Suggested 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
- Revenue: List revenue drivers & enquire about numbers to estimate revenue
- 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
- Profits & ROI
- Calculate profits
- Calculate ROI for year 1 horizon and check if it meets the investment threshold.
1. Revenue drivers
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
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 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
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:
- Demand exceeds supply hence utilization would be 100%
- During the day supply exceeds demand, so utilization would be 80% ( 2000/ 2500)
3. Total revenue
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.
- 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%
6. Other factors
- Other costs – Finance costs (interest), SG&A expenses could be some examples
- Tender preparation cost
- The license fee could be depreciated over the 5 year period. It would still not change the advice to the client.