Delta’s New Song: a Case on Cost Estimation in the Airline Industry

2091 words 9 pages
Delta’s New Song:
A Case on Cost Estimation
In the Airline Industry

Contents Question 1 2 Question 2 3 Question 3 4 Question 4 7 Question 5 8 Question 1 8 Question 2 9 Question 3 11 Question 4 13 Appendix 1 13 Appendix 2 19

Question 1

There are several possible factors that seem more relevant to be as a cost diver to estimate Delta’s salaries: * Available Ton Miles * Number of Departures(thousand) * Revenue Passenger Miles * Revenue Ton Miles * Revenue Miles scheduled
Salary cost for Delta consists of the payment to flight attendants and pilots so it can be determined by the hours flown. The miles and the time flown are correlated so between these cost drivers, available ton miles seems
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It is also more complicated and hard to understand than single regression. Question 4

In question 1-3 we assume that the wage per hour for pilots and flight attendant remain the same through 1993 to 2002 and we estimate the salary cost based on this wage so if the wage does not change in 2003 and 2004 for Delta Airlines we can use the cost functions estimated in question 1-3. Another factor that is important to consider estimating the cost based on the data from previous years is that the number of employee and labor does not change through these year and the year we want to estimate the salary cost based on our cost function estimated in questions 1-3. In summation we can say that the cost function estimated in question 1-3 are useful based on the following conditions: 1) The rate of wage for employee, labor, pilots and flight attendant will not change in year 2003 and 2004. So there should be no concerning about lowering staff’s salaries. 2) The number of employee, labor, pilots and flight attendant will not change in year 2003 and 2004. So there should be no regulation about reducing the number of Delta’s staff. 3) The fixed cost we estimate in our previous question should not change in 2003 and 2004. The new security rules caused by the September 11 terrorist attack may cause an increase

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