Continental Airlines Context

Continental AirlinesContext

Team B4Joseph Kattar Bethany Byrd Jocelyn

Stewart

Industry Overview

bull Air travel remains a large and growing industry

bull 15 billion passengers in 2005bull In the past decade air travel has grown

by 7 per year bull IATA forecasts to grow by an average

66 a year to the end of the decade and over 5 a year from 2000 to 2010

bull (resource 1)

Industry Overview

bull 4-6 growth is expected in Europe and North America

bull 9 growth a year in ASIAPACIFIC a year and is forecast to continue to grow rapidly

bull Profitability slowed during the Gulf War (1991)

bull net losses of $204bn in the years from 1990 to 1994

bull(resource 1)

Industry Overview

bull Many airliners realized they had to cut costs in order to survive

bull Reduce capacity growth and to increase load factors

bull The outlook for the air travel industry is one of strong growth Forecasts suggest that the number of passengers will double by 2010

bull (resource 1)

North America Airline IndustryOverview

bull The commercial aviation industry in the United States has grown dramatically since the end of World War II

bull In 1945 the major airlines flew 33 billion revenue passenger miles (RPMS)

bull In the mid 1970s when deregulation was beginning to develop the major carriers flew 130 billion RPMS

bull By 1988 after a decade of deregulation the number of domestic RPMS had reached 330 billion

bull (resource 1)

North America Airline IndustryOverview

bull Today the domestic industry in the US is mainly a low cost low fare environment

bull The majority have entered into cross-border alliances to improve profitability through synergy benefits

bull The United States is the largest single market in the world accounting for 33 per cent of scheduled RPMs

bull Deregulation of the industry

bull In 1989 events began which severely damaged the economic foundations of the industry (Gulf War)

bull(resource 1)

Airline Domestic Market Share February 2005 - January 2006

(resource 5)Airlines Share

American 158

Delta 131

United 118

Southwest 107

Northwest 74

Continental 71

USAirways 51

America West 40

JetBlue 36

Alaska 25

Other 189

Boeing Current Market Outlook 2005 Demand for Air Travel

(resource 4)

Load Factorbull Industry Load Factor 80bull (resource 7)

bull BE Industry Load Factor 85bull (resource 8)

Government Regulationsbull Aviation Security Actbull CRAF

Aviation Security Actbull TSA

-USVISITbull Improved Flight

deck securitybull Improved airport

perimeter access security

bull Increased airline crew security training

bull (Reference 2)

bull Enhanced security screening of passengers baggage cargo mail employees and vendors

bull Enhanced training of security screening personnel

bull Increased federal air marshals

Aviation Security Actbull Passenger Security Feebull TSA Aviation Security Infrastructure

Feebull Airport Passenger Facility Fee

Civil Reserve Air Fleet (CRAF)bull In time of war air carriers provide air

lift services to the Air Mobility Command at their own expense

bull (reference 2)

Fuel Pricesbull Commercial Aircraft engines require more

sophisticated form of fuel than ground vehicles

bull 195 billion gallons per year bull Next to labor jet fuel is the 2nd largest

operating expense totaling 10-25 of annual operating costs

bull Fuel prices doubled from $078gal in 2000 to $181gal in 2006

bull Every penny increase in price of gallon results in an additional $195 million in annual fuel costs

bull (resource 10)

Fuel Hedgingbull Airlines lock a fixed price or maximum

price cap for fuel in the future by buying a contract at a specific price

Ex Southwest Airlines2005 $26barrel2006 $32barrelCurrent market rate $70barrel

bull (resource 10)

Fuel Hedgingbull Carriers in financial trouble do not have the

cash or credit to pay for fuel hedge contractsbull Virtually no fuel hedges for Delta

Continental and Northwest in 2006bull American and United have hedged less than

10 of 2006 fuelbull (resource 10)

bull Continental has short term petroleum contracts

bull (resource 2)

High Labor Cost

bull 38 of total operating cost (resource 13)

bull 368000 in January 2002 to 270000 in January 2006 a decline of 27 percent (resource 14)

High Labor Cost

(Resource 14)

Rank 2002 2003 2004 2005 2006

Percentage Change

2002-20061 American 980 948 792 767 747 -2382 United 807 749 586 569 534 -3383 Delta 658 630 584 556 486 -2614 Continental 357 357 343 319 331 -735 Southwest 316 334 325 310 314 -076 Northwest 437 424 382 384 310 -2907 US Airways 346 278 265 241 199 -4268 America West 110 116 113 114 114 439 Alaska 98 102 99 92 90 -8010 JetBlue 22 39 52 68 88 291611 AirTran 41 47 55 59 67 62512 Frontier 23 27 35 41 42 82713 ATA 69 69 69 58 32 -53414 Spirit 20 24 24 25 21 33

