Yale SOM Consulting Club: A+ Airlines Case, Kellogg 2011

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hi Elaine Naomi nice to meet you meet you well welcome to som consulting for ya we are really excited to know you so we're just gonna dive right in actually with the case sounds great awesome so our client is a plus airline Co the third largest airline in the United States by passengers carried mmm this week we have been flying on our primary competitor gamma air line and we notice something interesting gammas stopped accepting cash from in flight food and beverages services and now the only acceptable credit cards okay so the CEO of a plus airline Co wants to know why the gamma airlines switched from a cash card system to a credit card only system and should we follow them okay great so just a couple questions so our client eight plus airlines currently uses both cash and credit cards yep okay and then gamma is switching gamma had been using both and now they're only using credit cards yes exactly okay great thank you do you my take a moment to structure my thoughts no go ahead thank you okay great so in order to address this question for our client I think first we want to look at why Gama switched and then we want to look at whether or not our client should follow them so in terms of Y gamma switched I think there are two primary reasons why a company would consider a transition like this the first would be operational and the second would be financial concerns so in terms of operational concerns they might be concerned about reducing time a handling cash takes effort on the part of flight attendants and on the ground crew so they may have done it in an effort to perhaps reduce staff time salary costs etc there also could have been a customer service component then they're trying to you know get to customers faster take less time serving beverages and switching to credit card only would make that a lot faster then we also have financial considerations so the first would be perhaps incentives from credit card companies I mean a lot of airlines are doing co-branded cards maybe they think it's really useful or they're getting some kind of you know you have some sort of deal with the credit card companies to promote their cars mm-hmm and the second thing could be working capital so if they have to have change on the plane on every single plane they're going to be flying up a lot of their working capital and so credit card only well not only so it's going to first of all free up working capital in terms of cash boxes and it'll also free it'll also reduce alright it's also going to get them a lot of their revenue much more quickly into their bank accounts instead of having to go ahead and process that cash then the second consideration sort of after we look at all of these factors we then want to decide whether or not we should follow so I think we'd want to first of all take a look at the costs and benefits in terms of our airline so in terms of the costs we would want to look again at these operational and financial considerations when we be able to save money on staff time on free up working capital improve customer service etc mm-hmm and then we also want to take a look at potential costs of the switching so first there could be logistical issues in terms of getting you know perhaps more credit card readers and we would also need to think about the impact of something like a technological failure so what would happen if I ran a card machine stopped working mid-flight would we be able to offer change or would we then just not be able to serve anybody any beverages so we know what if tech issues and then we'd also want to take a look at demographics of our current passengers so we want to know who is and isn't using credit cards versus cash right now and how many of them we think would make the switch great so I think I would like to start by learning I guess by exploring a little bit more information about our clients okay um and A+ Airlines passengers as well as their business models so do you have any information on these incentives from credit card companies yeah Brian just assumed of their knows incentives okay so no no credit card incentives great so in that case I think I want to move on to information about perhaps the revenues costs we'll have from the passengers themselves so do you have information on you know who the passengers of A+ airlines are yeah so we know that roughly 99 percent of all consumers purchase their airline tickets using a credit card mmm so that means that all consumers on airplanes have a credit card available to them okay great ABS we know that okay um do you have information then okay great so I think in that case we can assume that most of our passengers are capable of switching to edit card um do you have any information on you know perhaps how many we think might switch or not switch on a given flight because obviously probably not everybody pays with a credit card they want to use cash for some reason yep definitely so we have information on that actually so in terms of like there likely had to spend with the credit card versus cash we should have a lot of information on an average a plus airline flights okay great that's a take a moment look at that okay great so it looks like we're looking at a seating chart of a typical a plus airline flights we've got information here about seats / first or economy class as well as the type of travel or whether they're business or leisure so I think what I'd like to do is calculate how much the airline currently earns from these passengers and how much we think they might lose because here we have information on cash versus card purchase mm-hm so we can then start to get a sense of what they risk losing if they make this switch great sounds great okay great so we have a total of 200 seats on the plane twenty five percent our first class in seventy five percent our economy class so the first class load factor is a hundred percent which means that okay so we have first class and then we have economy class and I see here that first class passengers receive food and beverage so I'm just going to go ahead and say that they're earning zero dollars can I assume that I mean they're earning oh yeah yes i e+ Airlines is not yes selling any food and beverages to these so I think we can go ahead and disregard that for the purposes of this calculator we can always come back to it later so in terms of economy class they've got a load factor of 80% and half our business and half our leisure so in terms of business passengers it means that so 75% of all seats are economy so economy seats are 75% of 200 is 150 seats and they have a load factor of 80% so that means that