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Expert Case by Clara

COVID-19 impact on Heathrow Airport

Solved 3.4k times
COVID-19 impact on Heathrow Airport Your client is the CEO of Heathrow airport (London), the busiest airport in Europe in terms of commercial traffic. Due to COVID-19, the airport's operations and hence, revenue streams, have been severely affected. The CEO asks for your help with the preparation of the upcoming Steerco, focused on: “How to secure Heathrow's revenue streams during April-June 2020, mitigating the effects of COVID-19”.
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Problem Definition

Your client is the CEO of Heathrow airport (London), the busiest airport in Europe in terms of commercial traffic.

Due to COVID-19, the airport's operations and hence, revenue streams, have been severely affected.

The CEO asks for your help with the preparation of the upcoming Steerco, focused on:

“How to secure Heathrow's revenue streams during April-June 2020, mitigating the effects of COVID-19”.


Comments

This is a typical McKinsey case – perfectly extrapolatory to other MBBs, particularly 1st round – consisting of:

  1. Structuring part – Where the candidate will draft an issue tree / hypothesis tree to structure his/her thoughts.
    • How to conduct it? >
      • Allow 2-3 minutes for the candidate to draft the issue tree.
      • Encourage the candidate to make clarifying questions about the client and its business model and share the data in the orange box.
  2. Exhibit ­& math calculation – Where the candidate will perform ad-hoc calculations and draw conclusions from a table of content provided
    • How to conduct it? > Share Table 1 with the candidate.

Short Solution (Expand)

Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that shall be shared in the “Case exhibits” section.

Paragraphs highlighted in blue shall be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Question 1 – Structuring: How to secure Heathrow´s revenue streams during April, May and June 2020, mitigating the effects of COVID-19?

Note: includes securing old revenue streams and searching for new ones.

After the prompt, the candidate is entitled to ask some questions. Data to be provided to the candidate:

  • There are 5 main airports in London, from bigger to smaller:
    • Heathrow (largest)
    • Gatwick (2nd largest)
    • Stanstead (3rd largest)
    • City (smallest)
    • Luton (barely used)
  • Heathrow is considered the best option in London for a number of reasons, among which: size, # of terminals, international connections, brand building by famous architect Sir Norman Foster, fastest connection to the city center with the Heathrow Express train, etc. See Exhibit 1
  • The main revenue source from the airport is its charges to airlines, divided into:
    • Hub fees: fixed cost charged annually, for the airline to have the right to land in Heathrow (and not in Luton, for instance)
    • Take off/Landing fees: variable cost, charged per every plane that takes off or lands in Heathrow
  • Heathrow also owns the shops, rentals and other retail facilities present in the airport.

Exhibit 1 should be shared with the candidate as part of the initial information.

Example of an excellent structure (presented as an issue tree):

ECONOMIC FACTORS

Conduction of deep analysis on the 3 main revenue streams for the airport:

  • Airline fees: already outlined in the initial info as the airport's main revenue stream:
    • Commercial air traffic (i.e., passengers):
      • Securing “old” revenue streams (e.g., the flights that the airport had forecasted before COVID-19 crisis):
        • Acting on “Hub fees” (i.e., fix fees for the airlines): reducing temporarily fix fees or allowing delayed payments, in order to prevent airlines from cancelling the agreement with Heathrow for the upcoming months/years.
        • Acting on take off/landing fees: since most planes won't operate, there is little margin on action of those, apart from allowing and negotiating delayed payments for struggling airlines.
      • Opening “new” revenue streams:
        • Negotiating with governments to leverage Heathrow as a main European hub for citizens' repatriation flights.
    • Cargo air traffic
      • Securing “old” revenue streams: in line with previously described for commercial traffic.
      • Opening “new” revenue streams:
        • Negotiating with governments to leverage Heathrow as the main European hub for importing and exporting COVID-19 related supplies.
        • Negotiating with private companies in a similar line to fleet cargo flights to import supplies from production centers (e.g., China, etc.).

  • Government support:
    • Obtaining aids and support from Government and institutions: as one of the most affected industries, Heathrow should (1) define an internal group and (2) collaborate with other airports to claim for official support, both:
      • UK-based
      • European-Union based
    • Claiming taxes and/or negotiating with the regulator tax exemptions or reductions due to exceptional circumstances

  • Retail activity in the airport:
    • Airport shops and restaurants:
      • Fostering a temporal transfer to e-commerce for airport retailers, to enable customers to enjoy the shopping experience through online channels instead.
      • Ensuring safe and safety measures in the airport, to be able to serve the (little) passengers still traveling.
    • Car rentals:
      • Offering a shuttle service to bring rental cars to the city, to be available for potential customers (given that in the airport the demand will be very reduced).
      • Ensuring safe and safety measures in the airport, to be able to serve the (little) passengers still arriving to airports and renting cars.
    • Airport hotels:
      • Working with governments to utilize airport hotels as quarantine centers for travelers entering the country.