Total 3684 3487 3051 2927 2698 -268

Table 9 Network amp Low Cost Carrier Full-time Equivalent Employees January 2002-2006(Ranked by January 2006 FTE Employees)Numbers in thousands (000rsquos)

Source Bureau of Transportation Statistics

Note Detail may not add to total due to rounding Full-time Equivalent Employee (FTE) calculations count two part-time employees as one full-time

Note Percentage changes based on numbers prior to rounding

Technology Advancements

bull Worldspanndash ldquoProvide worldwide electronic

distribution of travel information Internet products and connectivity and e-commerce capabilities for travel agencies travel service providers and corporationsrdquo (resource 16)

Technology AdvancementsWorldspan

bull Standard Schedule Message (SSM)bull Frequent Flyer Verificationbull Departure Controlbull Revenue Managementbull Revenue Accounting Databull Electronic Ticketingbull Interactive Seat Selection

Technology Advancements

bull Fuel management ndash Pricing and reporting

bull Upgrading the operations control center

ndash More efficient flights

bull WiFi XM Radio

Open Skies Agreement

bull Expanded demand for international aviation service

bull Create new business for international air carriers

bull Reducing government interference

bull More than 70 bilateral Open Skies agreements

(resource 15)

Open Skies Agreement Rulesbull Free Market Competition

ndash No restrictions on international route rights number of designated airlines capacity frequencies and types of aircraft

bull Pricing Determined by Market Forcesndash A fare can be disallowed only if both governments concur

bull Fair and Equal Opportunity to Competendash All carriers -- designated and non-designated -- of both

countries may establish sales offices in the other country

bull Cooperative Marketing Arrangementsndash Designated airlines may enter into code-sharing or

leasing arrangements with airlines of either country

(resource 15)

Open Skies Agreement Rules

bull Provisions for Dispute Settlement and Consultationndash Model text includes procedures for resolving differences that

arise under the agreement

bull Liberal Charter Arrangementsndash Carriers may choose to operate under the charter regulations of

either country

bull Safety and Securityndash Each government agrees to observe high standards of aviation

safety and security

bull Optional 7th Freedom All-Cargo Rightsndash Provide authority for an airline of one country to operate all-

cargo services between the other country and a third country via flights that are not linked to its homeland

(resource 15)

Referencesbull 1) British Airways web site (2000 Jan) The Airline Industry retrieved

April 8 2006 httpadgstanfordeduaa241Introairlineindustryhtml

bull 2) Continental Airlines 10K 2005 (2005 January) retrieved April 8 2006 httpwwwcontinentalcomcompanyinvestordocscontinental_10k_2005pdf

bull 3) Donoghue JA (2006 January) Air Transport World Economics Channel Forecast Good Times Or As Good as it Gets retrieved April 8 2006httpwwwatwonlinecomchannelsdataAirlineEconomicsarticlehtmlarticleID=1496DataAirline

bull 4) Boeing Outlook 2005 World Demand for Commercial Airplanes retrieved April 8 2006 httpwwwboeingcomcommercialcmoindexshtml

bull 5) Bureau of Transportation Statistics Airline Domestic Share February 2005- January 2006 table received April 8 2006 httptranstatsbtsgov

Referencesbull 6) Bouvard Pierre and Diane Williams (2003 July) The Arbitron

Airport Advertising Study received April 8 2006 httpwwwarbitroncomarbitron_airport_studypdf

bull 7) Le Thuy-Doan (2006 March) Post-Gazette High oil prices push travel fuel prices across the board retrieved April 12 2006 httpwwwpost-gazettecompg06083675480-37stm

bull 8) May James C (2005 September) testimony given at the Aviation Hearing on Review of the Impact of Hurricane Katrina on the Aviation Industry retrieved April 2006 httpcommercesenategovhearingstestimonycfmid=1609ampwit_id=3413

bull 9) John L Mica (2006 February) Subcommittee on Aviation Hearing on Commercial Jet Fuel Supply Impact and Cost on the US Airline Industry retrieved April 12 2006 httpwwwhousegovtransportationaviation02-15-0602-15-06memohtml

References10) Washington (2005 November) Los Angeles Times New Limits on Airline

Ownership Proposed Easing curbs on foreign investment in carriers could inject fresh capital the US says retrieved April 9 2006 From LexisNexis

11) Koenig David (2005 November) Associated Press Financial Wire retrieved April 9 2006 Airlines Continue to Upgrade Web Sites retrieved April 9 2006 from LexisNexis

12) Koenig David (2005 October) Washington Post Airlines That Hedged Against Fuel Cost Reap Benefits retrieved April 9 2006 wwwwashingtonpostcom

13) Airlines retrieved April 182006 from wwwvaultcomarticlesAirlines-25831285html

QUESTIONS