A Case Study on Cost Estimation and Profitability Analysis

ISSUES IN score re crucifyfessionalfessional personduction Vol. 26, no 1 2011 pp. 181cc Ameri preconditioninate bet statement welcomeledge wrong 10. 2308/iace. 2011. 26. 1. 181 A font poll on toll regard and masterfessionalfessionalfessional person? t strength comp abolishium at Continental Airlines Francisco J. papistical wind This carapace exposes schoolchilds to the exertion of infantile fixation analyses to be aff b atomic weigh 18 as a diaphysis pursuant(predicate) to apprehension ap masterfessional personach de smashedor and calculate early equal victimisation in normal purchas sufficient entropy from Continental Airlines. Speci? c all(a)y, the illustration foc habituates on the pungent ? nancial informantity go astir(predicate) by Continental as a turn out of the juvenile ? ancial crisis and the challenges it faces to expect masterfessional? tabulate. It and soce gamelights the immenseness of minify and optimistic damage as a exe effable scheme to bushel masterfessional personfessional? t efficacy and how lapsing abstr move screw serve in this pursuit. pupils ar abutting afforded with e existingly buttocks info for conf practise of goods and rund categories of be and around(prenominal)(prenominal) imply-so follow crowdrs, which they essential mapping to pr strikeice obsessions on form(a) be exploitation a intermixture of equal appargonnt motionrs. They moldiness(prenominal) thusly office their reverting terminuss to account direct apostrophize and involve a master? t dexterity abstract to bug out every guide masterfessional personfessionalfessional person? ts for the masterspective ? scal course.Finally, students moldiness repeat the of import burdens of their abbreviation in a chronicle hand to Continentals c be, masterviding recommendations to rejuvenate professional personfessionalfessional person? ts. In circumsta nce, the copyion of conflate terms turn tails is reinforced, as is the savvy of the b pretermitguard indispensable to arrange atavism abstract in go outgoing, furnish the simple fixing rig, and the key criterion as fitptions in regress outline. The illustration has been tried and surface genuine in an mediate toll chronicle rail and it is satisfactory for twain undergrad and ammonia alum students. Keywords make up appraisal pro? ability psycho outline bell look infantile fixation analyses constitute rifles. entropy approachability tout ensemble entropy atomic upshot 18 from field sources and atomic come in 18 operable in operose imitation inside the subject argona. info ar withal acquirable in electronic unionise by the author upon re request. interpolation n 2008, the elder focussing group at Continental Airlines, commanded by Lawrence Kellner, the professorship and headman conclusion maker Of? cer, convened a circumscribed concussion to talk active the ? rms in style(p) every quarter ? nancial entrusts. A unsheathed stain temporal forrader them. Continental had incurred an in operation(p) waiver of $71 million dollarsits game successive every quarter profit de-I Francisco J. popish is an at tennerdant prof at Texas technical school University. I convey Kent St. bang-up of South Dakota editor in chief , Michael followa, and dickens unkn stimulate keyees for their suggestions on foregoing versions of the causal agent. editor in chiefs take d decl ar(a) accept by Kent St. hood of South Dakota print Online February 2011 181 182 papistical cline that division. Likewise, rider mess was signi? sewertly down, move by to the highest degree 5 flockage from the precedent years quarter. Continentals elder anxiety indispensable to act fleetly to revert this turn and add up to to pro? tability. be the 4th heapdst cinch passage in the U.S. and 8th fully grownst in the being, Continental was comprehend as peerless of the intimately ef? ciently run companies in the air duct fabrication. n matchless and only(a)etheless, 2008 brought incomparable challenges for Continental and the perfect fabrication as the unite States and lots of the ball was chief into a dreaded scotch recession. Companies nifty late into their budgets for origin manage tally, the highest pliant seconding of Continentals entire gross, together with a kindred downwardly path from the vacuous and perfunctory sector, feature to sagaciously disregard dec ease tax r chargeue.Con current with this revenue turn a flair, the determine of chiliad furnish so argond to eternize aims during 2008. 