Continental Airlines Case Study
Question
CASE QUESTIONS
1. Using the quarterly data for operating costs and the various cost drivers of costs provided in the spreadsheet, estimate regressions for each of the ten cost categories listed above. Then, write the appropriate cost function for each category of cost and interpret your regression results. For example, your first regression would have “salaries and wages” as your dependent variable and “available seat miles” as independent variable.
2. Based on your regression results and your interpretation of those results, where do you see the largest reductions in costs if flying capacity is lowered by 11 percent? Also, in which areas do you see opportunities to achieve further cost reductions? Why?
3. The table below provides a quarterly forecast of revenues, jet fuel prices,5
and the projected operating activity for 2009. Using the information from your regressions and the forecast information provided, estimate Continental’s operating costs and expected profit for the upcoming fiscal year.
4. Based on the results of your profitability analysis, what can you say about the firm’s financial outlook? Would Continental be earning an operating profit in 2009? If not, what should Continental’s management do to restore profitability in 2009?
5. Summarize your conclusions in a memorandum addressed to Continental’s CEO. In the memo, you must clearly communicate your main findings, emphasizing specific areas in which you see the greatest potential to achieve further reductions in costs and, based on your profitability analysis, sum up the financial outlook for 2009.
