2. 7907IBA Strategic case study presentation
Paul Maier
Linda Fraser
Aaron Howell
Ramesh Ramachandran
3.
4. United Airlines Strategic Analysis
Background
2008 Financial position
External environment
STEEP analysis
Issues and implications – Top five
Industry analysis – Porters Five Forces Model
Competitor assessment
Internal environment
Capabilities
Strengths and Weaknesses
Financial trends and ratios
Strategy formulation
Current strategy
Future strategic options
Conclusion
References
5. United Airlines background
• 1926 One of the oldest carriers in USA
• 1978 Thrived under government protection
• 1993 Largest majority employee-owned corporation in
the world
• 1997 Founding member of Star Alliance
• 2002/2006 Chapter 11 bankruptcy
• 2008 Posted biggest ever loss
6. 2008 financial position
A case study of United airlines ending Dec 31 2008
(In millions except rates)
Operating revenues $20,194
Total assets $19,461
Net income (loss) $ (5,348)
Revenue passenger miles 110,061
Revenue passengers 63
Yield 13.89₵
Passenger load factor 81.00%
source : United States Securities and Exchange Commission 10-k report for United Airlines.
8. Social/Demographic
Cuts in corporate spending
Increased governance
Political/Legal Technological
1978 deregulation Video conferencing
Persian Gulf war STEEP Email
2001 Terrorist attack
Limited foreign ownership
Environmental Economic
Increase oil prices
Recession
Low cost carriers
High leverage
9. General environment analysis,
United’s General environment analysis,
United’s issues and implications
issues and implications
Issue Implication Importance
Changing demographic of Business vs. Leisure High
travellers
Internet technology Less air travel High
Financial
Volatile fuel prices High
vulnerability
Global recession Less spend for air Medium
travel
Increased competition (LCC) Decreased Medium
prices/increased
buyer power
10. Porters Five Forces Model
Threat of new entrants (Low) Threat of substitutes (Low)
High entry costs Video calling
Limited slots Email
Highly regulated industry Internet communication
Economies of scale
Intensity of rivalry (High)
Limited customer loyalty
High fixed costs
Limited differentiation
High exit barriers
Supplier power (Med) Buyer power (High)
Limited manufacturers Highly competitive industry
Zero switching costs
11. Competitor assessment
• Delta Airlines
• Continental Airlines
Immediate • US Airways Alternative airline
competitors • American Airlines carriers
• Southwest Airlines
Impending • One World Alliance Growing airline
competitors • SkyTeam Alliance alliances
Invisible • Bus services Alternative modes
• Trains of transport and
competitors • Technology communication
13. Basic value chain
Support activities
Firm infrastructure
Human resource management
Technological development
Procurement
Marketing and sales
Outbound logistics
Inbound logistics
Primary activities
Operations
Service
14. Support value chain activities
Firm Infrastructure • Employee stock ownership
Procurement • Maintenance and spare parts
Human resources • Employee satisfaction
Technological • N/A
Development
15. Primary value chain activities
Operations • Hub and spoke
• Brand position
Marketing
• Premier services
Service • Customer service
Outbound logistics • N/A
Inbound logistics • N/A
26. Current strategy
Mission Values
To be recognised Focus on 5
worldwide as the airline
of choice
Integrated cost leadership/differentiation
Priorities
Payments
Performance
27. Strategic options
Decision
Issue Option Pros Cons
Criteria
Customer Stock
Other Economy
Reduce financial loyalty, price,
airline of scale
leverage Brand Labour
merger
identity relations
Capacity Large
Decrease Harmonise Reduce
issues, capital
operational costs fleet costs
Cost outlay
Cut Decreased
Optimise capacity Public Increased
premium business
and utilisation perception turnover
tiers service
28. Conclusion and recommendations
Establish merger with
Harmonise current fleet
complementary airline
Increased revenue
Achieve further
generating operational
economies of scale
time
Increased revenue and
Reduce costs and
improved shareholder
leverage
returns
Future consideration should be given to sustainability
29. References
American Airlines 10K 2007 Retrieved 07 April 2007
http://www.sec.gov/Archives/edgar/data/4515/000000451508000016/aa022010k.htm
American Airlines 10K 2008 Retrieved 07 April 2008
http://www.secinfo.com/d4Dc.tv.c.htm
Chris Ayres (2009) Revenge is best served cold – on YouTube. Retrieved from
http://www.thetimes.co.uk/tto/law/columnists/article2051377.ece
Delta Airlines 10K 2007 Retrieved 07 April 2007
http://images.delta.com.edgesuite.net/delta/pdfs/annual_reports/2009_10K.pdf
Delta Airlines 10K 2008 Retrieved 07 April 2008
http://www.secinfo.com/d4Dc.t1.x.htm
History of United Airlines Retrieved 15 April 2012
http://en.wikipedia.org/wiki/History_of_United_Airlines
Hitt M.A., Ireland R.D., and Hoskinson R.E. 2011 Strategic Management: Competitiveness & Globalization: Concepts and Cases.
