Case

In-flight Broadband

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Problem Definition

Our client is a startup that can deliver broadband internet aboard commercial flights.The company owns a patent on a necessary technology. They want to know whether their current business model is valid.


Comments

Since this is an interviewer-led case, the interviewer should guide the candidate through the interview.

This is a market entry case. The interviewee must evaluate a new product’s feasibility within the airline industry.


Short Solution

The startup should roll out their current business model on a small scale to validate it and determine whether the calculated market size is accurate.


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.

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

1. How big is the market for inflight broadband in long-distance?

Share Table 1 and Diagram 1 (market information) to help the interviewee.

Information that can be shared:

  • The airline industry is interested in in-flight broadband.
  • The startup charges customers per flight.
  • The end-customers are the passengers, not the airlines.
  • Each airplane flies 600 long-distance flights per year.
  • 3000 commercial airplanes worldwide.

Industry and market sizing

First Economy
Seats per plane 20 180
* load factor 0.75 0.75
= 15 135
* Business travellers (%) 100 30
= potential customers per plane 15 40.5

The interviewee should round down to 55 potential customers per flight.

Key Insight: There are 99m potential customers per year.

Pricing

Using the survey’s price elasticity information (for an arbitrary number of 100 potential customers):

  • 30 users at $5 = $150/flight
  • 25 users at $10 = $250/flight
  • 20 users at $15 = $300/flight
  • 10 users at $20 = $200/flight
  • 5 users at $25 = $125/flight

Key Insight: Total revenue is maximized at $15.

Potential market size in dollars/year

The potential market size is $297m/year.

2. How many customers does the startup need to break-even?

The interviewee can brainstorm cost segments.

Share Table 2 with an overview of the costs, if inquired.

Information concerning the costs that should be shared on demand:

  • The startup must pay satellite operators an annual satellite fee.
  • In addition, the startup must pay the operator for every megabyte downloaded in-flight.
  • The airline charges a yearly licensing fee.
  • The investment costs include amortized acquisition and installation costs.

Calculated from Table 2 the fixed costs account for $150,000 per annum per plane:

We can use the following structure to calculate the breakeven number of customers per flight:

Costs = Total revenue

4

To break-even the startup needs 50 customers per flight.

3. What are the main risks involved?

This open-ended question is intended to analyze the candidate’s creativity.

Possible answers:

  • Competitors could enter the market with a newer technology that provides faster connection speeds.
  • To compete, the startup must invest in the newer technology, thus increasing fixed costs. If these costs are passed on to customers, the startup is at a competitive disadvantage.
  • If airlines agree to work with the startup, licensing fees will probably be proportional to the startup’s revenue. Thus, as revenue rises, licensing fees also rise.
  • When renegotiating the contract, the satellite company could demand higher fees due to reasons such as higher utilization of capacity. This would also decrease the startup’s competitive advantage.
  • If the initial service does not work well due to severe connection problems or network failures, the startup could gain a bad reputation and lose customers. The airline could also argue that since the startup failed to provide service as promised, the airline can cancel the contract and search for another in-flight broadband partner.
  • Since this service relies on cutting-edge technology, the hardware probably needs to be frequently replaced in order to keep up with market trends. Old hardware could lead to competitive disadvantages that can reduce the startup’s market share.

4. What would you advise the startup?

Possible answer:

  • The business model does NOT seem promising because the number of customers required to break even is above the current market potential.

The startup should try to limit fixed costs increases because such increases will negatively affect their current business model.

  • If the startup could request that the airline be responsible for investing in, operating and maintaining the equipment, the startup reduces their risk of forced unplanned hardware investments.
  • To test the calculated market size and current business model, the startup should roll out the business on a small scale.

Difficult Questions

In the future, how can your client defend against competition from other in-flight broadband providers?

Suggested answers:

  • Examples of market barriers to entry include economies of scale, technology patents, and government regulations. The startup’s patented technology could be a good barrier to entry.
  • As soon as the startup has reached a certain size, the startup could use economies of scale to obtain discounts from Internet providers or satellite companies. They can also reduce hardware costs by ordering in bulk.
  • The startup could also invest in R&D to develop new technologies that render the use of satellites unnecessary.
  • The startup has first-mover advantage.
  • To increase customer loyalty, it could provide incentives such as long-term subscriptions for frequent flyers.
  • It could also provide perks for loyal clients such as faster connection speeds.
  • Branding and advertising can help increase customer loyalty. This might allow the company to charge higher prices without losing customers.
Related consulting question(s)

As you describe it, this is the longest version of this case format; normally too long for an oral interview, so it's super important to listen whether the question is about if (the client should ente... (more)

Best answer so far out of 2 answers:

If I understand your questions correctly, you are trying to figure out the difference between analyzing the overall market (or an industry), vs. the subsections of the market that a particular company... (more)

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Best answer so far:
Hemant
Expert
Ex-Mckinsey, current strategy guy at Google.

It's a badly framed question but that is no reason you should have a badly thought-out response. Sometimes interviewers will ask these just to tell whether you jump into a "5%? 10%?" guess-work or use... (more)

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

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Case exhibits


In the beginning, only business travelers are viewed as potential clients



Penetration for flat-rate Internet vs. price (i.e.: % of business passangers expected to use the service on any given flight.)



Additional Information

  • We assume that the average client uses 100 MB per flight

Before sharing this information, let the interviewee estimate the average data used per customer!

  • The total revenue per customer is set at $15. This is independent of the amount of data each customer uses.