Continental Airlines Inc.

2007

Case Summary

This is a case study on Continental Airlines. We have done this case study on the basis of
information of 2007 (Continental Airlines Inc. 2007 by Charles M. Byles, Virginia
Commonwealth University). We give our opinion that Continental Airlines can take possible
strategy in the future based on the recent challenges that could face. We evaluate the
company’s history, internal and external factors and give our opinion from our point of view.

Case Description

Continental Airlines was a major United States airline founded in 1934. The four major go
forward plans – Fly to win, Fund the future, Make Reliability a Reality, Working Together.
Continental operates both domestic and International fleets. It has a young top management
and a large number of the employee group. It is the world’s fifth largest airline; it operates
more than 3000 daily departures throughout Asia, Europe, and America. Continental operates
368. The service quality is quite poor among other airlines. They need to improve in this area.
Recent year continental is profitable as the cost of revenue decreased and improving
operation efficiency.

The airline Industry returns to profitability after the 9/11. Major airlines went through
bankruptcy have emerged as more cost-efficient and competitive. Continental views its main
competitive threats as low-cost carriers and lines operating under or recently emerged from
bankruptcy. Regional jet services transformed the industry in the last 20 years by providing a
more cost-efficient component to an airline’s overall routes. Regional jets are major cost
advantages for airlines. Government subsidies, security cost for the airline has increased. The
internet brings both opportunity and threat to the industry. Fuel cost is a major cost and
labour cost is second largest. Continental airline is aware of the environment issue.
Continental serves more international destination than any other U.S airlines. “EU-US open
skies” treat present an opportunity for Continental.

1
Problems

1. What strategy should Continental adopt to compete against the low-cost carriers
such as AirTran, JetBlue and Southwest? Can Continental realistically compete
with these airlines on the basis of price?

AirTran, Jet Blue and Southeast are the low-cost carriers. Because of their operational
efficiency and employee performance they can provide the best service with low cost. These
airlines have a good profit margin. From our case study, we see that Continental has the
lowest profit margin among these three airlines.

Continental should follow a low-cost strategy to compete with these airlines. Following plan
of action can adopt by the Continental-

 Buy more Boeing to reduce fuel cost, fuel-efficient fleet

 Enhance reputation among customer
 Fleet time, boarding, service, on-time departure, food menu.
 Low-cost strategy to domestic market
 Increase employee productivity
 Using secondary airports
 Discount to the customer
 Set go forward plan.

Continental cannot compete with these airlines on the basis of price. This airline has the best
service performance with the lowest cost. Employee performance is highly efficient.
Continental should go for a low-cost strategy to compete in the market with this airline.

2. How much of a threat are Delta, Northwest, U.S, Airways and United and what
should be Continental’s strategy to compete against these airlines?

The Threats of Continental from Delta, Northwest, U.S. Airways:

 Continental views its main competitive threats as low-cost carriers and airlines
operating or recently emerged from bankruptcy such as Delta, Northwest, U.S.
Airways, and United
 Substantial cost reduction through reduction on the discharge of debt, lease and
omission obligation.

2
  Interest in the merger with a carrier that has a strong presence in Northeast and hub of
South.
 Purchase of replacement plane by America and US Airways
 Fail of the new entrance

Continental can adopt the following strategies to compete for these airlines:

1. Market development: Continental can increase their existing market. Start operating
the low-cost airline service in a new state or a new region.
2. Product/Service Development: Purchase of new aircraft, provide better service –
traditional and regional food, on time departure.
3. Operation efficiency: Operation efficiency increases the profitability by reducing
the cost. Employee performance increases the operational efficiency.
4. Strategic Alliances: Merger, acquisition, the takeover of the small airlines could
increase competitiveness. That will facilitate resource sharing, cost reduction, high capacity
of providing service.

3. Will the changes in Continental’s regional jet service affect the overall service
offered by the airline?

Continental’s regional jet service need to change

Continental’s regional jet service need to change that will affect the overall service offered by
the airlines. Regional jet has transformed the industry in the last 20 years by proving a more
cost-efficient component to an airline’s overall route system and attracting travellers that
might otherwise drive or take a bus. Regional jets offer greater range and more comfort than
older turboprops and allow airlines to offer jet service to smaller markets. Regional jets are a
major cost advantage for airlines as their breakeven load factor is below that of large jets.