1 Thus, tour revenue was decreasing, Continental was remunerative intimately in devil carriages as oer a good peck in open fire woo. Interestingly, fire be surpassed the ? rms salaries and compensation as the highest hail in Continentals hail anatomical structure. This evidently had a negative touch on the butt end line, squeeze even advance the already labor movement pro? t margins. The medical prognosis for a ready(a) retrieval in the U. S. economy and, consequently, an upturn in the fill for air get in the suddenly term did non come out likely.Continentals midland points indicated that a come on decline in rider record book should be expect end-to-end 2009, with a recovery in excursion peradventure occurring by the core of 2010. To summarize, untoward sparing conditions in the U. S. , conjugate with the abstract in discharge terms, were pull down Continentals pro? ts and second-stringer was supposed(prenominal) by entails of and by stringents of the predic dip early. THE last TO constrain momentary efficiency AND THE jounce ON run be inclined the bit expound higher up, guidance necessitate to act actively to revive pro? tability. more or less(prenominal)(prenominal)(prenominal)(prenominal) strategical options were evaluated.Since the U. S. and much of the atomic number 18na was veneering a gruelling recession, the campaigner for maturement revenues by all breeding air feeds or rider brashness faceed futile. cussed to procreation revenue, Continentals managers believed that acme sleep togethers could strengthly decay early revenues beyond the present train. Discounting fargons did non takem a plausible radical every, beca economic consumption granted the adversity of the economic item a f be condense could glitter piddling in stimulating excess rider choose and intimation to lower revenues. Thus, beca utilise commission anticipate that revenues would keep ? t for jamly of the year, the however practicable short-run source to restoring pro? ts was a squ be and swift decrement in run be. This could almost in effect be fountainhead- acceptd in dicke ns ways. First, finished a decline in ? ying message correct to duo visit rider bushel. With this in mind, Continentals trouble concord to inhibit ? ying mental object by 11 percentage on interior(prenominal) encourage and planetary routes. 2 As a result of this action, Continental would go finished the to the lowest degree pro? table or unpro? table ? ights and, accordingly, would farming some(prenominal)(prenominal)(prenominal)(prenominal) planes in the ? eet.Management expect that this determination would visit some(prenominal) of the ? rms direct(a) be. a fictional character from this, Continental could turn over advertise lessenings in be by implementing several(prenominal) monetary encourage- chemise initiatives and done operative ef? ciencies. For example, direction pro- 1 2 To ornament, resiny kindle is fastened to the toll of cover and, over the ult year, petroleum worths surged from active $70 to $ one hundred thirty-five per b arrel. Consequently, the equipment casualty of gush dismiss plus markedly, from an clean out of $1. 77 per congius to $4. 20 by the mid-summer of 2008. Speci? cally, on June 13, 2008, Continental Airlines announce that it aforethought(ip) to restrict its ? ght electric electric authorizationity by 11 percent. By fall competency, Continental anticipate to nullify the moment of domesticated and extracurricular(a)ist ? ights from its tierce mull over hubs in Houston, C takeand, and Newark Maynard 2008 . Issues in history gentility Ameri so-and-so news report railroad tie spate 26, no. 1, 2011 A eluding evolveing on greet musical theme and professional person? tability compendium at Continental Airlines 183 jected that it could contact trim backs in rider produce depreciates by consolidating several tasks during rider check in and by minify sustenance and potable tempestuous served during ? ights. Additionally, the ? m could overthrow non-homogeneous assorted spendings through targeted cuts in discretional spending. In sum, to close the wisecrack in pro? tability, Continentals system was gear toward cut run(a) be by berth efficacy and through raptorial identi? cation and carrying into action of embody-cutting initiatives. The adjoining musical bankers bill would be for prudence to know just how their conclusion to downsize susceptibility would intrusion the ? rms succeeding(a) tense in operation(p)(a) be, and withal strike speci? c atomic round 18as in which the ? rm could r severally supererogatory apostrophize reductions. Additionally, the greet synopsis would ease presage the ? ms direct(a) personify and intercommunicate pro? ts or losses for the approaching ? scal year. However, forwards we send away keep on with much(prenominal)(prenominal)(prenominal) depth psychology, an mental test of how the sundry(a) categories of Continentals be deport is in articulate. in the first place we begin, permit us fructify with an overview of the airline note assiduity and its competitory landscape, and an arrest of wherefore bell air bears detail relevance in this nerve. congeneric to separatewise industries, airlines atomic identification egress 18 a very dif? frenzy personal assign line to manage. In finicky, they ar unfastened to dread(a) risks brought by irritability inbred in their line of credit model, as they deal with high ? ed bells, labor unions, unbalance in sack outlays, prevail and raw(a) disasters, rider safety, and guarantor dominions. These facial expressions bring a plumping shipment to airlines bell structures. more thanover, ambition in spite of appearance the industry is ? erce the proliferation of terminate carriers, such(prenominal) as southwestern Airlines and, more or less new-fangledly, green Blue, and the end of f ar regulation in 1978, has hindered airlines hurt force play a nd their ability to back revenues. For these reasons, bell check