there are 120 seats that are filled at any given time mm-hmm so 120 filled so 60 or business and 60 or leisure now I have information here that says that 75% of business class passengers purchase food or beverage on a flight average spend of ten dollars so that means that 25% will get zero dollars and then 75% of the 60 which is 45 passengers will spend ten dollars for a total of four hundred and fifty dollars spent by business class passengers on a typical flight and then for leisure passengers only 25% purchased food and beverage and they spend an average of five dollars each so that means we have 15 passengers purchasing $5 a piece which equals a $75 earned from these passengers so that means that our total spend on a given flight is four hundred and fifty plus seventy five equals five hundred and twenty-five dollars mm-hmm and of this five hundred twenty-five dollars can I assume that these cash and card purchases are the same between business and leisure passengers that's a great question yes you can okay great so that means that 20% is cash of that 525 and 80 percent is card so that means that uh we're going to have let's see let me just make sure I calculate this yeah okay so we're going to have a hundred and five dollars of that is coming from cash and then the rest of that five hundred and twenty five which is four hundred and twenty dollars is coming from cards so if we switch to cash assuming that earth if you switched a credit card only I think we can assume that all of the 80 percent who are already paying with card will keep purchasing but that this hundred and five dollars here is at risk mm-hmm do you have any information on how many like what percentage of passengers you think might switch to or might decline to purchase it they can only use a card yep so I think you're right in terms of you know not assuming that all we would lose all of them so right now guess you think we'll lose one-third of cash customers okay to this so that means that we're going to lose one-third of this one hundred and five dollars so let me just calculate what that is um it's going to be so we will lose $35 worth of uh yeah that's correct $35 of that cash per flight mm-hmm so you know based on these sort of overall income here 35 out of 525 is less than 10% of our current revenue per flight on average which I imagine depending on the cost savings we might enjoy or you know changes in working capital could be offset so I think preliminary it's definitely worth diving into this as it looks like a relatively small loss but I think I'd be interested in learning a little bit more about what the other gains might be from this kind of switch yeah so you mentioned to you mentioned costs and working capital which one do you want to start with next I think I'd like to start with information about I guess sort any kind of cost savings that I might you know A+ Airlines might have for this so do you have information on you know for example any kind of operational considerations you know for example time saved by staff yeah actually so before we dive in I know you detail that a bit in your initial framework but could you dive a bit more and brainstorm some more types of cost you think would be involved sure swiping switched some caught well so when you say costs involved in the switch do you mean potential savings in the part of A+ Airlines or cost that they're going to have to incur to make the switch um both if you had just reins from both yes sure so I'll start with potential costs to switch and then I'll talk about potential savings so in terms of switching costs I think these would probably come primarily in the form of personnel costs and then in the form of sort of PP&E type costs and so in the in terms of personnel costs we'd have to spend money on training mm-hmm you know we would need to institute a new process and really try to get all of the staff on board who might not be totally comfortable with this switch we also might want to have too a beefed-up RIT support because as I mentioned earlier if there were a technical failure if we weren't capable of accepting cash that could really I mean we could end up losing all of this money yeah right and of course as you I mean at least in my experience credit card machines do you stop working from her and then the other cost would be something like PP&E so we'd probably need to purchase new credit card readers mm-hmm and you know these days with all these chips coming in we might need to upgrade you know the better capable of accepting international credit card sort of thing which could be another major cost and then in terms of potential savings I think that could come in several forms and so there would be the really direct savings and then the more indirect savings so indirect savings is what I was talking about before with having potentially more working capital okay and I think the direct and then another sort of form of more indirect savings might be sort of benefits from pushing credit cards like our Cobra rewards and then in terms of direct savings I think some of it could be again personnel savings you know perhaps we need fewer flight attendants or a smaller finance department I think another form of savings could come in perhaps customer well I guess it does to be more of an indirect thing customer satisfaction house so you know if you're a customer and you're waiting for the beverage cart to come because you really want your coffee yeah and the flight attendant is taking time counting out dives to somebody yeah it's probably really frustrating especially if it's an early morning flight yeah so you know perhaps I'm used to that yeah exactly so perhaps if customers feel like they're getting quicker more efficient service they're going to be more satisfied another form of direct benefits this actually isn't savings its revenue it's that people spend more when they're not paying with cash a lot of studies suggest that for example when someone you know gets to swipe their credit card they spend more so it could be increased spend by customers and I think yeah I think those would probably be at least off the top of my head to me gray areas so we do have information on the cost but actually since you already dove into working capital could you just brainstorm a bit more like what would our client be able to do with the extra work in capital yeah sure okay so I think I will go ahead and create another little framework here so uses for extra working capital so I think there are a couple things they could do with this extra working capital so part of it I think they can either sort of keep it or they can pass it on to customers okay so if they pass it on to customers that could come in the form of lower