Profitability Case #2

Mexico City Airport Taxi Services

the authorities of the mexico city airport have decided to issue 2,500 new taxi permits for $1,000 each. these permits authorize a taxi to service arriving passengers. your client has a taxi fleet in the city but does not service the airport. he has excess capacity meaning he has cars and drivers available. he has asked you to determine if he should buy those new permits. if so, how many should he buy?

Information to be given to the candidate upfront:
airport handles 42 million passengers yearly.
these are 5,500 taxis operating in the airport
on average a taxi takes 60 minutes to drive the passenger and return to airport for next pick up
on average a passenger pays $200 cab fare via regulated rates
on average 40% of domestic flights passengers and 80% international flights passengers use taxis
30% of daily demand occurs between 6am to 10am. 40% occurs between 6pm to 10pm.
assume each passenger uses on cab.
on average each taxi requires $8,000 yearly on maintenance.
taxi drivers keep 50% of the fare.
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Framework:
This is a profitability problem. Use the Profit = Revenue - Costs framework.
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ok, that was not much waiting for you guys, I took the time to run some numbers and put up in here.

McKinsey interviews are math heavy and interviewer-led, so you just need to focus on the information you get at hand, and always make assumptions and check with the interviewer.

Answer:

This is a profitability problem essentially, because I would enter the market if it is profitable and not enter if not profitable. I would look at the Revenue and then the Costs, finally subtract the two to get the profit, before making the recommendation as to whether or not our client should enter the market.

there are 42 million passengers yearly, so that is roughly 42M/365 ~ 120,000 passengers per day. We do not know how many of them are domestic, so let's assume 50-50 split.

so that is 60,000 passengers for Domestic, 40% of them use taxis, so that is 24,000 daily.
also 60,000 for International flights, 80% of them use taxis, so that is 48,000 daily.
all together, that is 72,000 passengers.

now I would like to look at different periods in the day.
6am-10am, 4 hours, serves 30% of the passengers, which is 21,600 passengers. 5,500 taxis serve 4 people during the 4 hour period, so that is 22,000 capacity here. that is over-capacity here. considering i carry a small error upfront when i estimated the number of passengers per day, i would say this period, the demand should basically be met.

6pm-10pm, 4 hours, 40% of business occurs, that is 28,800 passengers. 5,500 taxis is definitely not enough here with 22,000 capacity. so shortage of 6,800 passengers during these four hours. that is 1700 taxis short of supply, considering this is the demand for 4 hour period.

the rest of the day, 16 hours, off peak, over capacity, no doubt.

so the Revenue would be:
R(per day) = 1700 passengers/hour x $200 x 4 hours = $1,360,000
R(yearly) = 1360000 x 365 ~ $490,000,000 (again a rough calculation here, cuz i dont want the interview to wait for me)

now look at the costs:
half of the revenue goes to taxi drivers, so that is 0.5 x R
maintenance: 8,000 x 1,700 ~ 14,000,000
Permits: I would recommend we buy out all the permits and use only 1700 of them. because, the demand is 1700 more, if we only buy 1700 permits, competitors will come in with 800 more licensed taxis to compete with us, which is not efficient, as the demand has already been met with 1700 taxis.
the cost here is 2500 x 1000 = 2,500,000

Revenue - Costs =$224 M roughly

There are risks associated with this business. first of all, there is no guarantee that the government will not sell more permits in the future. second, the other taxi companies might retaliate by aggressively competing with us in other areas of business, such as the business in the city.

Again, I would like to run some more accurate calculations before I present to the client.