M&A consulting case interview: Airline acquisition (w/ Bain and McKinsey consultants)

but what you'll notice is that there is no Northwest Airlines and there is no Continental Airlines um so why do you think those kind of like major players made different [Music] decisions Welcome to our interview how are you feeling this morning good thanks how are you I am fantastic um so we are going to do a case interview today I want to give you a little bit of prep before we dive in just a couple of things to be mindful of so first of all um this is an interviewer driven case right and so what

that means is I might ask you you like company's facing XYZ problem what's your recommendation in terms of how to investigate and you might say I want to look at a right what I will do is say that's a fine answer right if it is ask you some follow-up questions but then I'm going to ask you uh to do the next thing that I want us to look at right so I might say yeah a is a great idea but I want to look at B that does not mean mean that you are doing a

bad job what it means is that I have certain modules and questions that I need to get to to make sure I am evaluating you know a bunch of different categories of performance does that make sense makes perfect sense sounds great cool um any questions about the structure before we dive in no I'm ready to go awesome this is gonna be great all right your client Alaska Air Group has recently finalized its acquisition of Hawaiian Holdings bringing together the distinct brands of Alaska Airlines and Hawaiian Airlines the merger opens up new opportunities across an expanded

Network promising enhanced customer service and operational efficiency the clients wants the client wants to make sure it gets the most value out of the merger and has turned to our firm for support how should Alaska Air Group proceed to maximize value in the post merger landscape great sounds like a super interesting case all love flying to Hawaii and to Alaska so maybe out of this case we'll get a free trip uh a couple of questions for you before we dive into the framework the first is just regarding the objective so you mentioned that the case

was focused on how to maximize the value is there any specific objective that they're hoping to maximize or any specific metric that they're going to be aiming for sure uh I mean this is obviously a for-profit case uh and so kind of the typical for-profit objectives right would like to increase Revenue uh would like to find cost savings so that means both like operational synergies um and you know anything else we can do and would like to do that in a defensible way right meaning longer term perfect okay makes sense um and can you clarify

for me what the size of each firm is so maybe in terms of I don't know the flights per day or the revenue that each firm sort of brings in just to ground ourselves in like how big and whether there's a big size difference between the two yeah absolutely so uh Alaska Airlines uh as befitting its uh role as the purchaser is certainly the larger of the two operating about 1,200 flights a day revenue of about $8.2 billion annual uh Hawaiian meanwhile 300 flights 2.8 billion in Revenue okay sounds great um and then in terms

of sort of the markets that each of them serve so I'd imagine that Alaska Airlines focuses on Alaska and Hawaiian Airlines focuses on Hawaii um but you're clearly the airline expert they probably go into some other regions as well um do they each serve their specific markets is there any overlap in between those markets I think that'll just be helpful to know as we think about synergies y so you can think about Alaska Airlines is basically a West us uh Airlines so including Alaska uh but there are connections to other states and some International destinations

in Canada Mexico and it serves Costa Rica um Hawaiian kind of like a Pacific based right so really focused on inner Island flights within Hawaii and then direct flights from Hawaii to the US Mainland also has some International routes Japan South Korea Australia and South Pacific um and there is some overlap in service though not a ton uh primarily between the routes between Hawaii and the US Mainline Mainland um but otherwise like largely nonoverlapping networks got it okay helpful um and then similarly in terms of the markets would love to hear a little bit about

the customers sered so is there any specific information you have on customer segments that they each Target it sounds like since Hawaiian is focused on the Hawaii sort of inter island it might be like more so Hawaiian locals but probably a lot of tourists as well so um just would love to hear a bit about that yeah um tons of tourists on Hawaii it's basically a flying Dairy um so they are largely um certainly like very much focused on that Leisure Travel segment um you know inner Island to your point right like some of that

is commuting seeing relatives that kind of stuff a little less Leisure for the locals um Alaska you know serves certainly like a good amount of leisure as well but has a broader corporate base um given its presence on the west coast and you know between West Coast uh airports perfect uh would you mind if I take a minute to think about how I would sort of structure and think about this case rock and roll let's do it perfect um so I'm just going to sort of turn this around for a second so that you can