ticket prices you know if they're able to kind of operate with a smaller margin it could come in the form of you know better routes or more routes better sir better or cheaper service okay a little bit less of the nickel and diming on the flight and if they decide to keep it I know you know there are a couple forms that could take part of it could be reinvestment you know in their infrastructure I think would probably be the most important thing they could do so they would have more capital available to for example upgrade planes you know purchase more space in airports because I think Airlines usually rent gates and airports yep so they could purchase space which again goes with what I mentioned down here about offering more routes you know they could just purchase more planes um and again fly more frequently mm-hmm you know they could hire more staff to have better customer service on the airline maybe if they upgrade the planes they could have more legroom a few fewer seats mm-hmm anything unrelated can you share another idea it's unrelated to direct customer the other parts of the value chain for the firm that they could use working capital to satisfy other players yeah so I think you know other players you know in their value chain you know could include you know uh companies so they could work with again it's a type of customer but not an individual customer so they could in terms of passing it on to customers we could also look at the companies that they partner with from corporate flights and maybe offer more benefits they could also potentially I think another type of parent I really call it a customer but I guess you could is sort of local governments okay because that's who they're usually dealing with in terms of you know actually dealing with the airport um and in the skies so they could you know again I think that kind of ties back to perhaps offering more favorable costs to governments so more favorable terms again more frequent flights that sort of thing great awesome thank you that's good I'm so now when I give you information on so you talked about costs and I think you covered a lot of key ones and so this is something that our team was able to gather okay I'm a plus Airlines so this looks like it's information on the cast management versus credit card processes for A+ Airlines so just without even reading what's on here conceded the cash management process is way more complex there's a dozen boxes on here compared to only a few for credit card so it looks like for the credit card process the flight attendant swipes the card and it goes right through to the bank account – a 3-2 percent fee credit cards so you know there's a negative that they have to pay a fee but for cash management it seems that uh so the cash handler has to put change on the plane so 50 dollars on every single flight which again is that working capital I was talking about so that means if a plus Airlines is a large you know they're a large carrier they can have hundreds of planes this means that they have thousands and thousands of dollars tied up at any given moment yeah uh in these cash boxes which is something that they could be using for something else so the flight attendant has to take the time to collect cash deposit into a lockbox and there's lots of checks and balances on the way here getting it to the bank and reconciliation and that sort of thing and there's actually also a two percent fee for cash so that's actually a wash in terms of what our client has to pay out it's also a difference it takes 24 hours from swiping the card to getting the money in the bank account versus 31 days from cash because it has to go through the armored car service and cash processing and counterfeit collection so that's also a big negative and again ties into this working capital yeah that whatever revenue they do get is really tied up in this process versus credit card yeah get it right away so I think one thing I'm interested in learning a little bit more about is how much we think we're going to save in terms of staff costs here because if we eliminate cash it says here there's five cash handlers per airport mm-hmm and two employees in an on-site cash processing center per airport and presumably we're no longer doing cash we could assign these employees to something else yeah so do we have information on how much that's going to cost yeah I think I think you picked up a lot of the key differences between the two and so our team do the math and it's going to be about $35 per flight okay and I think I calculated back here yeah exactly so we're gonna lose thirty five dollars in revenue but we're gonna save thirty five dollars in uh in staff costs yep so that's gonna end up being a wash but I think that potentially some of these other benefits I talking about so the increase in working capital that perhaps extra spend if customers are paying with credit card instead of cash will end up being a net positive for our clients so I think you know this is probably a really good move and I assume I think this pretty much explains why gamma made the switch as well great well it can take a moment just to summarize what you found so far for our client sure even if I take a moment to just jot down my thoughts yeah go ahead great thank you okay so I my initial recommendation is that A+ Airlines consider switching to a credit card only system we found that there are substantial benefits to this system in terms of streamlining the operations process for cash handling and revenue collection which will result in increases in working capital for our client as well as decreases in logistical concerns one risk however is that there could be potential technical issues by switching to credit card only if the system goes down that could result in zero revenue for a flight or other problems and another really major risk is that this 30% figure here of customers who aren't going to switch to credit card could be higher than anticipated and if it is that could end up resulting in negative a really negative impact for our client so I think next steps would include probably doing a little bit more research into consumer behavior and whether or not we think consumers are really going to spend more if they switch to credit cards on flights and getting a better sense of how many cash paying customers will refuse to switch to credit card I think one major way of doing that would be piloting this system on a few flights obviously we probably see a decline in revenue temporarily because we wouldn't enjoy these cost savings just yet they don't give us a better sense of whether or not this is a feasible solution for our client wonderful we'll think is so much P to your time thank you thank you