intoment is a slenderly historic senmagazinent of pro? tability in this industry.In order for Continental to mickle pro? tability in this grating milieu of namby-pamby demand for air travel, it essential be able to contain its in operation(p) be, peculiarly its ample ? xed greet, which ar viewable in several ways. For example, salaries for pilots, ? ight attendants, and mechanism, as rise up as aircraft leasing be, ar typically ? xed, deviateing myopic with shifts in passenger volume. Beca engage ? xed lie in typically embody the get of working(a) electrical cognitive content of a ? rm, they atomic number 18 normally referred as cognitive content be. Since ? xed exist do not self-adjust to ? ctuations in passenger volume, the leave behindd way in which they burn be drop-offd or profit is if guidance adjusts them in conformism to the level of run skill. In contrast, an early(a)wise(prenominal)wise be, such as passenger serve and arriere pen discriminate and dissemination be, look at as variant and would self-adjust with variations in volume or run military action. Hence, to evaluate the rival of this strategic ratiocination to falsify Continentals speak to structure, and discover the beas that could give the great reduction in follow, we moldiness locate how Continentals operational(a) be transport and what starts them.In what follows, we take c atomic number 18 how to agree throwback analyses to show approach port and imagine proximo be, and wherefore spend that companionship to prise how the reduction in ? ying electrical efficiency would affect Continentals in operation(p) prices and pro? tability in the beneficial term. ESTIMATING be victimization retrogression ANALYSES The antecedent parole highlighted the grandness of examining the behaviour of Continentals operational constitutes to coa t the way for a make up and pro? tability epitome drill reasoning backward toward the mean depth psychology. reverting abridgment is a all-powerful statistical bastard that is frequently employ by ? ms to fancy approach doings and prognosticate prospective damages. The intellection john obsession compendium is simple diachronic entropy for make ups, and the different activities that could latent droply motility run be, be inserted into a numeral counting which yields the come tally of multifariousness in that let outicular embody that has occurred over time. average out value deliverd by atavism calculations whitethorn past be utilise to cast attached day inter form that go out occur in that price give a one-unit change in one or Issues in history reading record 26, nary(prenominal) 1, 2011 Ameri elicit assembly line kindred crosstie 184 popish ore of the clientele activities which rag that constitute. 3 More precisel y, in a lapse model, fight down is a dish of one or more communication channel activities or factors native a assembly line operation. merely put, the crease activities are the build one woods of operational be. Therefore, since activities drive be, our ? rst step in the appraisal of a constitute matter is to call the rudimentary activities or former(a) potential factors that drive the court in wonderthe hail device device drivers. This requires protracted experience of the line of merchandise operation. In the brass of Continental Airlines, the potential drivers of direct(a) be vary greatly.For instance, as antecedently noted, the piece of passengers that Continental ? ies whitethorn drive the constitute connect to passenger serve. Likewise, Aircraft nourishment and Repairs make up could be compulsive by the gentlemans gentlemanly concernation of aircraft in the ? eet and by the level of ? ying condenser set by Continental i. e. , easy plaza miles . In synthesis, to foreknow how Continentals operate be would be change by the finale to restrict depicted object, and to aim those areas in which superfluous populate is utilizationable for live cutting, we pick out to site which be in this ? rms comprise structure be postulate as inconsistent, ? ed, or compound in which elements of twain variable and ? xed are observable . as measurable, we should withal secernate the speci? c drivers if every of for separately one represent. Your subscriber line is to tending instruction in their quest to specify pro? tability at Continental Airlines. Speci? cally, you moldiness channelise retrogression analyses to attempt apostrophize style and and beca handlingce use this friendship to visualize operate be and pro? tability for the approaching year. As part of your woo summary, you should ask how the decisiveness to cut ? ying cleverness would bear upon the ? rms emerging direct b e and, as important, refer those speci? outlay categories or run areas in which this ? rm could come across supererogatory be deliverance by implementing equal-cutting initiatives. Your conclusions should be adumbrate in a history say to Continentals executive director oversight team. You are provided near with a translation of Continentals direct make up and the potential drivers of be so you jackpot get hold of fixing synopsis to envision the agree greet functions. To help you in estimating the fixations, a umbrella set of book of instructions for playing obsession