A Case Study on Cost Estimation and Profitability Analysis at Continental Airlines
A Case Study on Cost Estimation and
Profitability Analysis at Continental Airlines
Francisco J. Román
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. Continental had incurred an operating loss of $71 million dollars—its second consecutive quarterly earnings decline that year. Likewise, passenger volume was significantly down, dropping by nearly 5 percent from the prior year’s quarter. Continental’s senior management needed to act swiftly to reverse this trend and return to profitability.
Being the fourth largest airline in the U.S. and eighth largest in the world, Continental was perceived as one of the most efficiently run companies in the airline industry. Nonetheless, 2008 brought unprecedented challenges for Continental and the entire industry as the United States and much of the world was heading into a severe economic recession. Companies cutting deeply into their budgets for business travel, the highest yielding component of Continental’s total revenue, together with a similar downward trend from the leisure and casual sector, combined to sharply reduce total revenue.
Concurrent with this revenue decline, the price of jet fuel soared to record levels during 2008.1 Thus, while revenue was decreasing Continental was paying almost twice as much in fuel costs. Interestingly, fuel costs surpassed the firm’s salaries and wages as the highest cost in Continental’s cost structure. This obviously had a negative impact on the bottom line, squeezing even further the already strained profit margins.
The outlook for a quick recovery in the U.S. economy and, consequently, an upturn in the demand for air travel in the short term did not seem likely. Continental’s internal forecasts indicated that a further decline in passenger volume should be
Profitability Analysis at Continental Airlines
Francisco J. Román
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. Continental had incurred an operating loss of $71 million dollars—its second consecutive quarterly earnings decline that year. Likewise, passenger volume was significantly down, dropping by nearly 5 percent from the prior year’s quarter. Continental’s senior management needed to act swiftly to reverse this trend and return to profitability.
Being the fourth largest airline in the U.S. and eighth largest in the world, Continental was perceived as one of the most efficiently run companies in the airline industry. Nonetheless, 2008 brought unprecedented challenges for Continental and the entire industry as the United States and much of the world was heading into a severe economic recession. Companies cutting deeply into their budgets for business travel, the highest yielding component of Continental’s total revenue, together with a similar downward trend from the leisure and casual sector, combined to sharply reduce total revenue.
Concurrent with this revenue decline, the price of jet fuel soared to record levels during 2008.1 Thus, while revenue was decreasing Continental was paying almost twice as much in fuel costs. Interestingly, fuel costs surpassed the firm’s salaries and wages as the highest cost in Continental’s cost structure. This obviously had a negative impact on the bottom line, squeezing even further the already strained profit margins.
The outlook for a quick recovery in the U.S. economy and, consequently, an upturn in the demand for air travel in the short term did not seem likely. Continental’s internal forecasts indicated that a further decline in passenger volume should be