Continentals regional jet service was at one time provided exclusively by ExpressJet and
gave Continental the advantage of being the only airline with a full jet service. Continental
the advantage of being the only airline with a full fleet for its domestic routes; approximately
60 per cent of all departures ate operated by continental express and

In addition of the 148 domestic airports served, 61 are exclusively continental Express or
Continental connection. Recently, however, because Express Jet increases its rates,

3
Continental reduced the use of some ExpressJet aircraft offering regional service. Chautauqua
Airlines was selected as a replacement and will operate fifty-four 50 seat regional service jets
and Colgan was selected to operate fifteen 74 seat turboprop aircraft. Whether this
disagreement with ExpressJet will affect the current service is not known, nor is the effect
(from a customer satisfaction standpoint) of returning to turboprops known.

4. Based on the service quality report by the Airline Quality Rating, what specific
recommendations would you give Continental? In particular, address the
criticisms of involuntary denied boarding’s (bumping).

Continental’s current position is dramatically different from only ten years ago. The story
begins with the arrival of Gordon Bethune as CEO, who led Continental from its “worst to
first” position in the airline industry. In light of the above reading, the case study at nowhere
has several problems that have a barrier to prosperity. Now is given below

Information is not available:

Continental had outsourced its operational systems to EDS, including the mainframe systems
that provided a limited set of scheduled reports. The airline lacked the corporate data
infrastructure for employees to quickly access the information they needed to gain key
insights about the business.

No Return Ticket system:

It is a tremendous problem for the presenter's continental airlines should not allow the return
Ticket. That is why presenter is express sadness with the statement

Using rude behave with predestine:

It appears that those with the loudest and most insistent and rudest voices get helped first

Inconvenience with the service:

It is collected a statement from online comment. Predestine said to the opinion We are aware
that videos do not work. Please just use the music and games.” no apologies, no “sorry for the
inconvenience etc”.When we pressed the button for the attendant, they totally ignored us

Some specific recommendation about Continental Airlines is given below:

4
  Information should be available for all for example Ticket booking, rent, what
facilities are available in the plane, seat quality etc. all sort of information should be
disclosed.
 Convenience with all service for the predestine should not do anything with them.
 Service should be very quickly and always giving update information to the
passenger.
 Fly to Win. Continental needed to better understand what products customers wanted
and were willing to pay for.
 Fund the Future. It needed to change its costs and cash flow so that the airline could
continue to operate.
 Make Reliability a Reality. It had to be an airline that got its customers to their
destinations safely, on time, and with their luggage.
 Working Together. Continental needed to create a culture where people wanted to
come to work.
 Customer Value Analysis is needed for what they want and actually expect.
 On time arrivals, Involuntary denied boarding, Prevent mishandled baggage.

5. Should Continental change its international strategy in any way? Are there
destinations that it should add or remove?

Continental serves more international destinations than any other U.S airlines. As the airline
industries growing faster than ever. Increased number of people travels through the airline
and new destination has emerged, competition has increased, they should change their
strategy to compete in the industry. As a part of a strategy, they change flights features like
customer food menu and in-flight entertainment system according to the destination it travels
to. For example for its Indian customers such as a Bollywood movie channel showing movies
in Hindi with English Subtitles. In addition, other movies have Hindi subtitle. In-flight meals
include Indian vegetarian and non-vegetarian choices and no beef is served.

International markets are more profitable than the more competitive and less attractive
domestic market. An emphasis on international destinations makes strategic sense because
international flights generate higher levels of revenue passenger miles than domestic flights,
and revenue passenger miles are co-related with airline revenues. Along with its subsidiary,
Continental Micronesia Inc, and regional flights operated by Continental Express, and
Continental Connection, it operates more than 3000 daily departures throughout America,

5
Europe, and Asia and serves 148 domestic and 134 international destinations. Continental
focuses on Asia and China, India in particular.