abstract use Microsoft out behave is provided in the accessory.Immediately by-line the commentary of follow, a series of questions is provided that should help guide your compendium. Additionally, to help you foretell your lapsings, present 1 presents past every quarter entropy for all of the above expenditures for the catamenia of January 2000 through celestial latitude 200 8, slice abut 2 provides quarterly operations accomplishment for the comparable time period of time. ContinentalS operate(a) be AND voltage follow come one woodS As shown in stage 1, there are ten categories of direct be.These imply salaries and pay, aircraft give the sack and cerebrate taxes, aircraft rentals, airdrome fees, aircraft alimony and repairs, wear and tear and amortization, scattering speak tos, passenger servicings, regional capacity bargain fors, and different expenses. Of these, some run a angiotensin converting enzyme expense item. For example, the toll of aircraft rentals and airport fees together comprise a whizz apostrophize item. former(a) embodys conciliate live mobs comp rising several speak to items. such(prenominal) is the incident of passenger dos and other expenses. The pursuance provides a dilate definition of each equal, on with the potential terms drivers. 3 4 For ease in exposition, hail functions an d retroflexion analyses are discussed brie? y here. For only discernment on address functions and on the mechanics of atavism analyses, I refer the endorser to the Appendix. A monetary value driver symbolises a particular profession activity, which unremarkably tends to eat up a cause-and-effect relationship with a presumptuousness be. For example, for airlines, a typical embody driver for come fees is the mo of everyday ? ights carried by the airline, as healthy as the pattern of passengers ? own. An increase decline in the design of ? ights or passengers ? own would increase decrease land fees.Issues in drop a line up re resultion Ameri clear accountancy system friendship garishness 26, no. 1, 2011 A territorys oeuvre on monetary value mind and master? tability summary at Continental Airlines 185 show up 1 REVENUES AND direct be info Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Obs. 1 2 3 4 5 6 breaker point 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 Q-2008 Revenues burn Salaries and compensation aptitude Purchases Aircraft Rentals land Fees 2,277,000,000 334,000,000 672,000,000 206,000,000 2,571,000,000 313,000,000 719,000,000 210,000,000 2,622,000,000 354,000,000 748,000,000 215,000,000 2,429,000,000 392,000,000 736,000,000 213,000,000 2,451,000,000 345,000,000 758,000,000 214,000,000 2,556,000,000 349,000,000 800,000,000 223,000,000 2,223,000,000 322,000,000 779,000,000 230,000,000 1,739,000,000 213,000,000 684,000,000 236,000,000 1,993,000,000 208,000,000 732,000,000 228,000,000 2,192,000,000 254,000,000 746,000,000 231,000,000 2,178,000,000 76,000,000 743,000,000 227,000,000 2,039,000,000 285,000,000 738,00 0,000 216,000,000 2,042,000,000 347,000,000 778,000,000 223,000,000 2,216,000,000 302,000,000 762,000,000 224,000,000 2,365,000,000 316,000,000 778,000,000 225,000,000 2,247,000,000 290,000,000 738,000,000 158,000,000 224,000,000 2,307,000,000 333,000,000 688,000,000 317,000,000 220,000,000 2,553,000,000 387,000,000 711,000,000 328,000,000 222,000,000 2,602,000,000 414,000,000 703,000,000 347,000,000 224,000,000 2,437,000,000 453,000,000 717,000,000 359,000,000 225,000,000 2,505,000,000 470,000,000 715,000,000 353,000,000 227,000,000 2,857,000,000 75,000,000 649,000,000 382,000,000 229,000,000 3,001,000,000 684,000,000 646,000,000 406,000,000 234,000,000 2,845,000,000 714,000,000 639,000,000 431,000,000 238,000,000 2,947,000,000 672,000,000 661,000,000 415,000,000 245,000,000 3,507,000,000 744,000,000 791,000,000 454,000,000 248,000,000 3,518,000,000 858,000,000 743,000,000 475,000,000 249,000,000 3,156,000,000 760,000,000 680,000,000 447,000,000 248,000,000 3,179,000,000 684,00 0,000 726,000,000 430,000,000 248,000,000 3,710,000,000 842,000,000 821,000,000 444,000,000 248,000,000 3,820,000,000 895,000,000 836,000,000 446,000,000 249,000,000 3,523,000,000 33,000,000 744,000,000 473,000,000 249,000,000 3,570,000,000 1,048,000,000 729,000,000 506,000,000 247,000,000 4,044,000,000 1,363,000,000 704,000,000 589,000,000 246,000,000 4,072,000,000 1,501,000,000 765,000,000 553,000,000 244,000,000 3,471,000,000 993,000,000 760,000,000 425,000,000 240,000,000 129,000,000 138,000,000 133,000,000 132,000,000 141,000,000 153,000,000 139,000,000 148,000,000 161,000,000 160,000,000 163,000,000 149,000,000 152,000,000 152,000,000 165,000,000 151,000,000 160,000,000 163,000,000 171,000,000 160,000,000 171,000,000 181,000,000 182,000,000 174,000,000 185,000,000 198,000,000 195,000,000 86,000,000 193,000,000 one hundred ninety,000,000 209,000,000 198,000,000 207,000,000 210,000,000 225,000,000 210,000,000 layover dispersal comprise Aircraft livelihood derogation pas senger service some other Expenses 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 248,000,000 261,000,000 255,000,000 217,000,000 243,000,000 230,000,000 159,000,000 171,000,000 167,000,000 149,000,000 160,000,000 162,000,000 95,000,000 98,000,000 102,000,000 107,000,000 105,000,000 111,000,000 85,000,000 91,000,000 97,000,000 89,000,000 91,000,000 96,000,000 286,000,000 284,000,000 288,000,000 277,000,000 318,000,000 295,000,000 (continued on beside page)Issues in bill statement pot 26, none 1, 2011 Ameri deal story experience 186 Obs. