1. Using the quarterly data for operating costs and the various cost drivers of costs provided in the spreadsheet, estimate regressions for each of the ten cost categories listed above.
Then, write the appropriate cost function for each category of cost and interpret your regression results. For example, your first regression would have “salaries and wages” as your dependent variable and “available seat miles” as independent variable.
2. Based on your regression results and your interpretation of those results, where do you see the largest reductions in costs if flying capacity is lowered by 11 percent? Also, in which areas do you see opportunities to achieve further cost reductions? Why?
3. The table below provides a quarterly forecast of revenues, jet fuel prices,5 and the projected operating activity for 2009. Using the information from your regressions and the forecast information provided, estimate Continental’s operating costs and expected profit for the upcoming fiscal year.
4. Based on the results of your profitability analysis, what can you say about the firm’s financial outlook? Would Continental be earning an operating profit in 2009? If not, what should Continental’s management do to restore profitability in 2009?
Secondly, take the role of a consultant giving a short summary of your regression analysis. In particular, address the following three areas: (i) How do airlines make money?, (ii) What is the airline cost structure, and (iii) In which cost area do you see greatest potential to achieve cost reductions?
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