The purpose of this memorandum is to address the profitability issues at Continental Airlines and to estimate the costs for 2009 to forecast the future outlook of the company. To address these issues, I used regression analysis to observe what effect the 11% reduction in flying capacity would have on the firm’s future operating costs. I also used the results from the regression analysis to verify the costs that, if reduced, would further comply with the implementation of cost-cutting initiatives and operational efficiencies that the company is striving for. Lastly, I consolidated the data to forecast Continental’s financial outlook for 2009, then provided insight into how Continental can restore profitability in the future. Cost Analysis and Impact of Flight Capacity Change
The short-term solution of decreasing flight capacity by 11% affects many factors in the operation of Continental Airlines. At first, it seems that a reduced number of flights and available seat miles would only benefit an airline that is failing to fill its flights and is losing out on profits because of it. On the other hand though, one must look deeper into the effects to find which costs are directly related to a reduction in flight capacity and which costs will largely be unaffected by the proposed solution. After examining the ten operating costs that Continental incurs throughout quarterly operation, I concluded that some of these costs are fixed or would not have a reaction to changes in flight capacity. In contrast, there are a few costs that are directly related to flight capacity and would see a large reduction with the cut in capacity. Table 1 below shows the ten costs that are incurred, details about each cost, and how they vary with a change in flight capacity.
As a result of cost analysis, it is easy to see that the four costs positively affected by a reduction in flight capacity are: airport/landing fees, aircraft maintenance and repairs, distribution costs, and passenger services. In the first quarter of 2009, according to my estimates: •
Airport/landing fees reduce by 18%
Aircraft maintenance and repairs reduce by 16%
Distribution costs reduce by 26%
Passenger services reduce by 5%
Based on these estimates, the total cost savings of reducing flight capacity in the first quarter of 2009 is equal to $ 105,415,709. Taking my estimation a step further, I have come to the conclusion that the cost savings for the 2009 totals $ 537,909,381. The flight capacity change makes total costs substantially less and would help achieve the solution that Continental is searching for. Another key point is that this cost analysis does not necessarily mean that these are the only costs that Continental can reduce; they are simply the costs that see the largest reduction based on the short-term solution that your management team has formulated.
Additional Cost Reduction Possibilities
An 11% reduction in flight capacity does indeed help reduce some of the costs that Continental incurs, but there are also other costs that aren’t affected by this that can still be reduced in other ways. I see an opportunity to reduce the regional capacity purchases, which is the third largest expense behind fuel cost and salaries. According to my regression analysis, it costs $14,808 for each additional regional flight. Seeing as the cost is driven strictly by the available regional seat miles, I believe a reduction in these seat miles would have a large impact on the overall cost of this operation. By reducing available regional seat miles by just 10% there would be a cost saving of $42 million in the first quarter and $174 million for the year. This change would not only decrease the cost, but would allow Continental to fill more of the regional flights and not have flights that are unprofitable. Another cost that Continental has the potential to reduce is...
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