UNITED AIRLINES: FREQUENT FLYER PROGRAM1 Wong-Yong Oh wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2016, Richard Ivey School of Business Foundation Version: 2016-03-14 In June 2014, United Airlines, Inc. (United) announced that as of March 1, 2015, it would move from awarding miles based on distance flown to awarding miles for dollars spent for tickets, following in the footsteps of Delta Air Lines, which had recently made similar changes to its SkyMiles program. United's MileagePlus program president, Thomas O'Toole, said, \"These changes are designed to more directly recognize the value of our members when they fly United.\"2 In March 2015, many customers complained about United's new mileage policy and saw this change as a significant devaluation of award miles. According to the new mileage accrual plan, most United MileagePlus members would earn fewer miles unless they were flying on expensive short-haul flights or premium-class tickets (e.g., on business-class, first-class or full-fare economy-class tickets). Duane Myers, a Premier Gold member who flew more than 50,000 miles in 2014, said, \"This is very disappointing. United already increased the redemption miles requirement recently. Based on my understanding of the new rule, flight miles earning has been devalued by about 50 per cent. Why do I need to pay more to get the same miles I used to get?\" INDUSTRY OVERVIEW The U.S. airline industry was highly competitive and provided vital services. Domestically, United was competing with other major U.S. network carriers such as Delta Air Lines and American Airlines. At the same time, it was competing with low-cost carriers such as Southwest Airlines, JetBlue Airways, and Virgin America. Internationally, it was also competing against many other international airline companies such as Lufthansa, Air France-KLM, Japan Airlines, and Korean Air Lines. 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of United Continental Holdings, Inc. or any of its employees. 2 A. Bender, \"United Airlines Changes Its MileagePlus Frequent Flier Program, and Basically You're Hosed,\" Forbes, June 10, 2014, accessed April 20, 2015, www.forbes.com/sites/andrewbender/2014/06/10/united-airlines-changes-its-mileageplusfrequent-flier-program-and-basically-youre-hosed/#. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. 9B16M037 Page 2 9B16M037 In 1978, the Airline Deregulation Act completely changed the structure of the industry. During the regulated period, airline companies could pass on any increased costs to consumers, using a fixed rate of return-based pricing. Deregulation removed almost all government control regarding entry into the industry, flight routes, and ticket prices. Due to the lowered entry barriers, there was a rush of new entrants into the industry. The number of carriers in the United States increased from 34 in 1978, to 106 in 1985 (see Exhibit 1). As a result, rates became highly competitive, the industry became less concentrated, and price wars became a common form of competition. The high costs of aircraft and fuel were other challenges with which airlines needed to contend. Further, in order to run complex operations, airline companies had to maintain large labour forces, although they also had the ability to outsource some of their operations. In addition, due to excess capacity,3 no carriers had significant pricing power in the marketplace. Every one of the major network carriers, including United, had previously filed for Chapter 11 bankruptcy protection (see Exhibit 2), and many of them had undergone mergers with other companies (see Exhibit 3). Delta Air Lines acquired Northwest Airlines in 2008, United merged with Continental Airlines in 2010, Southwest Airlines purchased AirTran Airways in 2011, and American Airlines and US Airways merged in 2013. As a result, these four airlines had come to control nearly 85 per cent of the domestic market.4 Airline Alliance As a mature Alliance with a comprehensive network and good, close relationships between our member airlines, we are excellently placed to offer continuous enhancements in various ways that together improve the Alliance travel experience. -Mark Schwab, Star Alliance chief executive officer5 A distinctive element in the airline industry was that most of the largest passenger airlines worldwide were members of one of three major alliances, often