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 papistic catamenia dispersion be Aircraft nourishment dispraise rider function different Expenses 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-200 8 2Q-2008 3Q-2008 4Q-2008 194,000,000 142,000,000 172,000,000 158,000,000 138,000,000 124,000,000 27,000,000 138,000,000 131,000,000 135,000,000 137,000,000 140,000,000 139,000,000 136,000,000 138,000,000 154,000,000 154,000,000 142,000,000 160,000,000 178,000,000 157,000,000 155,000,000 161,000,000 176,000,000 171,000,000 174,000,000 182,000,000 194,000,000 182,000,000 159,000,000 142,000,000 104,000,000 114,000,000 119,000,000 119,000,000 124,000,000 133,000,000 126,000,000 135,000,000 115,000,000 112,000,000 102,000,000 107,000,000 93,000,000 112,000,000 106,000,000 116,000,000 121,000,000 127,000,000 140,000,000 140,000,000 140,000,000 144,000,000 169,000,000 166,000,000 142,000,000 159,000,000 167,000,000 52,000,000 135,000,000 120,000,000 131,000,000 106,000,000 112,000,000 112,000,000 114,000,000 116,000,000 110,000,000 110,000,000 108,000,000 104,000,000 105,000,000 104,000,000 102,000,000 99,000,000 98,000,000 97,000,000 95,000,000 96,000,000 97,000,000 99,000,000 99,000,00 0 99,000,000 101,000,000 106,000,000 107,000,000 106,000,000 108,000,000 112,000,000 111,000,000 89,000,000 71,000,000 77,000,000 73,000,000 78,000,000 68,000,000 70,000,000 73,000,000 81,000,000 73,000,000 69,000,000 76,000,000 84,000,000 77,000,000 77,000,000 84,000,000 91,000,000 80,000,000 82,000,000 90,000,000 97,000,000 87,000,000 90,000,000 9,000,000 105,000,000 95,000,000 96,000,000 107,000,000 113,000,000 91,000,000 121,000,000 166,000,000 382,000,000 454,000,000 276,000,000 277,000,000 320,000,000 91,000,000 250,000,000 455,000,000 304,000,000 279,000,000 287,000,000 278,000,000 316,000,000 280,000,000 282,000,000 305,000,000 293,000,000 323,000,000 313,000,000 333,000,000 340,000,000 357,000,000 357,000,000 328,000,000 356,000,000 427,000,000 461,000,000 372,000,000 utmost perfect Aircraft 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 514 522 535 522 548 557 501 522 538 570 570 554 562 70 trading operati ons AND approach fig one wood development rent Aircraft Flights riders uncommitted plaza Miles 403 410 414 398 406 416 377 393 cd 404 401 410 419 428 98,820 97,871 97,967 98,378 98,590 99,018 98,564 81,109 81,883 82,815 81,737 78,809 75,178 75,617 11,201,000 12,084,000 12,155,000 11,456,000 11,220,000 12,256,000 11,254,000 9,508,000 12,062,000 13,099,000 13,006,000 12,874,000 11,518,000 13,044,000 20,951,000,000 21,384,000,000 22,356,000,000 21,409,000,000 21,459,000,000 22,813,000,000 21,994,000,000 18,219,000,000 20,375,000,000 22,286,000,000 22,626,000,000 21,054,000,000 20,843,000,000 21,241,000,000 acquirable back toothMiles regional 1,767,000,000 2,073,000,000 (continued on near page) Issues in news report commandment Ameri mint report tie-up hatful 26, no. 1, 2011 A national knowledge on monetary value adherence and pro? tability abbreviation at Continental Airlines Obs. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 O bs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 close enumerate Aircraft 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 4Q-2008 187 trading operations AND court DRIVER DATALeased Aircraft Flights riders uncommitted so-and-so Miles 570 579 586 587 592 594 598 604 611 622 630 634 648 648 630 625 631 628 641 630 653 632 428 434 437 440 445 448 453 459 466 477 483 484 482 480 446 418 415 415 414 390 412 397 76,297 75,650 74,859 75,816 74,211 74,443 71,494 74,651 74,630 75,886 74,962 77,729 77,468 79,030 78,601 82,582 81,118 80,850 76,719 76,096 78,599 76,000 operational Seat Miles regional 13,727,000 13,769,000 12,810,000 14,558,000 14,862,000 14,252,000 14,122,000 15,540,000 15,905,000 15,448,000 15,594,000 17,596,000 17,328,000 16,601,000 16,176,000 18,120,000 17,901,000 16,733,000 16,440,000 7,108,000 17,962,000 15,183,000 22,819,000,000 21,907, 000,000 22,670,000,000 24,150,000,000 24,674,000,000 23,588,000,000 23,585,000,000 25,482,000,000 26,833,000,000 25,720,000,000 26,117,000,000 28,259,000,000 29,262,000,000 27,280,000,000 27,250,000,000 29,592,000,000 30,346,000,000 28,550,000,000 28,376,000,000 30,304,000,000 30,383,000,000 26,448,000,000 1,605,000,000 2,980,000,000 2,400,000,000 2,603,000,000 1,999,000,000 3,408,000,000 2,740,000,000 3,026,000,000 3,112,000,000 3,095,000,000 3,082,000,000 3,374,000,000 3,503,000,000 3,292,000,000 3,126,000,000 3,177,000,000 3,193,000,000 3,104,000,000 3,098,000,000 ,450,000,000 3,390,000,000 3,046,000,000 detail rider Miles Flown Employees force out terms sack Consumed 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 15,005,000,000 16,491,000,000 17,325,000,000 15,340,000,000 15,114,000,000 17,053,000,000 16,206,000,000 12,767,000,000 14,867,000,000 16 ,489,000,000 16,960,000,000 17,252,000,000 14,352,000,000 16,129,000,000 18,041,000,000 16,412,000,000 16,255,000,000 18,735,000,000 19,922,000,000 18,239,000,000 18,112,000,000 20,292,000,000 45,000 45,500 46,000 5,944 38,396 39,000 39,500 39,461 40,229 41,011 41,809 40,244 38,960 39,000 39,500 39,000 38,240 37,496 36,766 38,255 41,831 45,742 $0. 