6. How important are fuel costs and is Continental taking appropriate action to
manage these costs now and in the future?

Fuel costs represent one of the biggest expenses for the airline industries. On average, fuel
costs account for 29% of all operating expenses and 27% of the overall airline industry
revenue. Continental fuel expenses for 2007 were 29.4% of operating expenses. Labour is the
second largest cost for airlines. Labour cost relates to various categories of employee: flight
crews (pilots and engineers’), flight attendants, ground service (including baggage handlers,
reservationists), maintenance and customer service (bookings and boarding’s).

Continental taking appropriate actions to manage these costs likes many airlines. Continental
uses hedging strategies to control fuel costs. Fuel hedging, a contractual tool that airlines use
to reduce their exposure to the volatility of fuel prices. This toolkit often gives the airline a bit
of control when it comes to forecasting their expenses, but it can also create greater financial
issues if not forecasted correctly. Continental also plans to soon buy more Boeing 787 aircraft
because its modern fuel efficient fleet will help to reduce fuel cost. Instead of hedging fuel
costs, the continental authority should take the unprecedented measure of investing in their
own jet fuel production. For example in 2012, Delta Airlines invested $150 million into an oil
refinery, bypassing the jet fuel market and taking full control over its fuel production.
However, such a strategy does not work well when oil price increases because it makes the
jet fuel cost high. In this case, hedging the jet fuel price works better.

7. Evaluate Continental’s current use of the Internet in booking tickets.

Definition of Airline Ticket

An airline ticket is a document or electronic record, issued by an airline or a travel agency

that confirms that an individual is entitled to a seat on a flight on an aircraft. The airline ticket
may be one of two types: a paper ticket, which comprises coupons or vouchers; and
an electronic ticket.

The ticket, in either form, is required to obtain a boarding pass during check-in at the airport.
Then with the boarding pass and the attached ticket, the passenger is allowed to board the
aircraft.

6
Regardless of the type, all tickets contain the following information

 The passenger's name.

 The issuing airline.
 A ticket number, including the airline's 3 digit code at the start of the number.
 The cities the ticket is valid for travel between.
 The flight that the ticket is valid for. (Unless the ticket is "open")
 Baggage allowance. (Not always visible on a printout but recorded electronically for the
airline)
 Fare. (Not always visible on a printout but recorded electronically for the airline)
 Taxes. (Not always visible on a printout but recorded electronically for the airline)
 The "Fare Basis", an alpha or alpha-numeric code that identifies the fare.

Times on airline tickets are generally for the local time zone where the flight will be at that
moment. The continental airline has implemented the internet in the booking ticket process,
with benefit.

Issuing Air Ticket

A revenue passenger on an airline must hold a valid issued ticket. In order for a ticket to be
issued, there is two distinct processes:

Reservation

A reservation for an itinerary is made in the airline system, either directly with the airline or
by an agent. The itinerary includes all the above details needed for the issuance of an air
ticket, except the ticket number.

When the reservation the made, a passenger name record (PNR) will be created which is used
to manage the reservation and check-in. It is possible to have multiple passengers in a
single passenger name record.

Issuance

Traditionally, reservation and payment are separate steps, which the time between them are
defined in the fare rules when the reservation is made. However, it is more common to
require immediate payment on online booking systems.

Each passenger must hold his/her own air ticket, as shown by an individual ticket number,
even when the reservations are linked by a single PNR.

7
IATA announced that as of June 1, 2008, IATA-member airlines will no longer issue any
paper tickets.

A ticket is generally only good on the airline for which it was purchased. However, an airline
can endorse the ticket, so that it may be accepted by other airlines, sometimes on standby
basis or with a confirmed seat. Usually, the ticket is for a specific flight. It is also possible to
purchase an 'open' ticket, which allows travel on any flight between the destinations listed on
the ticket. The cost of doing this is greater than a ticket for a specific flight. Some tickets are
refundable. However, the lower cost tickets are usually not refundable and may carry many
additional restrictions.

