Sky China

Airline Cost Brainstorming

The major costs for airlines include:

• Labor
• Fuel
• Planes
• Marketing
• Back-office
• Hangar rent + plane maintenance
• Fees (airport fees, insurance, travel agent commissions, etc.)

The candidate should realize that some costs are prime candidates to be cut. They should also note the relative importance of each cost. Specifically, the candidate should understand the following:

• Labor – can be furloughed or put on reduced pay
• Fuel – costs could be lowered through futures contracts
• Planes – could be purchased at fire-sale rates, reducing/eliminating leasing costs
• Marketing – should be almost 0 during these times
• Back-office – probably cannot be reduced (still need to deal with complaints, refunds, legals, etc.)
• Hanger rent + plane maintenance – cannot be reduced (planes still exist and need to be store + maintained)
• Fees – could be reduced (i.e. negotiations with airports, travel agents no longer selling, etc.)

A good candidate will think critically through each cost, and rationalize which can be cut and how. Ideally, they should come close to the logic in the next section. If not, their logic should be reasonable.

You should provide the below information verbally to the candidate:

• (Short Term) Labor costs can be cut by 90% by furloughing employees, forcing leave, and reducing pay
• (Long Term) Fuel costs can be cut 50% through futures contracts (current prices are 20% of trend, but futures would incorporate expected rises)
• (Long Term) Leasing costs can be cut through the purchase of planes through capital received by government – new monthly costs (which include amortization) are reduced by 75%
• (Short Term) Marketing costs can be cut 90%
• (Short Term) Fees can be cut 50%

The candidate should calculate the amount by which costs can be cut through these actions. Short term actions last for 1 year while Long-Term actions last into perpituity. They should follow the below logic + calculations:

Total Savings from cost cutting exercises: $6.427B

In the short term:

• Ensure safety protocols adequately implemented, to both get government flying approval and assuage the public's fear
• Prepare aggressive marketing to encourage passengers to fly again
• Consider raising flight prices, given 1) Social distancing may reduce seats allowed and 2) Those flying will have a strong need/desire (business, pent-up demand, etc)

In the long term:

• Plans for international expansion should begin now, ready to be executed when the time is right
  • Acquisition of companies weakened due to the crisis
  • Purchase of planes at significantly reduced prices
  • Identification of routes lost due to bankrupt/failing competing airlines