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Continental Airlines (NYSE: CAL) is the fifth largest U.S. airline measured by 2006 domestic traffic^[1]. The company faced financial trouble during much of the 2000’s, as reduced travel following September 11th combined with competition from discount airlines led to decreased revenue However, the airline has fared better in this difficult environment than have other legacy carriers. While struggling to achieve profitability, Continental has managed to avoid declaring bankruptcy like its competitors (Delta, United, US Air, and Northwest). Ironically, this has also put it at a strategic disadvantage to those carriers that were able to restructure and cut costs under bankruptcy protection.

The low fare revolution in domestic airline travel has forced many legacy carriers to offer a “no frills” experience in order to remain competitive. Continental has been less willing to join this movement, and has instead continued to provide passengers with extra amenities such as blankets and meals. This more upscale experience has been financed through fares higher than the industry average, which consumers have proved willing to accept as evidenced by a rise in the airline's passegner load factor from 74.1% in 2002 to 81.1% in 2006^[2]. Management, however, has expressed concern that Continental’s high margins on international flights will come under pressure as current domestic competitors expand into those routes as part of their post bankruptcy operational strategy^[3].

As 2008 has seen extraordinary increases in oil prices and corresponding declines in the fortunes of the commercial airlines, Continental has had to make several strategic changes. At first, the changes were small and involved programs such as the implementation of a $25 fee for a second checked bag.^[4] But as oil surged upward to over $140 a barrel, the company bas been forced to make overarching changes to its business. On June 5, Continental announced a 6.5% workforce reduction and the early retirement of 67 planes.^[5] It will reduce capacity by 11% year over year. In a unique development, Continental's CEO and President will both not receive salary or incentives for 2008. ^[6] Continental recorded a net loss of $236 million in the 3Q 2008 largely due to the YoY increase in their jet fuel costs from $2.16/gallon to $3.49/gallon.^[7]

Contents 1 Business Financials 2 Key Trends and Forces 3 Competitors 4 Market Share 5 Notes

[edit] Business Financials

On average, Continental has 2700 daily departures bound for 136 domestic and 126 international destinations. The airline operates with a hub-and-spoke system, utilizing two major hubs at Newark and Houston, and one minor hub in Cleveland^[8].

Continental has experienced revenue growth every year going forward from 2003. This upward trend is reflective of the recovery in commercial air travel following September 11th. During the period from 2003-2006, Continental’s revenue passengers increased an average 6.6% year on year. This increased demand has allowed for higher load factors and expansions in available flights. The airline’s operating revenue has been further buoyed by yearly increases in the average fare per revenue passenger ^[9].

The airline’s operating income has been slightly more volatile. After achieving profitability in 2003, the company was faced with two years of operating losses due to cost increases (led by higher fuel prices) that outpaced revenue growth. Profitability was again achieved in 2006, as the airline managed to pass on more of the cost increases to its customers through higher ticket prices. From 2003 to 2004, the average ticket price increased only 4%, as opposed to 6% during the period 2005 to 2006^[10].

Operational terminology unique to the airline industry includes available seat miles (ASM), revenue per available seat mile (RASM) and cost per available seat mile (CASM). The three metrics are determined as follows:

[edit] Key Trends and Forces

• Rising Fuel Costs: Fuel expenses represent one of the largest single costs faced by airliners. From 2004 until 2006, fuel costs have climbed from 15% to 24% of Continental's total operating expenses^[14]. Continued oil price increases will pressure the carrier's profitability, given that its purchase contracts offer only limited hedging protection against higher prices (30% hedge for 1Q 2007 and a 10% hedge for 2Q 2007). ^[15]. However, management believes that the airline has a competitive advantage through its younger and more fuel efficient fleet. Moreover, Continental has previously had success in passing on higher fuel costs through increased ticket prices.^[16]. In September, Continental joined many of its airline peers by charging a $15 checked bag fee. They expect this initiative to generate $100 million in combined fee revenue and cost savings from decreased checked baggage.^[17]

• Increased Competition on International Routings: Continental has long been one of the most internationally oriented U.S. carriers. As of 2007, 47% of the company’s routings were to international destinations^[18]. These high revenue flights have helped Continental weather decreased domestic demand. However, the higher margins on these routes could be pushed downward by increased competition from other U.S. legacy carriers, which have announced expanded international routings as a key component of their post-bankruptcy operational plans^[19].

