A Case Study on Cost Estimation and Profitability Analysis...

ISSUES IN ACCOUNTING EDUCATION Vol. 26, No. 1 2011 pp. 181–200 American Accounting Association DOI: 10.2308/iace.2011.26.1.181 A Case Study on Cost Estimation and Proï ¬ tability Analysis at Continental Airlines Francisco J. Romà ¡n ABSTRACT: This case exposes students to the application of regression analyses to be used as a tool pursuant to understanding cost behavior and forecasting future costs using publicly available data from Continental Airlines. Speciï ¬ cally, the case focuses on the harsh ï ¬ nancial situation faced by Continental as a result of the recent ï ¬ nancial crisis and the challenges it faces to remain proï ¬ table. It then highlights the importance of reducing and controlling costs as a viable strategy to restore†¦show more content†¦Continental’s internal forecasts indicated that a further decline in passenger volume should be anticipated throughout 2009, with a recovery in travel possibly occurring by the middle of 2010. To summarize, adverse economic conditions in the U.S., coupled with the rise in fuel costs, were dragging down Continental’s proï ¬ ts and relief was unlikely through the foreseeable future. THE DECISION TO REDUCE FLYING CAPACITY AND THE IMPACT ON OPERATING COSTS Given the situation described above, management needed to act swiftly to restore proï ¬ tability. Several strategic options were evaluated. Since the U.S. and much of the world was facing a severe recession, the prospect for growing revenues by either raising airfares or passenger volume seemed futile. Contrary to raising revenue, Continental’s managers believed that raising fares could potentially erode future revenues beyond the present level. Discounting fares did not seem a plausible solution either, because given the severity of the economic situation a fare cut could fall short in stimulating additional passenger demand and lead to lowering revenues. Thus, because management anticipated that revenues would remain ï ¬â€šat for most of the year, the only viable short-term solution to restoring proï ¬ ts was a substantial and swift reduction in operating costs. This could most effectively be accomplished in two ways. First, through a reduction in ï ¬â€šyingShow MoreRelatedA Case Study on Cost Estimation and Profitability Analysis at Continental Airlines8979 Words   |  36 PagesA Case Study on Cost Estimation and Profitability Analysis at Continental Airlines Francisco J. Romà ¡n Introduction In 2008, the senior management team at Continental Airlines, commanded by Lawrence Kellner, the Chairman and Chief Executive Officer, convened a special meeting to discuss the firm’s latest quarterly financial results. A bleak situation lay before them. 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