Case #2: Profitability

Help our client Fun Cruise Lines become profitable again.

#InterviewPreparation #CaseStudy #Profitability

Client background

Our client is the international cruise company Fun Cruise Lines.
The company offers cruises primarily for the 50-80 year old target group in the Mediterranean region.
Fun Cruise Lines was very successful for a long time. However, in the recent past, the company has had to observe declining profit margins.
To solve the problem, the company wants to hire an external strategy consultancy and approaches CODEX Partners with the case.

The starting point of each case is to understand the question exactly. Summarize all relevant information and share your thoughts with the interviewer.
Ask thoughtful questions about the task, e.g. if things are not clear, or if you are still missing clues and information.
Take enough time to structure the problem for yourself. Do not rush into calculations or details. Discuss the big picture with your interviewer before you go into the concrete solution.
Ideally, you can visualize your solution approach in a framework and guide your interviewer step by step through your solution.

A framework for a profitability analysis might look like the following (exemplary):

The relevant parameters influencing profitability are revenue and the company's fixed and variable costs.
In the further procedure, you should analyze the individual building blocks of your framework one after the other in a structured manner

The revenue side is determined by the number of passengers, the ticket price, and the average revenue per passenger during their stay on board.
The number of passengers transported annually depends on the size of the fleet, the capacity of the ships, the capacity utilization, and the number of trips made.

The total costs result from the variable and fixed costs (e.g. expenses for employees, fleet) of the company.
The variable costs (e.g. catering on board) depend on the number of journeys made and the number of passengers on board.

The client is fine with your structuring and now wants to have the individual solution strands checked.
You now systematically go through all the influencing factors in order to find the cause for the decline in profitability.
Usually you would check the data status and ask specifically for further information from the company side. If the client does not have the information himself, you should make reflective assumptions.

You ask about changes in the cost structure and learn that there have been no significant changes recently, neither in fixed nor in variable costs.
Therefore, the reason for the decline in profitability must be on the sales side. We first look at the price side and then at the volume side.
On your request you learn that both ticket prices and prices for services on board have actually increased slightly in line with inflation. Overall, the target group is very price sensitive and the market is quite competitive, which is why the company always keeps an eye on the price side.
Consequently, the cause must be found in the volume. In this regard, you will learn that there have been no changes in the fleet, i.e. the number of ships has remained constant. The number of voyages and routes had also remained constant in the past. The last open point is the question of capacity utilization (occupancy). You are told that the number of passengers per ship has decreased in the past.

Now that the company side has been analyzed, the market side is still missing for the big picture. There are two possible explanations for lower occupancy: either the company has lost market share to the competition, or the market has declined overall.
The company estimates its own travel market share for the 50-80 year old target group at about 20% and adds that this has been stable over the past 5-8 years.
Thus, it is clear that a generally weaker market is the cause of Fun Cruise Lines' lower profitability.

Now that the problem has been identified, we can consider what measures might be useful to increase profitability in light of the given information.
First, let's look at the price side again. By raising prices, the company may increase sales and profitability in the short term. However, since we know that competitive pressure and price sensitivity are high in this market, there is a risk that the company will lose market shares as a result in the medium term.
The obvious solution therefore would be to increase the utilization of the ships. We learn from management that the occupancy has fallen from 85% to around 60% over the past 5 years.
One way to increase utilization is to increase the company's own market share by lowering prices. However, there is a risk of a "price war" in this competitive environment. In addition, the idea of price cuts is not the optimal solution in view of the overriding goal of increasing profit margins again.

Another option is to enter new market segments, for example by addressing younger target groups. It should be kept in mind that new target groups have other needs that should be addressed. This could be, for example, a different entertainment concept on board or offerings for families with children (e.g. water park, childcare).

At the end of a case, you should also be able to present a summary of your work and formulate options for action. Ideally, you will also classify these options according to their advantages, disadvantages and feasibility.
In this case, the situation can be summarized as follows: due to the price sensitivity in this market segment, it is not advisable to increase prices. Price reductions aimed at attracting a larger number of customers would tend to be ineffective due to the competitive environment (risk of price war and declining profitability in the long term). Since no internal changes have been made to the fleet and the range of routes, but it is known that the market for cruise travel has shrunk overall, Fun Cruise Lines faced declining ship utilization while its market share has remained stable.
The best option would therefore be to increase the company's market share. This could be done, for example, by entering new markets, such as adressing new customer segments (target group under 50). But this also includes adapting to new customer preferences, for example by refitting the ships (more entertainment, child-friendliness). Every launch decision must be critically reviewed.
In a "real" project, a follow-up analysis would be to determine the break-even capacity utilization of a ship using a concrete numerical example.