• Domestic Governmental Regulations: Public outcry against airline delays has led to demand for a government response. In November 2007, President Bush voiced support for higher penalties for airlines that severely delay passengers ^[20]. Even more troubling for Continental are suggestions that the government might limit the number of landing slots at busy airports including Continental's hub at Newark Liberty International Airport^[21]. This could result in significant scheduling difficulties for the airline.

• Bankruptcy by Legacy Airlines: Numerous U.S. legacy carriers (Delta, Northwest,US Airways, and United) have been forced to declare bankruptcy due to price competition from discount airlines and overall decreased demand for air travel. While Continental’s relatively healthier finances allowed it to avoid bankruptcy, the company is now at a competitive disadvantage to others in the industry. The carriers that declared bankruptcy have cut costs and restructured under Chapter 11 protection. As a result, these airlines have emerged as stronger and more serious competitors ^[22].

• International Turmoil and Profitability: With 47% of Continental’s flights departing for international destinations, much of the company’s revenue is dependent on its passengers’ willingness to travel abroad^[23]. The historical record suggests that passenger demand is quite responsive to changes in the worldwide geopolitical situation; airline passenger loads decreased considerably during both the SARS epidemic and the August 2006 terrorist threats against transatlantic aircraft^[24]. With the continued turmoil in the Middle East and the potential of terrorist activity, it is possible that a serious security threat could once again reduce demand for international travel.

• Cooperation and Partnerships: CAL's competitors like British Airways and Virgin Atlantic have started partnering with various other organizations such as US Transportation Safety Administration (TSA) and the Flyclear service. These partnerships offer users lesser number of security checks, standardization nationwide and respite from long lines at the airport, going a long way in enhancing customer satisfaction. Moreover, instead of charging for baggage, CAL could partner with FDX or UPS in order to streamline the baggage process and try and create a win-win situation. Otherwise they might just lose to their competitors.

[edit] Competitors

Continental's closest competitors include the following:

June 2008 Competitive Metrics (MoM)^[25]

Airline	Revenue Passenger Miles (Billions)	Traffic Pct Change	Available Seat Miles (Billions)	Capacity Pct Change	Load Factor (%)	Utilization Pct Change
American Airlines (AMR)	11.85	(3.1%)	13.86	(1.2%)	85.5%	(1.7%)
Delta Air Lines Inc. (DAL)	11.69	0.2%	13.68	0.7%	85.4%	(0.5%)
United Airlines (UAUA)	10.34	(3.6%)	11.97	(0.6%)	86.5%	(2.6%)
Continental Airlines (CAL)	7.71	(0.9%)	9.16	1.4%	84.1%	(2.0%)
Southest Airlines (LUV)	6.88	0.7%	8.80	5.7%	78.8%	(3.9%)
Northwest Airlines (NWA)	6.56	1.4%	7.48	2.4%	87.7%	(0.9%)
US Airways Group (LCC)	5.67	(0.5%)	6.67	0.4%	85.0%	(0.8%)
JetBlue Airways (JBLU)	2.30	2.3%	2.77	3.2%	79.5%	(0.7%)
AirTran Holdings (AAI)	1.89	15.5%	2.23	13.0%	84.7%	1.8%

Continental vs. Competitors (2006)

Company	Revenue Passenger Miles (RPMs) (millions)	Passenger Revenue per Available Seat Mile (RASM)	Operating Cost per Available Seat Mile (CASM)
Continental Airlines	79,192	$0.0996	$0.1056[26]
AirTran Holdings	13,836	$0.0956	$0.0974[27]
Alaska Air Group	20,513	$0.1157	$0.1198[28]
American Airlines	139,454	$0.1026	$0.1090[29]
Delta Air Lines	116,133	$0.1056	$0.1156[30]
Frontier Airlines Holdings	8,029	$0.0898	$0.0936[31]
JetBlue Airways	23,320	$0.0777	$0.0782 [32]
Northwest Airlines	78,044	$0.1078	$0.1095[33]
Southwest Airlines Company	67,691	$0.1293	$0.0880 [34]
United	117,470	$0.1004	$0.1123 [35]
US Airways Group	37,130	$0.1097	$0.1139 [36]

RASM and CASM respectively allow for comparisons across airlines for unit revenue and unit costs. In the battle between low fare carriers and legacy airlines, companies like Southwest and Jetblue have found ways to reduce CASM (through lower maintenance costs from a more uniform aircraft fleet type and a “no frills” customer experience) while legacy airlines continue with their historically higher CASM operating strategy. Thus, even if both types of carriers manage to fill seats and achieve similar RASM, the low fare airlines will achieve greater profitability from their lower cost structure.

