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Case study on United airlines

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  • 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 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,
  • Final show united airlines

    1. 1. 7907IBA Strategic case study presentation Paul Maier Linda Fraser Aaron Howell Ramesh Ramachandran
    2. 2. United Airlines Strategic AnalysisBackground2008 Financial positionExternal environment STEEP analysis Issues and implications – Top five Industry analysis – Porters Five Forces Model Competitor assessmentInternal environment Capabilities Strengths and Weaknesses Financial trends and ratiosStrategy formulation Current strategy Future strategic optionsConclusionReferences
    3. 3. 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
    4. 4. 2008 financial positionA case study of United airlines ending Dec 31 2008(In millions except rates)Operating revenues $20,194Total assets $19,461Net income (loss) $ (5,348)Revenue passenger miles 110,061Revenue passengers 63Yield 13.89₵Passenger load factor 81.00% source : United States Securities and Exchange Commission 10-k report for United Airlines.
    5. 5. External environment
    6. 6. Social/Demographic Cuts in corporate spending Increased governancePolitical/Legal Technological1978 deregulation Video conferencingPersian Gulf war STEEP Email2001 Terrorist attackLimited foreign ownership Environmental Economic Increase oil prices Recession Low cost carriers High leverage
    7. 7. General environment analysis, United’s General environment analysis, United’s issues and implications issues and implications Issue Implication ImportanceChanging demographic of Business vs. Leisure HightravellersInternet technology Less air travel High FinancialVolatile fuel prices High vulnerabilityGlobal recession Less spend for air Medium travelIncreased competition (LCC) Decreased Medium prices/increased buyer power
    8. 8. Porters Five Forces ModelThreat of new entrants (Low) Threat of substitutes (Low)High entry costs Video callingLimited slots EmailHighly regulated industry Internet communicationEconomies of scale Intensity of rivalry (High) Limited customer loyalty High fixed costs Limited differentiation High exit barriersSupplier power (Med) Buyer power (High)Limited manufacturers Highly competitive industry Zero switching costs
    9. 9. Competitor assessment • Delta Airlines • Continental Airlines Immediate • US Airways Alternative airlinecompetitors • American Airlines carriers • Southwest Airlines Impending • One World Alliance Growing airlinecompetitors • SkyTeam Alliance alliances Invisible • Bus services Alternative modes • Trains of transport andcompetitors • Technology communication
    10. 10. Internal environment
    11. 11. Basic value chain Support activities Firm infrastructure Human resource management Technological development Procurement Marketing and sales Outbound logistics Inbound logisticsPrimary activities Operations Service
    12. 12. Support value chain activities Firm Infrastructure • Employee stock ownership Procurement • Maintenance and spare parts Human resources • Employee satisfaction Technological • N/A Development
    13. 13. Primary value chain activities Operations • Hub and spoke • Brand position Marketing • Premier services Service • Customer service Outbound logistics • N/A Inbound logistics • N/A
    14. 14. Customer perceptionsAdapted from
    15. 15. Strategic alliances High Strong employee Strengths operational networkproductivity 4th largest carrier in U.S.A.
    16. 16. Weak financial performance WeaknessesStrong 3rd partyunions provider reliance
    17. 17. Financial trends and ratios Profitability Liquidity & Leverage Shareholders return
    18. 18. Stock Price 2006-200860504030 High Low20100 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 06 06 06 06 07 07 07 07 08 08 08 08
    19. 19. Revenue vs. Key metrics Expenditure Operating Revenue (millions) Operating Expenses (millions30,000 160 140 F 0625,000 F 07 12020,000 F 08 10015,000 80 6010,000 40 5,000 20 0 0 FY 2006 FY 2007 FY 2008 Revenue Available Load Factor Revenue Passenger Seat Miles (%) Passengers Miles (billion) (million) (billion)
    20. 20. Profitability Liquidity250 0.9 0.8200 0.7150 F 06 0.6 F 07100 F 08 0.5 50 0.4 0 0.3 0.2-50 Profit Return Return 0.1 Margin on on (%) Assets Equity 0 (%) (%) Current Ratio Quick Ratio
    21. 21. Leverage Shareholders return12 1510 108 56 F 06 F 074 F 08 0 Debt to Assets Debt to Equity2 -50 Price Earnings Dividend Yield-2 Ratio -10
    22. 22. Comparative expenses Jet Fuel Staff Expenses Maintenance Regional Affiliates Purchased Services Other100%90%80%70%60%50%40%30%20%10% 0% United Airlines Southwest Airlines American Airlines Delta Airlines
    23. 23. Strategic options
    24. 24. Current strategy Mission Values To be recognised Focus on 5 worldwide as the airline of choice Integrated cost leadership/differentiation Priorities PaymentsPerformance
    25. 25. Strategic options Decision Issue Option Pros Cons Criteria Customer Stock Other EconomyReduce financial loyalty, price, airline of scale leverage Brand Labour merger identity relations Capacity Large Decrease Harmonise Reduce issues, capitaloperational costs fleet costs Cost outlay Cut DecreasedOptimise capacity Public Increased premium business and utilisation perception turnover tiers service
    26. 26. Conclusion and recommendations Establish merger with Harmonise current fleetcomplementary 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
    27. 27. ReferencesAmerican Airlines 10K 2007 Retrieved 07 April 2007 Airlines 10K 2008 Retrieved 07 April 2008 Ayres (2009) Revenge is best served cold – on YouTube. Retrieved from Airlines 10K 2007 Retrieved 07 April 2007 Airlines 10K 2008 Retrieved 07 April 2008 of United Airlines Retrieved 15 April 2012 M.A., Ireland R.D., and Hoskinson R.E. 2011 Strategic Management: Competitiveness & Globalization: Concepts and Cases.9th Edition South-Western Cengage LearningPest Analysis Retrieved 15 April 2012 Five Forces Retrieved 15 April 2012 Airlines 10K 2007 Retrieved 07 April 2007 Airlines 10K 2008 Retrieved 07 April 2008 Airlines Corporate Responsibility Report 2009 - 2010– Every Action Counts: Making lasting Connections Retrieved Sept 24 2010 Airlines 10K 2007 Retrieved 07 April 2012 Airlines 10K 2008 Retrieved 07 April 2012