## Problem Definition

Your client American Airlinks has seen its inflight **revenues stagnate** for the past 3 years.

The CEO offers the possibility of doing a **partnership** with **Balzac Coffee** and of selling Balzac Coffee in the future, instead of handing out the current non-brand coffee for free.**Advise** the CEO if AA should either do this partnership or put a price on the current, non-brand coffee that is currently given out for free.

## Comments

This case encompasses a large amount of data which requires good structuring and data gathering from the interviewer.

## Short Solution (Expand)

## Detailed Solution

The following structure would be a good approach:

### I. Company

First step, the interviewee should investigate about the company.

**pin-point**the

**key factors**related to

**inflight sales**

**BEFORE**you

**share**the following

**information**!

**Information that can be shared if inquired:**

**American Airlinks**

**only**operates in the**USA.**They offer**short**and**long range**flights.**80%**of flights are**short**range and**20%****long**range. The company only operates flights with a**maximum capacity**of**220 seats.**The**average occupancy**per flight is**90%**. Partnership with Balzac Coffee entails a**50% profit split**.

**# clients per flight **= 220 * 90% = **198**

**II. Product**

**This section should help the interviewee get crucial information about which different products are already sold inflight and about the competitive edge of Balzac Coffee.**

**Information that can be shared if inquired:**

**Non-Alcoholic**drinks:

**Tea****Coffee****Soft-drinks****Water****Balzac Coffee**is the**market leader**in the**USA**selling a wide variety of coffees.**Non-alcoholic**beverages served on board are**free-of-charge**The**average price**per**Balzac**coffee would be**$4**. If AA was to charge for the current coffee, the price would be**$3**. The**profit margin**for Coffee items would be**20%**.**Demand**for the**Balzac Coffee**is estimated to be**25%**below the current demand for coffee due to the fact that currently the coffee is free.**Putting**a price on the current coffee would lead to a decrease of**70%**in demand.

**AA Profit margin for Balzac Coffee** = 50% * 20% = **10%**

**Share****Table 1**,**Diagram 2**and**3**if the interviewee inquires information about the inflight product mix.

**Items sold are considered as****free**or**charged**items.

**III. Customer**

**The customer part covers the amount of current customers as well as their purchase power.**

**Information that can be shared if inquired:**

**The company runs****50 daily flights**on**365 days**per year. Flights have**50% business**travellers.

**Share****Table 2**with information about the**items purchased****per flight**UPFRONT with the interviewee.

**The interviewee can now start**

**calculating**and has to be**sure about**what he**wants**to**calculate**.From **Table 2** the potential amount of purchased items per day can be deduced.

Short and long range flights have the **potential** of **7,920 products** per **day** each:

We now know that in total **7,920** **products** are sold **per day**.

Now the interviewee should try to compare selling Balzac Coffee to putting a price tag on its current coffee.

__Estimate the amount of Balzac Coffee sold__

Sales split show that coffee represents **35% **of** 50%** of inflight sales, hence** 17.5%**:

**Sales split** = 35% * 50% = **17.5%**

The **coffee products** therefore amount to **1,386 items** per **day**.

**NOT**sold for

**free**anymore, the demand will go down by

**25%!**

These flights operate **365 days **per** year**, and the **average price **per **item **is** $4**, therefore generating **$1.5 m** per **year**:

__Profit from Balzac Coffee__

With a profit margin of 10% AA could generate a profit of $200,000 from the coffee:

**Balzac Coffee profit** = $1,518,400 x 10% = **$151,840**

**Estimate the amount of normal coffee sold**

**Estimate the amount of normal coffee sold**

The **coffee products** amount to **624 items** per **day**.

**NOT**sold for

**free**anymore, the demand will go down by

**70%!**

This is due to the fact the **coffee** sold is **not a known brand** such as Balzac Coffee and therefore the **demand** reduces to a **higher extent**!

These flights operate **365 days **per** year**, and the **average price **per **item **is** $3**, therefore generating **$0.68 m** per **year**:

**Profit from normal coffee **

**Profit from normal coffee**

With a profit margin of 20% AA could generate a profit of $91,104 from the coffee:

**Normal coffee profit** = $455,520 x 20% = **$91,104**

### IV. Conclusion

Looking at the data, the interviewee should come up with the **conclusion** that it would make sense to put a **price tag** on the **coffee** in the plane.

- Currently,
**coffee**can be seen as**pure costs**, therefore any price on coffee would**improve**on-board**revenues**. - This can either be done by simply
**putting a price**on the coffee that is**already**available on board or via a**joint-venture**between**AA**and**Balzac Coffee**. - From a
**profit**point of view, it makes**most sense**to do the**joint-venture**with Balzac Coffee. - In addition, the
**brand**on the plane could increase**on-board sales**as it could affect**co-consumption**of other things such as desserts together with the coffee.

However, it is **important** the interviewee **specifies** the **different risks**:

**Risks: **

- People may
**not want to pay for coffee**since they**usually**get it for**free**. - People could be
**drinking coffee before**taking the**plane**, which would**reduce sales**. - The reduction of demand could be greater than estimated and therefore lead to a lower profit.

## Difficult Questions

### Which main risks should the CEO consider before doing a joint venture with Balzac Coffee?

The **important** part is to have the interviewee **brainstorm** and **explain** his **thoughts**.

**Possible/potential answers:**

**Objectives**of the venture are**not totally clear**and communicated to everyone**involved.**- Partner has
**different objectives**for the**joint venture**. **Different cultures**and**management styles**result in**poor integration**and co-operation.- Partner
**doesn't provide**sufficient**leadership**and**support**in the early stages.

**More questions to be added by you, interviewer!**

At the end of the case, you will have the **opportunity to suggest challenging questions** about this case (to be asked for instance if the interviewees solve the case very fast).