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Chapter 6 Brief

Josh Kennedy

on 30 October 2013

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Transcript of CH6Group_ACCT614_AR-brief

Cost Estimation & Profitability Analysis at Continental Airlines
Chapter 6 Group: Jeff Henderson & Josh Kennedy
ACCT614 Applied Managerial Accounting: Professor Sandra Damron
October 31, 2013

Focuses on the harsh financial situation faced by Continental as a result of financial crisis and challenges it faced to remain profitable

Highlights importance of reducing and controlling costs as a viable strategy to restore profitability

Cost estimation fundamental aspect of managerial accounting

Cost predictions are used in each of the management functions
Predict costs
Determine desirability of alternative options
Budget expenditures, profits, and cash flows
2008; fourth largest airline in the U.S. and eighth largest in the world, Continental incurred operating loss of $71m (second consecutive quarterly earnings decline that year)

Passenger volume significantly down ~5% from prior year’s quarter

Unprecedented challenges for industry as world heads for severe economic recession

Downward trend in business and leisure travel which sharply reduces revenue

Price of jet fuel soars to record levels (surpasses firm’s salaries and wages as highest cost)

Management needs to act swiftly to restore profitability
Growing revenues by raising airfares or passenger volume seemed futile

Raising fares could erode future revenues

Discount fares could fall short in stimulating additional passenger demand
Restore profits with substantial and swift reduction in operating costs

Accomplished in two ways

Reduction in flying capacity adjusted to match projected passenger demand
Reduce flying capacity by 11% on domestic and international routes
Eliminate least profitable or unprofitable flights and, accordingly, ground several planes in the fleet

Implement several cost-cutting initiatives and capitalize on operational efficiencies
Consolidate several tasks during passenger check-in and reduce food and beverage waste served during flights
Reduce various miscellaneous expenses through targeted cuts in discretionary spending
To close the gap in profitability, Continental’s strategy was geared toward slashing operating costs

Cutting capacity
Identification and implementation of cost-cutting initiatives

Continental survives downturn and eventually merges with United in 2012
Román, F. J. (2011). A Case Study on Cost Estimation and Profitability Analysis at Continental Airlines. Issues In Accounting Education, 26(1), 181-200. doi:10.2308/iace.2011.26.1.181

Hilton, R. W. (2011). Managerial Accounting: Creating Value in a Dynamic Business Environment. New York City: McGraw-Hill Irwin.
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