A case on cost estimation
In the airline industry
Shane S. Dikoli and Karen L. Sedatole
ABSTRACT: This case provides the opportunity to use various empirical techniques (i.e, High-low method, simple regression, and multiple regression) in the estimation of cost functions. The case uses the airlines industry as the setting for this analysis and, in particular, focuses on the efforts of delta airlines to plan for salaries, the cost category that dominates its income statement. The case provides the data and the opportunity to learn the details of cost function estimation, but more importantly, it provides a rich setting in which issues related to the interpretation of these cost function can be discussed. Finally, the entry of delta into the low-cost carrier segment with its formation of song provides a unique opportunity to think about how the cost function of an established full-service airlines compares to that of a low-fare startup. Data from successful newcomer jet blue is used to illustrate these differences. More generally, the case shows how the use of historical costs and cost estimation techniques can facilitate decision making about entry into product markets.
Founded in 1942, delta airlines is the third largest U.S. airlines in operating revenues and revenue passenger miles flown. Traditionally, deltas primary competition came from the other full-services airlines including united airlines and American airlines. However, in recent year, the major airlines have increasingly been forced to compete with low-cost, no-frill airlines pioneered by “fly for peanuts” southwest airlines. The significant downturn in passenger volume in the third quarter of 2001 (following the September 11 attacks) served only to increase the head to head competition between the majors and the low cost competitions.
AIRLINES LABOR COST
Airlines must operate within a low-margins. High-fix-cost...