DISCUSSION QUESTIONS 1. Using the quarterly data for operating costs and the various cost drivers of costs provided by Exhibits 1 and 2, estimate regression for cost category of costs. Then, write the appropriate cost function for each category of cost and then interpret your regression results. 2. Based on your regression results, where do you see the largest reductions in costs if flying capacity is lowered by 11 percent? Also, in which areas do you see opportunities to achieve further cost reductions and why? 3. Exhibit 2 provides a quarterly forecast of revenues, jet fuel prices, and the projected operating activity for 2009. Using the information from your regressions and the forecast information provided in Exhibit 2, estimate Continental's operating costs and expected profit for the upcoming fiscal year. 4. Based on the results of your profitability analysis, what can you say about the firm's financial outlook? Would Continental be earning an operating profit in 2009? If not, what should Continental's management do to restore profitability in 2009? Obs. Purchases |||||||||||| 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 EXHIBIT 1 REVENUES AND OPERATING COSTS DATA Salaries and Capacity Aircraft Period Revenues Fuel Wages Rentals Landing Fees 1Q-2000 2,277,000,000 334,000,000 672,000,000 206,000,000 129,000,000 20-2000 2,571,000,000 313,000,000 719,000,000 210,000,000 138,000,000 30-2000 2,622,000,000 354,000,000 748,000,000 215,000,000 133,000,000 40-2000 2,429,000,000 392,000,000 736,000,000 213,000,000 132,000,000 10-2001 2,451,000,000 345,000,000 758,000,000 214.000.000 141,000,000 20-2001 2,556,000,000 349,000,000 800,000,000 223,000,000 153,000,000 30-2001 2,223,000,000 322,000,000 779,000,000 230,000,000 139,000,000 40-2001 1,739,000,000 213,000,000 684,000,000 236,000,000 148.000.000 10-2002 1.993,000,000 208,000,000 732,000,000 228,000,000 161.000.000 2Q-2002 2,192,000,000 254,000,000 746,000,000 231,000,000 160.000.000 30-2002 2,178,000,000 276,000,000 743,000,000 227,000,000 163,000,000 4Q-2002 2,039,000,000 285,000,000 738,000,000 216,000,000 149,000,000 10-2003 2,042,000,000 347,000,000 778,000,000 223,000,000 152,000,000 20-2003 2,216,000,000 302.000.000 762.000.000 224,000,000 152,000,000 30-2003 2,365,000,000 316,000,000 778,000,000 225,000,000 165,000,000 40-2003 2,247,000,000 290,000,000 738,000,000 158,000,000 224,000,000 151,000,000 10-2004 2,307,000,000 333,000,000 688,000,000 317,000,000 220,000,000 160,000,000 20-2004 2,553,000,000 387,000,000 711,000,000 328,000,000 222,000,000 163,000,000 30-2004 2,602,000,000 414,000,000 703,000,000 347,000,000 224,000,000 171.000.000 4Q-2004 2,437,000,000 453,000,000 717,000,000 359,000,000 225,000,000 160,000,000 10-2005 2,505,000,000 470,000,000 715,000,000 353,000,000 227,000,000 171,000,000 20-2005 2,857,000,000 575,000,000 649,000,000 382,000,000 229,000,000 181,000,000 30-2005 3,001,000,000 684,000,000 646,000,000 406,000,000 234.000.000 182,000,000 40-2005 2,845,000,000 714,000,000 639,000,000 431,000,000 238,000,000 174,000,000 1Q-2006 2,947,000,000 672,000,000 661,000,000 415,000,000 245,000,000 185,000,000 20-2006 3,507,000,000 744,000,000 791,000,000 454,000,000 248,000,000 198,000,000 30-2006 3,518,000,000 858,000,000 743,000,000 475,000,000 249.000.000 195,000,000 40-2006 3,156,000,000 760,000,000 680,000,000 447,000,000 248,000,000 186,000,000 