Dubai Airport has decided to counter the chaos in the airport taxi service by commencing a bidding process to assign airport taxi services to 3 operators only. After years of cheating passengers, black-market drivers and unlicensed cabs, the airport has had enough of the problems and is now taking action.
They are retracting all existing permits and are issuing 2,100 new permits to the three largest operators in the country.
Our client is a local Big-three taxi operator with a 3,000 car fleet, but he is not servicing the airport yet. He has a spare capacity of 500 taxis and he is considering applying for 500 new permits, but he doesn’t know if he will get a positive return on his investment.
He asked us to help him determine if he should pursue applying for the permits or not.
Since this is a candidate-led case, the candidate should drive the case from start to finish.
Total ROI of 25% is higher than ROI target of 20% and thus investment is recommended.
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.
The following framework/structure provides an overview of the case:
I. Background info
Provide some additional information to help the interviewee understand the situation and the problem and see if candidate starts explaining the profit framework structure.
- Taxi operator has 500 taxis.
- Investment target is 20% ROI over a period of 1 year.
When asked on data to calculate revenue, interviewer can provide following data verbally.
- Airport has 84 m passengers per year.
- 20% goes into Dubai using a taxi, remaining 80% are transit passengers.
- Between 12.00 AM (midnight) and 6.00 AM, 50% requires a taxi (this takes into account multiple passengers sharing a taxi).
- Between 6.00 AM and 12.00 AM (midnight), the other 50% requires a taxi (this takes into account multiple passengers sharing a taxi).
- Night fares are $80.
- Day fares are $70.
- Taxis operate 24/7 - assume no need for fuel, maintenance or traffic-jams.
- Every trip takes 60 minutes to leave the airport and get back.
Now we can calculate revenue:
- Daily revenue of one taxi is: (6*$80)+(18*$70)=$1,740.
- Annual revenue of 500 taxis are: (500*$1,740)*365=$317.5 m.
Keep in mind that this calculation implicitly assumes a 100% utilization which is alright for simplicity's sake. But it is actually not correct since supply exceeds demand in the daytime shift. A great candidate makes that point by calculating demand per hour and compares that to supply per hour (segmented in daytime and night). Here's a short calculation:
Supply: 2.100 taxis per hour in daytime and night (we assume non-stop driving taxis with 1h per ride)
- Night: 50%*20%*84,000,000=8,400,000 passengers per year - 3,835 passengers per hour; (8,400,000/365/6hours)
- Daytime: 50%*20%*84,000,000=8,400,000 passengers per year - 1,278 passengers per hour; (8,400,000/365/18hours)
Result: During daytime the utilization is actually at 61% (1,278/2,100) which is quite below 100%. This could change the overall result a lot.
When asked on data to calculate cost, interviewer can provide following data verbally.
- Drivers get 50% of the revenue instead of a salary.
- Operating costs are $5,000 per cab per year.
- License costs are $250,000 per cab paid in advance as a one-time fee.
Now we can calculate costs:
- Total payroll is 50%*$317.5 m=$158.8 m.
- Operating costs are $5,000*500=$2.5 m.
- Total license costs are $250,000*500=$125 m.
We can now calculate ROI. Our target is 20%.
Total earnings over 1-year period: $317.5 m-$158.8 m-$2.5 m=$156.2 m.
ROI: (($156.2 m-$125 m)/$125 m))*100%=24.96%. So our return is an estimated 25% for the first year. Thereafter it will increase to 125% since license costs are not recurring.
25% return>20% so taxi-operator should continue with the investment.
- What additional check should we perform to verify if our estimated earnings are realistic?