You should read the business case titled, “A Case Study on Cost Estimation and Profitability Analysis at Continental Airlines,” posted on Blackboard. The assignment is quite simple. You must perform regressions analysis and estimate costs for three out of the ten cost pools presented in the case. You must answer the three questions listed below.1 Notice that you are only required to estimate regressions for the following three cost pools and should ignore the rest of them: (1) Wages & Salaries, (2) Aircraft Maintenance and Repair, (3) Passenger Services.
The regressions should be conducted in Microsoft Excel. The spreadsheet with the data to estimate the regressions and the cost projections is on Blackboard. Note that the required projection of costs is for fiscal year 2009 as the case was written around that time.
Requirements and/or questions
- Refer to the quarterly data on operating costs and the corresponding cost drivers for each cost pools mentioned above. Create a scatter plot and estimate a regression for each cost pool.2
- Write the appropriate cost function for each cost pool and interpret the regression results on every statistic for each regression—e.g., what is the intercept, slope coefficient, r-squared, t-stat. and p-values, indicating. Also, explain how costs would behave on each cost pool. Be thorough in your explanation.
- Refer to Exhibit 2. It provides quarterly forecasts of the projected activity on each cost driver for fiscal year 2009. Use your regressions results and the forecast on Exhibit 2 to estimate Continental’s quarterly costs for fiscal year 2009 on each of the three cost pools.
1 Ignore the five questions on page 190 of the case. Instead, focus only on the three questions here.
2 Note that Aircraft Maintenance and Repairs costs include two potential cost drivers: the number of planes in the fleet and the number of miles flown. Use the number of planes as the main cost driver instead of miles flown in your regression. Furthermore, during our lecture on regression, we discussed the need to inspect for extreme observations and/or outliers. For simplicity, assume no outliers are present. Therefore, do not eliminate any observations and use all available observations to conduct each of the three regressions.
Instructions regarding your report submission
- As required on question #1, your report should include the data plot for each regression, plus the regression results for each of the three cost pools. Label each plot and regression output appropriately. If prefer, you can include your plot and regression results for each cost pool on the same sheet to save on paper.
- Please limit your write-up of question #2, setting up the cost functions and the explanation of the results on each regression, to two pages maximum.
- Include all supporting documents of your cost projections as required by question #3.