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

Case
Summary
RegionFly – A regional
airline provider operating
within the Southeastern
United States market
catering to the professional
and wealthier flyers by
providing ultra premium
amenities and services
 An airline provider with a very niche service
offering, operating only on seven historic
routes along the United states eastern
seaboard.
 Despite its lean size, RegionFly has a record
of outstanding performance in customer
services and flight quality.
 The company has been recently facing competitive
challenges due to Tow Tier Structure
FSC - “Full Service Carriers”
LCC - “Low Cost Carriers”
 “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”
 Massive change in the company strategy
$5,000,000
 25% contribution criteria for the routes
$4,000,000
 Dropping of Rote 2 and Route 4 at the
$3,000,000 beginning of 2013
$2,000,000  Misconstrued Optimism leads to a
$1,000,000
“takeover”
 Poor performances continues – lowest level
$-
2011 2012 2013 2014 of profitability in 2013
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Revenue Profit  Impending decision lingers on the
 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 Sales Expenses 2000 Variable Cost
in-line and are
appropriate because Maintenance Expenses 3000 Variable Cost
they are spread across Fees and tax 4000 Fixed Cost
based on the variable
direct cost among the Depreciation 5000 Fixed Cost
routes and has a direct Other Expenses 6000 Fixed Cost
relationship with each
other. Airport Expenses 7000 Variable Cost

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 Variable Cost Analysis –Glossary of VC Accounts
Balanced scorecard slide 4
Account # 1000 - Flight Support Account # 2000 - Sales Expenses
Expenses
Wages and Fringe Benefits of reservations
Passenger Services, Flying operating personnel, ticketing, sales, advertising,
expenses, Personnel expenses and Fringe promotion and publicity expenses
Benefits

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

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

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 Route Specific Operating Profit Margin - 2012
Balanced scorecard slide 9
45.00%
40.57%
40.00% 41.41%

35.00%

32.96% 32.48%
30.00%

25.00%

24
20.00% %

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
BalancedVariable
scorecard slide
Costs over the years
7 Share of Variable cost across four accounts

2,000,000

1,688,251 2011
1,618,375

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%

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Route# 1 Route# 3 Route# 5 Route# 6 Route# 7
Proforma (2015) - Budget Analysis – Dropping Route 7

Allocated
Route Revenue VDC Revenue 3,324,330
OH
Route# 1 1,273,941 205,474 729,744
Variable DC 542,205
Route# 3 901,845 154,203 547,654

Route# 5 608,818 98,196 384,744 Allocated OH 1,925,650

Route# 6 539,726 84,332 299,506
Operating profit 856,475
Route# 7 0 0 0

TOTAL 3,324,330 542,205 1,925,650 Operating Profit Margin 25.76%

% of VDC for the routes

38% 28% 18% 16%

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Route# 1 Route# 3 Route# 5 Route# 6
 Route -7 “The Big If” – In terms of Profit Margin
Balanced scorecard
We propose slide
not dropping Route 7 3
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
beneficial to know if any of the fixed cost can be 35.00%
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
variable cost and the same % as prior year for 5.00%
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.
Balanced scorecard slide 10

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