. The head quarter is located in Houston USA. It has

368 Boeing jets, employees 44494.

Stage 1 “Input Stage” consists of the following:

Internal Factor Evaluation (IFE) MatrixExternal Factor Evaluation (EFE) MatrixCompetitive Profile Matrix (CPM)

Internal Factor Evaluation (IFE) Matrix

Strengths Weight RatingTotal Weighted

ScoreThe airline customizes its in-flight services according to the destination it travels

0.10 4 0.40

The company returned to profitability in 2006 after 4 years of losses

0.08 3 0.24

Relatively young top management team 0.05 2 0.10

Various incentive programs for employees

0.07 3 0.21

It has a wide coverage and serves more international markets than any other U.S. carriers

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

Its fleet consists of only Boeing aircrafts and is one of the youngest in the world. This has resulted in increased efficiencies and cost savings

0.07 3 0.21

Winner of numerous awards for quality service

0.09 3 0.27

Increment In Gross Profit and reduction in overall costs

0.05 2 0.10

WeaknessesThe “Go Forward” plan does not deal with environmental issue

0.07 3 0.21

Decrement in its overall Airlines Quality Rating Scores

0.03 2 0.06

Decrease in Service Quality 0.05 3 0.15

Poor on-time performance record 0.03 2 0.06

Worst record of over-booking and bumping among airlines

0.04 2 0.08

Lack of internal training for employees 0.03 2 0.06

Low market share 0.06 3 0.18No Online Presence 0.03 2 0.06

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 weakness. However there needs to be significant improvements in their internal operational structure in order to achieve competency.

External Factor Evaluation (EFE) Matrix

Opportunities Weight RatingTotal Weighted

ScoreExploration of international market because of intense competition in local market

0.07 3 0.21

Installation of winglets to reduce cost 0.10 4 0.40

The “EU-US open skies” provides an opportunity to increase its connectivity

0.09 4 0.36

Merger with United Airlines 0.10 4 0.40

Growing demand for travel 0.04 2 0.08

Adoption of Latest technology and internet to reduce cost

0.08 3 0.24

Increasing population in US 0.03 2 0.06

ThreatsRise in fuel cost and domestic competition 0.09 2 0.18

Increase in security cost due to the threat of hijacking and terrorist

0.08 3 0.24

The Rivals has recovered from bankruptcy and become more stronger

0.06 1 0.06

Purchasing of new aircraft by Rivals would challenge for It

0.07 2 0.14

Entry of international airlines into the domestic service

0.08 2 0.16

Price competition in the market 0.08 3 0.24

Airline industry is vulnerable to economic cycles

0.03 2 0.06

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.

Competitive Profile Matrix (CPM)

Critical Success Factors

WeightContinental

AirlinesAmericanAirlines

UnitedAirlines

Rating Score Rating Score Rating ScoreFinancial 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

Advertisement 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

3.25 3.0 3.6

The competitive profile matrix for continental Airline 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 crises situation and heavy customer complaints

regarding 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 ratings almost identical expect

American Airlines. The competition in adverting 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 airlines 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 rating as they offer similar quality of products to their customers.

Stage II “Matching Stage” consists of the following:

Strengths, weakness, opportunities, Threats (SWOT) Matrix

Strategic Position and Action Evaluation (SPACE) Matrix

Boston Consultancy Group (BCG) Matrix

Internal-External (IE) Matrix

Grand Strategy Matrix

Strengths, weakness, opportunities, Threats (SWOT) Matrix

Strengths Weaknesses

(1)-The airline customizes its in-

flight services according to the

destination it travels.

(2)- The company returned to

profitability in 2006 after 4

years of losses.

(3)- Relatively young top

management team.

(4)- Various incentive programs

for employees.

(5)- It has a wide coverage and

serves more international

markets than any other U.S.

carriers.

(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 consists of only

Boeing aircrafts and is one of

(1)- The “Go Forward” plan

does not deal with

environmental issue.

(2)- Decrement in its overall

Airlines Quality Rating Scores.

(3)- Decrease in Service

Quality.

(4)- Poor on-time performance

record.

(5)- Worst record of over-

booking and bumping among

airlines.

