Case

Online travel booking

Solved 600+ times

Problem Definition

An online travel agency earns a 10% commission on all of its bookings. Currently, their profits before taxes are $1 m, while the industry average is around $2.5 m. The client wants to know why they're making less than the industry average?


Comments

This is a candidate-led case which means that the candidate has to take the interview from start to finish.


Short Solution

  • The agency is making less money on leisure travellers which accounts for the majority of bookings & revenue.
    • Client should benchmark other players in terms of costs/revenue-structure.
    • Client should renegotiate transaction costs.
    • Client should offer more products to leisure travellers to increase revenue/profit per transaction.

Detailed 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.

The following framework/structure provides an overview of the case:

I. Background

Candidate should want to look into revenues first, since lower profits could mean that the company isn't turning as much revenue as its industry peers.

Information that can be shared if inquired by the candidate:

  • Agency books flight tickets for its customers and earns a commission.
  • Total revenue per year on average for the agency is $10 m.
  • The agency has a similar size and revenue size as its peers.
  • Average industry margins are around 43%.
  • Costs have stayed the same and are set at $9 per transaction regardless of the traveller type.

II. Analysis

Next, the candidate should want to understand the revenue breakdown and business segments as well as their profit contribution. With the information given, candidate should calculate profit contribution for each segment.

Information that can be shared if inquired by the candidate:

  • The agency has two business segments: business travellers & leisure travellers.
  • Business travellers account for 40% of total revenue & leisure travellers account for 60%.
  • The agency processes around a million bookings a year.
  • 300,000 bookings go to the business traveller & 700,000 go to the leisure traveller.

The candidate should calculate profit per transaction for both segments to see how profits are structured and where the problem lies.

Share Table 1 with the candidate for an overview.

Business segment:

  • 40% of total revenues of $10 m with a transaction cost of $9
    • 40%*$10 M=$4 m.
    • Revenue per transaction: $4 m/300,000 bookings=$13.33.
    • Profit per transaction: $13.33-$9=$4.33.
    • Total profits: $4.33*300,000 bookings=$1.3 m.

Leisure segment:

  • 60% of total revenues of $10 m with a transaction cost of $9
    • 60%*$10 M=$6 m.
    • Revenue per transaction: $6 m/700,000 bookings=$8.57
    • Profit per transaction: $8.57-$9=$-0.43.
    • Total profits: $-0.43*700,000 bookings=$-0.3 m.

III. Solution

It seems that the agency is earning less in absolute profit from the leisure segment which makes up for the majority of its revenue, whereas the business segment has a higher absolute profit per transaction.

  • The agency should benchmark its competitors and mimick them in terms of cost structures & revenue-structures.
  • The agency should focus more on the business traveller, since they make more money on those bookings.
  • The agency can also see if they can renegotiate transaction costs for the business traveller, since those travellers travel a lot and could thus earn a discount for the agency.
  • The agency can also choose to offer the leisure traveller more products to increase the revenue and profit per transaction.

Difficult Questions

  • What are some quick-win & short-term solutions the client can implement to increase profit margins?
  • Do you think airlines would offer lower transaction costs to business travellers? How can the agency make that pitch strong?
Related consulting question(s)
Best answer so far:
McKinsey / Accenture / More than 300 real MBB cases / Collected all Big 3 offers / Harvard Business School

Hi, 1) Youproactively ask in the beginning, even before drawing the structure (something like "What kind of products / revenue sources do we have) and then split the structure into price, qty,... (more)

Best answer so far out of 2 answers:
BCG Consultant / Interviewed 80+ applicants at BCG / Received offers from McK (US) and BCG (DE)

Hi Anonymous! Both are valid approaches. As a rule of thumb, 1) is more suitable for a quantitative assessment (e.g. "By how much has profit declined?"), while 2) seems like a good approach for a... (more)

Best answer so far out of 3 answers:
McKinsey / Accenture / More than 300 real MBB cases / Collected all Big 3 offers / Harvard Business School

Hi, Focus on the most common industries in the followingpriority (sorted by probability of geting a case): 1-retail and CPG; 2-airlines; 3-Telecom; 4-banking; 5-natural resources; 6-tech There a... (more)

Related BootCamp article(s)

Benchmarking

Benchmarking can be very useful for a case interview. You can benchmark internally (comparing your own plants) or externaly (comparing to competitors)

0 Comment(s)

CAGR - Compounded Annual Growth Rate - CAGR

The Compounded Annual Growth Rate (CAGR) Is a theoretical steady growth rate over a specific amount of time, not the average of the Y-o-Y growth rates. It can mask sub-trends within the period

5 Comment(s)

Growth Strategy

Growth questions are among the most common questions in consulting case interviews: gather the necessary Information about volume and price to find the best growth lever

4 Comment(s)

Pareto Principle

Learn how to use the Pareto Principle to prioritize issues in cases and sort out areas where the highest impact is created

4 Comment(s)

Profitability Case

Learn to crack Profitability Framework Consulting Cases, which are the number 1 reason for real consulting projects and hence are an important case type.

1 Comment(s)
4.0 (341 ratings)
4.0 5 341
Case exhibits