called global airline alliances Star Alliance, Oneworld, and SkyTeam (see Exhibit 4).6 Each alliance was composed of a number of airline companies that covered different geographical areas through larger networks. In 1997, the Star Alliance was founded, and competing airlines responded by forming Oneworld in 1999 and SkyTeam in 2000. Alliances provided a network of connectivity, marketing branding, and convenience for international passengers and international packages. Airline alliances could extend their networks by code-sharing agreements,7 pricing cooperation, and coordination of schedules. Thus, customers could have improved 3 O. Wojahn, \"Explaining Over-Capacity in the Airline Industry,\" International Air Transport Association (IATA), January 2012. N. Dihora, \"United Continental Holdings Inc,\" Morningstar Equity Research, October 23, 2014. 5 The Business Travel News, \"New LOT,\" accessed February 25, 2016, www.btnews.co.uk/article/9020, June 29, 2015. 6 Alliances were also formed between cargo airlines, such as that between WOW Alliance and SkyTeam Cargo. 7 Two or more alliance companies shared the same flight. Tickets could be purchased from any participating airlines, but the flight was actually operated by only one of these code-sharing airlines, often called an operating carrier or administrating carrier. 4 Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. The number of carriers had increased dramatically, and passenger revenue, airline traffic, and passengercarrying capacity had also increased. Relatively stable industry concentration ratios except in the early 1980s, when deregulation allowed easy entry into the industry indicated that the largest airlines dominated the industry, whereas small airlines occupied only the niche markets (see Exhibit 1). Page 3 9B16M037 Customers earned award miles from flying on other alliance carriers and redeemed their miles by using award tickets from a single account. For example, United customers could earn miles by flying with other Star Alliance network carriers, such as Lufthansa and Air Canada. They could also redeem miles by getting free award tickets from these alliance partner carriers. Frequent Flyer Program8 In addition to large network alliances, the airline industry had another unique characteristic namely, its frequent flyer programs (FFPs). An FFP was \"a loyalty program offered by many airlines to customers allowing them to accumulate (or \"earn\") points for flights taken or services bought from the airlines' commercial partners.\"9 On May 1, 1981, following the industry deregulation in the United States, American Airlines launched the first FFP. The initial idea of the FFP was quite simple: rewarding high-frequency customers by giving them free tickets if they reached a certain threshold. FFPs could give customers incentives to use any single carrier repeatedly, thus increasing switching costs. American Airlines initiated the next step of FFP development by introducing \"gold\" tiers into its program. Since then, other airlines had followed this model and offered special membership tiers (commonly referred to as elite programs, e.g., Silver, Gold, Platinum and 1K members for United) to recognize high-frequency customers. In addition, American Airlines initiated a joint marketing program with Hertz and Holland America Cruise. Airline companies realized that the miles could be used to generate external revenue by selling miles to their partners, such as hotels, and rental car and cruise companies. In order to determine the value of a mile, airlines used the equivalent commercial value of a reward ticket as a base. In 1987, American Airlines and Citibank introduced the industry's first co-branded credit card, which was the most significant development in the history of FFPs. Frequent flyer co-branded credit cards delivered significant ancillary revenue for airline companies. By the early 1990s, most North American and European airlines had launched very similar types of FFPs, not only rewarding frequent flyers but also approaching less frequent flyers with alternative ways to earn miles. Up until the early 1990s, airlines perceived FFPs as cost centres, especially given that customers' accrued miles were the liability of the companies. As FFPs matured, airlines realized the limitations of the early FFP models. As the number of alliance partners