(6)- Lack of internal training for

employees.

(7)- Low market share.

(8)- No Online Presence.

the youngest in the world. This

has resulted in increased

efficiencies and cost savings.

(8)- Winner of numerous awards

for quality service.

(9)- Increment In Gross Profit

and reduction in overall costs.

Opportunities SO Strategy ST Strategy

(1)- Exploration of international

market because of intense

competition in local market.

(2)- Installation of winglets to

reduce cost.

(3)- The “EU-US open skies”

provides an opportunity to

increase its connectivity.

(4)- Merger with United

Airlines.

(5)- Growing demand for travel.

(6)- Adoption of Latest

technology and internet to

reduce cost.

(7)- Increasing population in

US.

Product Development

Market Penetration

Backward Integration

Product Development

Market Penetration

Threats WO Strategy WT Strategy

(1)- Rise in fuel cost and

domestic competition.

(2)- Increase in security cost due

to the threat of hijacking and

terrorist.

(3)- The Rivals has recovered

from bankruptcy and become

stronger.

(4)- Purchasing of new aircraft

by Rivals would challenge for

Product Development

Market Development

Market Penetration

Retrenchment

Horizontal Integration

It.

(5)- Entry of international

airlines into the domestic

service.

(6)- Pricing completion in the

market.

(7)- Airline industry is

vulnerable to economic cycles.

Strategic Position and Action Evaluation (SPACE) Matrix

Financial Ratio Analysis

Liquidity Ratios 2006 2005 2004Current Ratio 1.0439949 1.0082 0.8665Quick Ratio 0.98913 0.9491 0.8009

Leverage RatioDebt to Total Assets 0.96931 0.9785 0.9853Debt to Equity Ratio 31.5879 45.588 66.813

Activity RatiosFixed Assets Turnover 2.09612 1.8416 1.5678Total Assets Turnover 1.16095 1.0645 0.9418

Profitability RatiosReturn on Capital 0.9884 -0.30 -2.63Return on Assets 0.03033 -0.006 -0.039

Growth RatiosSales 17.1306 13.224Net income 604.41 83.37

SPACE Matrix

Financial Strength (FS)Return on Investment 4Leverage 3Liquidity 3Working Capital 5Cash Flow 4Inventory Turnover 4

Total 23Competitive Advantage (CA)Market share -1Product quality -1Product life cycle -1Customer Loyalty -2Competition's capacity utilization -3Technological know-how -3Control over suppliers & distributors -3

Total -14Environmental Stability (ES)Technological changes -4Rate of Inflation -4Demand variability -3Price range of competingproducts

-2

Barriers to entry into market -4Competitive pressure -3Ease of exit from market -3Price elasticity of demand -4Risk involved in business -2

Total -29Industry Strength(IS)Growth potential 5Financial stability 2Technological know how 2Resource utilization 3Ease of entry into market 2Productivity, capacityutilization

4

Total 18

Calculations:

Average value for FS = ( 23/6 ) = 3.83

Average value for CA = ( -14/-7 ) = -2 Point on X axis = (-2+3) = 1

Average value for IS = ( 18/6 ) = 3 Point on Y axis = (3.83-3.63) = 0.20

Average value for ES = ( 29/9 ) = -3.63

Recommended Strategies

Continental should continue its initial venture into the European and Asian markets

aggressively.

It should try to improve its domestic market share by flying to newer destinations using its

regional jets.

It should fit all its aircraft with winglets to reduce fuel consumption and thereby reduce costs.

Boston Consultancy Group (BCG) Matrix

Relative Market Share

Continental Sales in 2006 is 13128000

Delta Airlines Sales in 2006 is 17100000

The Relative Market Share is 7.7%

Industry Growth Rate is

Major Airlines Revenue 2006 Revenue 2005 Average Growth

Rate %Continental Airlines 13128000 11208000 14.62American Airlines 19917000 23766000 16Delta Airlines 28063000 22697000 23Southwest Airlines 10350000 11023000 6

Total 59.62/4=14.905

The following BSG matrix shows the proportion between relative market share and industry growth rate of continental airlines. With a relative market share of 7.7% and a industry growth rate of 14.905% the position lies in the forth cell ‘Dogs’

Recommended Strategies are:

Liquidity, Divestiture, and retrenchment

The company has very low relative market share and compete in slow or no market growth with weak internal and external position.

