Continental Airlines' response to September 11th and market challenges

¶ … Continental

When we are discussing the airline industry and the companies involved here, we need to differentiate between two periods: before the attacks of 11th of September 2001 and after the attacks, because the changes in the economic, social and political environment were so tremendous that they have changed everything radically, both in perceptions and in actions.

Before September 2001, Continental had had a troubled period during the 80s and at the beginning of the 90s, characterized by heavy losses, periods of economic default and bankruptcy. The coming of Gordon Bethune, president and COO, later elected CEO, changes began to take place within the company. These changes generally acted on four different plans: financial, marketing, product and people/employees. The success was almost immediate, with increasing value added for the customer, a better atmosphere in the work place and a different attitude from the employees, stimulated by subsequent bonuses and prizes.

The attacks in September 2001 brought a period of regression for almost everybody operating in the airline industry. This came from different sources. First of all, there was a general fear that terrorism naturally brought about, not only the fear of flying itself, but also the fear of leaving one's home and premises. Second of all, the costs that the new security systems and necessity brought about took their toll on the industry. Continental was no exception in this case and it needed to adjust some of its strategies to be able to face the new market challenges.

2) Five Forces Analysis

As we know, Porter's Five Force model is one of the main tools used to assess the profitability of an industry and is one of the key issues in our analysis. We will be analyzing each of the components of the model: threat of substitutes, barriers to entry, supplier power, buyer power and rivalry.

The Threat of Substitutes "comes from products outside the industry"

, in this case, we are referring to alternative forms of transportation. If we consider the airline industry, the threat of substitutes may come from land travel or sea travel, for example. However, in order to evaluate the threat of substitutes, we need to briefly compare some of the main transport industry.

The greatest advantage for the airline industry is that it is fast. Indeed, if we consider a trip from Budapest to Paris, for example, this will take less than two hours by plane. If we add the additional time one may spend in the airport, the total travel time may go up to four or five hours. On the other hand, a trip by car or rail will take approximately two whole days. So, the airline industry is addressing at least two categories of consumers. The first one are people who want to save time when traveling (businessmen), the second are people who want to travel comfortably and safely (it is a known fact that plane crashes are much rarer than car accidents).

The attacks in September 2001 are not likely to affect the first category of consumers, but will probably affect the number of the second category. In this sense, the threat of substitute is much more likely to reach the second category, as these are more likely to prefer other forms of alternative transportation.

Indeed, if we consider the characteristics of each consumer group, it is more likely that the terrorist threat will not reach the business executives who travel, because for them the airplane represents the fastest way to travel. It is more than doubtful that you will be able to convince a CEO who needs to travel from New York to Los Angeles and attend a meeting there in due time to take the car. He needs to be on the West coast in less than ten hours. On the other hand, people who want to travel safe and are willing to spend more hours on the road may turn to other ways of traveling, because the airline industry will be associated with the terrorist attacks.

The barriers of entry are quite elevated, if we consider the specificity of the airline industry. Indeed, efficiently running an airline company, considering all the costs, operations and mechanisms involved, is likely to turn away the new companies who may want to enter the market. Here I should point out a single exception. Companies like EasyJet or BlueJet who have been able to save enormously on costs and present a cheap package to the consumer. These companies have successfully entered the market and are a potential threat in the future for Continental and other airline industries, mainly because of their incredible adaptability to the market conditions.

The buyer power is strictly determined by such elements as buyer volume, buyer information, substitutes availability (not necessarily from other industries, but other companies as well) or price sensitivity

. In this particular case, the airline industry provides a rather high level of buyer power. The reasons for this are quite simple: the companies are competing in an ever more challenging business environment, an environment, where the customer decides. The fact that the terrorist attacks required increasing safety and security demands, which in turn increased costs, means that the companies who will be able to offer smaller increases in the price of the ticket are most likely to succeed. Otherwise, the customer will simply choose those companies offering low prices. Price sensitivity is quite high, especially for the second category of customers I have mentioned.

In terms of suppliers' power, given the numerous associated inputs, ranging from food to fuel to spare parts, the right choice of supplier may make the difference between failure and success. With the increasing cost of the patrol barrel, it is important to negotiate the right deals in order to minimize costs.

In order to evaluate the degree of rivalry in the airline industry, we will be using the 4-firm concentration ratio. According to the definition of this concept, a concentration ratio "indicates the percent of market share held by the four largest firm"

. A high concentration ratio shows that the four main firm hold a significant share of the market, with a tendency towards oligopoly. A low concentration ratio points to a fragmented market, with increased competitiveness. In our case, the 4-firm concentration ratio for the airline industry in 2002 was 71.0%

. This is quite high, especially if we consider some of its previous values: 54.2% (1982), 61.5% (1990) and 66.4% (1999). The reasons are quite simple and they are related to the increased challenges and costs, which make companies prefer strategic alliances and mergers instead of individual combat.

