How should I approach this case? "Our client is an airline and is trying to figure out how many airplanes it should buy next year. It has hired us to advise".

Hi,

Agree with Angelo - Objective is the king. Depending on the objective you should make a structure.

I would select from the following bucket list:

1) Demand 

• # of destinations we have, # of trips per destination
• Unserved demand due to lack of capacity
• Potential to unlock additional destinations / demand (with faster / bigger planes, etc)
• Demand forecast for the next years

2) Supply

• Current capacity, Current fleet types
• Routing model (spoke-hub, etc)
• Fleet upgrades (Sell our fleet, buy new)
• Replacement rate for the fleet

3) Number of planes we need

• Types of the planes wee need
• New / used planes
• # of planes
• Tech specifications (speed, etc)

4) Deal details

• Deal structure (Buying, lease, etc)
• Financing the deal (Cash, loan, etc).
• Can we afford additional costs (Fixed - maintenance, hangars, labor, variable - fuel, etc)
• Required returns
• Timing (Do we need to buy all of them now?)

Best!

Hi,

I think you should ask some questions to ask the objectives (ex. required profitability, alternatives -i.e. buying new vs buying old vs leasing etc-, time horizon, type of airline, market, etc).

Then, given the information you now have, I think that you should structure the problem and see whether what you find out meets the requirements/objectives.

The answer will then be a number/range from 0 to X, supported by the analysis.

Cheers!

Agreed with the macro steps suggested in other replies. More specifically in terms of objectives/thresholds I would try to be more specific to interviewer and propose a couple of contextually relevant objectives and talk about $/seat/mile, load factors (seats occupied/seats available) needed to be able to be profitable/be able to afford planes.

hope it helps,

andrea

Hi Anonymous,

I would proceed as follows:

Step 1: Clarify the objective. Does the client want to increase revenues, decrease costs, increase profits, or other?

Step 2: Assuming the most complete scenario  - profitability optimization: calculate the point where marginal revenues for the additional airplane are equal to marginal costs. There are several elements that could have an impact on that:

• Revenues
  • External
    • Customers issues (eg expected growth in demand)
    • Competitors issues (eg ability to increase their market share against us)
    • Supplier issue (eg availability to provide in the required time the planes)
  • Internal
    • Our expected actions on price (eg introduce price discrimination thanks to more routes)
    • Our expected actions on volume (eg future marketing campaign, new distribution channels, new routes, etc)
• Costs
  • External
    • Customers issues (eg new requests in terms of functionalities on new routes which implies new costs)
    • Competitors issues (eg lobby against us with regulator to increase costs of labour for new destinations)
    • Supplier issue (eg increase in costs for new planes compared to budget)
  • Internal
    • Elements influencing cost per unit (eg ability to negotiate with supplier so far that we increase size)
    • Elements influencing number of units (eg economies of scale so far that we grow)

Step 3: Check capabilities. Do we have the money and other resources required to do the investment (or disinvestment)

Step 4: Consider risks. Anything that could go wrong with the previous mentioned elements.

Best,
Francesco

Agreed with the macro steps suggested in other replies. More specifically in terms of objectives/thresholds I would try to be more specific to interviewer and propose a couple of contextually relevant objectives and talk about $/seat/mile, load factors (seats occupied/seats available) needed to be able to be profitable/be able to afford planes.

hope it helps,

andrea