Airline Food

Our client provides catering services to major airlines at Houston Intercontinental Airport. They are considering investing in new refrigerating equipment that will lead to an overall reduction of 10% of their variable costs. We have been hired to determine if they should invest in the new equipment.

• New equipment will cost $10M • They currently charge $10 per meal to the airline, with average COGS of $5 per meal (including spoilage, labor, and manufacturing equipment) • The company requires a three year, undiscounted payback

Our client provides catering services to major airlines at Houston Intercontinental Airport. They are considering investing in new refrigerating equipment that will lead to an overall reduction of 10% of their variable costs. We have been hired to determine if they should invest in the new equipment.

The framework should center around a cost-benefit analysis to assess if the investment creates value. Relevant considerations would include investment, revenue, costs, competition, product and market. • Market/competition: our client currently has a 40% market share at HIA, with the remainder split between three other major players. • Customers sign 5 year contracts, making new customer acquisition limited • Air traffic through Houston has been steady for the past 5 years • Product: airline food is generally seen as a commodity, however we may be able to capture slightly more market share by providing a fresher product through improved refrigeration • Market size: instruct the candidate to the market through his own estimation • The investment would reduce COGS by 10% Example (do not provide exact numbers to candidate, but suggest figures that make investment decision relatively close): 1.Total # of runways x departures per hour per runway x hours of operation per day x average number of passengers 2 Segment on international, domestic long-haul, and domestic short-haul 3. Multiply by number of days (tell candidate to assume 360 days of full operation) 4. Multiply by market share, then revenue and COGS to find profit