A profitability case is a bridge: profit moved by $X; which line did that. The algebra is profit = revenue − cost, then revenue = price × volume × mix, cost = fixed + variable. The skill is not drawing the tree. It is killing branches until one driver is left, then recommending a fix for that driver.
Naming a “profitability framework” is optional. Isolating the driver is not. If you recommend a cost-out when mix did it, you failed the case with a pretty tree.
The tree, then the knife
| Level 1 | Level 2 | You are done when… |
|---|---|---|
| Revenue | Price / yield, volume, mix | One of these explains most of Δ |
| Cost | Variable (fuel, crew, COGS), fixed | One line explains most of Δ |
Ask for a bridge (this year vs last, $m). If they will not give it, build it from the exhibits. Do not brainstorm 12 initiatives until the bridge exists.
Volume vs mix vs price are the usual tangle. Volume is units. Price is $/unit on a constant mix. Mix is shift between units with different $/unit. If you lump mix into price, you will “raise prices” on a customer you already lost.
Worked example: isolate, then speak
Prompt. Cedar Air, 22 turboprops, profit $18m → $6m (−$12m). Fuel spiked in the newspapers. The CEO wants a hedge program and a hiring freeze. You get a simple P&L:
| Last year | This year | Δ $m | |
|---|---|---|---|
| ASMs (m) | 1,240 | 1,255 | Volume +1.2% |
| Revenue | 186 | 171 | −15 |
| Fuel | 41 | 44 | −3 (cost up) |
| Crew + other var. | 62 | 63 | −1 |
| Fixed | 65 | 58 | +7 (they already froze) |
| Profit | 18 | 6 | −12 |
Fuel is +$3m cost. Painful, not $12m. Fixed cost fell $7m (the freeze already happened). The hole is revenue −$15m on slightly more flying. This is not a cost case. Stop talking hedges as the main play.
Revenue: volume, yield, mix. ASMs up 1.2% would have added ~$2m at last year’s yield. Instead revenue fell $15m. Yield (RASM) fell from 186/1240 = 15.0¢ to 171/1255 = 13.6¢. That yield gap × 1,255m ASMs ≈ −$17m, offset by tiny volume. Yield is the bucket. Now mix vs rate.
Two exhibits: business shuttle (weekday, 6 city pairs) vs leisure (weekend beaches).
| LY rev | TY rev | LY share of rev | TY share | |
|---|---|---|---|---|
| Weekday shuttle | $98m | $96m | 53% | 56% |
| Weekend leisure | $88m | $75m | 47% | 44% |
Leisure −$13m. Shuttle −$2m. Almost the whole −$15m is leisure. Inside leisure, two routes (a beach pair and a casino pair) added a ULCC. Average fare $94 → $71 (−24%) on those two; loads 81% → 88%. Contribution on those routes: last year $11.2m; this year $3.1m. −$8.1m on two city pairs. Remaining leisure softness: −$5m (a weaker holiday calendar). Shuttle is almost flat.
Isolated driver: yield collapse on two leisure routes after ULCC entry, not fuel, not “the airline.” Fuel is $3m. The two routes are $8m of contribution, plus $5m other leisure.
Recommendation. Do not freeze more crew (fixed already −$7m; you will break the shuttle that still pays). Do not match the ULCC network-wide. Options on the two routes: cut to one frequency (give up market share, restore fare mix), or exit one pair. A 24% fare match with 7 points of load destroyed contribution. Next: 13-week fare/load by flight number on those two. Risk: ULCC follows you onto a shuttle city — watch that, do not pre-emptively discount the cash cow.
That is profitability: one driver, then a local fix.
When this tree is the wrong first move
The question is industry margins for all players. Porter, two forces, not a Cedar Air bridge.
The question is which division to fund. Growth-share.
You already isolated cost and the plant is the scene. Ops cost.
Org is why the leak persists. After the bridge, maybe 7S. Not instead of the bridge.
The mistake unique to profitability cases
Fixing the newspaper. Fuel was in the headlines and in the P&L for $3m. Candidates run a hedge memo. The unique fail is not isolating: they keep all branches alive through the recommendation (“we should watch fuel, mix, and costs”). A partner wants the $8m on two routes.
Second unique fail: price cut math without contribution. Matching $94 → $71 on a full cabin can drop profit while raising load factor. Always contribution, not load factor.
How to open
“Profit is down $12m. I will bridge revenue versus cost first. If the exhibit shows ASMs up and revenue down, I will go straight to yield and mix, not to a cost tour.”
Then the table, then two routes. Then a recommendation that could not have been said in minute one.
Bridge, isolate, then recommend
Structure drills on profit prompts: one driver, one so-what. If you still have four equal branches at the end, restart.