[edit] Market Share

Continental is the fifth largest airline in the United States, capturing nearly 8% of the domestic commercial airline market. The top fifteen U.S. airlines by market share are ranked below, where market share is measured in terms of domestic revenue passenger miles.

Airline Domestic Market Share by Revenue Passenger Miles (September 2006 - August 2007) ^[48]

Rank	Company	Market Share
1	American Airlines	15.0%
2	Southwest Airlines Company	12.2%
3	United Airlines	11.9%
4	Delta Air Lines Inc. (DAL)	11.0%
5	Continental Airlines	7.8%
6	Northwest Airlines	6.9%
7	US Airways Group	4.7%
8	JetBlue Airways	4.2%
9	America West	3.8%
10	AirTran Holdings	2.7%

[edit] Notes

1. ↑ Continental 2006 Annual Report, Item 1, pg. 1
2. ↑ Continental 2006 Annual Report, Item 6, pg. 30
3. ↑ Continental 2006 Annual Report, Item 3, pg. 5
4. ↑ Continental News Release
5. ↑ Reuters
6. ↑ Forbes
7. ↑ Marketwatch
8. ↑ Continental 2006 Annual Report, Item 1, pg.1
9. ↑ Continental 2006 10K, Item 6. Pg. 30-31
10. ↑ Continental 2006 10K, Item 6. Pg. 30-31
11. ↑ Continental 2006 10K, Item 6, pg. 29
12. ↑ Continental 2006 10K, Item 7, pg. 36
13. ↑ Continental 2006 10K, Item 6, pg. 30
14. ↑ Continental 2006 Annual Report, Item 3, pg. 7
15. ↑ Continental 2006 Annual Report, Item 12, pg. 48
16. ↑ Continental 2006 Annual Report, Item 3, pg. 5
17. ↑ http://www.reuters.com/article/topNews/idUSN1134552420080911?feedType=RSS&feedName=topNews
18. ↑ Continental 2006 10K, Item 1, pg. 6
19. ↑ Delta 2006 10 K, Item 1, pg. 1
20. ↑ The Washington Post, “Bush Frees up Military Airspace for Thanksgiving”, November 15, 2007
21. ↑ Continental 2006 Annual Report, Item 1, pg. 1
22. ↑ Continental 2006 Annual Report, Item 3, pg. 5
23. ↑ Continental 2006 10K, Item 1, Pg. 6
24. ↑ Continental 2006 10K, Item 1B, Pg. 19-22
25. ↑ Reutersretrieved July 7, 2008.
26. ↑ Continental 2006 10K, Item 6, pg. 29
27. ↑ AirTran 2006 10K, Item 6, pg. 22
28. ↑ Alaska Air Group 2006 10K, Item 6, pg. 27
29. ↑ American Airlines 2006 10K, Item 7, pg. 40
30. ↑ Delta 2006 10K, Item 6, pg. 19
31. ↑ Frontier 2006 10K, Item 6, pg. 30
32. ↑ JetBlue 2006 10K, Item 6, pg. 26
33. ↑ Northwest 2006 10K, Item 6, pg. 24
34. ↑ Southwest 2006 10K, Item 6, pg. 15
35. ↑ United 2006 10K, Item 6, pg. 32
36. ↑ US Airways 2006 10K, Item 7, pg. 44
37. ↑ ^{37.0 37.1 37.2} AMR 2007 10-K, Item 7, pg na
38. ↑ ^{38.0 38.1 38.2} AMR 2007 10-K, Item 8, pg na
39. ↑ ^{39.0 39.1 39.2 39.3} CAL 2007 10-K, Item 6, pg _
40. ↑ ^{40.0 40.1} CAL 2007 10-K, Item 7, pg _
41. ↑ ^{41.0 41.1 41.2} DAL 2007 10-K, Item 6, pg. 24
42. ↑ ^{42.0 42.1} DAL 2007 10-K, Item 8, pg. F-6
43. ↑ ^{43.0 43.1 43.2} JBLU,2007 10-k, Item 6, pg 26
44. ↑ ^{44.0 44.1} JBLU,2007 10-k, Item 8, pg 46
45. ↑ JBLU 2007 10-K, Item 8, pg. 46
46. ↑ ^{46.0 46.1 46.2} UAUA, 2007 10-K, Item-6, pg-30
47. ↑ ^{47.0 47.1 47.2} UAUA, 2007 10-K, Item-8, pg-74
48. ↑ U.S. Department of Transportation, Bureau of Transportation Statistics

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