Problem Definition
We are an airline major operating out of India. We want to increase the number of passengers on all our flights. Could you please calculate the financial return of adding one more passenger per flight?
Case
Airline Economics
Comments
The case is designed to be presented to the candidate by an interviewer, who plays the role of a represetative of an Indian airline major.
Short Solution (Expand)
Detailed Solution
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.
To calculate the financial return or the extra profit, the candidate needs to look at the revenue and costs associated with adding one more passenger per flight.
If asked, let the candidate know that there is enough capacity to put at least one more passenger in each flight.
I. Revenue Analysis
Revenue could be simplified as a product of average price of a ticket and number of new passengers added.
1. Average ticket price
India:
- 50% of the flights fly between New Delhi and Mumbai; on average, a passenger pays $100 for this 2 hour journey
- 25% of the flights fly between other major cities which are 2.5 hours away from each other. We charge the passenger $100 for these flights
- The remaining 25% of the flights fly between other cities which are 3 hours away from each other. The average ticket price for these flights is $200
Therefore the average ticket price would be (50% X $100 + 25% X $100 + 25% X $200) or $125.
2. Number of new passengers
We know that number of new passengers would be equal to the number of total flights since we only add one more passenger per flight.
Therefore we should first estimate the number of airplanes owned by the firm and then the number of flights each airplane takes.
There are many ways to estimate the number of new passengers. For instance, the candidate could also calculate the number of flights by multiplying the number of routes with the average number of flights per route.
The company owns 110 planes. The candidate can assume that 50% of the total flights take the 2 hour route, 25% take the 2.5 hour route and the remaining 25% take the 3 hour route.
This gives us:
- Delhi-Mumbai, 2 hours route - 50% of 100 or 50 planes
- Major cities, 2.5 hours route - 25% of 100 or 25 planes
- Other cities, 3 hours route - 25% of 100 or 25 planes
Airplane companies usually spend a lot of money on maintenance. Therefore out of the total 110 planes the firm owns, 10 are usually under maintenance. Correct the candidate if he assumes any other number.
To estimate the number of flights per airplane per day, we need to figure out the following:
- Total flight time: When does the first airplane depart? When does the last airplane of the day arrive?
- On ground time: How much time does on ground jobs such as taxing, cleaning and boarding need?
Allow the candidate to make his own assumptions for the above timings. The aim is not to meet the correct answer but the process and kind of assumptions the candidate makes to estimate that number.
Assumptions: The total flight time is 15 hours and on ground time per flight is 1 hour.
- Delhi-Mumbai, 2 hours flight: 15 hours/3 hours or 5 flights per plane per day
- Major cities, 2.5 hours flight: 15 hours/3.5 hours or about 4 flights per plane per day
- Other cities, 3 hours flight: 15 hours/4 hours or 3 flights per plane per day
Total flights:
- Delhi-Mumbai, 2 hours flight: 5 X 50 or 250 flights per day
- Major cities, 2.5 hours flight: 4 X 25 or 100 flights per day
- Other cities, 3 hours flight: 3 X 25 or 75 flights per day
Total flights = 250 + 100 + 75 = 425 flights per day.
Therefore, the monthly extra revenue would be 425 flights/day X 30 days X $125 or about $1,600,000.
II. Cost Analysis
The marginal cost of one additional passenger per flight would be zero since most costs would occur anyways.
III. Conclusion
Since the marginal cost is zero, the monthly extra revenue is the monthly extra profit. Therefore the financial return of addition of one more passenger per flight would be about $1,600,000 per month.
Difficult Questions
If the interviewee solves the case very quickly, you can discuss the marketing strategy to attract more passengers with him.
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