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United Airlines SWOT
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Table of Contents I. Introduction 1 Background 2 Financial Information 6 II. Industry Analysis 6 Rivalry among Competing Sellers 7 The Potential Entry of New Competitors 8 Competitive Pressures - Substitute Products 8 Competitive Pressures - Supplier Bargaining Power 10 Competitive Pressures - Buyer Bargaining Power 10 III. Company/SWOT Analysis 11 Strengths 11 Weaknesses 14 Opportunities 16 Threats 16 IV. Strategic Analysis 17 V. Recommendations 21 Tuesday, September 11, 2001 was the day that terrorists attacked the United States by turning American icons such as jet airliners and skyscrapers into weapons of mass destruction. The attack on the U.S. was a well thought out plan that intended to kill thousands of innocent people and to damage U.S. businesses and industries. In the immediate days after September 11th, the U.S. government ordered all commercial airlines to be grounded as safety precautions against follow up terrorist attacks, which severely crippled the already struggling airline industry. Two of the four planes that crashed on September 11th were United Airlines flights scheduled to make cross-country trips. The combination of losing two planes in the terrorist attacks and the cancelled flights during the four days after the attacks resulted in the loss of many millions of dollars for United. Airline companies have huge operating expenses due to the nature of the business, which include maintaining the airplanes and purchasing the fuel. When the planes are not in the air, they are just sitting at the airport gates burning through cash. The only time the airline companies are making money is when the planes are in the air. Many airline companies have extremely high cost structures due to the large overhead requirements of the industry, which means that the four days of grounded planes put the large airliners in serious financial trouble. United Airlines is the world’s largest air carrier, operating one of the largest fleets in the world. The terrorist attacks that brought down two of its planes and the following four days of suspended air travel cost United around $2 billion dollars. United is faced with a variety of problems right now, but the most important task is getting people back on the airplanes. It has to rebuild its reputation based on safety to reassure travelers that it is okay to fly again. Other important tasks that must be accomplished are the restructuring of order contracts to match the softening demand for air travel, the integration of the work force to quell any labor disputes that might damage the company’s well being, and the improvement of safety measures to restore passenger confidence. Background United Airlines is the world’s largest air carrier and the second largest in the U.S. United is owned and controlled by its parent company UAL Corporation. The employees own Fifty-five percent of UAL, making it the world’s largest employee owned company (MarketWatch.com). The fact that its employees own UAL makes labor disputes with the executives difficult. This will be discussed in more detail later in the case. United has hubs in San Francisco, Chicago, Denver, Los Angeles, and Washington D.C. and also has key international gateways in Tokyo, London, Frankfurt, Miami, and Toronto. United flies to 133 destinations in twenty-eight countries with around 2,300 flights per day (MarketWatch.com). UAL’s official headquarters is in Chicago and it trades on the New York Stock Exchange using the ticker symbol UAL. Prior to the terrorist attacks, the airline industry was already facing a slow down due to the weakening economy. For the fourth quarter ending in December 2000, UAL posted a $124 million loss equating to a per share loss of $2.41. For the full year of 2000, net earnings were $50 million, which comes out to a gain of $0.04 per share. Below is a chart comparing these historical numbers to the recent financial numbers to better illustrate the downward trend prior to the attacks. (in millions except EPS) 2000 1999 1998 Operating Revenues 19,352 18,027 17,561 Operating Expenses 18,698 16,636 16,083 Earnings From Operations 654 1,391 1,478 Net Earnings 50 1,235 821 Net Earnings per share 0.04 9.94 6.83 (2000 Annual Report) Looking at the above chart, it is obvious that the earnings from operations have declined significantly from 1999 to 2000 and net earnings have decreased from $1.2 billion to $50 million. This huge decrease in earnings is due to the higher cost of fuel and labor and also the decrease in higher yielding business travel. The softening U.S. economy has forced companies to purchase more economical tickets for its traveling employees rather than allowing their employees to travel first class. Companies are putting restrictions on its traveling employees by no longer allowing first class travel at the company’s expense. The reduction in the high yield business traveler is having a negative effect on United because, although business travel only accounts for 9% of traffic, it accounts for about 46% of United’s revenues (Carey, 10/29/01). The entire