To: Lawrence Kellner
The purpose of this memorandum is to address the profitability issues at Continental Airlines and to estimate the costs for 2009 to forecast the future outlook of the company. To address these issues, I used regression analysis to observe what effect the 11% reduction in flying capacity would have on the firm’s future operating costs. I also used the results from the regression analysis to verify the costs that, if reduced, would further comply with the implementation of cost-cutting initiatives and operational efficiencies that the company is striving for. Lastly, I consolidated the data to forecast Continental’s financial outlook for 2009, then provided insight …show more content…
The forecasted costs for 2009 are in total a 19% reduction from the very same costs just a quarter before. The chief factor to look at though is the major loss in revenue from the 4th quarter of 2008 and the 1st quarter of 2009. Despite the fact costs are largely down, the decrease in revenue is much larger and diminishes the gains created by reducing operating costs. To help illustrate the immense changes in revenue, I have provided Table 3 below. Revenue decreases by 15% in the first quarter, and by as much as 27% over the entire year. It is very difficult for Continental to make an operating profit with such a disastrous plunge in revenue from one year to the next.
Suggestions to Restore Profitability
Continental Airlines’ financial outlook is grim at best under the current policies and procedures. In order to restore profitability in 2009, Continental would need to do either of two options. The first option would be to continue with cost-cutting initiatives. Further reduction in flight capacity, paired with the cost-cutting opportunities I listed earlier, could be a way to reduce costs even further to the point that they are lower than revenue. The biggest fear with that option is when customers begin to realize Continental is shedding expenses and dropping more and more flights. Once that happens, customers could exercise their option to choose another airline or demand lower ticket prices to make up for the