1Q-2007 3,179,000,000 684,000,000 726,000,000 430,000,000 248,000,000 193.000.000 20-2007 3,710,000,000 842,000,000 821,000,000 444,000,000 248,000,000 190,000,000 30-2007 3,820,000,000 895,000,000 836,000,000 446,000,000 249,000,000 209,000,000 40-2007 3,523,000,000 933,000,000 744,000,000 473,000,000 249,000,000 198,000,000 10-2008 3,570,000,000 1,048,000,000 729,000,000 506,000,000 247,000,000 207,000,000 20-2008 4,044,000,000 1,363,000,000 704,000,000 589,000,000 246,000,000 210,000,000 30-2008 4.072,000,000 1,501,000,000 765,000,000 553.000.000 244.000.000 225.000.000 4Q-2008 3,471,000,000 993,000,000 760,000,000 425,000,000 240,000,000 210,000,000 Obs. 1 2 3 4 5 6 Period 1Q-2000 20-2000 3Q-2000 4Q-2000 10-2001 20-2001 Distribution Costs 248,000,000 261,000,000 255,000,000 217,000,000 243,000,000 230,000,000 Aircraft Maintenance Depreciation 159,000,000 95,000,000 171.000.000 98.000.000 167,000,000 102,000,000 149,000,000 107,000,000 160,000,000 105,000,000 162,000,000 111,000,000 Passenger Services 85,000,000 91,000,000 97.000.000 89,000,000 91,000,000 96,000,000 Other Expenses 286,000,000 284,000,000 288,000,000 277,000,000 318,000,000 295.000.000 Obs. Period 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 30-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 20-2003 3Q-2003 4Q-2003 1Q-2004 20-2004 30-2004 4Q-2004 1Q-2005 20-2005 30-2005 4Q-2005 1Q-2006 20-2006 30-2006 4Q-2006 1Q-2007 20-2007 3Q-2007 4Q-2007 1Q-2008 20-2008 3Q-2008 4Q-2008 Distribution Costs 194,000,000 142,000,000 172,000,000 158,000,000 138,000,000 124,000,000 127,000,000 138,000,000 131,000,000 135,000,000 137,000,000 140,000,000 139,000,000 136,000,000 138,000,000 154,000,000 154,000,000 142,000,000 160,000,000 178,000,000 157,000,000 155,000,000 161,000,000 176,000,000 171,000,000 174,000,000 182,000,000 194,000,000 182,000,000 159,000,000 Aircraft Maintenance 142,000,000 104,000,000 114,000,000 119,000,000 119,000,000 124,000,000 133,000,000 126,000,000 135,000,000 115,000,000 112,000,000 102,000,000 107,000,000 93,000,000 112,000,000 106,000,000 116,000,000 121,000,000 127,000,000 140,000,000 140,000,000 140,000,000 144,000,000 169,000,000 166,000,000 142,000,000 159,000,000 167,000,000 152,000,000 135,000,000 Passenger Depreciation Services 120,000,000 89,000,000 131,000,000 71,000,000 106,000,000 77,000,000 112,000,000 73,000,000 112,000,000 78,000,000 114,000,000 68,000,000 116,000,000 70,000,000 110,000,000 73,000,000 110,000,000 81,000,000 108,000,000 73,000,000 104,000,000 69,000,000 105,000,000 76,000,000 104,000,000 84,000,000 102,000,000 77,000,000 99,000,000 77,000,000 98,000,000 84,000,000 97,000,000 91,000,000 95,000,000 80,000,000 96,000,000 82,000,000 97,000,000 90,000,000 99,000,000 97,000,000 99,000,000 87,000,000 99,000,000 90,000,000 101,000,000 99,000,000 106,000,000 105,000,000 107,000,000 95,000,000 106,000,000 96,000,000 108,000,000 107,000,000 112,000,000 113,000,000 111,000,000 91,000,000 Other Expenses 121,000,000 166,000,000 382,000,000 454,000,000 276,000,000 277,000,000 320,000,000 91,000,000 250,000,000 455,000,000 304,000,000 279,000,000 287,000,000 278,000,000 316,000,000 280,000,000 282,000,000 305,000,000 293,000,000 323,000,000 313,000,000 333,000,000 340,000,000 357,000,000 357,000,000 328,000,000 356,000,000 427,000,000 461,000,000 372,000,000 Total Aircraft Obs. Period Available Seat Miles Regional 