see the framework that I've come up with here um move my face out of the way so um as we have discussed the goal of this case is to think about how to maximize merger value so that's sort of in this main bucket here and then I've split it down into Revenue growth and cost efficiencies which I think are sort of the two main drivers um that you can come back to in this case so under Revenue growth there are two main pillars there's Market ex expansion which I think could be like any new routes

that neither of the um Airlines currently serve that they might be able to serve um we can think about Partnerships so uh maybe because of this enhanced you know the size of the the new company um there could be better Partnerships they could become part of one of the alliances I think there's like Star Alliance and I'm not exactly sure what they all are um but maybe they could think about a new partnership and then there's also the ability to do some cargo Revenue so maybe with new routes or maybe with some of the rootes

that they currently do they can expand to Cargo Revenue in addition to their passenger Revenue um so that's something to explore then in terms of non-flight Revenue I think there's a maybe an additional loyalty program that could be taken advantage of um bundled services so actually bundling together like um whether it be flights and like hotel package or the car rental um I feel like you always see that when you book flights these days and I have no idea about what the economics are on that but they could look into that um and then the

last one is maybe advertising Revenue so um sort of taking advantage of advertising like other services or things to do within the countries when they get there you mentioned a lot of Tourism so that might be a good one um then in terms of cost efficiencies I think there's operational synergies and that could be um root optimization for example or Fleet rationalization so root optimization being like going from place to place or maybe thinking of a hub and spoke model um and then Fleet rationalization is saying like what is the exact number of flights that

we need making sure that there's not too many but also not too few would probably be easier to do when you just have a bigger Airline um and the second one is the tech and Staffing synergies so from a tech stack perspective like making sure that there aren't two booking systems that you're paying a fee on and making sure that there aren't too like um route I'm sure they're like mapping the routes and mapping the occupancy um so any type of Technology around that and then similarly around Staffing like you only need one CFO probably

so you can think about you can cut some headcount um across the organization um how does that sound to you is that sort of along the lines of what you're thinking no I mean I think uh like great start makes a lot of sense uh I think my kind of like my follow-up question would be if if we added kind of like the dimension of time right like limited resources like where would you start right do you start cost do you start revenue where specifically within that like how would you actually start yeah I would

definitely start on the market expansion piece under Revenue growth so I always try and think about these things in terms of like growing the business rather than cutting especially when it's like there's this new beginning and it's an exciting opportunity I think like the opportunity to grow is endless and the opportunity to cut is obviously finite um so I like to think about sort of in the more positive light um and just from a man a Market expansion perspective I think there are so many potential opportunities there to expand roots to think about um a

new model and I think that's like a really exciting way for the company to first start awesome all right um so the next question we're going to tackle is one around branding okay um so Alaska is currently uh deliberating a significant branding decision post merger with the integration of Hawaiian Holdings the company has Torn Between Two strategic paths path one rolling both Airlines into a single unified brand to streamline operations strength Market identity uh or have two maintaining the distinct brands of Alaska and Hawaiian to preserve their unique Market positions how should our client make

this decision okay so it sounds like the two decisions are either combine it into one or keep it as two separate Brands um right and perfect when I think about that I I want to think back to the framework that we had um where we're really thinking about like the whole case is surrounded around maximizing Revenue um and making the the company more valuable so when we look at that let's look at it again from the revenue and the cost perspective um so as I had mentioned sort of one minute ago in terms of the

costs um I think that although with one brand there would probably be phys fewer physical and digital assets um it's probably a fairly limited amount of synergies that you could create like as I mentioned maybe you can get rid of one of the CFOs maybe there are a couple like people who you can but overall you're not going to be able to get that many cost savings I really see the biggest potential here on the revenue side um so that's where I'd sort of like to focus and if we think about having one brand I

think some of the the maybe positives towards Revenue are greater Customer Loyalty greater scale of the brand so you could actually like have bigger brand reach um geographically and greater synergies in Hawaii and Alaska travel so you can actually have um I mean both of them are kind of in unique positions geographically to the US so I think there are some some interesting synergies you could create there um but when we look at two Brands I actually think that having like specific names to the locations if you're in Hawaii and you're going from Island to