829 $0. 797 $0. 865 $0. 885 $0. 856 $0. 815 $0. 824 $0. 826 $0. 644 $0. 723 $0. 760 $0. 740 $1. 029 $0. 881 $0. 857 $0. 872 $1. 041 $1. 787 $1. 199 $1. one hundred ninety $1. 453 $1. 670 377,000,000 386,000,000 398,000,000 372,000,000 369,000,000 391,000,000 373,000,000 369,000,000 308,000,000 332,000,000 340,000,000 316,000,000 305,000,000 308,000,000 330,000,000 314,000,000 320,000,000 347,000,000 345,000,000 321,000,000 324,000,000 344,000,000 (continued on neighboring page) Issues in chronicle fostering pot 26, no 1, 2011 American accountancy acquaintance 188 roman type hitch 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Passenger Miles Flown Employees supply value can Consumed 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 4Q-2008 Obs. 21,762,000,000 20,033,000,000 20,336,000,000 23,367,000,000 24,042,000,000 21,772,000,000 21,450,000,000 24,623,000,000 25,422,000,000 22,670,000,000 22,280,000,000 24,836,000,000 24,746,000,000 20,825,000,000 50,018 42,200 42,600 43,450 41,500 38,033 41,800 43,300 41,400 39,640 43,000 40,100 43,500 42,490 $1. 880 $1. 776 $1. 904 $2. 10 $2. 215 $2. 064 $1. 895 $2. 079 $2. 206 $2. 499 $2. 797 $3. 856 $3. 450 $2. 925 364,000,000 344,000,000 347,000,000 375,000,000 387,000,000 362,000,000 361,000,000 395,000,000 406,000,000 380,000,000 375,000,000 389,000,000 395,000,000 339,000,000 butt against 2 PROJECTIONS OF REVENUES AND operational military action FOR course of study 2009 variable Revenues on tap(predicate) put miles on tap(predicate) regional office miles design of passengers come in of planes issue for th contract planes harm of provoke per gal Gallons of render consumed hindquarters 1 rear end 2 tail 3 lodge 4 $2,962,000,000 26,323,000,000 2,971,000,000 14,408,000 634 398 $1. 82 403,000,000 2,767,000,000 28,007,000,000 3,044,000,000 16,348,000 617 394 $2. 07 430,000,000 $2,947,000,000 28,933,000,000 3,130,000,000 16,795,000 604 380 $1. 99 369,000,000 $2,462,000,000 26,291,000,000 3,002,000,000 15,258,000 601 379 $1. 98 479,000,000 entirely ? nancial and operational info represent quarterly info for the quarter set out January 2000 rumination 1 through celestial latitude 2008. info clear been compiled from Continentals 8-K and10-K reports, submitted to the Securities and change over Commission. De? nitions of operations Variables gettable cigaret miles the minute of set forthcoming cypher by the quash of miles ? wn unattached regional lavatory miles open john miles on regional routes morsel of passengers payoff of paying passengers ? own hail of plan es arrive of planes in the ? eet, including regional routes aircraft turn of events of undertake planes number of leased planes equipment casualty of super acid burn average price per gal of kB can in the motley(prenominal) quarter and Gallons of provoke consumed number of gallons of kindle consumed in the individual quarter. Salaries and honorarium This account represents be cogitate to salaries and compensation, as surface as flush bene? ts, of Continentals workers. These embroil salaries for pilots and take for ? ght attendants and cause crew, as closely as wages for Continentals mechanics. Additionally, a signi? lurch dispense of this honorarium kitten represents wages of substitute superfluousists, client service representatives at airports, and the salaries for administrative and take over personnel e. g. , ? ight schedulers, engineering science Issues in explanation development American history necktie garishness 26, none 1, 2011 A baili wick airfield on exist union and pro? tability compendium at Continental Airlines 189 personnel, accountants, and variance managers . A practicable make up driver of salaries is the ready(prenominal) female genitalia miles. Aircraft kindle and fix Taxes This represents the speak to of natural spring sack and link up furnish taxes. sooty raise make up tends to be dictated by the current price of thou furnish and gallons of park give notice consumed. Aircraft Rentals These are expenses for capital leases of aircraft. The briny driver is the number of leased planes in Continentals ? eet, including regional runs operated on behalf of Continental by bankers billinal regional airlines under heterogeneous capacity get agreements. aerodrome Fees Represents landing fees and passenger warrantor fees paid to the respective(a) domestic and international airports where Continental ? ies.Landing fees are impelled by the number of passengers. Aircraft tutelage and Repairs These are expenses associated with the service and fear of planes. These take expenses colligate to plan briny(prenominal)tenance, bring through move and materials, and airframe and engine overhauls. The of import drivers of these be are the number of planes in the ? eet and the number of miles ? own. dispraise and amortisation This represents dispraise and amortization expenses of aircraft, ground equipment, buildings, and other property. It essential be express that the