United Continental Holdings - Report Example

Contents A.INTRODUCTION 4 B.MISSION MENT 4 C. VISION MENT 5 D. EXTERNAL ASSESSMENT 6 EXTERNAL AUDIT/ASSESSMENT 6 Economic factors 6 Social, cultural, demographic, and environmental factors 6 Political, governmental, and legal factors 6 Technological factors 7 Competitive factors 7 2. EXTERNAL FACTOR EVALUATION MATRIX 7 3. COMPETITIVE PROFILE MATRIX 8 E. INTERNAL ASSESSMENT AUDIT 9 1. FINANCIAL RATIO ANALYSIS 9 2. Key Internal Forces 15 3. Internal Factor Evaluation Matrix 16 References 18 A. INTRODUCTION In the present report, the key objective is to analyze the case of United Continental Holdings. United Continental Holdings is a holding company, which includes entirely owned ancillaries of Continental Airlines and the United Air Lines. The operations and service portfolio of the corporation consists of transporting passengers and cargo to a variety of locations throughout the world. As of the recent times, the firm offers air services to various areas across the globe like Asia- Pacific, US, Middle East, Europe, Latin America as well as Africa. The enormous area of the air transportation of the firm automatically creates the path network of the airline firm as the most wide-ranging all over the globe. The firm is endorsed to run above 5500 flights on a daily basis in almost 375 sites in the United States as well as in other global regions. The company is in fact created as an outcome of joint venture between Continental Airlines and United Airlines. The report aims to carry out a highly structured and well planned strategic framework which will facilitate the flourishing conclusion of the integration procedure of the two airlines as well as will assist in challenging against the partnership efforts of Air Tran and Southwest Airlines (The Conference Board, 2013). B. MISSION STATEMENT The present mission statement as presented in the case study of the company focuses on the collective short term goals of the merged corporation. The mission statement discusses about creating the most widespread global network, which include world class international gateways along with nonstop or one stop service from any location within in the United States. It also discusses about developing the most modern and fuel efficient fleet along with best new aircraft order book among all network carriers of the US. The mission statement also aims to develop the leading frequent flyer program within the airline industry along with the development of hubs in highly optimal locations in 10 cities, including the development of hubs in the four largest cities in the US. Since the existing mission statement is very broad in nature, a new mission statement can be proposed. The new mission statement can be as follows: To offer a high class consumer service to the passengers around the globe and thus forming the most desired recurrent flyer program. Constructing an energy efficient fleet which has the capability to offer one stop or nonstop service from any US based site to a range of worldwide gateways by working in the broadest airline arrangement. C. VISION STATEMENT The vision statement of the company highlights the long term goals of the company. The existing vision of the company is to become the leading player in the global aviation sector. In analyzing the existing vision statement, it can be said that it is a little over ambitious in nature as the many entire aviation sector is very expansive in nature and already comprises of multiple strong players. A more effective and meaningful vision statement is proposed hereby. The vision is to become a leading airline in the global aviation sector with focus on providing smooth connectivity and high customer satisfaction to masses all over the world. D. EXTERNAL ASSESSMENT 1. EXTERNAL AUDIT/ASSESSMENT Economic factors 1. For UAL, fuel is the largest cost for the year ending December 31, 2010 which is 30% of the operating expenses. 