Delta’s New Song: a Case on Cost Estimation in the Airline Industry

Delta’s New Song:
A Case on Cost Estimation
In the Airline Industry

Contents Question 1 2 Question 2 3 Question 3 4 Question 4 7 Question 5 8 Question 1 8 Question 2 9 Question 3 11 Question 4 13 Appendix 1 13 Appendix 2 19

Question 1

There are several possible factors that seem more relevant to be as a cost diver to estimate Delta’s salaries: * Available Ton Miles * Number of Departures(thousand) * Revenue Passenger Miles * Revenue Ton Miles * Revenue Miles scheduled
Salary cost for Delta consists of the payment to flight attendants and pilots so it can be determined by the hours flown. The miles and the time flown are correlated so between these cost drivers, available ton miles seems to be the most reasonable cost driver since it indicate the time that the pilots and the flight attendant work for the Delta.
Question 2

We first apply simple regression using each of the cost drivers mention above and other factor to estimate the salary by the cost drivers individually to see which one is best cost driver based on statistical reason and comparing R square.
The scatter plots are shown in appendix 1.
Results are as follows:

X | Y | Y=AX+B | R square | Available Seat Miles | Salary Cost | Y=38.099X+262.71 | 0.0997 | Available Ton Miles | Salary Cost | Y=0.5517X-682.64 | 0.5577 | Number of Departures | Salary Cost | Y=-8.5728X+3184.7 | 0.3229 | Revenue Air Hours | Salary Cost | Y=3.2063X+112.59 | 0.1239 | Revenue Miles flown | Salary Cost | Y=8.0355X+21.593 | 0.149 | Revenue Miles Scheduled | Salary Cost | Y=8.0801X-7.3518 | 0.2023 | Revenue Passengers Emplaned | Salary Cost | Y=16.906X+890.46 | 0.0408 | Revenue Passengers Miles | Salary Cost | Y=38.238X+577.26 | 0.1764 | Revenue Passengers Ton Miles | Salary Cost | Y=0.3821X+577.91 | 0.1765 | Revenue Ton Miles | Salary Cost | Y=0.3301X+614.33 | 0.1378 |

We can conclude from the above table that “Available Ton Mile” is better than