9th Edition South-Western Cengage Learning
Pest Analysis Retrieved 15 April 2012
http://www.en.wikipedia.org/wiki/STEEP_analysis
Porters Five Forces Retrieved 15 April 2012
http://en.wikipedia.org/wiki/Porter_five_forces_analysis
Southwest Airlines 10K 2007 Retrieved 07 April 2007
http://www.secinfo.com/dsvrp.t1hb.9.htm
Southwest Airlines 10K 2008 Retrieved 07 April 2008
http://www.southwest.investorroom.com/download/2008+Annual+Report.pdf
United Airlines Corporate Responsibility Report 2009 - 2010– Every Action Counts: Making lasting Connections Retrieved Sept 24 2010
http://www.eglobaltravelmedia.com.au/airline/united-airlines-releases-2009-2010-corporate-responsibility-report-%E2%80%93-every-action-
counts%C2%AE-making-lasting-connections.html
United Airlines 10K 2007 Retrieved 07 April 2012
http://ir.unitedcontinentalholdings.com/phoenix.zhtml?c=83680&p=IROL-
secToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDEwNDc0NjktMDgtMDAxOTUxL3RvYy9wYWdl&ListAll=1
United Airlines 10K 2008 Retrieved 07 April 2012 http://ir.unitedcontinentalholdings.com/phoenix.zhtml?c=83680&p=IROL-
secToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDExMDQ2NTktMDctMDE5OTE5L3RvYy9wYWdl&ListAll=1
Editor's Notes
In chapter 11, unless a separate trustee is appointed for cause, the debtor, as debtor in possession, acts as trustee of the businessA debtor in possession can acquire financing and loans on favourable terms by giving new lenders first priority on the business' earnings.The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.
Yield is a measure of average price paid per passenger mile, which is calculated by dividing passenger revenues by RPMsPassenger load factor is % of available seat miles sold.