and program-participating customers increased, airlines had the problem of a limited inventory of award seats, which were originally intended to fill empty seats. Therefore, airlines increasingly put restrictions on reward tickets, used so-called \"black-out\" periods, and introduced mileage expiration policies. Customers felt that the reward seats were too limited, especially at the lowest reward level (e.g., 25,000 miles for a U.S. domestic flight). The imbalance between accumulated miles and the availability of award seats created new challenges for FFPs. For example, at the end of 2007, Delta Air Lines' SkyMiles members had 510 billion unused miles 8 E. de Boer and S. Gudmundsson, \"30 Years of Frequent Flyer Programs,\" Journal of Air Transport Management 24 (2012): 18-24. 9 Ernst and Young, \"Frequent Flyer Program: Ready for Take-Off,\" Ernst and Young, 2014, accessed April 15, 2015, www.ey.com/Publication/vwLUAssets/etude-ey-sur-les-programmes-de-fidelite-des-compagnies-aeriennes/$FILE/etude-eysur-les-programmes-de-fidelite-des-compagnies-aeriennes.pdf. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. flexibility in terms of destinations and schedules. Also, these alliances reduced costs through the sharing of sales offices, maintenance facilities, airport lounges, and operating staff. Page 4 9B16M037 In order to address this imbalance, airlines began to make tactical changes to their programs. Many airlines adjusted the required miles for an award ticket, increasing capacity by simply devaluing the accumulated miles. For example, some airlines charged 40,000 miles for flights that used to be 30,000 miles. In simple terms, those \"free\" tickets for customers were about to get a lot more costly. Also, some airlines allowed customers to use their miles to book stays at hotels and resorts. At the same time, some airlines had started to recognize dollars spent instead of distance flown. For example, members of JetBlue's FFP (TrueBlue program) earned three points for every dollar spent, and Virgin Australia offered its customers five points per dollar spent. Furthermore, Singapore Airlines had introduced its KrisFlyer top tier only to customers who spent more than S$25,000 (approximately US$19,500)11 on first- or business-class tickets.12 Once perceived as a reward program for frequent customers and a powerful marketing tool, FFPs had started to become businesses of their own. By selling miles to airlines' partners, an FFP could be a very attractive and cash-generating business, and airlines began to consider FFPs as separate business units. Therefore, even spin-offs of FFPs were considered. For instance, ACE Aviation Holdings (Air Canada's parent company) had sold 12.5 per cent of Aeroplan (Air Canada's FFP) through an initial public offering in 2005. From 2005 to 2008, ACE progressively sold its remaining stake, which made the Aeroplan Group into a pure loyalty management company. In May 2012, the company changed its name to Aimia Inc.13 In sum, the airline industry had seen enormous potential in FFPs and changed its perspective on them (see Exhibit 5). Over a 30-year history, FFPs had evolved from simple customer reward programs to independent profit-generation business models. COMPANY OVERVIEW United Airlines United Continental Holdings, Inc. was a holding company, and United Airlines, Inc. was its principal wholly owned subsidiary.14 United, with approximately 84,000 employees, had 373 destinations in 60 countries and served 138 million passengers in 2014. Its main hub cities included Chicago, Denver, Houston, Los Angeles, Newark, San Francisco, Washington, Guam, and Tokyo.15 United was a member of the Star Alliance, and the network carriers served over 1,300 airports in more than 190 countries, as of January 2015. 10 S. Stellin, \"Award Plans Earn Cash for Airlines,\" The New York Times, April 1, 2008, accessed April 14, 2015, www.nytimes.com/2008/04/01/ business/01frequent.html?_r=2&ref=travel&oref=slogin&. 11 All currencies are in US$ unless otherwise stated; S$=Singapore dollars. 12 De Boer and Gudmundsson, op. cit. 13 \"Frequent Flyer Program: Ready for Take-Off,\" op. cit. 14 Annual Report 2015, United Continental Holdings Inc. 15 \"Corporate Fact Sheet,\" United Continental Holdings, Inc., accessed April 20, 2015, http:/ewsroom.unitedcontinental holdings.com/corporate-fact-sheet. