Continental Airlines Context

1
Continental AirlinesContext

• Team B4
• Joseph Kattar, Bethany Byrd, Jocelyn Stewart.

2
Industry Overview

• Air travel remains a large and growing industry.
• 1.5 billion passengers in 2005
• In the past decade, air travel has grown by 7
  per year
• IATA forecasts to grow by an average 6.6 a year
  to the end of the decade and over 5 a year from
  2000 to 2010
• .(resource 1)

3
Industry Overview

• 4-6 growth is expected in Europe and North
  America
• 9 growth a year in ASIA/PACIFIC a year and is
  forecast to continue to grow rapidly
• Profitability slowed during the Gulf War (1991)
• net losses of 20.4bn in the years from 1990 to
  1994
• .(resource 1)

4
Industry Overview

• Many airliners realized they had to cut costs in
  order to survive.
• Reduce capacity growth and to increase load
  factors
• The outlook for the air travel industry is one of
  strong growth. Forecasts suggest that the number
  of passengers will double by 2010
• .(resource 1)

5
North America Airline IndustryOverview

• The commercial aviation industry in the United
  States has grown dramatically since the end of
  World War II
• In 1945 the major airlines flew 3.3 billion
  revenue passenger miles (RPMS).
• In the mid 1970s, when deregulation was beginning
  to develop, the major carriers flew 130 billion
  RPMS
• By 1988, after a decade of deregulation, the
  number of domestic RPMS had reached 330 billion
• .(resource 1)

6
North America Airline IndustryOverview

• Today the domestic industry in the US is mainly a
  low cost, low fare environment
• The majority have entered into cross-border
  alliances to improve profitability through
  synergy benefits.
• The United States is the largest single market in
  the world, accounting for 33 per cent of
  scheduled RPMs
• Deregulation of the industry
• In 1989 events began which severely damaged the
  economic foundations of the industry (Gulf War)
• .(resource 1)

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Airline Domestic Market Share February 2005 -
January 2006 .(resource 5)
Airlines Share
American 15.8
Delta 13.1
United 11.8
Southwest 10.7
Northwest 7.4
Continental 7.1
USAirways 5.1
America West 4.0
JetBlue 3.6
Alaska 2.5
Other 18.9
8
Boeing ? Current Market Outlook ? 2005 ? Demand
for Air Travel .(resource 4)
9
Load Factor

• Industry Load Factor 80
• (resource 7)
• BE Industry Load Factor 85
• (resource 8)

10
Government Regulations

• Aviation Security Act
• CRAF

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Aviation Security Act

• TSA
• -USVISIT
• Improved Flight deck security
• Improved airport perimeter access security
• Increased airline crew security training
• (Reference 2)

• Enhanced security screening of passengers,
  baggage cargo, mail, employees, and vendors
• Enhanced training of security screening personnel
• Increased federal air marshals

12
Aviation Security Act

• Passenger Security Fee
• TSA Aviation Security Infrastructure Fee
• Airport Passenger Facility Fee

13
Civil Reserve Air Fleet (CRAF)

• In time of war, air carriers provide air lift
  services to the Air Mobility Command at their own
  expense
• (reference 2)

14
Fuel Prices

• Commercial Aircraft engines require more
  sophisticated form of fuel than ground vehicles
• 19.5 billion gallons per year
• Next to labor, jet fuel is the 2nd largest
  operating expense totaling 10-25 of annual
  operating costs
• Fuel prices doubled from 0.78/gal in 2000 to
  1.81/gal in 2006
• Every penny increase in price of gallon results
  in an additional 195 million in annual fuel
  costs
• (resource 10)

15
Fuel Hedging

• Airlines lock a fixed price or maximum price cap
  for fuel in the future by buying a contract at a
  specific price
• Ex Southwest Airlines
• 2005 26/barrel
• 2006 32/barrel
• Current market rate 70/barrel
• (resource 10)

16
Fuel Hedging

• Carriers in financial trouble do not have the
  cash or credit to pay for fuel hedge contracts
• Virtually no fuel hedges for Delta, Continental,
  and Northwest in 2006
• American and United have hedged less than 10 of
  2006 fuel
• (resource 10)
• Continental has short term petroleum contracts
• (resource 2)