Island being able to go on like Hawaiian Airlines it does sound pretty cool and it's it's sort of like that brand reputation would have would carry a little bit more weight tied specifically to that region um and similarly it sounds like they have kind of unique offerings and unique propositions to their customers um the inter island travel within Hawaii for example so I think for me the um revenue of the two Brands really outweighs the revenue for the one brand and the cost is fairly negligible um in order to make like a full decision what

I would want to evaluate in terms of the next steps are trying to tie some Financial metrics to each of these more qualitative pieces that I have here um and also just looking at if there are other Airline mergers that we can look at as sort of comparables to see what they did and how it ended up turning out for them um great uh I'd love to just kind of like explore that second part that you just mentioned there which is um other Airline mergers right so you know the two that kind of spring to

mind uh you know like in my lifetime that were like major US mergers right is Delta buying Northwest Airlines um and United buying continental and somebody bought somebody else in American but I forget what that was but what you'll notice is that there is no Northwest Airlines and there is no Continental Airlines um so why do you think those kind of like major players made different decisions yeah and I think that that thank you for pointing those out I actually was not aware of those two mergers so I think um looking into that and fully

diagnosing and understanding would be a great Next Step but just off a hunch and off sort of what I can imagine I think it's probably because the locations of Hawaii and Alaska actually carry more like weight of the brand of those locations than Northwest does um I'm not even really sure what that I'm not American but I'm not even sure like exactly what the Northwest is to be honest whereas everyone knows what Hawaii is and everyone wants to go there um so I think it's just a little bit more of like the brand of the

actual place that they represent is more pronounced um and so by the airline carrying that brand they're sort of like taking on the positive effects that the brand of the place actually has in itself got it so that's why that is why Alaska Hawaii is different than for example like Northwest Delta yes yes okay all right uh ready for our next question awesome all right uh so we're talking about hubs right now um so as part of the merger are you aware kind of of the you know Hub and smoke model yeah generally speaking Yeah

okay great uh as part of the merger the client is looking to transform Honolulu into a hub for service around the Pacific a member of your team has run the numbers on what service would look like with and without the Hub I want you to calculate the revenue and profit impact of using Honolulu as a hub and I'm going to share this exhibit with you as long as technology cooperates perfect can you see it I can yes awesome um and then the specific question is if the improvements to Honolulu airport require an investment of 500

million how long will it take to pay back okay time to pay back um perfect so if we look at this chart that you've put up here we can see one column is the existing service so what they're currently doing and then one is if they they were to switch to the Honolulu Hub and then you can see a number of criteria here so the flight per day seats for flight the load factor which I guess is the percentage of occupancy on the flight is that the right way to think about load Factor that's right

how full is it perfect um average oneway Fair fuel cost per flight and operating costs per flight so just by quickly looking at this um it looks like a couple of most of the elements are actually the same um three of them are the same three of them are different so can see the load Factor would be slightly higher with the Honolulu Hub um we can see that the fuel cost uh there's a rise in fuel prices with the Hub which makes sense like it's flying a little bit further each time um and then we

can see that the operating costs are higher with existing service um so it looks like what we should do is understand what the differential sort of profit would be from each of these areas and then see what the payback period would be on the 500 million investment does that sound right to you I love it perfect so what I'm going to do here is I'm going to start with the revenue and I'm going to look at no Hub so our existing service what we're currently doing and I'm going to take to calculate the revenue I'll

take the average Fair times the number of seats um and then I'm going to multiply that by the load factor and then the number of flights um per day to get the total flights so um here I can get $250 per fair for no Hub times 150 seats times a 70% load factor and that's going equal $26,000 per flight um in Revenue that we're making for no Hub and we can see that in both scenarios we actually have um 1,500 flights per day so here we're going to multiply it by 1,500 and that equals roughly

