Cheap Fly Air

Practice Case for McKinsey PST – Cheap Fly Air

2011

Instructions: -

This practice case has 9 questions. questions. In the real PST, you will have three cases, each has about 8-9 questions to make 26 in total. No calculation and any electronic electronic devices are allowed. You have 20 minutes to complete this case. In the real PST, you will have 60 minutes to answer 26 questions. This is a free practice case. You are welcome to share this document to anyone interested.

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2011

Cheap Fly Air Our client, Cheap Fly Air is a major low-cost airline carrier in the US, accounted for over 20% of the total US flight market share. It operates on an all-Boeing-737 fleet which consists of 550 planes. It has been among the most profitable airlines in the country. The reasons for that high level of performing are Cheap Fly Air's unique strategies: all-Boeing-737 fleet, low down-time between flights (about 4 flights per day per plane), unique culture, secondary airports... However, facing the economy downturn, great competitions, fluctuating fuel costs…, the airlines need to

put up together strategies to keep its profitability moving forward. They hire McKinsey to help with that. Here is its basic information.

BASIC PROFITABILITY INFORMATION (Millions USD)

2010

2009

2008

2007

2006

Operating revenues

12,104

10,350

11,023

9,861

9,086

Operating expenses

11,116

10,088

10,574

9,070

8,152

Operating income

988

262

449

791

934

Average Passenger Ticket Fare (in $US Dollars)

130.27

114.61

119.16

106.60

104.40

Seat Usage Percentage

79.3%

76.0%

71.2%

72.6%

73.1%

Fuel Cost per gallon (net of tax) (in $US Dollars)

2.51

2.12

2.44

1.80

1.64

Passenger carried

88,191,322

86,310,229

88,529,234

88,713,472

83,814,823

Question 1: After reviewing the information above, the consulting team sketches out a plan for analyzing the engagement. How should the McKinsey Team tackle the engagement? (Answer this question independently from all others) A. Focus on Revenue B. Focus on Cost C. Tackle Operating Income D. Analyze Fuel Cost E. Study Revenue and Cost


Practice Case for McKinsey PST – Cheap Fly Air Question 2:

2011

What is the best and worst Profit Margin performing Year?

A. 2010 and 2009 B. 2010 and 2008 C. 2006 and 2009 D. 2006 and 2008 E. 2007 and 2009 Question 3: What is a possible reason for the drop in 2009 revenue? A. The Cost Increase in the year of 2009 B. Customers' responses to the increased fares C. 2009 is in the middle of the economy downturn D. Decrease in the number of passengers carried E. Customers are not satisfied with services provided by the client Question 4: Assume all planes are utilized at the max level (in term of flights per year). Cheap Fly Air uses the only-Boeing-737 fleet, each can carry 150 passengers. With the increase in the number of customers carried in 2010 over 2009, how many new air-crafts did Cheap Fly Air need to acquire? A. 0 B. 1 C. 3 D. 6 E. 12 _______________________________________________________________ The engagement team decides to tackle Cost to see if there is an area for improvement. A breakdown of costs in recent years was gathered. THE AIRLINES OPERATING COSTS BREAKDOWN (Billions) 2010

2009

2008

Salaries, wages, and benefits

3.76

3.54

3.23

Fuel and oil

3.68

3.11

3.6

Maintenance, materials and repairs

0.76

0.73

0.7

Aircraft rentals

0.18

0.19

0.15

Landing, fees, and other rentals

0.82

0.73

0.64

Depreciation and amortization

0.64

0.63

0.58

Other

1.45

1.36

0.02

11.29

10.29

8.92

Total



2011

Question 5: What is (are) the main driver(s) of the Airline's Cost? 1 - Fuel Cost 2 - Salaries 3 - Capacity (measured by # of customers carriable x # mile flown) 4 - Aircraft Cost (depreciation + rentals) A. Only 1 B. Only 2 C. 1 and 2 D. 1 and 3 E. 3 and 4 Question 6: Which Cost increases the most (by percentage) from 2008 to 2010? A. Salaries B. Fuel C. Landing D. Maintenance E. Depreciation Question 7: What is some initial information will you need to analyze Fuel Cost? 1 - Different types of fuels used by the client 2 - Prices paid by client for fuels 3 - World oil - gasoline market 4 - Profitability, going concern of client's fuel supplier 5 - Fuel cost per seat per mile of different air-crafts 6 - Fuel usage volume by the client A. 2 and 6 B. 1 and 2 C. 1 and 3 D. 6 and 5 E. 4 and 2 Question 8: If the fuel cost in 2010 has been $3, what would the Operating Income be for Cheap Air Fly? A. 50 m B. 250 m C. 425 m D. 700 m E. 890 m



2011

Cheap Fy Air is not considering an acquisition of SouthEast Air, a relatively small low cost airline operating in the south east area of the country. The consulting team is asked to analyze potential synergies of the acquisition. Synergy, in general, may be defined as two or more things functioning together to produce a result not independently obtainable.

Question 9: Which of the following is NOT a potential synergy of the acquisition? A. SouthEast Air has a very young but expensive fleet while Cheap Fly Air's fleet has consistently been criticized to be a little old. B. SouthEast focuses on serving the south east area, whereas Cheap Fly Air doesn't have a lot of connections. C. SouthEast Air operates two major air-crafts: B737 and B717. B717 fleets of SouthEast Air will help Cheap Fly Air save cost on those small and short routes. D. Cheap Fly Air has a strong on-flight culture whereas SouthEast does not. E. The all B737 fleet of Cheap Fly Air saves them on maintenance cost. SouthEast Air maintenance cost is higher due to its more complex fleet.

Answers Keys to this Test is available on our website.


Cheap Fly Air

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