airline industry was turned on its head September 11th. Millions of dollars were lost due to the loss of planes in the attacks, four days of no flights, and a decrease in passengers due to fear. United has been forced to take reactionary steps such as re-negotiating order contracts with Airbus and Boeing to reduce the amount of expected planes. United had to lay off 20,000 employees, which is twenty percent of its work force, and replace both the CEO and CFO. The third quarter results have been released for United and are totally reflective of the tight situation the airline companies are facing. United posted a net loss of $542 million dollars in the third quarter and losses are expected to be around $2.5 billion for the year 2001. Fourth quarter results have not been released yet, but analysts are expecting losses to be much higher in the fourth quarter. The reduction in capacity has slashed the revenues generated by United for the third and the fourth quarter. The company is burning through approximately $13 million every day trying to balance the high overhead costs with smaller revenues (Peltz, 12/05/01). United was supposed to enter into a joint venture with American and Delta to provide funding to Boeing and its new satellite based broadband program. Boeing’s new program called Connexion is a mobile satellite technology that will deliver broadband capabilities to passengers while in flight. After the September 11th attacks, cash strapped United pulled out of the venture to conserve money. Boeing is still going ahead with the new venture despite losing the funding from the airlines (Lunsford & Pasztor). When the markets opened up on Monday, September 17, UAL’s stock price took a nosedive. In the four or five days after the terrorist attacks, UAL’s market capitalization was cut in half. The stock price closed at $30.82 on September 10th and when the market opened again the following Monday, it closed at $17.50 (Press Release: United). United is considering every possible cost cutting method in order to gain control of its high cost structure. The new CEO, John Creighton, has indicated that he is willing to go as far as cross company pay cuts in order to turn the company around. Even the slightest inclination of pay cuts has infuriated the United mechanics because they were in the process of re-negotiating their contract when the terrorist attacks came. Last year all United pilots received huge raises, while the mechanics did not receive anything. At this point in time, a raise for all the mechanics is nearly out of the question and this has prompted the mechanics to threaten the company with a strike. The mechanics are in a heated battle with the executives; meanwhile the executives are trying to keep the company from going under. This labor dispute could not have come at a worse time for United. The regular employees believe that the executives are doing a bad job and are demanding that many be removed. The attacks have made it impossible for the company to appease the mechanics with a pay raise, creating extremely low morale among the employees and disunity between the executives and the other employees. The airline industry was already in a downward spiral when the September 11th attacks exacerbated the situation. People are afraid to fly, forcing United to significantly reduce air capacity and cancel orders with Boeing and Airbus. The attacks have also created a huge labor dispute within the company pitting the executives against the operations staff. Since the employees own UAL, they have more bargaining power than most other companies. United has to resolve this labor disunity before the demand picks up for air travel or competitors are going to steal market share. The events of September 11th have changed the entire country, with major impact on the airline industry. Security is becoming much tighter, which translates to higher costs. The high costs of the airline industry can only be defeated with higher revenues, which will only happen when people are no longer afraid to fly. Financial Information The following chart outlines the effects felt by United Airlines after the attacks of September 11th in relation to last year’s financial results. Financial Summary (in millions) Three Months Ended September 30 2001 2000 %Change Operating Revenues 4097 4916 (16.7) Operating expenses 4848 4934 (1.7) Special charges 1313 12 6161 4946 Loss from operations (2064) (30) Looking forward from the negative financial effects of the third quarter, the following table summarizes the company’s expectations for expense factors affecting fourth-quarter and full-year performance. Year-over-year Percent Increase (Decrease) Fourth Quarter 2001 Full Year 2001 Available seat miles (21%) (6%) Fuel price per gallon, avg (13%) 8% Operating Exp per available seat mile 6% 6% INDUSTRY ANALYSIS Since the action-forcing events of September 11th, the airline industry has suffered a string of direct and indirect repercussions. While United has felt the effects of low capital and reduced business caused by traveler apprehension, it has also felt its own set of unique consequences.
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