The Airline's Bleeding Regional Network
The Prompt
Your client is a full-service Indian airline. Its 22 regional routes (smaller cities → metro hubs) lose ₹240 crore a year combined, while its 35 trunk routes (metro–metro) make ₹610 crore. The CFO wants to cut the regional network entirely. The CEO resists, claiming the regional routes "feed" the profitable network. Resolve it with analysis, not opinions.
Structure & Hypothesis
Analysis & Data
Data for the network: of the ₹240 crore fully-allocated loss, ₹95 crore is allocated overhead and unavoidable fleet/hub cost. Connecting passengers contribute an estimated ₹120 crore of trunk-route margin, but it varies wildly: eight routes connect 55%+ of passengers; nine routes connect under 12%.
So network-wide: avoidable loss ≈ ₹145 crore against ₹120 crore of feed — cutting everything would still hurt by destroying more trunk margin than… no wait, let me be careful: cutting all 22 saves ₹145 crore cash but kills ₹120 crore of feed margin — net saving only ₹25 crore, a rounding error for the airline, and that's before recapture assumptions. But the blob hides the real answer: the eight high-feed routes almost certainly have B > A individually — keep. The nine low-feed routes are genuine bleeders — likely cut. The middle five get the "fix" treatment: smaller aircraft, schedule timed to hub banks, or regional-subsidy schemes.
Catches his own sign confusion out loud and recovers — and lands the segmented answer the blob analysis concealed.
The CFO says recapture saves you: "cut the feeders and we'll sell those trunk seats to someone else."
Partially true and testable: trunk load factors run what — high 80s? Then yes, some recapture. But connecting passengers book early, pay through fares, and fly midweek; replacing them with spot leisure demand at marginal fares recovers maybe 40–60% of the margin. I'd apply a route-level recapture haircut, not a blanket assumption — on high-frequency metro pairs recapture is real; on thinner trunks it isn't.
Recommendation
Recommend
- Reject both executive positions: segment the 22 routes into keep-8 / fix-5 / cut-9 using avoidable loss vs network feed, route by route.
- Exit the nine low-feed routes over two schedules (slot and crew redeployment), redeploying aircraft to trunk frequency where load factors support it.
- Fix the middle five with right-sized aircraft and hub-bank timing; apply for regional connectivity subsidies where eligible.
- Institutionalize the metric: report every regional route monthly on avoidable P&L + feed contribution, killing the fully-allocated mirage permanently.
Key Takeaway
What this case teaches
Signature-level cases braid two disciplines — here, cost accounting (avoidable vs allocated) and network strategy (feed economics). The meta-lesson: when two executives disagree, both usually hold a partial truth; the analysis that segments the portfolio resolves what the argument cannot.