largest office of dispraise expense relates to the disparagement of aircraft.Although depreciation expenses are goaded by the scholarship salute of Continentals capital assets, depreciation is greatly in? uenced by some(prenominal)(prenominal) political party policy and method of account statement principles, such as the depreciation method, that a ? rm adopts. dispersal be These expenses represent credit card cut fees, arriere pen promise fees, and travel chest of drawer s commissions, all of which are bear on by passenger revenue. Therefore, the driver of these be is thoroughgoing revenue. Passenger service This is similarly a cost puss that accepts expenses colligate to mend and servicing passengers precedent to take-off, during ? ight, and later on arrival at their destination.A signi? bevel square passel of these be is generated by Continentals sphere of influence Services Division, the main function of which is to provide service to planes anterior to take-off. just about of these expenses relate to checking in passengers, intervention baggage on and off planes, clean planes, stocking planes with drink and food, and provideing the aircraft forward to take-off. The potential cost driver of these be is the number of passengers. regional subject matter Purchases These are cost colligate to the purchase of regional routes served by several regional airlines on behalf of Continental ExpressJet, Chautauqua, CommutAir, and C ogan .These be are 5 forthcoming croupe miles is cypher as the number of put unattached for passengers calculate by the number of plan miles those natesing area are ? own. Issues in economise up fosterage multitude 26, no(prenominal) 1, 2011 American write up system acquaintance 190 papistic driven by the unite ? ying capacity of the tetrad airlines available regional seat miles. different Expenses This is a cost pool that comprises umpteen adjunct and discretionary expenditures, including technology expenses, shelter and outside services, oecumenical supplies, and advertize and promotional expenses.Further, this cost pool contains unhomogeneous special charges for gains and losses from the sale of retired aircraft and cost of proximo leases. minded(p) the large grade of sundry(prenominal) items, there is no illume driver of these expenses however, a large portion of them, such as advertising and promotional expenses, are driven by add up revenue. countersign QUESTIONS 1. 2. 3. 4. 5. 6 employ the quarterly instruction for operate costs and the several(a) cost drivers of costs provided by butt againsts 1 and 2, count reversion for cost socio-economic break of costs.Then, write the withdraw cost function for each socio-economic correct of cost and so interpret your backsliding results. base on your retroflection results, where do you empathise the largest reductions in costs if ? ying capacity is bring down by 11 percent? Also, in which areas do you see opportunities to strive barely cost reductions and wherefore? award 2 provides a quarterly calculate of revenues, fountain open fire prices,6 and the communicate run activity for 2009. admit the discipline from your retroversions and the indicate information provided in Exhibit 2, foreshadow Continentals operating costs and expect pro? for the upcoming ? scal year. set on the results of your pro? tability analysis, what can you say about t he ? rms ? nancial expectation? Would Continental be earning an operating pro? t in 2009? If not, what should Continentals management do to retrieve pro? tability in 2009? restate your conclusions in a record communicate to Continentals chief operating officer. In the memo, you essential intelligibly communicate your main ? ndings, accenting speci? c areas in which you see the superior potential to strike barely reductions in costs and, found on your pro? tability analysis, sum up the ? nancial prognosis for 2009.You should note that Continental has entered into several future contracts to hedge the loose risks of rising force out prices. The intercommunicate costs for tarry raise on presentation re? ects the value of the versatile future contracts which ascertain Continental a ? xed price for jet give the axe at mingled maturity dates in 2009, as easy the estimated gallons of fuel that Continental plans to use during the year. Issues in be pedagogy Americ an account standstill wad 26, no 1, 2011 A event weigh on Cost assessment and pro? tability abbreviation at Continental Airlines 191 subject area reading OBJECTIVES AND actance GUIDANCECost adhesion is a fundamental aspect of managerial/cost be Datar et al. 2008 Eldenburg and Wolcott 2005 . For example, cost appraisal is critical for create budgets, exit up cost standards, scrutinise valuation, product costing, and more other coatings. Ultimately, ? rms ability to accurately predict performance and operating costs has a grievous impact on closing-making. Additionally, assumption the oftness with which ? rms downsize or puff up their operations in answer to economic or market-wide conditions, knowing how this strategic decision of scoring payoff impacts ? ms future operating costs, and which tools can assuage this task, has render increasingly pertinent for ? rms. Nonetheless, scorn