Australian Airline
You are a consultant posted on a case in Canberra, Australia. As you are flying out to another client location, you see several empty seats on the flight. You wonder what would be the financial impact of adding one additional customer on all the flights of that airline over a month. As you have time to spare, you decide to calculate the financial impact. You decide to take the help of the in-flight crew to validate some of your basic assumptions.
In order to calculate the financial impact by adding one additional passenger to each of the flights of the airline, the candidate would need to estimate the additional revenue generated and the incremental cost incurred.
1. Revenue Analysis
In order to estimate the additional revenue generated, the candidate would need the following::
- Average ticket price
- No. of passengers added - this could be estimated by the number of flights flown by the airline
A. Average Ticket Price
Prompt the candidate to make his/her own assumptions. However, if required, the below information can be shared verbally with the interviewee:
- 35% of the flights of the airline are between Sydney and Melbourne. The average ticket price for this 1.5 hours flight is $100.
- 30% of the flights of the airline are between other major cities. The average flying time between these routes is 2 hours and the average ticket price is $150.
- 35% of the flights of the airline connect other smaller airports. The average flying time between these routes is 2.5 hours and the average ticket price is $200.
Therefore the average ticket price can be calculated as follows:
B. No. of Passengers added
Since only one passenger is added per flight, the no. of new passengers would be equal to the no. of flights flown by the airline.
The candidate would need to know the no. of aircrafts owned by the airline and the no. of flights by each aircraft on an average.
The candidate can therefore infer the following:
- 100 aircrafts are in operation at any point of time (105 - 5 for maintenance)
- 35 aircrafts (35%) fly between Sydney and Melbourne which takes 1.5 hours.
- 30 aircrafts (30%) fly between other major cities. The average flying time for these aircrafts is 2 hours.
- 35 aircrafts (35%) fly between other smaller airports in Australia. The average flying time for them is 2.5 hours.
In order to calculate the no. of flights each aircraft does every day, the candidate would need additional information about the regular operational hours and the on-ground time for each flight.
The typical operating hours per day are 16 hours. The candidate can now calculate the number of flights per aircraft for the following route categories:
- Sydney and Melbourne (1.5 hours flying time & 1 hour on-ground time) - 16/2.5 = 6 flights per aircraft per day
- Major cities (2 hours flying time & 1 hour on-ground time) - 16/3 = 5 flights per aircraft per day
- Other cities (2.5 hours flying time & 1 hour on-ground time) - 16/3.5 = 4 flights per aircraft per day
The candidate can now calculate the total number of flights:
- Sydney and Melbourne - 35 aircrafts and 6 flights per aircraft per day - 210 flights
- Major cities - 30 aircrafts and 5 flights per aircraft per day - 150 flights
- Other cities - 35 aircrafts and 4 flights per aircraft per day - 140 flights
So there would be a total of 500 flights per day ( 210 + 150 + 140). Therefore, the airline would add 500 passengers per day by adding one additional passenger per flight.
The total additional revenue per month would be: 500 passengers x 30 days x $150 = $2,250,000
2. Cost Analysis
The incremental or marginal cost of adding one additional passenger per flight would be zero as all the costs have already been incurred (equipment, fuel, labor, other expenses).
3. Conclusion
As the marginal cost of adding one additional passenger per flight would be zero, therefore the financial impact of adding one additional passenger per flight would be an incremental revenue of $2,250, 000 for the airline.