2. The load factor is Revenue Passenger Miles divided by Available Seat Miles and it measures the percentage of available capacity that is taken by revenue paying passengers. Once the load factor exceeds the break-even point the airline becomes profitable. Social, cultural, demographic, and environmental factors 1. The rules initiated by the transportation security administration that compelled the passengers to provide their full names written on their official identity proof and pat-downs including the chest and groin areas are required for those passengers who refuse to go for a full-body X-ray scan. These rules can make the passengers avoid the airlines and opt for some other mode of communication. 2. The fuel consumption by the airlines significantly affects the crude oil reserves and also the emissions affect the natural environment of the region and the world at large to a great extent (U.S. Travel Association, 2013). Political, governmental, and legal factors 1. The EU “Regulation on Air Passenger Rights”, passed in 2004, applies to both EU and other carriers flying out of EU airports. The law levies fines of up to $870 per ticketed passenger who is denied of boarding. Airlines may also be fined for long delays or cancellations. 2. The Department of Transportation announced a four-hour limit on tarmac delays for international flights and a fine of $27000 for violators. Technological factors 1. The Department of Transportation announced that the airlines must clearly disclose all fees as well as government taxes on their website. 2. E-tickets reduce the cost of printing paper tickets since passengers print boarding passes at home or get them at an airport kiosk (Tassey, 2012). Competitive factors 1. Low cost carriers prove to be a formidable threat which can ultimately lead to bankruptcy as we can see in the case of Delta. 2. The quality of the airline service is a significant aspect of competition specifically for the business travelers (United States Department of Commerce, 2009). 2. EXTERNAL FACTOR EVALUATION MATRIX External Factor Evaluation Matrix Key External Factors Weight Rating Weighted Score Domestic and International Regulation 0.25 4 1.00 Airline Industry and Competition 0.20 1 0.20 E tickets 0.25 4 1.00 Fuel and Labor Costs 0.30 1 0.30 Total Weighted Score 1.00   2.50 Rating   1 Major Threat 2 Minor Threat 3 Minor Opportunity 4 Major Opportunity The rating for the following points - 1 = the response is poor 2 = the response is average 3 = the response is above average 4 = the response is superior Thus as the weighted score is around 2.50, it means the firm is responding to the threats and opportunities in an average manner. 3. COMPETITIVE PROFILE MATRIX Competitive Profile Matrix Key Success Factors Weight Rating Weighted Score Mission and Vision 0.05 3 0.15 Fleet 0.25 4 1.00 Cooperative Arrangements 0.20 4 0.80 E tickets 0.25 3 0.75 Service Quality 0.30 2 0.60 Total Weighted Score 1.05   3.15 The CPM matrix, in this case has a score of 3.15 which reveals that the company has a high number of positive success factors. Thus, the preparation of CPM not only helps to determine the strength and weakness of an organization in comparison to its competitors, but also helps to evaluate information which will help in decision-making (Gartner, 2013). E. INTERNAL ASSESSMENT AUDIT 1. FINANCIAL RATIO ANALYSIS A tabular format to show the three-to-five year’s internal historical trend analysis Ratio Analysis of United Continental Holdings for the five-year period 2012 2011 2010 2009 2008       A. Profitability Ratios           i. Gross Profit Margin= Gross Income/Sales 0.52 0.54 0.59 0.60 0.04 ii. ROA= Net Income/Total Assets (0.02) 0.02 0.01 (0.03) (0.27) iii. Operating Profit Margin= Operating Income/Sales 0.001 0.05 0.04 (0.01) (0.22) iv. Net Profit Margin= Net Income/Sales (0.02) 0.02 0.01 (0.04) (0.26) B. Solvency Ratios           i. Total Debt to Assets Ratio= Total Debt/ Total Assets 0.35 0.34 0.38 0.46 0.52 ii. Debt-Equity ratio= Total Debt/ Total Shareholders equity 27.37 7.05 8.76 (3.04) (4.09) C. Liquidity Ratios           i. Quick ratio= Current assets - Inventory/ Current Liabilities-Bank overdraft 0.73 0.91 0.92 0.72 0.64 ii. Current Ratio= Current Assets/Current Liabilities 0.78 0.97 0.95 