2010, United Continental Holdings Strategic Management Case Study Carter Vaillancourt, Megan Land, Emily Michaud UMFK
Overview Company Overview • A brief history of United Continental Holdings • Existing Mission and Vision Statements New Mission and Vision Statements External Audit • Industry Analysis • Opportunities and Threats • EFE Matrix • CPM Matrix Internal Assessment • Organizational chart • Strengths and Weaknesses • Financial Condition • IFE Matrix Strategy Formation • SWOT Matrix • Space Matrix • Grand Strategy Matrix • Matrix Analysis • QSPM Matrix • 3 year-goals Implementation Strategies • EPS/EBIT • Projected Financials • Projected Ratios United Update
United Airlines History Originating in Boise, Idaho, the carrier flew the first Contract Air Mail flight in the U.S. on April 6, 1926 1926 In 1933, United began operating the Boeing 247 the first all-metal airliner. It was able to fly a transcontinental flight in 20 hours, which at the time was very fast. 1933 United merged with Capital Airlines in 1961 and regained its position as the United States' largest airline. In 1968, the company reorganized, creating UAL Corporation, with United Airlines as a wholly owned subsidiary 1961-1968 In 1982, United became the first carrier to operate the Boeing 767, taking its first delivery of 767-200s on August 19 1982 In 1985, United expanded dramatically by purchasing Pan Am's entire Pacific Division, giving it a hub at Tokyo's Narita International Airport, and in 1991 purchased routes to London Heathrow Airport from ailing Pan Am, making it one of two US carriers permitted exclusive access to Heathrow 1985
United Airlines History In 1995, United became the first airline to introduce the Boeing 777 in commercial service 1995 During the September 11, 2001 terrorist attacks, two of the four airplanes hijacked and crashed by al-Qaeda terrorists were United Airlines aircraft which created an airline industry downturn 2001 In 2005, United announced it had raised US$3 billion in financing to exit bankruptcy and filed its Plan of Reorganization, as announced, on September 7, 2005 2005
Continental Airlines History Continental Airlines' history dates back to 1934, when the carrier was operated under the name of Varney Speed Lines by its owners Walter Varney and Louis Mueller. They were operated out of El Paso, Texas. 1934 In July 1937, Robert Six changed the name of Varney Speed Lines to Continental Airlines and the carrier moved its headquarters to Denver, Colorado 1937 During the 1940' and 50's, Continental Airlines was able to expand its fleet of aircraft and profits through its participation in World War II by providing air transportation to the military 1940-1950 1983 In 1983, Continental filed bankruptcy with losses of ($218,000,000.) 1984 -1986 By the end of 1984 Continental was able to turn a profit. In 1986 Continental took over Frontier Airlines and began flying its routes.
United Continental Holdings • Early in February 2008, United Airlines andContinental began advanced stages of merger negotiations • In June 2008, CEOs of both United Airlines and Continental Airlines signed an alliance pact presaging their eventual merger • On October 1, 2010, UAL Corporation completed its acquisition of Continental Airlines and changed its name to United Continental Holdings, Inc
Major Hubs Located in San Francisco, Chicago, Cleveland, Denver, Houston, Los Angeles, Newark, Washington Dulles, and Guam
“ Combining these two companies is the best way to position ourselves…to thrive in the changing and competitive airline industry. Continental is strong where United is weak; United is strong where Continental is weak. Putting these two carriers together is a match made in heaven” – Jeff Smisek
Vision (proposed) United Continental Holdings vision is to be the World’s number one choice for airline travel.
