Industry primers: airlines, pharma, software, energy
Four more industries you will meet often in cases, one page each.
Key takeaways
- Each industry has one or two numbers that explain most of its profit: for airlines it is how full the planes are, for pharma the life of its patents, for software how long customers stay, and for energy the price of what it sells.
- Generic makers can then sell copies at much lower prices, so the original drug loses much of its volume and price.
- Above 100 percent means the existing customer base spends more this year than last, even after some customers leave.
Key idea
Each industry has one or two numbers that explain most of its profit: for airlines it is how full the planes are, for pharma the life of its patents, for software how long customers stay, and for energy the price of what it sells.
| Topic | Details |
|---|---|
| How it makes money | Tickets, plus extras such as bags, seats, and cargo. Revenue = seats offered (capacity) x load factor (share of seats filled) x average fare. |
| Biggest costs | Fuel (one of the largest), staff, aircraft ownership or leases, airport and navigation fees, maintenance |
| Key metrics | Load factor; RASK (revenue per available seat kilometre: revenue divided by seats offered times kilometres flown); CASK (cost per available seat kilometre, calculated the same way for costs); aircraft utilization (hours flown per day); on-time performance |
| Typical case questions | Should we open a new route? How do we respond to a low-cost competitor? What do we do when fuel prices jump? |
| Regional example | Gulf airlines based in hubs such as Dubai and Doha earn much of their revenue from passengers connecting between Europe, Asia, and Africa |
So-what
An empty seat earns nothing once the plane leaves, so airlines work hard to fill seats and adjust prices.
| Topic | Details |
|---|---|
| How it makes money | Sells patented medicines at high prices while the patent protects them, then faces cheaper copies (generics) after it ends. Generic makers earn from high volumes at low prices. |
| Biggest costs | Research and development (many drugs fail in trials), sales and marketing to doctors, manufacturing |
| Key metrics | Drug pipeline (drugs in development), R&D spend as a share of revenue, peak sales of each drug, years of patent protection left |
| Typical case questions | Should we launch this drug, and at what price? How do we respond when our patent ends? Should we buy a biotech company? |
| Regional example | India is one of the largest makers of generic medicines, supplying many countries at low cost |
So-what
When a big patent ends, sales of that drug can fall fast. This is often called a patent cliff.
| Topic | Details |
|---|---|
| How it makes money | Monthly or yearly subscriptions per user or per company. Revenue repeats as long as customers stay. |
| Biggest costs | Engineers, sales and marketing to win customers, cloud hosting, customer support |
| Key metrics | Annual recurring revenue (ARR: the yearly value of all active subscriptions), churn, net revenue retention (revenue kept from existing customers including upgrades), CAC, LTV, gross margin (often high) |
| Typical case questions | How do we grow ARR? How should we set price tiers? Why are customers leaving? |
| Regional example | Many software companies in India and Singapore sell to customers worldwide and price in USD |
So-what
Net revenue retention above 100 percent means existing customers alone grow revenue, even with no new customers.
| Topic | Details |
|---|---|
| How it makes money | Sells oil, gas, or electricity. Revenue = volume x price. Oil and gas prices are set by world markets. Many power utilities have prices set or limited by a regulator. |
| Biggest costs | Very large upfront investment (wells, pipelines, power plants, solar and wind farms), then operating and maintenance costs, and fuel for some power plants |
| Key metrics | Production volume, cost per barrel or per megawatt hour, capacity factor (actual output divided by the output at full power all the time), regulated return, carbon emissions |
| Typical case questions | Should we invest in a solar or wind farm? How should an oil company plan for the energy transition? Is this power plant worth building? |
| Regional example | Gulf countries such as Saudi Arabia and the UAE are major oil producers that are also building very large solar projects |
So-what
Energy projects cost a lot upfront and pay back over many years, so investment cases often use NPV and payback.
A flight has 180 seats and 153 passengers. What is its load factor, in percent?
What usually happens to a medicine's sales when its patent ends?
A software company has net revenue retention of 110 percent. What does that mean?
Which is the best first question in a case about building a solar farm?
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