What's the approach to this case in a real life situation?

qwerty_mbb's picture
Rank: Monkey | 58

So I was going through BCG's Interactive case library, and came across a case where I'm getting stuck in a situation, and am really curious what would one do in a real life scenario. So this is the case:

Your client is a low cost carrier airline, and its profitability has began decreasing because of increase in costs due to a industry wide hike in fuel prices. Now, which of the following would you want to look into first
(a) identify potential ways of increasing revenues
(b) identify if the costs can be decreased

They went with identifying if the costs can be decreased or not, but I'm unable to figure out a reason as to why would one prioritize that over the other. What do you guys think?

Comments (18)

Nov 14, 2017

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Nov 14, 2017

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Nov 14, 2017

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Nov 14, 2017

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Jul 7, 2017

I believe the logic would be: in a low-cost airline you can assume prices are set by the market. Thus increasing revenues is difficult and thus not a priority. Whereas the cost increase is due to one factor - fuel - and there may be numerous other cost factors. Thus cost decrease should be prioritised.

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Jul 7, 2017

I was thinking the same thing. This reads like Southwest airlines hedging fuel costs a couple decades ago.

Edit: Prices set by market is sort of true, but it is easily an arbitraged market with fairly simple algorithms that scrap the internet.

Oct 18, 2017

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Jul 7, 2017

On the contrary it works quite well for American Airlines. Your fixed assets are what you can borrow against after you declare bankruptcy protection.

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Jul 7, 2017

No, I don't think cost cutting is more sustainable than growth (unless cost > growth). The AA comment was merely a cheap joke. I like your ideology of gaining market share, but you did not clarify how that is going to happen. I would probably partner with a much larger airline and do their regional flights, while plotting out new routes and destinations.

Jul 7, 2017

This all depends on the market forces. However, generally speaking, in cases with discounters (whether it be electronics, telcos, airlines, you name it), you do not compete on price, but on margins. Therefore, it is usually recommendable from a purely initial hypothesis view to look at costs first, unless you've got a very compelling reason not to.

Cases can go all over the place dependent on the specifics of it. E.g. how is it's competitive positioning, marketshare, current margins, how are margins expected to develop (are they shrinking or growing; are they negative or positive?), how long do we expect these margins to hold on, how much working capital do we have, is the problem at hand firm specific or industry specific, when does a solution need to be implemented etc. etc.

However, you need to start somewhere just to explore the situation, and as per OPs question, that would usually be costs.

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Jul 7, 2017

/schooled. Sb'd sir.

Jul 10, 2017

Thanks for posting this question. I love these sorts of of problems and it is great for students like myself.

Jul 10, 2017

Complete outsider to the airline industry here, aside from having suffered through the declines in service and customer experience as a result of cost cutting, as a passenger.

Consensus view and correct answer to the "which should we look at first" question, from responses so far, seems to be decreasing costs. But I'm wondering, could a case not be made to identify ways of increasing revenues through, say, sale of ancillaries, given we're already a LCC with presumably high relative margins and a disciplined approach to costs? Bake in hidden costs to passengers that aren't apparent in the base ticket price (checked bag = +$50), go for the upsell at each step of the online ticket buying experience (window seat? +$50), enter revshare agreements with rental car / hotel partners for referred sales, etc.?

Answer may remain that the first place to look is cutting costs (which certainly wouldn't preclude the approach I outlined above); but genuinely curious whether my devil's advocate view would fly (pun intended).

Jul 11, 2017

+1, thanks, this is a helpful way to frame it.

Jul 11, 2017

As someone who has never gunned for consulting and has no desire to/is confused by the answers in this thread, thought I'd ask:

  1. If the airline is an LCC, is it not the case that they have already been scraping the margins for cost cutting measures in their service generally? Seems this answer is strange if the company's claim to existence is that they have already identified and passed the benefits of cost cutting measures on to the consumer.
  2. What is meant by "the costs" in "(b) identify if the costs can be decreased". Are they proposing to examine whether the costs of fuel specifically can be decreased? If not, see point #1. If so, isn't the answer basically no? Airlines don't just go to market and buy gas at the pump, they have futures contracts in place years before a price swing to deter this exact sort of impact on their bottom line. This suggests to me that the increased costs are a long term issue and not something they have to hide/address immediately.
  3. Given that this is a long term problem, I suppose you could look for "long term" cost cutting solutions like trying to boost synergies through acquiring/merging with competitors, converting your capital ownership structure so that you're leasing your jets, or something like that...but again, if you're an LCC wouldn't this be part of your DNA anyway?

My first reaction was increase revenues (with the obvious caveats about not being a first mover in price increases, blah blah). The answers in this thread strike me as varying in quality, but seems somewhat counter-intuitive.

No offense (truly, and I'd like someone to explain if they disagree), but this reinforces my hunch that a lot of strategy consulting is full of shit.

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Best Response
Jul 11, 2017

Guy...chill. All I did was explain my thinking on the problem and ask for someone (hopefully a FT professional) to explain why it's incorrect.

Apparently (according to BCG) I haven't even solved a two-option multiple choice question correctly, let alone an entire industry, nor did I claim to do either. Clearly, you think you have got it all figured out though, and seem not a little perturbed that my post is currently the top reply (albeit with a one banana lead on the runner-ups, lol).

If there's some consensus among those who study these sorts of things as to your "facts and figures", then sure...I guess I'd like to hear those. If you're going to prove that you're capable of cobbling together a few disparate studies into an argument, I must admit to you that I just don't care that much. But if you love it so much, then by all means, have at it. FWIW, I promise I'll read it.

Like I said, these case interviews are pretty confusing to me because the answers (at least as presented in this thread) seem to be mostly subjective. In my opinion, this makes them no more than an exercise in fashioning a cogent, well-thought-out answer on the fly - in layman's terms, "bullshitting".

There's no shame in bullshitting. Most well-paid professions entail some degree or another of it, and I count it among the most important tools in my kit for work and life. Still, seems a little odd (and rubs me the wrong way) that a top shop like BCG would put something out for students that (to me, at least) has no readily available explanation for why it's the capital-t "True" answer.

That's why I'd very much like to hear the rationale for this from someone who has done this full-time for a while, and can either explain the precepts of management science I'm failing to grasp, or explain how getting the "right answer" here creates better consultants.

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Jul 13, 2017
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fight for MBB