Mission (Proposed) With great people, the world’s most comprehensive global route network(3), the best current aircraft order book among U.S. network carriers(4, 7) and the industry-leading loyalty program(2), United is well positioned to deliver meaningful profitability and sustainable long-term value for our customers, the communities we serve, our shareholders and our co-workers around the world(6). As we strive to meet the needs of travelers (1), we continue to grow as a company and increase our financial standings in the industry (5). Through our continued growth and valued employees, United Continental Holdings will continue to reach out to the communities in which we operate and meet the concerns of our customers (9). Customer Products or services Markets Technology Concern for survival, profitability, growth Philosophy Self-concept Concern for public image Concern for employees
Revenue % of Cash • Cash as a Percentage of Revenue: 12 months ended 31-Mar-2010 Source: United Airlines
SWOT Opportunities • With over 100 open skies agreements in effect, more access to international airports is allowed • Maintenance operation center at SFO occupies 120 acres of land, 2.9 mil square feet of floor space, and nine aircraft hangar bays, lease up for renewal in 2013 and able to renew through 2023 • Growing use of websites, alternative distribution systems, and new global distribution systems (GDS) entrants leads to a predicted 87% for online air ticket sales in 2011 • Global penetration, in areas such as the pacific which accounts for only 17% of total revenue. • The aviation industry is growing by a projected amount of 11.0 billion which will ultimately enable more people to fly. • United Continental will be affected by the growth in the tourism industry expected to grow 3.2% in 2011. • The merging of the two corporations, United and Continental is expected to deliver $1.0 billion to $1.2 billion in net annual synergies on a run-rate basis by 2013, and between $800 million and $900 million in incremental annual revenues. • United Continental Holdings Inc. establishes a joint venture with Air Canada will likely result in a substantial lessening of competition on 19 trans-border city pair routes. • After merging and earning the extra percentage in revenue s by 1.0 billion, United Continental will show strong liquidity give the new company a flexibility to pay down its debt. • United Continental made plans to increase WIFI capabilities in 200 domestic Boeing 737 and 757 aircraft equipped with DIRECTV(R), providing onboard connectivity and more than 95 channels of live television programming to customers in late 2010. Threats • Unstable fuel prices and availability can cause large expenses, accounting for 31% of total operating costs in 2010 • With 72% of employees under labor organizations, union disputes, employee strikes, and other labor disputes are likely to occur. • 100% of United employees and 53% of Continental employees are covered by collective bargaining agreements (CBA), significant increases in pay and benefits from new CBAs could financially harm the company • New open skies agreements decrease value of routes, caused United $29 million impairment charge in 2010 for indefinite-lived Brazil route • With an aging fleet, UAL will have to soon start replacing or fixing their planes. With a large amount of planes this will become very costly. • Illnesses could affect travel and decrease the amount of passengers flying, UAL reported that H1N1 cost them roughly $50 Million in related revenue. • The airline industry is vulnerable to terrorist attacks and other related security threats. The new threats have resulted in new security measures which will increase the security related costs adding to the already high number of operating costs at $22,253. • Customer prior dissatisfaction with either United or Continental may inflict buyers decision to choose new merged company while United standing at 12th in customer dissatisfaction and Continental standing at 8th in 2010. • ARM Corp is trailing United Continental Holdings co. by just 1059 million standing in third place for top revenue for airlines 2010. • The company faces stiff competition from national and international airline companies which can affect competitive pressures and ultimately lowering $3billion market cap.
Organizational Chart Jeff Smisek President and CEO Mike Bonds Executive Vice President, Human Resources and Labor Relations Jim Compton Vice President and Chief Revenue Officer Jeff Foland Executive Vice President and Mileage Plus Holdings LLC Nene Foxhall ExecutiveVice President Communications and Government Affairs Keith Halbert Executive Vice President and Chief Information Officer Brett Hart Senior Vice President, General Counsel and Secretary Pete McDonald Executive Vice President and Chief Operations Officers Zane Rowe Executive Vice President and Chief Financial Officer
SWOT Strengths • Passenger revenue increased 43% in 2010 • Unrestricted cash and cash equivalents hit a record $8.7 billion • Aircraft rent expense decreased by 6% in 2010 • They employ roughly 85,000 employees, the highest among their competitors. • UAL offers premium seating with spacious accommodations for those who seek a more comfortable trip. • The U.S. and Canada market account for 61.7% of total revenue. • Net income grew 38% from a loss in 2009 to a profit in 2010. • United Continental has strong strategic collaborations. The company has a number of bilateral and multilateral alliances with other airlines such as the largest alliance which is the Star Alliance who serves approximately 1,290 destinations in 189 countries. • Because of United Continental Holdings flight completion factors of 98.5% and 99%, it has a very strong brand utilization and trustworthiness. • United is the largest of 2 U.S carrier to the People’s Republic of China and maintains a large operation throughout Asia. Weaknesses • Operating expenses increased $2.2 billion in 2010 • Interest expense increased by 23% in 2010 • Removal of Boeing 737 fleet and some Boeing 747 aircraft caused impairment charges of $165 million in 2010 • In relation with salaries and related costs increasing, Pension liability increased by $1,380,000 in 2010 • They are behind Delta Airlines (DAL) in market cap by over $3Billion. • From the income statement it appears that they have no money spent on research and development for the past 3 years. • At 16.0 cents, UAL has the highest cost per available seat mile in their industry compared to AirTran Holdings at 11.0 cents. • UAL has assets of $20.1 Billion, liabilities of $22.9 Billion and equity of -$2.76 Billion. This may make it hard for them to get loans when their assets are currently less than their liabilities. • United Continental puts heavy dependence on third party providers, many of the operations such as customer care, aircraft maintenance, aircraft fueling are outsourced, which adds to the overall expense amount of $22,253 million. • The overall age of aircrafts totals about 14.3 years old, which gives higher expense to the operating costs because they are less fuel efficient and require more maintenance.