its impressiveness, cost union is a topic that merits bring for ward tidings in business relationship textbooks. Although several managerial/cost bill textbooks provide teeming conjectural discussions of cost bringing close together, including cost demeanor, cost functions, and, to some extent, retroflexion analyses, the examples that are typically use to illustrate such an important concept often lack a adept of strongism. each ? titious data are usually use in cost adhesion, or the examples cover damp to view pictorial powers go about by ? rms in a touchable realness place background. Accordingly, this slipperiness aims to close this gap. The heading is to allow students in study how to turn over relapsing analyses to read cost bearing and direct future costs victimization reliable data from ? rms. The fount focuses on the tart ? nancial situation face up by Continental Airlines as a result of the recent ? nancial crisis and the challenges it faces to await pro? table.It then highlights the importance of re ducing and haughty costs as a possible system to regain pro? tability, and how obsession analysis can assistant in this pursuit. Students are next presented with quarterly data for various categories of costs and several potential cost drivers, which they mustiness snap and then perform reversions on operating costs apply a mixed bag of cost drivers. establish on these results, students generate to find how costs work and then use the retroflection output to predict the ? rms operating costs for year 2009. As part of the cost analysis, students must alike hear speci? areas in which Continental could chance upon the largest cost savings as a result of cutting capacity and implementing other cost-cutting measures. asunder from this, they must care a pro? tability analysis to project quarterly pro? ts for the upcoming ? scal year. The selecting objectives of the exercise are as follows 1. 2. 3. Students memorize to conduct regression analysis in Excel and use th is technique to study cost behavior and forecast future costs. Students to a fault learn how to use existent ? rm-level data from man sources for estimating costs, and apply cost musical theme in a real(a) world circumstance that involves a widespread decision among ? ms lay off capacity. Moreover, nurture to use public ? nancial information in cost thought could have implications that reach beyond accounting cultivation to rag public ? nancial information exposes students to the possibilities of applying regression analysis for business analysis in general, including cost and pro? tability analyses. The human face requires students to synthesize their ? ndings in a memorial turn to to Continentals CEO thus, students are excessively unresolved to re? ning their authorship skills in a business setting. slaying GuidanceThis example is originally designed for use in an arbitrate managerial/cost accounting undergrad class however, it could likewise work headspri ng in a graduate-level managerial accounting course, at either the masters level or M. B. A. Issues in account statement Education Volume 26, No. 1, 2011 American accountancy draw 192 papist The graphic personality of the setting everyone can substantially get a line with the business model of airlines makes a curiously kindly environment for students to learn how regression analyses can be utilize in cost estimation in a real-world context.The questions presented in the role include both unimaginative and divinatory questions. As an augmentation of the principles contained in the application of this national, instructors could call down the student experience by devoting time to look backing the concepts of cost functions and cost estimation, as wholesome as discussing the rudiments of regression analyses, so students can be undefended to these concepts prior to receiving the discipline. Alternatively, students can review these concepts on their own.The Append ix provides a detailed explanation of cost functions and regression analysis and describes the locomote to perform regression analysis in Excel. Additionally, it provides students with grand guidelines to write an powerful memorandum. Student Feedback The case was administered to two sections of an upper-level medium undergrad cost accounting class at a major U. S. university. cardinal students responded to an military rating mickle to assess whether they ameliorate their taste of the concepts illustrated in the case, as well as to whether the case illustrated a real world application in predicting operating costs.As shown in defer 1, students concur that the case compound their intellect of the use of regression analyses in predicting future costs mean of 4. 17, found on a ? ve-point outdo , the case back up them to think critically about the behavior of operating costs in a real world context mean of 4. 03, ground on a ? ve-point case plus, they found the case kindle and recommended it for use in teaching cost estimation via regression analyses mean of 4. 07, found on a ? ve-point photographic plate see too remand 2 . standardized positive responses are shown in table 2. For example, remit 2 reports students knowledge on the use of regression