Airline Company

I: Your client is an airline company facing decline in profits.

C: I would want to understand the client’s business. What kind of flights does the company run, magnitude of the problem and the timeline?

I: The company is a low-cost airline carrier which operates only domestic passenger flights. The profits have declined by 15% in the past two years. 

C: Alright, and has this decline been in any specific geography? 

I: No. The decline is uniform throughout the country.

C: How many competitors do we have and are they facing similar problems?

I: We have 4 major competitors and they have been facing similar decline.

C: Okay, what is the quantum and timeline of the decline?

I: Yes, they faced a decline of 10% in the past 6 months. 

C: I’ll like to analyze the profit structure of the company and break it down into revenues and costs which are the two components of profit. Has there been any change in any of these recently?  

I: The revenues have gone down by 10% and the costs have increased by 5%. 

C: Would it be fair to assume that the decrease in revenue is an industry wide issue while the increase in costs is client specific?  

I: Yes, that is a fair assumption to make. Let us focus on the revenue first.

C: Passenger services, inflight sales and cargo are the some of the major revenue streams I can think of. I wanted to confirm once that have the revenues gone down for all of them or for is specific to any one of these. 

 I: Yes, those are the major sources of revenue and the decline in the revenues has been uniform throughout all the streams. Let us focus now on the revenue generated from sale of tickets.

C: : I would break them down into price per ticket and volume of tickets sold. Has there been a decline in either?

I: The prices have remained constant focus on the volumes here. 

C: This could be because of supply side issues, where the demand exists but the client has not been able to meet it, or a demand side issue with the problem at the consumer’s end. Could you help me understand, on which side the  is?  

I: The client believes that there has been a fall in demand.  

C: Alright then This fall in demand can then further be attributed to internal factors or external factors. Since the fall in demand is an industry wide trend. I would like to focus on the external factors first. Would that  be okay?  

I: Sure, go ahead.

C: There are 6 lenses I’d consider, i) Political, ii) Economic, iii) Social, iv) Technological, v) Environmental, & vi) Legal. Has there been any change in the government policies, people's purchasing power, taxation policy, inflation, possible economic slowdown or the preferences of people?

I: What do you mean by change in preferences? Do you have examples? 

C: People might find other means of transport more suitable for travel or they might not be comfortable because of safety concerns. 

I: : Right. The people are scared to travel because there has been a viral eye infection spreading throughout the country for the past 6 months which is the reason for reduced travel. I would now like you to analyze the costs. 

C: Costs can be further broken down into fixed and variable costs. Salaries, administrative costs and maintenance costs are some fixed costs I can think of. 

I: The maintenance costs have gone up recently

C: I can further break down maintenance costs into procurement of raw materials and equipment costs, transportation costs, processing costs and storage costs.

I: Yes, the storage costs have increased. 

C: Storage costs can be broken into price per unit and volume of units. Either the cost of storage could have increased or the number of stored spare parts. 

I: That’s right the cost of storage has increased because the vendor has increased the rental by 50%. Now that you know the reason of the declining profits, can you suggest some recommendations to overcome the same? 

C: In short run, 1) Increase passengers testing pre-boarding, 2) Launch positioning campaigns to relate safety to travel, 3) Reduce frequency of operational flights as per occupancy rates and 4) Negotiate reduced storage costs. In the long run, we can 1) Switch vendors and 2) Incorporate just-in-time procurement system.