SOCIAL & POLITICAL FACTORS / RISKS:

  • Brand perception risk when remaining open despite the crisis, if safe and safety measures cannot be followed (or not at 100%) and Heathrow becomes zone-zero.
  • Health risk and potential bad press derived from remaining open during the crisis, exposing workers to potential contagious travelers.
  • Profitability risks: depending on how much revenue we are able to generate from new revenue streams (i.e., repatriation, import of COVID related supplies, etc.), we might not be able to cover the airport's operational costs.
  • Operational risks: by remaining open, Heathrow management are exposing the airport to a total closedown during X weeks (given uncertainty, cannot be known for sure), which can be in the longer run worse than closing for the peak weeks and then re-taking operations (e.g., by having critical employees such as air controllers getting sick, further investigations, etc.).

IMPORTANT NOTE: Social & political factors, that encompass furthermore the risks of the operation, are key in the case. Structures without them lack a key part of the analysis.


Question 2 – Exhibit & math: The CEO would like to know how many passengers Heathrow airport missed/will miss during April, May and June 2020 (COVID-19 peak in Europe). For this, they ask for your help to:

Estimate what was the forecasted traffic in the airport in the cited 3 months.

Table 1 should be shared with the candidate.

If the candidate needs clarifications:

  • Runway utilization (1 takeoff/landing every two mins) is given per runway. Hence, we would have 30 operations per runway per hour.
  • Although the airport plans to open 365 days/year, it's most accurate to use 360 in the calculations, to account for exceptional situations such as extreme weather, strikes, etc.

Example of an excellent exhibit analysis:

Before jumping to the analysis, an excellent candidate would give an overview of the overall steps he/she is going to take (e.g., First, I will start calculating the number of planes per day operating in Heathrow. In parallel, I will calculate what the average capacity of those planes is. Then, I would combine both and multiply per 360 to obtain the yearly-expected traffic. Finally, since we need to account for 3 months only, I would calculate ¼ of the yearly).

  1. Runway analysis:
  • Number of runways: 2
  • Runway utilization: 1 takeoff or landing every 2 mins = 1 plane every 2 mins (in each runway)
  • Number of operations per hour: (60 mins/2) * 2 runways = 60 planes/h
  • Opening hours of airport: 18h/day
  • Number of planes/day: 60 planes/hour * 18 hours = 1,080 = ~1,100 planes/h

  1. Plane capacity analysis:
  • Average plane capacity: 300 passengers
  • Average plane utilization rate: 70%
  • Average passenger volume per plane: 300 * 70% = 210 passengers on average

  1. Conclusion:
  • Passengers per day: 210 avg. passenger volume * 1,100 planes = 231,000 passengers/day
  • Passengers per year: 231,000 passengers per day * 360 = ~83MM passengers/year
  • Passengers in April, May and June: ~83MM/4= ~20 MM passengers for the cited 3 months

*Candidate can also adjust this number, increasing it by 5-15%, assuming that spring-summer is peak season for Heathrow airport – both for flights in and out Europe but also transit ones.


Question 3 – Lost business: We know from an industry report that airports in Europe ranged from losing 100% of their operations in April-June 2020 (i.e., total closure) to keeping 10% of their operations.

Knowing that, plus the facts that we already know about Heathrow airport:

  1. Which percentage of their initially forecasted operations do you estimate they have been/will be able to maintain.
  2. How many passengers will the airport have then in April-June 2020?

Example of an excellent answer:

  1. We know that the number of passengers Heathrow will be able to keep will range from 0% to 10%. Given that the COVID crisis impacted even more smaller hubs, that had to close completely (e.g., small airports in main cities or main airport from small cities), we can assume that Heathrow will be closer to keeping 10% of the initially forecasted passengers, since:
    • It's the biggest airport in the UK, concentrating all repatriation traffic
    • It's the busiest airport in Europe, hence concentrating most of the remaining traffic
  2. Assuming Heathrow keeps ~10% of the initially forecasted traffic:
    • ~10% of 20MM = 2MM passengers will transit through Heathrow in April-June 2020, and the airport will lose the remaining 18MM passengers.

Final question – Executive summary: You are the Associate who worked in this engagement, and who is currently guiding the CEO of Heathrow Airport to the ExCom meeting with the MBB partners. In the elevator ride (1 minute), she asks you to provide her a quick note on what the conclusions are.

  • Due to the COVID 19 crisis, Heathrow Airport will be able to keep ~10% of the initially forecasted passengers in April-June 2020. Hence, only 2MM out of the initial 20MM passengers will fly.
  • This will greatly impact the airport's revenue, given that airline fees are the main revenue stream. In order to mitigate this, Heathrow can take some actions such as securing “old” revenue streams coming from airline fees and establishing “new” ones – for both commercial and cargo flights, (2) ensuring official support for government and EU institutions and (3) diversifying retail income.
  • As next steps, we will focus on deep-diving on the risks cited in the structure, such as health and safety standards, operational risk of brand perception risk.

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Case exhibits

Exhibit 1: Overview of London's airports and their average time to the city center


Exhibit 1: Key data regarding Heathrow's capacity