Regionfly Airline Case Study

Executive Summary: 

RegionFly is a premium airline which is distinguished for the superior quality of service through southeastern airspace. Of late, we have lost continuously due to the price pressure of big, low cost carriers which have benefitted disproportionately due to the recent financial crisis and the resulting aftermath of economy in general struggling. We have witnessed a considerable slowing in premium travel with firms getting pushing for cost-saving measures and people cutting their discretionary spending by substituting luxury travel to economical one. As such we have witnessed worst ever profitability KPIs and need to find ways to reverse the declining trend. One such action was taken a couple of years ago, when we stopped operating on routes 2&4. Although we had expected increased profits, a year later things have got only worse.

We are currently assessing the proposal to the management whether they should stop operating on route 7 as well.

Findings:

From our analysis, we have found out that the biggest contributor to the lower profitability is the increased overhead allocation to the costs. It can be seen from Exhibit – 1 (see below) that after closing route #7, this cost allocation increased from $2.66 to $3.02. It may be as a consequence of excess capacity building in the system after a route was closed, but the capital leases, the planes, and the maintenance slack was never removed. As such, the bulk of the fixed overhead costs remained in the system as deadweight with lower revenue.

Analysis:

We took a pro-forma analysis approach and projected the financial year 2015 profits and margins in both the scenario – with or without route #7 operating. We segregated all costs as variable and fixed and at the same time direct and overhead and listed them down as shown in Exhibit 1. The assumptions taken were – first, the revenue and direct variable costs were to remain constant from all other routes. As far as overhead fixed costs were concerned, we took them as constant. Second – the only overhead variable costs (Exhibit 1: Classification) – Flight support, Maintenance and Airport expenses, denoted by accounts 1000, 3000, 7000 were assumed to be cut down proportionately to the direct variable cots ($18,000 of route #7) times the dollar amount of allocation of variable overhead ($ 1.47).

Conclusion:  

It is clear that the biggest increase in costs is coming from Variable overhead costs, which went up from $1.22 to $ 1.50 after route #7 was closed. It means that for per unit of revenue earned, we started spending more on Flight support, Maintenance and Airport Expenses. This can be attributed to various factors such not cutting the manpower proportionately, increased maintenance and inefficient air staffing. The proposed wage agreement might also be another factor. Our analysis therefore, suggests that closing route #7 is not the best approach to increase the profitability.