What is your assessment of Ryanair’s launch strategy? Was it a good strategy? In your answer consider potential market demand, pricing and Ryanair’s likely cost structure. After having grown up in the airline industry, the Ryan brothers proved they were able to operate a scheduled airline successfully with their 14 seat flights between southeast Ireland and a secondary London airport. Their strategy was to expand to the Dublin-London route, a known lucrative route for British Airways and Aer Lingus. Ryanair planned to have unrestricted fares priced at I? 98, while providing first-rate customer service.
Ryanair chose to enter the market at a time when the consumer base needed a low cost alternative and the airline industry was being deregulated. At the time, there was a large segment of the European population, over 750,000 people, who were traveling from Dublin to London via rail and sea ferries instead of air. Ryanair assumed that if these customers had a more economical option, they would likely choose to take a flight and cut the time of their trip by 8 hours. Aer Lingus also offered discount fares that were on par with Ryanair but they weren’t always available and had to be booked one month in advance.
Ryanair’s option offered consumers the option to have no advance commitment and still only pay I? 43 more to save 16 hours roundtrip. This was a perfect alternative for last-minute business travelers, as well as leisure travelers who didn’t fly because of historically high prices. Elements of Ryanair’s operating structure allow for the low cost fare they are offering. Utilizing 44-seat turboprop planes versus the 747s used by competitors is a significant cost differentiator for Ryanair. The large planes used by BA and AL are estimated to be only 60-70% full so there is a certain amount of overhead to manage these planes that is not covered.
Additionally, BA and AL have the costs for the staffing, maintenance, service and training required with keeping up a diverse fleet of large planes. From Exhibit 4 we can see that British Airways spends roughly 38% of their revenues on support for their range of aircraft. Taking advantage of the secondary airports is another key aspect of their low cost strategy. By using secondary airports for their point to point model, they don’t have to pay as much for use of the facilities and support staff. In order for Ryanair to succeed they need to determine if they are going to be low cost or high service.
It will be difficult for them to sustain the low cost fares while offering amenities comparable to Aer Lingus and British Airways. In order to make the same operating profit that BA makes, Ryanair will need to have operating expenses totaling I? 87 per passenger, compared to BA’s I? 155 per passenger. Because the Ryan brothers have their family’s financial backing they may be able to sustain this low-cost-plus-high-service model for a short period of time but eventually they will have to start increasing fares or cutting amenities to generate rents.
If Ryanair goes with the idea of being an unrestricted, low cost airline that allows for last minute booking they are likely to succeed. If they attempt to remain “stuck in the middle,” Ryanair likely will not be able to make a profit. 2. How do you expect Aer Lingus and British Airways to respond? Why? Aer Lingus and British Airways will likely view Ryanair’s low cost strategy as a threat to their business that they will have to mitigate. These large, industry dominant airlines are restricted in the routes they are allowed to fly because of their government’s involvement in the company and proven ability to dictate their business.
The most profitable route for BA and AL is the Dublin to London flights. Since Ryanair is threatening their highest return-on-capital route, BA and AL have no choice but to react by attempting to cut costs to reduce their fares. It is not likely that BA and AL will try to match the exact prices of Ryanair because of other factors that would influence their customer base to remain loyal. The majority of their costs are fixed, making it difficult for them to quickly reduce their operating expenses. Not only will BA and AL have to figure out ways to lower their costs, they will also need to reassess the restrictions they have on their tickets.
Ryanair is offering tickets without any restrictions, so even if BA and AL came close to their price, the customer may still opt for Ryanair if the others do not make policy changes. In addition, BA and AL are likely to launch advertisement campaigns to try and convince the consumer market that their level of service and experience in the industry is worth paying a higher price. BA has retail shops that offer in-person service and are known among business travelers for their in-flight amenities. Additionally they offer a variety of classes of service, from first to economy, while Ryanair has one class on one type of plane.
BA and AL are assuming that the deregulation of the airline industry, particularly in the United Kingdom, will allow them to expand their routes and cover more of their significant overhead. British Airways has been continually increasing their revenue and profit from a low in 1981. BA carries more international passengers than any other airline and has an overall higher operating margin than in Europe alone. It would be safe to assume that BA will focus efforts on other markets and not feel too much pain from losing some business on this route. 3.
How costly would it be for Aer Lingus and British Airways to retaliate against Ryanair’s launch? That is, how much in Irish pounds could they lose? For BA and AL to retaliate against Ryanair’s launch they would have to significantly change the way they do business to match the lower price for the Dublin-London route. Because they have a lot of overhead to cover and this isn’t the model they’ve operated under, it’s not likely to be sustainable in the long run. Ryanair’s advantage is that it is a small start-up company with several low cost advantages that allow them to give the consumer a better deal.
The sheer size of BA and AL and the high fixed costs they have to incur as global carriers drives their ticket prices up. Having 171 retail shops worldwide to maintain and staff is a significant investment that needs to be covered by BA’s ticket fares. Aer Lingus is taking operating losses on their trans-Atlantic flights and making minimal profits on domestic and European routes. In addition Aer Lingus does not have a focused strategy and is entering into new markets, ranging from hospital management to robotics.
In order to compete with Ryanair on the 98lb price, BA would need to come up with a way to bring their cost per passenger down to 91lbs each. This price would allow them to maintain their current operating profit percentage (6. 9%). BA would have to cut 64lbs per passenger in order to accomplish this. The only segment of their operating expenses that appears to be variable enough to cut is staffing. Currently BA has almost double the staff compared to both their U. S and European airline counterparts.
What is most significant is that the “passengers per staff member” is the second lowest of the 10 airlines compared in Exhibit 2. Even if BA were to figure out a way to cut their staffing expenses in half they would still lose 46lbs per passenger. If BA were to try and acquire even half of the 750,000 potential market base they would risk losing around 17 million lbs. There would be some operating efficiencies and economies of scale gained through spreading their fixed costs over a greater number of passengers however we would need more information to determine if these would be large enough to allow the company to break even.