Example Case: Virgin Atlantic
Our client is virgin Atlantic and after they came out of the Corona virus pandemic, they desperately needed a way to increase profits. Normally, Virgin Atlantic would reserve 1 seat on every flight for emergency purposes. The reason being, if during a mid-air flight someone’s seat was broken, and they needed to switch seats or if a fight broke out and they needed to separate individuals then that extra seat would be used. This is not a regulatory requirement to have this seat and in 99.9% of flights the seat goes unused.
In a bid to boost profits, the CEO would like you to examine the impact this would have on profits if that seat were to be sold and what would take to actually make this happen.
Additional information
- The airline operates 24 hours per day
- There are two planes on each route
We are going to answer this question in 2 parts.
- 1. Impact of selling the additional seat on each flight
First, we need to get confirmation that we are not breaching any regulations by selling this emergency seat and that this seat is actually free during flight and not being used for anything else. Otherwise, we are wasting our time. In the brief it says its not a legal requirement but if we can double check this that would be great. But we are going to assume that we can.
We are going to use the profit framework to answer this questions (Profit= revenue – Cost). The effects of selling an additional seat on a flight is simply the cost of providing an additional meal and the rest of that revenue hits the bottom line directly.
To analyse the calculation the candidate should request more data on the revenue, cost per customer and flight details.
What we need is to find the revenue per customer and then we can adjust this figure for flights and frequency. We will begin with the daily revenue from each flight per customer.
- NYC – BER: (24 hours of operation / 8-hour flight route) X 2 planes= 6 flights per day
- NYC – DUB: (24 hours of operation / 10-hour flight route) X 2 planes = 4.8 ~ 5 flights per day
- NYC – PAR: (24 hours of operation / 8-hour flight route) X 2 planes= 6 flights per day
- NYC – LHR: (24 hours of operation / 7-hour flight route) X 2 planes= 6.8 ~ 7 flights per day
- NYC – TYO: (24 hours of operation / 16-hour flight route) X 2 planes= 3 flights per day
So daily revenue works out as;
- NYC – BER: 6 X ($1,000 – $20) = $5,800
- NYC – DUB: 5 X ($3500 -$20) = $3,400
- NYC – PAR: 6 X ($3000 -$20) = $2,880
- NYC – LHR: 7 X ($4000 -$20) = $3,860
- NYC – TYO: 3 X ($6000 -$30) = $5,910
Total average revenue per day is $21,850
Assuming the airline operates 360 days per year, that’s 360 X $21,850= $7,866,000 of revenue per year per additional passenger on each flight if the airlines sells its emergency seat as a commercial seat.
- 2. Should we proceed with this?
We can do a quick benchmark analysis and compare this to other airlines to see if they have or not maintained an emergency seat. Regardless, if it is not a regulatory requirement or not, given this seat is still being used in only used 1 in every 1000 flights might still prove very useful to maintain in the event of an emergency in the air.
The lack of an emergency seat might mean flight attendants cannot separate customers who might get physical which might hurt someone else and the airline will be on the hook for not providing a safe method of transport and that lawsuit could be worth more then the $7,866,000 per year in savings.
Alternatively, to increase profits instead of selling the emergency seat the airline could relocate flights, for example the 6 flights from NYC to Paris which only provides $2,880 in daily revenue whereas just 3 flights from NYC to Tokyo can provide $5,910 in daily revenue. Granted, there are duration differences but we could cut back on the Paris flight and increase the number of airlines routes to Japan more.
On the other hand, if increasing revenue is proving problematic then reducing cost might be easier in the forms of seeking cheaper catering providers, reducing the number of pilot or flight attendants or operational improvements which can be further examine with more time.