40 million per day is that right that's right perfect um and then if we look at those exact same numbers use the exact same formula except just use the numbers in the other column we'll do the $250 Fair times 150 seats so that that that was the same as above um and then we'll multiply that instead of 70% load factor a bit higher to 80% for the load factor and that will actually get us to $30,000 per flight so we can see that instead of 26,000 with no Hub we have 30,000 with a hub so

we know that it's going to be higher um and if we multiply it by, 1500 flights a day that's actually 45 million um so five million more approximately in Revenue if we're doing the Hub but we know because of the operating cost that there's actually going to be more costs um so let's try and figure out what the additional costs are so we can determine the profit um so with the cost we have the fuel cost plus the operating cost which is 8,000 plus 5,000 um so that's 13,000 per flight times, 1500 flights a day

um so for no Hub there's about is it okay if I round yeah it's about 20 million per day um and then for the Hub it's the same where we're going to add fuel plus operating cost so 10,000 plus 2,500 which equals $12,500 per flight multiply One Last Time by the 1500 flights a day and we get to also approximately 20 million a day so actually not a significant difference on the cost because the fuel and the operating seem to wait each other out um so what what that comes down to is that the profit

is actually going to be an incremental five million dollar per day by using the Hub and spoke model which is quite incredible when you think about it um and then if we look at that versus our 500 million investment um that's about 100 days that we would take to pay back which is very very short period of time just over three months to pay back that investment so um I think as a Next Step what I would want to do is really evaluate that 500 million investment I think oftentimes with infrastructure Investments the initial estimate

is not met so we'd want to see like what are the risks what are the contingencies around that um and I would also really want to look at this um this fair I'm thinking if someone would have to like deboard a plane reboard a plane to get to their same destination they might not be willing to pay as much but um sort of pressure testing some of those assumptions would be my next step sure sure yeah I mean I think my basic reaction right is so you're telling me that I can invest $500 million and

in 200 days I can double that investment right like that feels like what's your immediate reaction if I told if I told you I have a great investment idea for you I need I need a half a billion dollars and I'll turn it into a billion dollars in 200 days I think anybody on the planet who had $500 million would give it to you in a second yeah if I had 500 million it would be going to you sure sure if I could guarantee it right but I think my question is like would you trust

it I I mean that's that's the thing I think that's where you really do have to pressure test the numbers I do think the Hub and spoke model to your point earlier where you said like let's compare this to a a similar situation The Hubb and spoke model is used in the airline industry all over the place it's going to be a pretty easy investment to justify I'm sure there are 100 case studies that you could come up with where you could show the math and how it's worked out um so I do think that

it's probably going to be a pretty good investment okay awesome all right so um good news uh Alaska did decide to go forward uh and is proceeding with plans to make Honolulu a hub um but bad news um we're getting word that we have one passenger in particular that is very negatively impacted passenger lives in San Diego and flies to Maui three times a year um so like now that the flights are routing through Honolulu in the updated Hub model this passengers onetime travel will increase from 5.5 hours to 8.5 hours each day and let

me tell you he's pissed been a longtime loyalty program manager uh program member he's very upset taking to social media to complain about the merger disparaging the airlines how dare they add three hours to my flight to get to Maui a bunch of dummies over there it's He's very mad would you do just imagine the tweets let me tell so many just a fire storm every time he hops on the plane he's live tweeting about us on his flights oh no it's it's a mess I think first they should look into discontinuing the free Wi-Fi

for the Loyalty members in that case just kidding just kidding okay so it sounds like we need a bit of a PR team on this so if we look at the steps that we would need to take um for me the first thing in this type situation that I think brands should do is always just acknowledge the impact that they've had you know an apology costs absolutely nothing and it can sometimes go a long way and just say like we're really sorry you've been inconvenienced that we've added three hours times three trips a year that's

nine hours of this guy's life I I get it it's not he's not happy about it acknowledge it tell him that that you know you're sorry about the impact that it's had on his life um and then that's where I think more of the like monetary comp compensation might be able to come in the first I think is just in the in the respective points it sounds like he's a loyalty member we obviously want him to stay loyal um and so saying like here's some free points responding to the tweets and saying here's some points

for compensation for your inconvenience might help him retain him for his future trips but also just a couple free points goes a long way sometimes and if we still didn't think that was enough the third sort of Step or third option might be even to add a cash cash bonus in there and just say like next time you book on the same route you get $50 off again would do very little to our bottom line especially when we're looking at that 50 million 500 million in 100 days sort of Target there it it really doesn't

impact that um but might go a long way for him and for our brand um but overall I I do just want to clarify that this is one person there could be thousands of people who are being impacted in a similar way who maybe just aren't is active on social media or maybe one of their three trip trips of the year just has not come up yet um so I think that what's important is creating some type of like system in which we would be able to intake the complaints and some system that we would