0.79 0.67 D. Turnover Ratios           i. Return on capital employed= Net Income/ Capital Employed, where, Capital Employed=Debt Liabilities + Shareholders Equity (0.05) 0.06 0.02 (0.11) (0.70) ii. Return on net worth/Return on Equity= Net Profit (after interest and tax)/ Shareholders fund (1.50) 0.47 0.15 0.23 2.17             Comparison of organization’s ratios to the industry average for the recent year On comparing the ratios of the organization with that of the industry averages for the year 2012, it can be said that the company was unable to meet the industry average standards due to the loss faced by the company from its operations during the year 2012. As compared to the industry averages the organization has earned a much lower amount of profits and return in 2012. The organization also failed to maintain the standards of solvency and liquidity, so as to compete in the market. Thus, from the point of view of industry averages it can be said that the performance of the company has not satisfied the industry standard. Comparison of organization’s ratios to its competitors for three to five year period On comparing the ratios of United Continental Holdings with two of its competitors US Airways Group Inc and AMR Corporation over three to five years, it can be said that the organization’s performance was better than AMR Corporation but poorer than US Airways Group Inc. The performance of the company US Airways Group Inc is noticed to improve during the 5-year period, whereas the performance of the company AMR Corporation has declined during the last five years (S&P Capital IQ, n.d.). In comparison to these companies, if to analyze the performance of the organization United Continental Holdings, it can be said that the performance of the organization improved in the year 2010, which it tried to continue in 2011, but failed to maintain in 2012 and suffered a loss. Thus the trend followed by the competitors, has not been maintained by the organization. Financial Ratio Analysis of US Airways Group Inc 2009 2010 2011 2012 A. Profitability Ratios         i. Gross Profit Margin= Gross Income/Sales 0.19 0.22 0.18 0.20 ii. ROA= Net Income/Total Assets (0.03) 0.06 0.01 0.07 iii. Operating Profit Margin= Operating Income/Sales (0.02) 0.07 0.03 0.06 iv. Net Profit Margin= Net Income/Sales (0.02) 0.04 0.01 0.05 B. Solvency Ratios         i. Total Debt to Assets Ratio= Total Debt/ Total Assets 0.54 0.51 0.50 0.47 ii. Debt-Equity ratio= Total Debt/ Total Shareholders equity (11.34) 47.65 27.53 5.54 C. Liquidity Ratios         i. Quick ratio= Current assets - Inventory/ Current Liabilities-Bank overdraft 0.75 0.94 0.89 0.99 ii. Current Ratio= Current Assets/Current Liabilities 0.84 1.02 0.96 1.08 D. Turnover Ratios         i. Return on capital employed= Net Income/ Capital Employed, where, Capital Employed=Debt Liabilities + Shareholders Equity (0.06) 0.12 0.02 0.12 ii. Return on net worth/Return on Equity= Net Profit (after interest and tax)/ Shareholders fund 0.58 5.98 0.47 0.81 Financial Ratio Analysis of AMR Corporation 2009 2010 2011 2012 A. Profitability Ratios         i. Gross Profit Margin= Gross Income/Sales 0.20 0.23 0.20 0.22 ii. ROA= Net Income/Total Assets (0.06) (0.02) (0.08) (0.08) iii. Operating Profit Margin= Operating Income/Sales (0.04) 0.01 (0.01) 0.02 iv. Net Profit Margin= Net Income/Sales (0.07) (0.02) (0.08) (0.08) B. Solvency Ratios         i. Total Debt to Assets Ratio= Total Debt/ Total Assets 0.39 0.35 0.39 0.34 ii. Debt-Equity ratio= Total Debt/ Total Shareholders equity (2.86) (2.22) (1.29) (0.99) C. Liquidity Ratios         i. Quick ratio= Current assets - Inventory/ Current Liabilities-Bank overdraft 0.79 0.71 0.67 0.67 ii. Current Ratio= Current Assets/Current Liabilities 0.86 0.78 0.74 0.73 D. Turnover Ratios         i. Return on capital employed= Net Income/ Capital Employed, where, Capital Employed=Debt Liabilities + Shareholders Equity (0.23) (0.10) (0.95) 34.74 ii. Return on net worth/Return on Equity= Net Profit (after interest and tax)/ Shareholders fund 0.42 0.12 0.28 0.23 Conclusion and implication of the financial ratio