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Case

Airport Taxi

Difficulty: Beginner
Type: Candidate-led
Topics:
Valuation
Profitability
Case prompt
Dallas Airport Development Authority has decided to launch a tender process to invite applications for airport taxi operators. The current system is fraught with unorganised operators cheating customers, exorbitant fares and unlicensed taxis. They have removed the existing unorganised players and have launched a tender process to issue 2,500 new taxi licenses, which would now service the airport.

Our client is evaluating whether he should bid for the tender. Our client has a large fleet of taxis, but currently does not service the airport. He has a spare capacity of 600 cars at the moment.

He has asked us to advise him on whether he should bid for this contract and if the airport segment would yield a positive return on his investment.
Detailed solution

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the β€œCase exhibits” section.


Suggested case structure

Key question: What is the estimated ROI of this investment?

Provide some background information to the candidate, so that he can build a case structure

    • The client is evaluating bidding for 600 licenses
    • The company has an internal threshold of 20% ROI over a 1 year horizon for new investments

 

    Exhibit 1 


     
    The candidate should go through the following steps:
    1. Revenue: List revenue drivers & enquire about numbers to estimate revenue
    2. Cost: List cost drivers and enquire about numbers. Potential cost drivers would be: Operating costs (Driver salaries, other operating costs like fuel, repairs etc) and License costs
    3. Profits & ROI
      1. Calculate profits
      2. Calculate ROI for year 1 horizon and check if it meets the investment threshold.

    If needed, share Exhibit 1 with the interviewee


    1. Revenue drivers


    The interviewee should enquire about the drivers of revenue for the airport taxis.

    Allow the candidate to list out factors that he believes would drive revenue. A good candidate would list out demand drivers like passengers transiting through the airport, % using airport taxis, average fares etc.

    Share the below information with the candidate, to enable him to estimate revenue:

      • Dallas airport handles 73 mn passengers annually
      • 50% of the passengers are transiting to a different destination; 30% gets into Dallas using taxis and the remainder using other modes of transport like personal cars, buses etc.
      • Of the customers who use taxis, 40% travel from 12:00 am to 6:00 am and 60% from 6:00 am to 12:00 am
      • Average trip duration is one hour
      • The taxis operate through the day (24/7), without any breaks for refuelling, maintenance etc.
      • The average fare for night time trips are $60
      • The average fare for day time trips are $40
        •  

    A great candidate would point out that the utilization of the fleet during night time vs day time is different and would use that as a starting point for revenue calculation.

    Otherwise a candidate might ignore utilization, and move on straight to revenue estimation.


    2. Utilization calculation

    Brainstorm with the interviewee on how he would look to calculate utilisation. If required, prompt him to perform the calculation on a per hour basis

    To calculate utilization, we need to look at supply & demand during night time & day time. Doing these calculations on a per hour basis would make the most sense.

      • Demand would vary by night vs. day – as described in the previous exhibit
      • Supply would remain the same through the 24 hours


    Supply: 2,500 taxis per hour – Both during night & day time operations


    Demand: 

    First calculate no. of passengers per day =73 m/ 365 = 200,000 passengers/per day


    Demand per hour during Night time


    Demand can be calculated as follows:



    Key insight

      • Demand exceeds supply hence utilization would be 100%

    Demand per hour during Day time




    Key insight

      • During the day supply exceeds demand, so utilization would be 80% ( 2000/ 2500)

    Once the interviewee has successfully calculated the utilisation, ask the interviewee to assume 100% utilisation throughout the day. Now the candidate can move on to revenue calculations.


    3. Total revenue


    The candidate should use the information given earlier to now calculate the total revenue for the company. 

    Daily revenue per car:

    π·π‘Žπ‘–π‘™π‘¦ π‘Ÿπ‘’π‘£π‘’π‘›π‘’π‘’= (π‘π‘–π‘”β„Žπ‘‘ π‘‘π‘–π‘šπ‘’ β„Žπ‘œπ‘’π‘Ÿπ‘  Γ— π‘›π‘–π‘”β„Žπ‘‘ π‘‘π‘–π‘šπ‘’ π‘“π‘Žπ‘Ÿπ‘’) +(π·π‘Žπ‘¦ π‘‘π‘–π‘šπ‘’ β„Žπ‘œπ‘’π‘Ÿπ‘  Γ— π‘‘π‘Žπ‘¦ π‘‘π‘–π‘šπ‘’ π‘“π‘Žπ‘Ÿπ‘’π‘ )

    = 6 βˆ—60 + 18βˆ—40

    = 1,080 $ per day per taxi


    Annual revenue for the fleet:

     Annual revenue =π·π‘Žπ‘–π‘™π‘¦ π‘Ÿπ‘’π‘£π‘’π‘›π‘’π‘’ Γ—π‘π‘œ. π‘œπ‘“ π‘‘π‘Žπ‘₯𝑖𝑠 Γ—365

    =1,080 Γ—600Γ—365

    = 236.5 m$

    4. Costs


    The below cost assumptions can be shared verbally with the interviewee:

      • Our client has a variable pay structure where drivers get 60% of the revenues instead of salary
      • Operating costs per taxi per year are $ 3,000
      • The client would have to pay a license fee to Dallas Airport Development Authority if he wins the tender. This is a fixed fee of $125,000 per taxi and has to be paid in advance. The license lasts for 5 years; post which the licenses would be allotted again through a tendering process.

     

    Now, the costs can be calculated per year.

    Payroll cost 
    =60%Γ—π‘‡π‘œπ‘‘π‘Žπ‘™ π‘Ÿπ‘’π‘£π‘’π‘›π‘’π‘’
    =60%Γ—236.5=141.9 π‘š$

    Operating cost
    =3,000Γ—π‘π‘œ. π‘œπ‘“ π‘‘π‘Žπ‘₯𝑖𝑠
    =3,000Γ—600=1.8 π‘š$

    License Fee
    =125,000Γ—π‘π‘œ. π‘œπ‘“ π‘‘π‘Žπ‘₯𝑖𝑠
    =125,000Γ—600=75 π‘š$

    Total cost = $141.9+$1.8 = 143.7 m$
    One time cost = 75 m$

    Total cost = $141.9+$1.8 = 143.7 m$
    One time cost = 75 m$

    5. ROI


    Now, the profit and the ROI can be calculated.

    Profit
    = 𝑅𝑒𝑣𝑒𝑛𝑒𝑒 βˆ’π‘‡π‘œπ‘‘π‘Žπ‘™ π‘π‘œπ‘ π‘‘
    =236.5βˆ’143.7
    = 92.8 m$

    Net Earnings 
    =π‘ƒπ‘Ÿπ‘œπ‘“π‘–π‘‘ βˆ’πΏπ‘–π‘π‘’π‘›π‘ π‘’ π‘π‘œπ‘ π‘‘π‘ 
    =92.8 βˆ’75
    = 17.8 m$ 

    ROI:
    = 23.7%

    Key insight

      • ROI on the investment over a one year horizon is 23.7% , which is higher than the target return of 20%
      • Since the license costs are one time, the ROI from next years would be 123.7%

    The interviewer can prompt the interviewee to come to a conclusive advice for the client.



    6. Other factors

    Brainstorm with the candidate on other factors that should be considered


    Potential other factors and costs to be considered include:
    1. Other costs – Finance costs (interest), SG&A expenses could be some examples
    2. Tender preparation cost
    3. The license fee could be depreciated over the 5 year period. It would still not change the advice to the client.


    Exhibits
    Exhibit 1

    Exhibit 1

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