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1Q-2000 20-2000 30-2000 40-2000 1Q-2001 20-2001 30-2001 40-2001 1Q-2002 20-2002 30-2002 4Q-2002 1Q-2003 20-2003 514 522 535 522 548 557 501 522 538 570 570 554 562 570 OPERATIONS AND COST DRIVER DATA Leased Aircraft Flights Passengers Available Seat Miles 403 98,820 11,201,000 20,951,000,000 410 97,871 12,084,000 21,384,000,000 414 97,967 12.155.000 22,356,000,000 398 98,378 11.456.000 21,409,000,000 406 98,590 11,220,000 21,459,000,000 416 99,018 12.256,000 22,813,000,000 377 98,564 11,254,000 21.994,000,000 393 81,109 9.508,000 18,219,000,000 400 81,883 12,062,000 20,375,000,000 404 82,815 13,099,000 22,286,000,000 401 81,737 13,006,000 22,626,000,000 410 78,809 12,874,000 21.054,000,000 419 75,178 11,518,000 20,843,000,000 428 75,617 13,044,000 21,241,000,000 1,767,000,000 2,073,000,000 Obs. Period Total Aircraft Available Seat Miles Regional 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1Q-2000 20-2000 30-2000 4Q-2000 1Q-2001 20-2001 30-2001 40-2001 1Q-2002 20-2002 30-2002 4Q-2002 1Q-2003 20-2003 514 522 535 522 548 557 501 522 538 570 570 554 562 570 OPERATIONS AND COST DRIVER DATA Leased Aircraft Flights Passengers Available Seat Miles 403 98,820 11,201,000 20,951,000,000 410 97,871 12,084,000 21,384,000,000 414 97,967 12,155,000 22,356,000,000 398 98,378 11,456,000 21,409,000,000 406 98,590 11,220,000 21,459,000,000 416 99,018 12,256,000 22,813,000,000 377 98,564 11,254,000 21,994,000,000 393 81,109 9,508,000 18,219,000,000 400 81,883 12,062,000 20,375,000,000 404 82.815 13,099,000 22,286,000,000 401 81,737 13,006,000 22,626,000,000 410 78,809 12,874,000 21,054,000,000 419 75,178 11,518,000 20,843,000,000 428 75,617 13,044,000 21,241,000,000 |||||||| 1,767,000,000 2,073,000,000 Obs. Total Aircraft Period 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 3Q-2003 40-2003 1Q-2004 20-2004 30-2004 4Q-2004 1Q-2005 2Q-2005 30-2005 4Q-2005 1Q-2006 20-2006 30-2006 4Q-2006 1Q-2007 20-2007 30-2007 40-2007 1Q-2008 20-2008 3Q-2008 4Q-2008 570 579 586 587 592 594 598 604 611 622 630 634 648 648 630 625 631 OPERATIONS AND COST DRIVER DATA Leased Aircraft Flights Passengers Available Seat Miles 428 76,297 13,727,000 22,819,000,000 434 75,650 13,769,000 21,907,000,000 437 74,859 12,810,000 22,670,000,000 440 75,816 14,558,000 24,150,000,000 445 74,211 14,862,000 24,674,000,000 448 74,443 14,252,000 23,588,000,000 453 71,494 14,122,000 23,585,000,000 459 74,651 15,540,000 25,482,000,000 466 74,630 15,905,000 26,833,000,000 477 75,886 15,448,000 25,720,000,000 483 74,962 15,594,000 26,117,000,000 484 77,729 17,596,000 28,259,000,000 482 77,468 17,328,000 29,262,000,000 480 79,030 16,601,000 27,280,000,000 446 78,601 16,176,000 27,250,000,000 418 82,582 18,120,000 29,592,000,000 415 81,118 17,901,000 30,346,000,000 415 80,850 16,733,000 28,550,000,000 414 76,719 16,440,000 28,376,000,000 390 76,096 17,108,000 30,304,000,000 412 78,599 17,962,000 30,383,000,000 397 76,000 15,183,000 26,448,000,000 Available Seat Miles Regional 1,605,000,000 2,980,000,000 2,400,000,000 2,603,000,000 1,999,000,000 3,408,000,000 2,740,000,000 3,026,000,000 3,112,000,000 3,095,000,000 3,082,000,000 3,374,000,000 3,503,000,000 3,292,000,000 3,126,000,000 3,177,000,000 3,193,000,000 3,104,000,000 3,098,000,000 3,450,000,000 3,390,000,000 3,046,000,000 628 641 630 653 632 Obs. Period Fuel Price Fuel Consumed 