Analysis of Cost Behavior for United Airlines

You very may have flown on United Airlines. If measured by fleet size and number of routes, United
Airlines is the third largest airline in the world. It is headquartered in Chicago with eight hubs and
Chicago-O'Hare being its largest in terms of passengers carried and number of departures.

Please open the 2021 and 2018 10-ks for United Airlines; both are posted in the same Canvas folder as this case.
A 5 year summary of selected financial data can be found in ITEM 7 on pages 37 and 38 of the 2021 10-k
and Item 6 on pages 22 and 23 of the 2018 10-k. Complete the data table that is on the Data worksheet. You
will be stunned at the drop in everything for 2020 due to Covid 19! I have entered the 2021 numbers to get
you started. From the information in Item 7 for 2021 and Item 6 for 2018, prepare a table for the years 2021
through 2014 showing Passengers, Operating revenue, and Operating expense. This table will be used
for you to prepare linear regressions. I suggest having three columns at top: Operating revenue, Operating
expense, and Passengers. Then show the years in rows to the left of the columns. I have started a table for
you on the "Data" worksheet. Be careful, Operating revenue and Operating expense is stated in millions,
while passengers is stated in thousands. I suggest restating the numbers such that they are all either in
millions or thousands. In my solution, I stated everything in millions.

1. Using the "high-low" method, compute and show the formula for operating revenues as a function
of passengers. Careful, your fixed revenue will be negative if done properly.
2. Using the "high-low" method, compute and show the formula for operating expenses as a function
of passengers. Fixed cost will be positive.
3. Prepare a simple regression of operating expenses as a function of passengers.
Prepare a plot of the regression results. Include in your XY scattergram a trendline, R 2, and regression
formula. Be sure the regression formula is not in scientific notation. Please note that operating
expenses is shown in $millions and revenue passengers in thousands. I suggest, for ease of interpretation,
that passengers be converted millions. Be sure your regression line exactly intersects
the axis (either Y or X, which ever it may be).
4. Prepare a simple regression of operating revenues as a function of passengers.
Prepare a plot of the regression results. Include in your XY scattergram a trendline, R 2, and regression
formula. Be sure the regression formula is not in scientific notation. Please note that operating
revenues is shown in $millions. I suggest, for ease of interpretation,making the same adjustment to
passengers as I recommend in #3. Be sure your regression line exactly intersects
the axis (either Y or X, which ever it may be). Fixed revenue will be negative.
5. Compute both operating revenues and operating expenses for 158.3 million passengers using the regression
equations derived in #3 and #4. How close is the regression equation to the actual revenues and expenses
for 158.3 million passengers?
6. Using the regression equations derived in #3 and #4, estimate the number of Revenue passengers to
be carried for United to break even. Subtract the Operating expense equation from the
Operating revenues equation, plugging in Revenue passengers carried until the result is close to $0. That will
be your break-even point, on average, over the years 2014 - 2021.
 United Airlines

Operating Operating Passengers

revenues expenses (consolidated)
Year (millions) (millions) (millions)
2021 $24,634 $25,656 104.1
2020 $15,355 $21,714 57.8
2019 $43,259 $38,958 162.4
2018 $41,303 $38,011 158.3
2017 $37,784 $34,113 148.1
2016 $36,558 $32,214 143.1
2015 $37,864 $32,698 140.4
2014 $38,901 $36,528 138.0

Operating revenues for 158.3 million passengers

Fixed Passengers Variable Total
Computed -$1,159.90 158.3 $270.80 $41,708
Actual $41,303
Difference $405

Operating expenses for 158.3 million passengers

Fixed Passengers Variable Total
Computed $10,828.20 158.3 $164.70 $36,900
Actual $38,011
Difference ($1,111)

Break Even Point

Revenue Variable
Fixed Passengers per Total
(millions) (millions) passenger (millions)
Operating revenues -$1,159.90 112.9900 $270.80 $29,437.792
Operating expenses $10,828.20 112.9900 $164.70 $29,437.653
Operating income $0.139

Break even is at approximately 112,990,000 passengers.

 UNITED AIRLINES
High-Low Method, Revenues as a Function of Passengers High-Low Method, Expenses as a Function of Passengers

Revenue - Revenue Expense - Expense

High Low High Low
- -
Passengers Passengers Passengers Passengers

$43,259 - $15,355 $27,904 Variable Revenue $38,958 - $21,714 $17,244 Variable Expense
= = $266.769 = = $164.857
162.4 - 57.8 104.6 per Passenger 162.4 - 57.8 104.6 per Passenger

Total revenue at high activity level $43,259 Total expense at high activity level $38,958
Variable revenue at high activity level: Variable expense at high activity level:
Passengers 162.4 Passengers 162.4
VR per passenger $266.8 V.E. per passenger $164.9
Total $43,323.2 Total $26,772.7
Fixed cost (negative) ($64.2) Fixed expense $12,185.3

Total revenue at low activity level $15,355 Total expense at low activity level $21,714
Variable revenue at low activity level: Variable expense at low activity level:
Passengers 57.8 Passengers 57.8
V.R. per passenger $266.8 V.E. per passenger $164.9
Total $15,419.2 Total $9,528.7
Fixed revenue (negative) ($64.2) Fixed expense $12,185.3

It works!! It works!!

Formula: $266.8P + ($64.2) = Total revenues Formula: $164.9P + $12,185.3 = Total expenses
P = passengers in millions P = passengers in millions
Fixed revenue is also in millions Fixed revenue is also in millions
 United Airlines, Revenues as a Function of United Airlines, Expenses as a Function of Passengers
Passengers
$45,000
$50,000

$45,000 $40,000

f(x) = 270.801232849354 x − 1159.88215051134 f(x) = 164.670746356745 x + 10828.1800854291

$40,000 R² = 0.972321044632217 $35,000 R² = 0.894676414124831
Total Operating Revenue ($millions)

Total Operating Expenses ($millions)

$35,000
$30,000

$30,000
$25,000
$25,000
$20,000
$20,000

$15,000
$15,000

$10,000 $10,000

$5,000 $5,000

$0
40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 $0
40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0
Passengers (millions)
Passengers (millions)

Formula: Formula:
Operating revenues (millions) = $270.8x - $1,159.9 Operating expenses (millions) = $164.7x + $10,828.2
Where x = number of passengers carried (in millions) Where x = number of passengers carried (in millions)
Fixed revenue is also in $millions Fixed expense is also in $millions