Continental Airlines Context Team B4 Joseph Kattar, Bethany Byrd, Jocelyn Stewart.

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)

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)

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)

North America Airline Industry Overview 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)

North America Airline Industry Overview 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)

Airline Domestic Market Share February 2005 - January 2006 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%

Boeing · Current Market Outlook · 2005 · Demand for Air Travel Boeing · Current Market Outlook · 2005 · Demand for Air Travel .(resource 4)

Load Factor Industry Load Factor 80% BE Industry Load Factor 85% (resource #7) BE Industry Load Factor 85% (resource #8)

Government Regulations Aviation Security Act CRAF

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

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

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)

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)

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)

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)

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)

High Labor Cost (Resource 14)

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)

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

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

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)

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)

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)

References 1) British Airways web site, (2000, Jan) The Airline Industry, retrieved April 8, 2006 http://adg.stanford.edu/aa241/Intro/airlineindustry.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/dataAirlineEconomics/article.html?articleID=1496Data/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

References 6) Bouvard, Pierre and Diane Williams (2003, July) The Arbitron Airport Advertising Study, received April 8, 2006 http://www.arbitron.com/arbitron_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.senate.gov/hearings/testimony.cfm?id=1609&wit_id=3413 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 http:www.house.gov/transportation/aviation/02-15-06/02-15-06memo.html

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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