SWOT Matrix WO SO Strengths Weaknesses Opportunities ST WT Threats
FS 6 Aggressive Conservative 5 4 3 2 1 CS IS -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 -1 -2 -3 -4 -5 Competitive Defensive -6 ES Space Matrix FP Conservative Aggressive +6 +5 +4 +3 +2 +1 IP -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4 Defensive -5 Competitive -6 SP
GSM Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Related diversification Quadrant III 1. Retrenchment 2. Related diversification 3. Unrelated diversification 4. Divestiture 5. Liquidation Quadrant IV 1. Related diversification 2. Unrelated diversification 3. Joint ventures
Possible Strategies Market Development Retrenchment Require employees to participate in stock ownership to decrease or prevent pension liability increases and to increase employee work satisfaction. (W4, T2, T3) Increase marketing in foreign countries to take advantage of the over 100 open skies agreements and increase global penetration in china, Asia, and the pacific. (S8, S10, O1, O4) Utilize extra percentage in revenue, obtained through merging, to pay down liabilities. (W8, O2) Backward Integration Product Development Renew Maintenance lease at SFO to ultimately decrease the dependence on outsourced aircraft maintenance. (W9, O2) Increase premium seating and flatbed seats to enhance travel experience and increase customer satisfaction on long flights. (S5, O5, O8) Utilize unrestricted cash and equivalents of roughly $8.7 billion to replace aging fleet with more fuel efficient airplanes. (S2,S3,T1,T5) Horizontal Integration Utilize unrestricted cash and equivalents of roughly $8.7 billion to replace aging fleet with more fuel efficient airplanes. (S2,S3,T1,T5) Increase R&D to research methods that would increase the gap between competitive airlines both nationally and internationally. (W6, T9, T10). Increase R&D spending to take advantage of aviation and tourism growth through the production of new global distribution systems. (W6, O3, O5, O6)
3 Year Goals • Year 1-Expand further into China • Year 2-Expand throughout Asia to regions such as South Asia and India • Year 3-Expand into Russia
EPS/EBIT Analysis Assumptions
EPS/EBIT Cont. Assumptions Assumptions
Projected Financials 2011 Income Statement
United Continental Holdings Update In 2012, United and United Express carried more passenger traffic than any other airline in the world and operated nearly two million flights carrying 140 million customers United is investing in upgrading its onboard products and now offers more flat-bed seats in its premium cabins and more extra-legroom economy-class seating than any airline in North America In 2013, United became the first U.S.-based international carrier to offer satellite-based Wi-Fi on long-haul overseas routes The airline also features DIRECTV® on nearly 200 aircraft, offering customers more live television access than any other airline in the world The company expanded its industry-leading global route network in 2012, launching nine new international and 18 new domestic routes. Business Traveler magazine awarded United Best Airline for North American Travel for 2012, and readers of Global Traveler magazine have voted United’s Mileage Plus program the best frequent flyer program for nine consecutive years.