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. in their accounts, United's MileagePlus had 488 billion unused miles, and American Airlines' AAdvantage Plan reported 613 billion unused miles. \"We're at a turning point,\" said Jeff Robertson, managing director for Delta's SkyMiles program, explaining that although Delta Air Lines's members earned 27 per cent more miles in 2007 than in 2004, the capacity allocated for award seats stayed flat. \"We at Delta [Air Lines] and as an industry cannot continue to have customers earn a significantly greater number of miles year after year without providing customers some flexibility in ways to use those miles.\"10 Page 5 9B16M037 While the merger with Continental Airlines in October 2010 had made United one of the largest airlines in the world, the company still struggled to successfully merge two companies into one. At the time of the merger, executives expected the integration process to be wrapped up within 12 to 18 months. However, some of the integration work remained unfinished, including ongoing system integration and resolving relations with employees. For example, United had not yet finalized a unified labour contract with flight attendants, and mechanics were using two separate information technology systems for maintenance. Smisek said, \"We're examining everything, because we have a set of assets that are very good. [But] they have not been producing the level of revenue they should be producing. We are keenly aware of that.\"17 United's MileagePlus Program United's FFP was its MileagePlus program aimed at building customer loyalty by offering awards and services to loyal customers. Before March 2015, the basic structure of the MileagePlus program was not significantly different from that of other major FFPs. The program had co-branded credit card marketing with Chase Bank USA, National Association, thus allowing customers to earn miles by using that credit card. Customers could also earn miles on qualifying cruise vacations and car rentals, as well as on shopping and dining at partner businesses. Miles expired after 18 months of member account inactivity. The MileagePlus program generated a substantial amount of revenue (see Exhibit 7). Approximately 4.8 million, 5.0 million and 4.7 million MileagePlus flight awards miles were used in 2014, 2013, and 2012, respectively. These awards represented 7.1 per cent, 7.7 per cent, and 7.1 per cent of United's total revenue passenger miles18 in 2014, 2013, and 2012, respectively. What's New in FFPs in 2015? On June 10, 2014, United confirmed that starting in March 2015, it would be moving to a revenue-based FFP. Under the new MileagePlus program, customers would not be awarded miles based on the distance (i.e., miles) flown, but rather, on how much they spent per flight (as explained below).19 The fare for mileage accrual included the base fare of the ticket plus carrier-imposed surcharges, but excluded any governmentimposed taxes and surcharges. 16 General MileagePlus members (non-elites): Earn five miles per dollar spent MileagePlus Premier Silver members: Earn seven miles per dollar spent MileagePlus Premier Gold members: Earn eight miles per dollar spent G. Karp, \"United Airlines Expects another Record Profit in 2nd Quarter,\" Chicago Tribune, April 23, 2015, accessed June 20, 2015, www.chicagotribune.com/business/breaking/ct-united-airlines-earns-0424-biz-20150423-story.html. 17 S. Carey, \"United Continental: One Sick Bird,\" The Wall Street Journal, June 8, 2014, accessed April 20, 2015, www.wsj.com/articles/united-continental-struggles-to-stabilize-1402263534. 18 Revenue passenger miles (RMP) is a measure of airline traffic, calculated by multiplying the number of paying passengers by the distance travelled. 19 Bender, op. cit. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. United operated 1,257 aircraft as of December 31, 2014. The company's financial forecast was promising: in 2015, Jeff Smisek, United's chief executive officer, announced a first-quarter profit of $508 million, compared with a $609 million loss in the same quarter of the previous year (see Exhibit 6) due to low jetfuel costs and continued efforts at cost reduction. Industry analyst Jim Corridore rated United a \"strong buy.\" He expected United to continue to generate revenue and lower debt: \"We think the revenue environment remains good, and we remain positive on the company and the industry.