As a brief resume of the Five Force Analysis, we may say that the airline industry is characterized by a rather increased threat of substitutes, applicable for specified categories of customers. The terrorist attacks of 11th of September have brought about an increased concentration on the market, with what seems to be a lower level of direct competition between the main players. However, even if the concentration ratio has been slowly increasing in the last twenty years, I tend to see the airline industry as a still competitive industry, mainly because of the suppliers' power and the numerous inputs that the industry needs.

In terms of threats, the alternative forms of transportation seem the most dangerous source of threats for Continental. Additionally, several small cost-small price companies, like EasyJet and BlueJet, that have managed to significantly reduce their costs and offer competitive prices are also a serious challenge.

3)

Industry average

Continental

2001

2002

2003

2001

2002

2003

Revenue Passenger Miles (million)

651,700

641,102

655,850

61,140

59,349

59,165

Passenger Load Factor (%)

70.0

71.8

73.4

72.4

74.1

75.5

Aircraft Departures (thousands for industry)

8,788

9,187

10,840

371,100

Revenue Passengers Enplaned (millions)

44.2

41.01

39.86

Operating Revenues (millions)

115,526

106,985

115,906

8,969

8,402

8,870

Total Employment

601,355

570,688

37,680

Total Compensation

(millions)

74,807

79,356

3,021

2,959

3,056

4) Of course, the terrorist attacks on the 11th of September 2001 turned the airline industry to a period of financial losses, but, despite terrorism still being a main issue, there are now signs that the industry is pulling back together. In my opinion, Continental should be speculating this period and insist on its major assets. The tendency for the company seems to be pointing in this direction, with the Continental Express being sold in 2002, in a definite strategy to reduce all non-core related costs.

5) Strategic Fit Analysis and Strategy Recommendations

In order to provide a strategic fit analysis we need to first "analyze value chains of each business to identify opportunities for cost sharing"

and decide on the potential strategic fit relationships and possible beneficial interindustrial relationships.

In my opinion, the issue of cost reduction remains a key point for Continental, as well as for any airline company. However, several studies have shown a certain circumspection as to the level at which one can still operate cost reductions. As such, we need to have a look at possible ways of boosting up revenues as well.

As a recommendation, Continental should be approaching different companies in other related industries in order to form mutually advantageous partnerships that will reduce its costs. In this sense, I am referring to catering companies, for example. A partnership with such a company will be benefic to both companies. Continental will ensure not only the timely deliver of its food to the planes, but also a preferential price on the overall service. The idea of having partnerships with companies operating in some part of the supply chain is not new, but it can be successfully be applied by airline companies, especially with the present requirement for excessive cost reduction.

In terms of future strategy recommendations, I would consider diversification. Of course, such a concept is hard to be applied for an airline company, where, more or less, all the companies provide the same type of service. However, one has to provide an incentive so that the customer will buy ticket from you and not from the competitor. We should jot down some of the first things that come to mind when choosing an airline company: accessibility in terms of ticketing and location, reliability (everything related to the flight, from on time policies to security), etc. Concentrating on the businessmen sector would allow Continental to provide quality services and charge an extra amount of money for them.

8) Corporate Social Responsibility Issues

In my opinion, both in the past and in the future, the most important issues related to the company's social responsibility issues are those that characterize its product: product safety and reliability, as well as the treatment of employees.

As we have seen from the case study, the first issue, related to product safety and reliability, was the most important endeavor during the 90s. Most of the financial problems that Continental had had derived from its inefficient handling of luggage, from not respecting the flight schedules and canceling flights, etc. Statistics in this sense were obvious: not being on time cost the company $5 million dollar each year. The solution was quite simple: take half of this amount and turn it into bonuses for the employees, in the case they managed to pursue on time policies. The rest of the sum was the company's own profit.

In this sense, it is to be expected, in my opinion, to continue this policy into the future as well. Reliability, both in terms of schedule and luggage delivery, has the greatest advantage of being relatively cheap: besides the employee bonuses, there is no real cost associated with doing a better job out of it. As such, increased reliability may later become a competitive advantage for the company.

The treatment of employees was the second issue that the management used in order to be able to turn things around and be able to bring Continental out of the financial mess it was in the beginning of the 90s. The treatment of employees is directly proportional with the way they do their job and with the efficiency they have at the workplace. The fact that there were wage cuts and serious fights between departments for the company's resources could be of no help to the company's overall progress and improvement.

So, in this sense, a teamwork atmosphere in the workplace seems essential in the future as well, especially given the tougher times the industry is passing through, times which are affecting Continental as well. I would recommend some of the employee programs and activities that have been largely successful in the past, emphasizing the company spirit and communion. Things like barbecues, field trips, etc. represent only a small proportion of the company's overall spending, while the impact and benefits are much more important.