REGIONFLY

Cutting costs in the airline industry

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 Case Overview
Overhead Allocation Rates
Classification of Costs and Route
Allocations
Agenda Analysis of Contingent Plans
Proforma – Budget Analysis
Route -7 “The Big If”
Summary
 An airline provider with a very niche service
offering, operating only on seven historic
Case routes along the United states eastern
Summary seaboard.
Despite its lean size, RegionFly has a record of
outstanding performance in customer services
RegionFly – A regional airline and flight quality.
provider operating within the
 The company has been recently facing competitive
Southeastern United States challenges due to Tow Tier Structure
market catering to the FSC - “Full Service Carriers”
professional and wealthier LCC - “Low Cost Carriers”
flyers by providing ultra
premium amenities and
services
 “In a Pickle”
The company was cruising at steady rate until
the competition from “LCC” started putting
RegionFly in a Pickle.
Financial Standpoint
$7,000,000
The story so-far
$6,000,000  Lowest level of Profitability in “2012”
$5,000,000  Massive change in the company strategy
$4,000,000
 25% contribution criteria for the routes
 Dropping of Rote 2 and Route 4 at the
$3,000,000
beginning of 2013
$2,000,000
 Misconstrued Optimism leads to a “takeover”
$1,000,000  Poor performances continues – lowest level
$-
of profitability in 2013
2011 2012 2013 2014  Impending decision lingers on the probability
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Revenue Profit of dropping “Route 7”
 Overhead Allocation Rates
Total Allocation Overhead
Contribution margin of VDC by routes Route 2011 2012 2013 2014

Route 2011 2012 2013 2014 1 460,446.68 446,931.05 643,819.12 620,141.10

1 17% 16% 28% 28% 2 453,895.90 521,704.46 - -

2 17% 19% 0% 0% 3 520,476.03 562,585.96 591,119.53 465,400.09

3 19% 20% 25% 21% 4 278,610.54 286,933.19 - -

4 10% 10% 0% 0% 5 325,791.09 349,268.81 301,827.70 296,365.36

5 12% 12% 13% 14% 6 209,859.24 211,575.76 276,728.77 254,522.42

6 8% 8% 12% 12% 7 448,212.52 430,015.77 518,381.88 543,258.02

7 17% 15% 22% 25%

Allocation rate per VDC Dollar

Total Overhead Cost
$ 2.66 2.67 3.02 3.02
Total 2,697,292.00 2,809,015.00 2,331,877.00 2,179,687.00

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Classification of Costs and Route
Allocations
In terms of the current
Classification of Cost Route Type
strategy, the route costs
reported by the cost Flight Support Expenses 1000 Variable Cost
system, appears to be in- Sales Expenses 2000 Variable Cost
line and are appropriate
Maintenance Expenses 3000 Variable Cost
because they are spread
across based on the Fees and tax 4000 Fixed Cost
variable direct cost Depreciation 5000 Fixed Cost
among the routes and
has a direct relationship Other Expenses 6000 Fixed Cost
with each other. Airport Expenses 7000 Variable Cost

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 Variable Cost Analysis –Glossary of VC Accounts

Account # 1000 - Flight Support Expenses Account # 2000 - Sales Expenses

Passenger Services, Flying operating Wages and Fringe Benefits of reservations

expenses, Personnel expenses and Fringe personnel, ticketing, sales, advertising,
Benefits promotion and publicity expenses

Account # 3000 - Maintenance Expenses Account # 7000 - Airport Expenses

Wages and Fringe Benefits of repair and Wages and Fringe Benefits of Air Traffic and
maintenance workers, related equipment, ground service personnel, baggage handles,
repair, oil and repair expenses gate and cargo agents

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 Route Specific Operating Profit Margin - 2012
45.00%
40.57%
41.41%
40.00%

35.00%
32.48%
30.00% 32.96%

25.00%

20.00% 24%

15.00%

10.00% 14%

5.00%

0.00%
Route #1 Route #2 Route #3 Route #4 Route #5 Route #6 Route #7

At the Beginning of 2013, route 2 & route 4 are dropped, as they did not meet the profit threshold of 25%

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 Variable Cost Analysis - Dropping Route 2 & 4
Variable Costs over the years Share of Variable cost across four accounts

2,000,000

1,688,251
1,618,375 2011

1,500,000
1,171,764
2012
1,253,190
1,000,000

2013

500,000
Decrease in
2014
Variable Cost
-
2011 2012 2013 2014
- 250,000 500,000 750,000 1,000,000

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Proforma (2015) - Budget Analysis – No additional routes
are dropped
Allocated
Route Revenue VDC Revenue 4,164,340
OH
Route# 1 1,273,941 205,474 584,003
Variable DC 722,205
Route# 3 901,845 154,203 438,279

Route# 5 608,818 98,196 279,095 Allocated OH 2,052,668

Route# 6 539,726 84,332 239,690
Operating profit 1,389,467
Route# 7 840,010 180,000 511,600

TOTAL 4,164,340 722,205 2,052,668 Operating Profit Margin 33.37%

% of VDC for the routes

29% 21% 14% 12% 24%

Proforma (2015) - Budget Analysis – Dropping Route 7

Allocated
Route Revenue VDC Revenue
OH
Route# 1
Variable DC
Route# 3

Route# 5 Allocated OH
Route# 6
Operating profit
Route# 7

TOTAL Operating Profit Margin

% of VDC for the routes

38% 28% 18% 16%

 Route -7 “The Big If” – In terms of Profit Margin
We propose not dropping Route 7

Route 7 should not be dropped as the overall Comparison of Overhead Rate

margin including this route is 33.37% vs. a 40.00%

projected 25.78% if it’s dropped. It would be

35.00%
beneficial to know if any of the fixed cost can be
reclassified as variable cost such as warehouse or 30.00%
maintenance expenses.
25.00%

33% 26%
20.00%

15.00%

10.00%
We assumed the average of two years for the
5.00%
variable cost and the same % as prior year for
fixed cost to calculate the 2015 OH cost. 0.00%
1 3 5 6 7

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 Takeaway
 RegionFly has been constantly losing its profitability in
the market.
 Although cutting costs has been helping the company
to bridge few of its issues, these measures are not
helping them to a greater extent.
 After looking at their 2014 results, it was quite
evident that, the strategic initiatives on dropping
routes has not helped the struggling airlines.
In terms of profit margins of the routes, route 7
contributes only to 11% of the profit, however
dropping it will result in loss of 8% of the total
profit for RegionFly
Recommendation
 From the cost and profitability perspective we
recommend not to drop Route 7.
 If the situation continues for the next year, we can
revisit the strategy on dropping Route 7 next year
 It would be beneficial to know if any of the fixed
costs such as operating lease payments, rental
spaces, depreciation cost of the aircrafts involved in
route 7 can be reclassified as variable cost, in order
to give a better analysis.
THANK YOU