What about industrial relations- pilots and other staff can only work for certain hours and need rest breaks
Changing demographics Less business travel due to corporate governance and electronic communicationInternet technology Less overall travel due to electronic communicationVolatile fuel prices Increasing and volatile fuel prices, 2008 59% fuel increase, $3.1 billion increase in overall costs (hedging/direct costs)Global recession Reduced spending overall due to global recessionIncrease competition More LCC, offering more choice, driving prices down, increasing consumer power
InfrastructureEmployee Stock Ownership Plan provides job security for the so called new ownersWorkers have little control over the critical decisions of the firm. HRCEO Salary remains high even though Company is underperforming2500 salaried staff laid off in 2008, considering another 1400 in 2009Affiliated Unions unhappy with CEO salary & lay offs70% of employees are dissatisfied working for United
Proclaim customer service, however customer perception difficult to control. 1 perceived bad decision can be costly.150,000 views within one day, half a million hits in 3 days, 5 million 1 month.MarketingGoal is to transport passengers from smaller airports to United HubsAcquiring points for the United Frequent Flyer program fro all 2000 daily flights.Travel Options by United was implemented in 2008 Introduction of ‘Premium Service’ Revenue streamsIncome remained comparable with financial year 2007Negative Cash flow Liquidity focuses on short term investment salesJet Fuel hedging produced a $100million Loss in FY 2008
Chris Ayres of the LondonThe Timesnewspaper reported that within 4 days of the video being posted online, United Airline's stock price fell 10%, costing stockholders about $180 million in value. However, other analystshave questioned whether this price drop can be directly linked to the video
1.-Operates more than 3,000 flights a day to more than 230 destinations on United and United Express.-United’s hubs are strategically located at Chicago, Washington, Denver, Los Angeles, and San Francisco airports. These hubs provide direct international flights to international destinations such as China, Kuwait City, Europe, Australia, Latin America, and the Caribbean. In addition, these hubs also provide services to domestic destinations for the international passengers. Hub-and-spoke method makes operations streamlined for airlines than do the point-to-point method. -Due to the hub-and-spoke method, United’s passenger load factor is 81.2%, which is much better than many point-to-point airlines.2.-Star Alliance provides United with access to destinations that it cannot have access to otherwise.-These agreements enables United to provide increased flight frequencies, less waiting time to customers, and new standards of convenience thereby earning it a competitive advantage over other airlines.4.United is currently the fourth largest carrier in the United States by passenger revenue.Strong operational network.- Operates more than 3,000 flights a day to more than 230 destinations- One of the two U.S. carriers authorized to serve U.S. – Narita routes from any U.S. points and to serve Asia from Narita.- United is a hub-and-spoke companyStrategic alliances.- World’s most comprehensive strategic alliance ( Star Alliance).- Independent agreements with other air carriers outside the Star Alliance.Relatively high employee productivity.- Stronger revenue per employee, as compared to its competitors.Fourth largest carrier in the U.S. Now largest carrier in the world after the merging.Give United the power and resource to deal with the buyers and supplier threats.
Weakening financial performance.- United incurred net loss of $5.3 billion in 2008 as compared to a minute net profit of $403 million in 2007.- Long-term stock performance has been lower than the industry’s average.- Stained United’s overall credit rating.- Burden with loans that most of its revenue is used for interest payments.- Inefficient cost management controls in place.- Difficult for the company to secure future loans for aircraft and other purchases.Heavy dependence on third party providers. United’s dependence on outside vendors may reduce the company’s revenues and increase its expenses.Customer call service centers, aircraft repair and maintenance and aircraft fueling operations.Strong unions.- Most of the United employees are members of professional unions.Main job of these unions is to facilitate pay increases and job security.United can lose millions of dollars a day, if one or more unions decide to go on a strike.Pilots are members of ALPA, flight attendants are members of AFA, mechanics are member of IBT, dispatchers are members of PAFCA, engineers are members of IFPTE, and even public contract employees are the members of IAM.
Stock high price in FY 2007 of $51.60 in Q4 and low of $31.62 in Q2Stock high price in FY 2008 of $41.47 in Q1 and low of $2.80 in Q3
Operating revenue increased by 12.95% from FY 2006 through to FY 2008 however operating expenses increased by 28.9% from FY 07 to FY 08 which led to United’s largest ever loss of $5.348 billion dollars.
Largest expense across all airlines are fuel, followed by salaries.
Focus on 5 (Hemisphere magazine.com 1/12/2009)On time performanceCleanlinessServiceCostRevenue
Continue with cost/differentiationstrat. but tweak it slightlyMergeEconomy of scale – routes and milesReduce costs/leverage - revenues and milesReduce cost/leverage – revenues and equitySustainability, recycle, carbon emissions,