Interactive Case: Low-Cost Carrier Airline Profitability

Introduction

• Case from BCG's library: Simulates interview experience with questions/prompts based on your answers.
• Client: Large low-cost carrier airline in Asia.
• Problem: Initial losses, recently profitable, but now threatened by a >50% increase in fuel prices.
• Objective: Develop immediate response to return to profitability + long-term strategy.

Initial Case Approach

• Predict overall profitability analysis; break down drivers of profitability.
• Focus on factors affecting revenues and costs.

First Question: How to approach the case?

• Selected option: Examine factors affecting client’s profitability (Revenues and Costs).

Next Question: Factors impacting profitability?

• Ruling out: Solely increasing revenue or looking at market competitors initially.
• Selected option: Increase revenues, decrease costs, or both. Seek information on these key drivers.

Exploring Factors (Revenues First)

• Decision: Start with revenues before costs.
• Revenue Drivers: Ticket Sales + Other Sources (e.g., meals, baggage fees).

Steps to Increase Revenue

• Options: Increase ticket price, increase number of customers.
• Selected: Increase ticket sales by adjusting price (Quantity x Price).

Feasibility of Price Increase

• Factors to consider: The elasticity of ticket prices, impact on demand.
• Decision: Investigate LCC business model.
• Insight: Lower prices to stimulate demand – typical LCC model.
• Evaluation: Test if increasing prices increases sales revenue. Analyzed current sales & prices.

Price Elasticity Calculation

• Finding: 1% price increase = 2% demand decrease.
• Conclusion: 13.3% price hike leads to 26.6% drop in demand → not feasible.

Alternative Revenue Strategies: Increasing Quantity Sold?

• Options Evaluated: Discounts, bigger aircraft, utilize current capacity.
• Outcome: Low upside in reducing ticket prices, high load factors.

Non-Ticket Revenue Sources

• Explored: Ancillary revenue potential - found to be at industry best practice, no significant potential.

Shift to Cost Management

• Non-Fuel Costs: Short-term reduction possible (5-10%), evaluated but insufficient long-term solution.
• Fuel Costs: Fuel costs analysis, explore price reduction strategies (e.g., cooperatives, renegotiations).
• Outcome: Short-term negotiation difficult, examined efficient use of current fleet instead.

Long-Term Strategy

• Unable to make immediate significant cost reductions.
• Consider: Financial stability over competitors due to low-cost base.

Price Leadership Assessment

• Competitive Position: Low costs, high margins → can sustain low prices longer than competitors.

Industry Outlook and Recommendations

• Observation: Higher cost competitors likely to exit; room for market share increase.
• Strategic Decision: Maintain price leadership, absorb short-term losses, aim for long-term profitability improvement.

Conclusion

• Approach: Logical step-by-step exhaustive analysis of revenue and cost drivers.
• Final Assessment: Strong position to maintain low prices, assert leadership, focus on long-term strategy.

Interactive Case Success

• Scores: High percentile across rigor, business judgment, structuring, synthesis.
• Recommendation: Practice similar cases to get comfortable with the format and approach to solving profitability cases.