18 thoughts on “Yale SOM Consulting Club: A+ Airlines Case, Kellogg 2011”

  1. sometimes handling machines takes more time than tendering change– you have to press numbers, sometimes the connection goes away (in India at least) .. its definitely not time saving

  2. That’s a lot of structuring of thoughts!

    My response would have been we will not simply play fast follower to the other airline but doing something radically different than the competitor.

  3. A good question would also be for the airline that wants to know "Why should i?" Let's look at the competitors revenue compared to his as well. Are they making more? What are people buyong more? Should prices change? As well as the question. Credit card companies like Amex offer reward points so free flights when u swip. Its also a direct relationship benefit for airlines to go "plastic only" and yes she was right cash is time consuming, hard to keep accounting methods for, and i bet they did a market rrsearch analyses and figured "hey its 2018, who carries cash anymore, and who would pull I'm it out going to a city they dont know of? 35.00 a day times 6 flights a day times by the month (7 days a week). We're looking at about 4 grand or so monthly. THIS is what these businesses care about when looking at profit and loss or even weekly. They see that they are LOOSING overr a grand.

  4. Zero for structure
    Zero for the 1000 ‘etc …’
    10 for filling paper
    She wants to look at 10000000 things in 30 minutes ! You need some practice before start coaching
    Follow that video and congrats you are out 🙂

  5. Hey Elaine, thanks for the videos. Its really helpful for me to pause and try to prepare my structure as I go through the case. It would be great to see some information that you provide to the candidate but still a good effort. And specially the notes also helps me to see what the candidate thought about! Keep it up!

  6. Thank you so much Elaine for uploading such useful content. I Have read so many books on case study. Content like that help me to shape up my thoughts. I love you for that. Would you like to suggest some books in which reader can understand the pricing and dynamics of market

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