Delta's New Song: A Case on Cost Estimation in the Airline Industry

Abstract

This case provides the opportunity to use various empirical techniques (i.e., high-low method, simple regression, and multiple regression) in the estimation of cost functions. The case uses the airline industry as the setting for this analysis and, in particular, focuses on the ef forts of Delta Airlines to plan for salaries, the cost category that dominates its income statement. The case provides the data and the opportunity to learn the details of cost function estimation, but more importantly, it provides a rich setting in which issues related to the interpretation of these cost functions can be discussed. Finally, the entry of Delta into the low-cost carrier segment with its formation of Song provides a unique opportunity to think about how the cost function of an established full-service airline compares to that of a low-fare startup. Data from successful newcomer JetBlue is used to illustrate these differences. More generally, the case shows how the use of historical costs and cost estimation techniques can facilitate decision making about entry into new product markets.