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 1Q-2000 20-2000 30-2000 4Q-2000 1Q-2001 20-2001 3Q-2001 4Q-2001 1Q-2002 20-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 20-2004 30-2004 4Q-2004 1Q-2005 2Q-2005 Passenger Miles Flown 15,005,000,000 16,491,000,000 17,325,000,000 15,340,000,000 15,114,000,000 17,053,000,000 16,206,000,000 12,767,000,000 14,867,000,000 16,489,000,000 16,960,000,000 17,252,000,000 14,352,000,000 16,129,000,000 18,041,000,000 16,412,000,000 16,255,000,000 18,735,000,000 19,922,000,000 18,239,000,000 18,112,000,000 20,292,000,000 Employees 45,000 45,500 46,000 45,944 38,396 39,000 39,500 39,461 40,229 41,011 41,809 40.244 38,960 39,000 39,500 39,000 38,240 37,496 36,766 38,255 41,831 45,742 $0.829 $0.797 $0.865 $0.885 $0.856 $0.815 $0.824 $0.826 $0.644 $0.723 $0.760 $0.740 $1.029 $0.881 $0.857 $0.872 $1.041 $1.787 $1.199 $1.190 $1.453 $1.670 377,000,000 386,000,000 398,000,000 372,000,000 369,000,000 391,000,000 373,000,000 369,000,000 308,000,000 332,000,000 340,000,000 316,000,000 305,000,000 308,000,000 330,000,000 314,000,000 320,000,000 347,000,000 345,000,000 321,000,000 324,000,000 344,000,000 Passenger Miles Flown Obs. Period Fuel Price Fuel Consumed 23 24 25 26 27 28 29 30 31 32 33 34 35 36 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 20-2007 3Q-2007 4Q-2007 1Q-2008 20-2008 3Q-2008 4Q-2008 21,762,000,000 20,033,000,000 20,336,000,000 23,367,000,000 24,042,000,000 21,772,000,000 21,450,000,000 24,623,000,000 25,422,000,000 22,670,000,000 22,280,000,000 24,836,000,000 24,746,000,000 20,825,000,000 Employees 50,018 42,200 42,600 43,450 41,500 38,033 41,800 43,300 41,400 39,640 43,000 40,100 43,500 42,490 $1.880 $1.776 $1.904 $2.110 $2.215 $2.064 $1.895 $2.079 $2.206 $2.499 $2.797 $3.856 $3.450 $2.925 364,000,000 344,000,000 347,000,000 375,000,000 387,000,000 362,000,000 361,000,000 395,000,000 406,000,000 380,000,000 375,000,000 389,000,000 395,000,000 339,000,000 EXHIBIT 2 PROJECTIONS OF REVENUES AND OPERATING ACTIVITY FOR YEAR 2009 Variable Quarter 1 Quarter 2 Quarter 3 Quarter 4 Revenues $2,962,000,000 $2,767,000,000 $2,947,000,000 $2,462,000,000 Available seat miles 26,323,000,000 28,007,000,000 28,933,000,000 26,291,000,000 Available regional seat miles 2,971,000,000 3,044,000,000 3,130,000,000 3,002,000,000 Number of passengers 14,408,000 16,348,000 16,795,000 15,258,000 Number of planes 634 617 604 601 Number leased planes 398 394 380 379 Price of fuel (per gallon) $1.82 $2.07 $1.99 $1.98 Gallons of fuel consumed 403,000,000 430,000,000 369,000,000 479,000,000 All financial and operational data represent quarterly data for the quarter beginning January 2000 (Observation 1) through December 2008. Data have been compiled from Continental's 8-K and10-K reports, submitted to the Securities and Exchange Commission. Definitions of Operations Variables: Available seat miles = the number of seats available multiplied by the number of miles flown; Available regional seat miles = available seat miles on regional routes; Number of passengers = number of paying passengers flown; Number of planes = number of planes in the fleet, including regional routes aircraft; Number of leased planes = number of leased planes; Price of jet fuel = average price per gallon of jet fuel in the respective quarter, and Gallons of fuel consumed = number of gallons of fuel consumed in the respective quarter