The carrier is represented by a standardized 2-letter code. In the example above, Thai
Airways is TG. The departure and destination cities are represented by International Air
Transport Association airport codes. In the example above, Munich is MUC and Bangkok is
BKK. The International Air Transport Association is the standard setting organization.

Airline booking ploys are tactics used by travellers in commercial aviation to lower the costs
of flying to the desired destination. These tactics take advantage of inefficiencies in pricing
by working around the airline's fare and route systems, often due to the airlines' use
of fortress hubs. Several of these tactics exist.

Reduced the costs of tickets sales administrative costs:

Online ticket facility can reduce the cost. every continental airline gives this opportunity so
that the customer can easily receive this opportunity and the customer increase the airline
travel. Continental airline provides the better service to the customer through lower cost. The
customer does not any bore through this process because the internet is available to the
customer. On the other hand, the continental airline gets the available customer so the
continental does not face the loss through the process.

Throwaway Ticketing

Throwaway ticketing is purchasing a ticket with the intent to use only a portion of the
included travel. This situation may arise when a passenger wants to travel only one way, but
where the discounted round-trip excursion fare is cheaper than a one-way ticket. This can
happen on mainline carriers where all one-way tickets are full price. For instance, a passenger
only intending to fly from Los Angeles to New York may find the one-way ticket costs $800,
but that the round-trip fare is $500. The passenger, therefore, purchases the round trip from
Los Angeles to New York and back to Los Angeles, boards the flight to New York, but stays

8
in New York and "throws away" the second half of the ticket by not showing up for the return
flight. It is only possible to "throw away" the final segment(s) of a ticket because throwing
away a segment by not showing up for the outbound trip will often lead to the airline's
cancelling the entire reservation.

Just Print it at the counter tickets at the airport:

Just booking the airline ticket through the internet the counter print the booking copy after
paying the rent the counter provides the counter ticket at the airport .after get the counter
ticket the customer easily enter into other activity in air terminal .the continental airline just
provide that facility and customer easily shift one place to another place.

Faster:

the continental airline current use of the internet in booking tickets is used to increase day by
day because of saving the time to the customer the customer easily booking the air ticket
though system apply in every demotic and international flight .this system apply the customer
and easily plan to tour the aboard. so it is the main advantage of the booking ticket in the
continental airline.

Pressing ticket counter fees:

Continental airline open booking system through the internet and extra charge the fee for this
service. But this booking system is secured and do not have any fault the customer pay the
extra payment for that system.

Increasing the customer satisfaction:

This process is liable to the customer satisfaction level increases day by day. The continental
airline gives the safe and comfortable journey to the customer and increases the customer day
by day. The booking system through the internet is profitable day by day and customer
increase the continental booking system for international travel for a different purpose.

Hidden city ticketing

Hidden city ticketing is a variant of throwaway ticketing. The passenger books a ticket to a
fictitious destination (the "hidden" city) with a connection at the intended destination, walks
away at the connection node and discards the remaining segment. Flight fares are subject to
market forces, and therefore do not necessarily correlate to the distance flown As a result, a
flight between point A to point C, with a connection node at point B, might be cheaper than a
flight between point A and point B. It is then possible to purchase a flight ticket from point A

9
to point C, disembark at the connection node (B), and discard the remaining segment (B to
C).

Using the hidden city tactic is usually practical only for one-way trips, as the airlines will
cancel the subsequent parts of the trip once a traveller has disembarked. Thus, round-trip
itineraries need to be created by piecing two one-way flights together. This tactic also
requires that the traveler have carry-on luggage only, as any checked baggage items will be
unloaded only at the flight's ticketed final destination Exceptions to this requirement occur
when re-entering a country where luggage must be processed by customs agents, when
changing airports, or when train travel is involved in the flight ticket. This allows for a
traveller to reclaim their luggage before checking in for their final destination, and therefore
to simply leave the airport. Hidden-city ticketing carries the risk of the initial flight's being
overbooked or cancelled, and the airline's transferring the passenger to a different route that
bypasses the connection node.

