Week 3
Case Type - Revenue Increment
Case: Let’s fly to Lemon
Few Logistics --
Instructions Please follow the case structure highlighted during the interview process for week three and submit
the required documents.
Problem Statement
One of our clients is the CEO of a midsize passenger airline(FlyFly Co.) in Mexico D.F. The airline
currently operating on the Hub & Spoke model seeks to increase its revenue. The company intends to
switch its aircraft serving the flight to Lemon, Brazil (an agricultural outpost) to its existing service New
York line. Is this a good idea?
Clarifying Questions {Insight: Clarifying questions aim to understand the rationale behind the switch, evaluate existing
performance metrics, and assess the potential impact of the change.}
<<Response Required>>
1.
2.
3.
4.
5.
What is a Hub & Spoke Model?
What is the objective of the company?
Why you want to switch your flight from Brazil to New York?
What is the market share of your existing airline in New York and Brazil?
What is the existing occupancy rate, capacity? and is it going to affect after the switch?
Response 5 changed after seeing the table below.
Also based on the answer for response 3 question we may change these response 4 and 5 questions
right?
{Insight: The Hub & Spoke Model is a system where a central hub connects to multiple smaller
destinations (spokes). It centralizes operations, improving efficiency and consolidating resources,
commonly used in aviation to streamline connections between cities.}
Answers to a few critical clarifying questions <<Remove Black Highlight in Word to see. Ideally, do this after you have taken the first pass at your
clarifying questions>>
Service Line
# Planes
# Round Trips
Capacity
Occupancy Rate
Price
To Lemon
1
2/day
200
90%
350
To NY
4
3/day
200
80%
350
Please note that adding additional aircraft to NY service would reduce the occupancy rate from 80% to
70%
Additional Information 1. Costs are irrelevant to the analysis
{Insight: Lemon has a high occupancy rate but operates with fewer planes and trips. New York has a
lower occupancy rate but a higher frequency and number of planes. Adding more planes to New York
would reduce the occupancy rate further.}
Simulation Try answering the questions below –
1. Does the incremental demand in NY line justify the opportunity cost of switching from the
Lemon line?
No, considering the below revenue calculations we can say that the revenues will be higher for
the existing model when compared with switching to New York for incremental demand.
Revenue = No of planes * No of trips * Actual Capacity * Price.
For Lemon:
Considering the 90% occupancy rate
Actual capacity = 200*0.9 = 180
Revenue = No of planes*No of trips*actual capacity*price
Revenue per plane = 1 * 4 * 180 * 350= $252000
Revenue = $252000
For New York:
Considering 80% occupancy rate
Actual capacity = 200*0.8 = 160
Revenue = No of planes*No of trips*actual capacity*price
Revenue = 4 * 6 * 160 * 350 = $1,344,000
Revenue per plane = 6 * 160 * 350 = 336000
Total (Lemon + New York) = $1,586000
After switch:
For 5 flights considering the 70% occupancy rate
Total Revenue = 5 * 6 * 140 * 350 = $1,470,000
Which is less than the Total Revenue before switch (-116000)
Revenue per plane = 294000 which is (-42000)
{Insight: Switching reduces total revenue by $116,000 due to a drop in occupancy rates. Lemon
contributes significantly despite lower operations, so switching diminishes overall performance.}
If occupancy rate drops to 80% in Lemon then
Revenue per plane = 1 * 4 * 160 * 350 = 224000 which is -28000 from the actual estimates and the
total revenue will be 1,558,000 which is still higher revenue for before switch than after switch
{Insight: Even in a worst-case scenario where Lemon’s occupancy drops, the current model still
generates higher revenue compared to switching. This confirms the robustness of the current
operations.}
Recommendation Summary
After the analysis of opportunity costs for the incremental demand in New York after switching
from Lemon to New York, it is better to continue the same existing services in Lemon and New
York because the revenues are higher for the existing model when compared with the revenues
after switching to New York. In the worst case if the occupancy rate drops to 80% in Lemon for
the existing then also it is considerably generating more revenue.
{Insight: Maintaining the current operations provides better financial outcomes, confirming that the
Lemon service adds significant value despite its smaller scale. Expanding in New York risks reducing
overall profitability.}