Expense models: regressions, itemized costs and margin assumptions

In short

• Historical regression: $\%\Delta\text{Expense} = a + b \times \%\Delta\text{Revenue}$. The intercept $a$ captures cost growth unrelated to sales (fixed costs); the slope $b$ captures how costs move with sales. Use changes, not levels.
• Regressions suit mature companies with stable cost structures; they are less useful for early-stage or highly cyclical companies.
• Itemize costs that are economically significant but missing from standardized data (an airline's fuel and labour), using as-reported statements or the annual report.
• A direct margin assumption implies a cost growth rate: a rising margin needs costs to grow slower than revenue, and the effect is larger the bigger the cost line.
• Net margins also move with non-operating items (write-downs, restructuring, interest, taxes, interest income) that are unrelated to revenue.
• With a fixed/variable cost split, margins swing across revenue scenarios: fixed costs spread over more or less revenue.