Hidden city ticketing violates most airlines' contract of carriage (A notable exception
is Southwest Airlines, whose fare rules do not specifically prohibit the practice.) Someone
doing it infrequently is unlikely to be pursued by the airline, but some frequent fliers have
reported either losing their flier accounts or being threatened with such a loss. Experienced
fliers recommend that if doing it more than very occasionally, passengers either not associate
their frequent flier numbers with reservations using the hidden city trick or instead crediting
the miles to a partner airline In 2014, United Airlines and Orbits filed a lawsuit against a
search engine dedicated to finding hidden city tickets, alleging damages from lost revenues,
but were unsuccessful.

Back-to-back ticketing :

Back-to-back ticketing is a type of nested ticketing whereby a traveller tries to circumvent

minimum stay requirements. For example, say a traveller wants to make two round trips
midweek in two different weeks. At one time, airlines typically charged more for midweek
round trips than for trips that involved a Saturday-night stay. The back-to-back ticketing ploy
allows the traveller to book two round-trip tickets with Saturday stays even though the actual
travel is all midweek. If a business traveller wanted to make two round trips from New York
to Los Angeles in two consecutive weeks, instead of booking two round-trips in separate
weeks in the following way:

 Ticket 1 outbound: week 1 Monday New Ythe other the k to Los Angeles

10
 Ticket 1 return: week 1 Friday Los Angeles to New York
 Ticket 2 outbound: week 2 Monday New York to Los Angeles
 Ticket 2 return: week 2 Friday Los Angeles to New York

In such case, the traveller appears to stay at the destination on the weekend for both tickets
(staying at Los Angeles for ticket 1, and at New York for ticket 2), thus taking advantage of
the Saturday-night requirement for both tickets.

Within North America, the usefulness of this strategy has diminished materially, as most
airlines have abandoned the discount for a Saturday-night stay-over for these types of trips.
However, many intercontinental round-trip tickets still have a minimum length of stay
requirements. Back-to-back ticketing is useful with tickets when there is a minimum length of
stay on the discount (e.g., 7 days), and the traveller needs to stay only in the destination for a
shorter period of time.

Legal Status

Airlines are strongly opposed to booking ploys for financial reasons. Other reasons cited by
airlines include "public safety" concerns, but these are usually not explained. Many airlines
have established means of identifying and penalizing travellers who take advantage of such
tactics, most notably through their frequent flier programs

Booking ploys are generally a breach of the contract of carriage between the passenger and
the airline. Violating the contract is generally a civil, not a criminal matter. When a traveller
is shown to have practised such methods, airlines may respond by confiscating tickets,
cancelling frequent flier status, and billing travel agents for the fare difference.

8. What should Continental’s actions be in light of the EU-US Open Skies Treaty?

The United States, Canada, and 22 European nations signed the Treaty on Open Skies on
March 24, 1992. The treaty entered into force on January 1, 2002, and now has 34 members.
Each participant must permit unarmed observation aircraft to fly over its entire territory to
observe military forces and activities. The treaty is designed to increase transparency, build
confidence, reduce the chances of military confrontation, and encourage cooperation among
European nations. supporting the EU-US open skies treaty because this is an opportunity to
be able to expand the flight area, increase market size, potential flight paths(the area between

11
America to UK Heathrow Airport must be differentiated compared to Delta, Continental and
US Airways)

To expand the flight area:

Supporting the EU-US open skies agreement to expand the flight area. But some rules follow
both the county .the EU-US open skies expand the international flight .the customer available
for the international flight .so the EU-US mutually take the action for open skies agreement
so that they can easily overcome the treaty.

Increase the market size:

if the EU-US take the action to overcome the treaty of open skies form this their market size
expand, they get an available customer for flight .so the continental take the action to increase
the market size which is profitable for the business.

Potential flight paths:

If the EU-US take the open skies treaty that step is profitable for continental business .this
time different potential flight path open which is expand the business size. if the open skies
treaty successful by EU-US easily travel the different country which is open the potential
flight path.

