NOTE: Data in Exhibits 2, 4, 5, and 6 are available in Microsoft Excel format on our course website. This will make it MUCH easier to do regressions.
1. Identify several possible drivers of salary costs for use in estimating a salary cost function. Using one of these cost drivers, apply the high-low technique to estimate the salary cost function for Delta Airlines. What driver did you select and why? How would Delta use this function to forecast costs? What are the advantages of this technique? The disadvantages? 2. Use simple regression to estimate the salary cost function for Delta Airlines. Comment on the statistical validity and significance of your results. What are the advantages of this technique? The disadvantages? Is this technique an improvement over the high-low method? Why or why not? 3. Under what conditions do you think the cost functions estimated in Questions 1-3 will be useful for predicting the salaries for Delta in 2003? 2004? Under what conditions would they be less useful? Explain. 4. Use the high-low technique to estimate the salary cost function for JetBlue Airways Corp. How does it compare to the salary cost function for Delta? 5. (This one will call for some speculation - there is no right answer!) What volume (amount of cost driver you chose above for #1 and #2) do you think Delta can expect for Song in its first year of operations? Using the cost function you developed in either #1 or #2 (the better of the two), predict the salaries cost for Song in its first year of operation. 6. Delta's New Song:
A Case on Cost Estimation
in the Airline Industry
Shane S. Dikolli and Karen L. Sedatole
Founded in 1924, Delta Airlines is the third largest U.S. airline in operating revenues and revenue passenger miles flown. 1 Traditionally, Delta's primary competition came from the other full-service airlines, including United Airlines and American Airlines....