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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".

Anonymous

PS: More specifically - What quantative factors to evaluate? Thanks for help!

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Vlad replied on 03/09/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

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!

Angelo replied on 03/08/2018

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!

Andrea
Expert
replied on 03/09/2018
Former BCG decision round interviewer with 300+ real interviews in 8 years of interviewing

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

Andrea
Expert
replied on 03/09/2018
Former BCG decision round interviewer with 300+ real interviews in 8 years of interviewing

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

Francesco replied on 03/09/2018
Ex BCG | MBB Specialist | #1 Expert for coaching sessions (1300+) and recommendation rate (100%)

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

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