analysis Financial Ratio Analysis throws light on the financial health of a business. Analysis of Financial Ratios of an organizations helps to examine its different business aspects, such as debt, inventory and sales, profit, returns, etc. For example, liquidity analysis of an organization with the help of liquidity ratios will help to determine how efficiently the business is able to meet its short-term financial obligations (Keynote, n.d.). Thus, analysis of financial ratios of an organization not only depicts the picture of the various aspects involved in different activities undertaken by the organization, but also determines the position of business, performance and prospects (Mintel, 2013). The analysis of financial ratios of the organization United Continental Holdings depicts the different aspects and the position of the organization with reference to the various activities performed by it during the year. The ratios throw light on the present status of the organization and its historical trend over the past five years which have been derived from its activities. The analysis of the ratios shows the profitability, solvency, and liquidity position and trend carried over the years, and also helps to determine the returns gained by the organizations from its operations and different activities undertaken during the period of time. Thus the analysis summarizing all the activities gives an overall view which will help in formulation and implementation of strategic decisions accordingly by the management (Global edge, 2013). 2. Key Internal Forces Strengths of the firm Contracts with regional airlines New aircraft Ethical business Optimal hub locations Star Alliance membership Increased Market share Revenue from other sources Weakness Outsourcing Hedging Hidden charges Presence of only male Board of Directors 3. Internal Factor Evaluation Matrix The internal factor evaluation (IFE) matrix is a tool for strategy formulation which helps in summarizing the firm’s internal strengths and weakness with regards to the functional area. The entire process of designing the IFE matrix has a high resemblance to the external factor evaluation (EFE) matrix. The average score for IFE matrix is 2.5 and a score higher than that reveals that the company has more opportunities than threats. Rating   1 Major Weakness 2 Minor Weakness 3 Minor Strength 4 Major Strength Internal Factor Evaluation Matrix Key Internal Factors Weight Rating Weighted Score Mission and Vision 0.20 4 0.80 Code of Ethics 0.05 3 0.15 Board of Directors 0.20 4 0.80 Scope of Operations 0.05 4 0.20 Fleet 0.15 4 0.60 Cooperative Arrangements 0.05 4 0.20 Operating Performance 0.05 2 0.10 Financial Performance 0.05 1 0.05 Service Quality 0.20 2 0.40 Total Weighted Score 1.00   3.30 The IFE matrix, in this case has a score of 3.30 which reveals that the company has more strengths as compared to weakness. References Global edge (2013) Get Insights by Industry. Retrieved from http://globaledge.msu.edu/global-insights/by/industry S&P Capital IQ. (n.d.) Industry Surveys. Retrieved from http://www.standardandpoors.com/products-services/industry_surveys/en/us Mintel (2013) Airlines - US - August 2012. Retrieved from http://store.mintel.com/airlines-us-august-2012 Keynote (n.d.) Business Ratio Reports. Retrieved from http://www.keynote.co.uk/business-intelligence/ratio-reports Gartner (2013) Top 10 Strategic Technologies of 2013. Retrieved from http://www.gartner.com/technology/home.jsp U.S. Travel Association. (2013)Travel Industry Forecasts. Retrieved from http://www.ustravel.org/research/travel-industry-forecasts Tassey, G. (2012) Beyond the Business Cycle: The Need for a Technology-Based Growth Strategy. Retrieved from http://www.nist.gov/director/planning/upload/beyond-business-cycle.pdf The Conference Board (2013) The Conference Board Employment Trends Index™ (ETI). Retrieved http://www.conference-board.org/data/eti.cfm United States Department of Commerce. (2009) Domestic Airline Markets. Retreived from http://www.census.gov/compendia/statab/cats/transportation/airline_operations_and_traffic.html Read More