\"16 Page 6 MileagePlus Premier Platinum members: Earn nine miles per dollar spent MileagePlus Premier 1K members: Earn 11 miles per dollar spent20 The most common complaint about this change was that a passenger would earn fewer miles for flying the same flight. For instance, in the case of a $450 economy-class flight between Los Angeles and New York/Newark (with a one-way distance of 2,454 miles), customers at all levels would earn fewer miles under the new program, as shown in the following table. This change indicated that awards tickets would become more costly for all levels of passengers. Previous program New program Non-elite 4,908 2,250 Silver 6,135 3,150 Gold 7,362 3,600 Platinum 8,589 4,050 1K 9,816 4,950 Also, there was frustration for those who were searching for a good bargain price, for example, for a trip to Frankfurt, Germany, from Chicago, United States, in which the customer would be rewarded the same miles as other customers who paid a very high price for a last-minute flight to San Francisco. The new rules had caused other controversies. First, if passengers travelled on a ticket issued by United's alliance partners (e.g., Star Alliance carriers, such as Lufthansa and Air Canada), customers would accrue United miles based on distance flown, not how much they paid. Second, there were no changes for the amount of miles earned by third-party partners, such as credit card companies. Thus, the net effect was to make miles earned from third parties more valuable than flying with airlines. Customers expressed their disappointment and anger on United's Facebook page. In particular, many customers were not happy about the massive devaluation (i.e., requiring more miles for free award tickets or seat upgrades) in February 2014. WHAT'S NEXT? The idea of a revenue-based FFP was quite simple: the more you spent, the more miles you would earn. However, this simple idea had potentially huge consequences for both customers and airlines. Delta Air Lines and United had adopted revenue-based FFPs. The change was good for passengers who spent a considerable amount on tickets, sat in first- or business-class, and/or flew short distances with lastminute bookings. However, for most general customers, the change most likely meant a reduction in value earned from the program. Among the largest U.S. carriers, American Airlines, one of the Oneworld carriers, was the only airline still using the conventional miles-based FFP. Should American Airlines also adopt the revenue-based FFP, following its competitors? The company could opt to keep its miles-based FFP, signalling that it valued all its customers, not just those who spent more. Alternatively, American Airlines could follow this trend once it finalized the American Airlines and US Airways post-merger integration. 20 United Airlines' elite status had four tiers: Premier Silver members (who flew 25,000-49,999 miles per year with the airline), Gold members (50,000-74,999 miles), Platinum members (75,000-99,999 miles), and 1K members (100,000 miles and up). Also, for U.S. residents, Premier Qualifying Dollars refers to dollar spending per year to reach elite status and was as follows: $3,000 for Silver, $6,000 for Gold, $9,000 for Platinum, and $12,000 for 1K. Source: \"Premier Status Qualification Requirements,\" United Airlines Inc., accessed March 11, 2016, https://www.united.com/web/en-US/content/mileageplus/ premier/qualify.aspx. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. 9B16M037 Page 7 9B16M037 Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Number of Carriers 39 36 34 35 33 34 36 34 34 50 61 86 93 95 95 106 98 93 77 71 67 66 70 80 88 95 97 99 98 94 96 100 141 150 140 139 141 151 150 130 Passenger Revenue 31.3 32.2 34.9 36.5 38.7 36.8 40.2 43.1 46.5 52.0 58.7 58.5 55.1 56.8 61.8 63.7 63.6 69.3 75.4 77.2 80.9 76.2 78.0 81.7 81.1 85.1 88.2 93.9 94.6 96.9 105.5 89.2 79.5 81.8 88.5 93.4 98.0 100.7 102.8 83.2 Operating Profits 0.2 1.2 2.2 2.1 2.4 0.3 2.0 2.4 3.4 0.5 -0.5 -0.8 -1.3 0.5 3.6 2.3 2.1 3.8 5.2 2.7 -2.6 -2.4 -3.1 1.8 3.5 7.2 7.5 10.2 10.9 9.1 8.0 -11.1 -9.3 -2.3 -1.4 0.3 7.3 8.7 -3.3 2.2 RPM (a) ASM (b) CR4 (c) CR8 (c) 131.7 135.7 152.4 162.0 162.9 162.8 179.0 193.2 226.8 262.0 254.2 248.8 259.0 281.3 304.5 335.9 366.3 404.3 423.3 432.7 457.9 447.8 478.1 489.1 518.2 540.4 578.4 605.4 619.5 651.6 692.5 651.7 