Background President Eisenhower proposed an Open Skies agreement in 1955 to reduce the
risk of war. Before satellites existed, aerial overflights provided information for both
intelligence and confidence-building purposes. The Soviet Union rejected the proposal
because it considered over flights equal to espionage and believed the United States had more
to gain than it did. President George H. W. Bush revived the proposal in May 1989. By this
time, both the United States and the Soviet Union collected intelligence with satellites and
remote sensors. But as Europe emerged from the East-West divide of the Cold War, the
United States supported increased transparency to reduce the chances of military
confrontation. The Open Skies Treaty was one of three arms control arrangements—
including the Vienna Document and the Conventional Armed Forces in Europe Treaty
(CFE)—which could serve, as then-Secretary of State Baker noted, as "the most direct path to
greater predictability and reduced risk of inadvertent war." Key Provisions Open Skies
participants make all their territory accessible to overflights by unarmed fixed-wing
observation aircraft. They can restrict flights for safety concerns, but cannot impede or

12
prohibit flights over areas, including military installations that would otherwise be off-limits.
In most cases, the nation conducting the observation flight provides the aircraft and sensors.
Nations can also conduct joint overflights to share costs or use aircraft and sensors provided
by other nations. The treaty specifies that a nation conducting an observation flight provide
72 hours' notice before arriving in the host country. This provides the host with time to
suspend sensitive military exercises or activities. The observation team presents a mission
plan, specifying details including the route and altitude for the flight. The host nation can
propose changes to the mission plan, due to weather or flight safety considerations, but it
cannot deny access to any area of its territory. Open Skies aircraft can be equipped with four
types of sensors: optical panoramic and framing cameras (cameras for still photography) with
a ground resolution of 30 centimeters (around one foot); video cameras with a ground
resolution of 30 centimeters; infrared line-scanning devices with a ground resolution of 50
centimeters (around 20 inches); and sideways-looking synthetic aperture radars (SARs) with
a ground resolution of 3 meters (around 8 feet). This equipment allows collection of basic
information on military forces and activities, but would not provide detailed technical
intelligence. It also allows monitoring of military and civilian infrastructures, such as
industrial plants, airports, roads, and railway lines, but would not allow recognition of
sensitive details about items such as electronic equipment. Both the observing nation and
observed nation have access to the data from each flight; other parties can purchase copies of
the data, so all can share information collected during all flights. The treaty allows the
participants to upgrade cameras and sensors as technology advances, as long as the
capabilities remain within treaty parameters. The party using the new technology must
demonstrate that technology to the others participants and receive consensus approval before
they can transition to new cameras. Russian Compliance According to the U.S. State
Department, Russia has refused access for Open Skies observation some areas of
southwestern Russia. It has also limited access to a region over Moscow and along the border
of Russia with the Georgian regions of South Ossetia and Abkhazia. Russia has reportedly
also failed to provide priority flight clearance for Open Skies flights on a few occasions. The
United States has raised these issues, without resolution, in the Open Skies Consultative
Commission.

Benefits and Risks

Benefits and Risks When the United States first signed Open Skies, most analysts agreed that
the treaty would provide little information not already available from observation satellites.

13
Nevertheless, some have identified benefits not related, directly, to the value of the
information collected during the overflights. For example, most other participants in the
treaty do not have observation satellites, so, as former Secretary of State George Schultz has
noted, "Open Skies is their only means of alleviating security concerns through timely
overhead imagery." This reduces the risk of misunderstandings or crises that could involve
the United States and also contributes to "a more stable and secure European continent." The
treaty has been particularly useful in recent years, as an increased number of flights have
provided the parties with added information about Russian military forces near the border
with Ukraine. In 1992, analysts also asserted the treaty would create few risks for the United
States because Russia could collect more detailed information with its observation satellites.
Recently, however, U.S. military and intelligence officials have expressed concerns about
U.S. vulnerabilities if Russia were to employ new electro-optical cameras. Admiral Cecil
Haney, the former Commander of U.S. Strategic Command, noted that better optical
technology would allow Russia to overcome weaknesses in its satellite surveillance
capabilities. Others have questioned these conclusions, however, noting that Russia will
operate commercially available cameras, with resolutions that are both within the bounds
established by the treaty and also less precise than those offered by commercial satellites.

14