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High Labor Cost

• 38 of total operating cost. (resource 13)
• 368,000 in January 2002 to 270,000 in January
  2006, a decline of 27 percent (resource 14)

18
High Labor Cost
(Resource 14)
19
Technology Advancements

• Worldspan
• Provide worldwide electronic distribution of
  travel information, Internet products and
  connectivity, and e-commerce capabilities for
  travel agencies, travel service providers, and
  corporations. (resource 16)

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Technology AdvancementsWorldspan

• Standard Schedule Message (SSM)
• Frequent Flyer Verification
• Departure Control
• Revenue Management
• Revenue Accounting Data
• Electronic Ticketing
• Interactive Seat Selection

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Technology Advancements

• Fuel management
• Pricing and reporting
• Upgrading the operations control center
• More efficient flights
• WiFi/ XM Radio

22
Open Skies Agreement

• Expanded demand for international aviation
  service
• Create new business for international air
  carriers
• Reducing government interference
• More than 70 bilateral Open Skies agreements
• (resource 15)

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Open Skies Agreement Rules

• Free Market Competition
• No restrictions on international route rights
  number of designated airlines capacity
  frequencies and types of aircraft.
• Pricing Determined by Market Forces
• A fare can be disallowed only if both governments
  concur
• Fair and Equal Opportunity to Compete
• All carriers -- designated and non-designated --
  of both countries may establish sales offices in
  the other country
• Cooperative Marketing Arrangements
• Designated airlines may enter into code-sharing
  or leasing arrangements with airlines of either
  country
• (resource 15)

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Open Skies Agreement Rules

• Provisions for Dispute Settlement and
  Consultation
• Model text includes procedures for resolving
  differences that arise under the agreement.
• Liberal Charter Arrangements
• Carriers may choose to operate under the charter
  regulations of either country.
• Safety and Security
• Each government agrees to observe high standards
  of aviation safety and security.
• Optional 7th Freedom All-Cargo Rights
• 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)

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References

• 1) British Airways web site, (2000, Jan) The
  Airline Industry, retrieved April 8, 2006
  http//adg.stanford.edu/aa241/Intro/airlineindustr
  y.html
• 2) Continental Airlines 10K 2005 (2005, January)
  retrieved April 8, 2006 http//www.continental.com
  /company/investor/docs/continental_10k_2005.pdf
• 3) Donoghue, J.A. (2006, January) Air Transport
  World Economics Channel Forecast Good Times Or,
  As Good as it Gets retrieved April 8,
  2006http//www.atwonline.com/channels/dataAirlineE
  conomics/article.html?articleID1496Data/Airline
• 4) Boeing Outlook 2005 World Demand for
  Commercial Airplanes retrieved April 8, 2006
  http//www.boeing.com/commercial/cmo/index.shtml
• 5) Bureau of Transportation Statistics Airline
  Domestic Share February 2005- January 2006 table
  received April 8, 2006 http//transtats.bts.gov

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References

• 6) Bouvard, Pierre and Diane Williams (2003,
  July) The Arbitron Airport Advertising Study,
  received April 8, 2006 http//www.arbitron.com/arb
  itron_airport_study.pdf
• 7) Le, Thuy-Doan (2006, March) Post-Gazette,
  High oil prices push travel fuel prices across
  the board, retrieved April 12, 2006
  http//www.post-gazette.com/pg/06083/675480-37.stm
  
• 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 http//commerce.sen
  ate.gov/hearings/testimony.cfm?id1609wit_id3413
  
• 9) John L. Mica (2006, February) Subcommittee on
  Aviation Hearing on Commercial Jet Fuel Supply
  Impact and Cost on the U.S. Airline Industry,
  retrieved April 12, 2006 httpwww.house.gov/transp
  ortation/aviation/02-15-06/02-15-06memo.html

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References

• 10) Washington (2005, November) Los Angeles
  Times, New Limits on Airline Ownership Proposed
  Easing curbs on foreign investment in carriers
  could inject fresh capital, the U.S. 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
  www.washingtonpost.com
• 13) Airlines, retrieved April 18,2006 from
  www.vault.com/articles/Airlines-25831285.html

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QUESTIONS???