Relative Market Share

Stars

Question Mark

Cash Cow Dogs

Internal-External (IE) Matrix

High 1.0 Medium 0.50 Low 0.0

Medium 0

High +20

Low -20

Industry Growth Rate %

3.0

2.0

Internal-External (IE) Matrix

The internal-External matrix is a strategic management means 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 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”. The strategy mainly focuses on both market

penetration and product development.

Grand Strategy Matrix

Strong

3.0 to 4.0

Average

2.0 to 2.99

Weak

1.0 to 1.99

4.0 3.0 2.0 1.0

IFE Total Weighted Score

I II III

IV

V

VI

VII VIII IX

The 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.

II I

III

IV

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.

Rapid Market Growth

Slow Market Growth

Weak Competitive

Position

Strong Competitive

Position

Stage III “Decision Stage” consists of the following:

Quantitative Strategy Profile Matrix (QSPM)

StrategiesSWOT 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

2

Retrenchment 2

Divestiture 1

Liquidation 1

Joint Venture 1

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 strategic planning matrix

QSPM Matrix

Alternative Strategies(HI) Merging with

United Airlines

(MD) Developing a Strong Market in Japan and China

Strengths Weight AS TAS AS TAS

The airline customizes its in-flight services according to the destination it travels

0.10 2 0.20 3 0.30

The company returned to profitability in 2006 after 4 years of losses

0.80 3 0.24 2 0.16

Relatively young top management team

0.05 2 0.10 1 0.05

Various incentive programs for employees

0.07 - - - -

It has a wide coverage and serves more international markets than any other U.S. carriers

0.08 2 0.16 3 0.24

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 1 0.07

Its fleet consists 0.07 3 0.21 2 0.14

of only Boeing aircrafts and is one of the youngest in the world. This has resulted in increased efficiencies and cost savings

Winner of numerous awards for quality service

0.09 2 0.18 3 0.27

Increment In Gross Profit and reduction in overall costs

0.05 - - - -

WeaknessesThe “Go Forward” plan does not deal with environmental issue

0.07 - - - -

Decrement in its overall Airlines Quality Rating Scores

0.03 1 0.03 2 0.06

Decrease in Service Quality 0.05

30.15 2 0.10

Poor on-time performance record

0.03 2 0.06 1 0.03

Worst record of over-booking and bumping among airlines

0.04 2 0.08 1 0.04

Lack of internal training for employees

0.03 - - - -

Low market share 0.06 2 0.12 1 0.06

No Online Presence 0.03 3 0.09 1 0.03

Total 1

OpportunitiesExploration of international market because of intense competition in local market

0.07 - - - -

Installation of winglets to reduce cost 0.10 - - - -

The “EU-US open skies” provides an opportunity to increase its connectivity

0.09 2 0.18 3 0.27

Merger with United Airlines 0.10 4 0.40 2 0.20

Growing demand for travel 0.04 4 0.16 3 0.12

Adoption of Latest technology and internet to reduce cost

0.08 2 0.16 1 0.08

Increasing population in US 0.03 3 0.09 1 0.03

ThreatsRise in fuel cost and domestic competition

0.09 - - - -

Increase in security cost due to the threat of hijacking and terrorist

0.08 - - - -

The Rivals has recovered from bankruptcy and become more stronger

0.06 2 0.12 3 0.18

Purchasing of new aircraft by Rivals would challenge for It

0.07 2 0.14 3 0.21

Entry of international airlines into the domestic service

0.08 3 0.24 1 0.08

Pricing completion in the market 0.08 2 0.16 1 0.08

Airline industry is vulnerable to economic cycles

0.03 - - - -

1 3.39 2.8

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

faces 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 be wasted if polices do not match the expected outcomes; this may be completely

disadvantageous for the business and may also lead it to bankruptcy.

Strategy recommendation

From 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 were distributed and tasks were also spread across their much greater operations

base.