639.6 655.9 731.9 779.0 797.4 829.0 811.4 769.5 264.9 279.9 287.4 310.6 297.0 303.0 322.8 345.6 358.8 416.0 431.2 432.5 424.9 463.4 514.0 547.0 606.8 648.4 648.7 684.4 733.4 715.0 751.8 770.8 783.8 806.6 834.7 860.6 874.2 917.8 956.5 930.5 892.7 893.9 969.0 1,003.3 1,006.4 1,037.1 1,020.1 952.2 57 56 57 54 53 53 53 52 53 50 49 47 47 48 46 45 48 51 53 57 57 63 69 69 68 67 66 66 65 64 62 64 62 58 57 55 54 53 61 60 83 82 83 83 83 82 82 81 81 79 80 76 77 76 74 73 74 84 85 87 88 90 94 93 91 89 89 89 89 89 88 89 87 83 81 83 82 81 83 83 Note: Passenger revenue and operating profits are in US$ billions. (a) RMP (revenue passenger miles) is a measure of airline traffic, calculated by multiplying the number of paying passengers by the distance travelled. (b) ASM (available seat miles) is a measure of an airline's passenger carrying capacity, calculated by the number of seats available multiplied by the number of miles flown. (c) CR4 and CR8 (concentration ratio) are measured by the sum of market shares by the four largest (and eight largest) firms in the industry. Source: Adapted by case authors from A. Johnston and J. Ozment, \"Concentration in the Airline Industry: Evidence of Economies of Scale?\" Journal of Transportation Management 22, no. 2 (2011): 59-74. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. EXHIBIT 1: AIRLINE INDUSTRY OVERVIEW (1970-2009) Page 8 9B16M037 Date Nov. 29, 2011 Jan. 5. 2010 Oct. 6, 2008 Apr. 11, 2008 Mar. 31, 2008 Sept. 14, 2005 Sept. 12, 2004 Dec. 9, 2002 Aug. 11, 2002 Bankrupted Company American Airlines Mesa Airlines Sun Country Airlines Frontier Airlines Aloha Airlines Delta Air Lines, Northwest Airlines, Comair US Airways United Airlines US Airways Date Jan. 10, 2001 Feb. 26, 1998 Jun. 30, 1995 Sept. 21, 1993 Jan. 31, 1992 Jun. 27, 1991 Bankrupted Company Trans World Airlines Pan American World Airways Trans World Airlines Hawaiian Airlines Trans World Airlines America West Airlines Jan. 18, 1991 Jan. 8, 1991 Dec. 3, 1990 Eastern Air Lines Pan Am World Airways Continental Airlines Source: The Associated Press, \"American Joins Long List of Airline Bankruptcies,\" boston.com, November 29, 2011, accessed April 10, 2015, www.boston.com/business/articles/2011/11/29/american_joins_long_list_of_airline_bankruptcies. EXHIBIT 3: AIRLINE INDUSTRY MERGER & ACQUISITION HISTORY Year 1972 1979 1982 1985 1986 1987 1988 1990 1991 1993 1997 1999 2001 2005 2008 2010 2011 Merger & Acquisition Activities Delta Air Lines acquired Northeast Airlines. Allegheny Airlines became US Airways, after a series of mergers and acquisitions. Eastern Air Lines purchased Braniff International Airlines' South American routes. Southwest Airlines acquired Muse Air. Northwest Orient Airlines merged with Republic Airlines and became Northwest Airlines. Trans World Airlines merged with Ozark Air Lines. Frontier Airlines, New York Air and People Express Airlines merged into Continental Airlines. American Airlines acquired AirCal. Delta Air Lines merged with Western Airlines. Piedmont Airlines was purchased by US Airways. US Airways acquired PSA Airlines. American Airlines purchased Eastern Air Lines' South American routes. Delta Air Lines purchased Pan Am's assets, including Northeast shuttles, 45 jets and European routes. Southwest Airlines acquired Morris Air. ValuJet Airlines merged with AirWays Corp., and became AirTran Airways. American Airlines acquired Reno Air. American Airlines acquired Trans World Airlines. US Airways merged with American West Airlines. Delta Air Lines merged with Northwest Airlines. United Airlines merged with Continental Airlines. Southwest Airlines merged with AirTran. Source: \"A Timeline of US Airline Merger History,\" PeterGreenberg.com, August 19, 2013, accessed April 20, 2015, http://petergreenberg.com/2013/ 08/19/a-timeline-of-us-airline-merger-history/. