American Airlinks

Style:

Candidate-led (usual style)

Topics:

Market analysis , Profitability analysis

Rating:

4.4 (800+ ratings)

19.5k

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Intermediate

Difficulty

Rating

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

Show short solution

Solution

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 structure would be a good approach:

Case Structure

I. Company

First step, the interviewee should investigate about the company.

Let the interviewee 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.

Due to the fact that the coffee is 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

The coffee products amount to 624 items per day.

Due to the fact that the coffee is 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

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).