use to deal with it in a very standardized way we don't want to have hundreds of people having to work on this and sort of squash the customer service complaints and be responding on Twitter we want to be able to have a very like systemized way to respond um so I think creating a system and replicating that over and over for all the impacted customers how would you think about creating a system to deal with uh angry people versus proactively trying to prevent them like which you know which method are you going down I think

that if you're a a a b2c brand you will always have customers who are upset about something you can do something that's going to work for 80% of people but not for the 20% and the 20% will always complain um so I think yes there might be a certain like you know you have a message on the website we're sorry for all customers impacted by our new routing fine but I do think you're always going to need a team to sort of help with the individual complaints from customers and sort of the more reactive Team

Awesome okay great um so uh got a note from the CFO no pretty worried he is worried that the companies are not adequately preparing for the risks of the integration in a timeline wise this has to be post we've already merged but we're worried or we've already completed the transaction as you're aware right but he's that the teams are not prepared for the risks what do you think the major risk for this project and how would you mitigate them great question um so the first risk I would say is just from from an operational perspective

um so I think one is just from like inefficiencies people are going to be learning new systems they're going to be learning new routes they're going to need to learn the thing they're supposed to say when there's an angry customer lots of new stuff that's going to happen and people are going to be inefficient um and then secondly is from a safety perspective like we are in the business of flying people in the air from one place to another it's not the world's safest activity um so just sure I mean it's not that unsafe but

you know what I mean there have to be protocols that are more dangerous than sitting on your couch eating Cheerios and watching cartoons thank you thank you less dangerous than uh base jumping there you go perfect somewhere between those two between we don't exactly know um so my mitigation for that would be just a phased implementation of this like before the merger the two companies were operating perfectly fine if it takes a little bit longer to sort of implement but it can be done in a way that's methodological and that people are safe and that

people understand what's going on um that's the best way even if it takes like a full year or two to get to the very um end what I would say about the phased integration is just the team sort of prioritizing the elements that will have the biggest impact first and then phasing down from there great um excellent recommendation but bad news our CFO friend is still in an absolute Huff okay so we need another another risk we're presenting to them tomorrow right and they are concerned that the mergers not even worthwhile Bo not even why

did we even do this thing right I'm gonna unmerge demerge wow yeah so you know what's your final recommendation on like how to get the most value and kind of reassure the CFO to not take their ball and go home okay well I think the first thing is really just reorienting the CFO and ourselves and everyone in terms of what the goal of this merger was the goal of the merger was not to reduce customer complaints the goal of the merger was to maximize revenue and profitability of the combined Airline okay and I think that

sort of the the way to do that is to maintain the distinct Brands and maybe if there are some things that need to be maintained um as a result of that some separate um operations that's okay you know they're going to each have their own website for example but it's really just maintaining those distinct Brands maintaining the distinct way that they they currently are um and then second is to transform Honolulu into to a hub that's really what needs to be done in order to um maximize the profitability of the airlines we saw there with

increased Revenue by doing that and I think that that's probably the most important thing to sort of reassure the CFO um and then the third thing I would do to reassure him is just say like we're with you on this next phase of the journey um and there are some next steps that we can continue to look into to make sure that you're supported as this goes on no one wants to feel like they're alone so sort of reassuring the CFO and saying like let's really look back into those infrastructure Investments and let's finalize what

we think those were um and let's also initiate the brand loyalty program across the two programs to really you know continue to push that branding that customer attention um and make sure that they're all supported in this next phase of the combined company journey I think you did it I think they're calming down they're going to proceed I think we should feel all right very good awesome well Tessa thank you so much uh really appreciate your time and uh we'll be back with you with a final decision thank you hey everyone it's Kenton gaves here

the founder of Rocket blocks thank you so much for watching this mock interview video I hope you found it inform ative and helpful as you are getting ready to prepare for your own interviews and hopefully Landing that job offer you are excited about we have a ton of great content on the rocket blocks Channel coming out on a weekly basis mock interviews mini lessons and chats with our rocket blocks experts so if you haven't subscribed yet already please do so there is a big red button below and if you hit that you'll get all of

our content as soon as it comes out thanks for watching and have a great day