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. EXHIBIT 2: AIRLINE INDUSTRY BANKRUPTCY HISTORY SINCE 1990 Page 9 9B16M037 Airlines Airlines Destinations Revenue (US$ billion) Passengers per year Countries served Star Alliance United Airlines*: 1997 Lufthansa*: 1997 Air Canada*: 1997 Scandinavian Airlines*: 1997 Thai Airways Int'l* : 1997 Air New Zealand: 1999 All Nippon Airways: 1999 Austrian Airlines: 2000 Singapore Airlines: 2000 Asiana Airlines: 2003 LOT Polish Airlines: 2003 Adria Airways: 2004 Croatia Airlines: 2004 TAP Portugal: 2005 South African Airways: 2006 Swiss Int'l Air Lines: 2006 Air China: 2007 Turkish Airlines: 2008 EgyptAir: 2008 Brussels Airlines: 2009 Aegean Airlines: 2010 Ethiopian Airlines: 2011 Shenzhen Airlines: 2012 Copa Airlines: 2012 Avianca: 2012 EVA Air: 2013 Air India: 2014 27 1,321 177.42 Oneworld American Airlines*: 1999 British Airways*: 1999 Cathay Pacific*: 1999 Qantas*: 1999 Finnair: 1999 Iberia Airlines: 1999 LAN Airlines: 2000 Japan Airlines: 2007 Royal Jordanian: 2007 S7 Airlines: 2010 Air Berlin: 2012 Malaysia Airlines: 2013 Qatar Airways: 2013 SriLankan Airlines: 2014 TAM Airlines: 2014 SkyTeam Delta Air Lines*: 2000 Korean Air*: 2000 Air France*: 2000 Aeromxico*: 2000 Czech Airlines: 2001 Alitalia 2001-2009 as Alitalia-Linee Aeree Italiane, rejoined 2009 KLM: 2004 Aeroflot: 2006 Air Europa: 2007 China Southern Airlines: 2007 Kenya Airways: 2007 TAROM: 2010 Vietnam Airlines: 2011 China Airlines: 2011 China Eastern Airlines: 2011 Xiamen Airlines: 2012 Saudia: 2012 Aerolneas Argentinas: 2012 Garuda Indonesia: 2014 Middle East Airlines: 2014 15 1,010 143.23 20 1,052 186.33 653.81 million 512.3 million 588 million 193 155 177 Note: * indicates founding members. Source: Created by author based on data from global airline alliances websites, accessed April 20, 2015, www.staralliance.com/, www.skyteam.com/, www.oneworld.com/. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. EXHIBIT 4: GLOBAL AIRLINE ALLIANCES AND PARTICIPATING AIRLINES Page 10 9B16M037 Main function Strategic focus Structure Ownership Third-party investment Non-air partner accrual as % of total miles accrual Partnership Rewards Legacy FFPs \"Cost centre\" Frequent flyers Advanced FFPs \"Profit centre\" Frequent flyers & high credit card spenders Autonomous FFPs \"Cash cow\" Frequent flyers & everyday spenders (including infrequent flyers) Separate company FFP department (part of marketing division) Owned by airline Separate strategic business unit Owned by airline No No Owned by airline and/or outside investors Yes Small (20%) Large (>50%) Mostly travel-related (hotel, car rental, cruises) Travel-related and financial services (credit cards) Travel/financial/everyday spending (e.g., groceries, fuel, telecommunications) Award tickets and upgrades for air travel Rewards travel and limited merchandise Air, merchandise and other partner products/services Source: Adapted from E. de Boer and S. Gudmundsson, \"30 Years of Frequent Flyer Programs,\" Journal of Air Transport Management 24 (2012): 24. EXHIBIT 6: UNITED'S FINANCIAL DATA Income Statement Data Operating revenue Operating expenses Operating income Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share Balance Sheet Data (at December 31) Unrestricted cash, cash equivalents & short-term investments Total assets Debt and capital lease obligations 2010 2011 2012 2013 2014 23,325 22,349 976 253 1.22 1.08 37,110 35,288 1,822 840 2.55 2.26 37,152 37,113 39 (723) (2.18) (2.18) 38,279 37,030 1,249 571 1.64 1.53 38,901 36,528 2,373 1,132 3.05 2.93 8,680 7,762 6,543 5,121 4,384 39,598 15,133 37,988 12,735 37,628 13,166 36,812 12,409 37,353 12,115 Note: Units in millions, except earnings per share data. Source: UAL Statement of Consolidated Operations Data, Company Annual Report, 2015, 28. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. EXHIBIT 5: DEVELOPMENT OF FREQUENT FLYER PROGRAMS Page 11 9B16M037 Year Cash Proceeds from Miles Sold Other Revenue Recognized Upon Award of Miles to Third-party Customers (a) Increase in Frequent Flyer Deferred Revenue for Miles Awarded (b) 2012 2013 2014 2,852 2,903 2,861 816 903 882 2,036 2,174 2,178 Increase (Decrease) in Advance Purchase of Miles (c) (174) (199) Note: Units in millions US$. (a) This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing-related deliverable services component of the sale. (b) This amount represents the increase to frequent flyer deferred revenue during the period. (c) This amount represents the net increase (decrease) in the advance purchase of miles obligation due to cash payments for the sale of miles in excess of (less than) miles awarded to customers. Source: Company Annual Report, 2015, 71. Authorized for use only by dushyant tagotra in Master of management at Crandall University from Jul 01, 2020 to Aug 10, 2020. Use outside these parameters is a copyright violation. EXHIBIT 7: REVENUE FROM UNITED'S MILEAGEPLUS PROGRAM