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									                                                       Ryanair Case Write-up




                  I have abided by the University honor code on this
                  assignment.




Authors:
Philip Larson

Satyan Merchant

Michael Cheung
Competitive Strategy - Ryanair – Philip Larson, Satyan Merchant, Michael Cheung



What is your overall assessment of Ryanair’s launch strategy?

The Airline Industry in General is Unattractive
Generally, the airline industry is not very attractive. As noted in Exhibit 1, profitability of
European airlines was very volatile and generally negative from 1970 to 1985. Much of this was
to be expected given the nature of the industry. Barriers to entry are fairly low in this business,
as deregulation made it easier for new entrants to lease planes and pick off the more profitable
routes of the major carriers. Moreover, airports are public property so new airlines could get
access to gates and resources. In addition to being able to lease planes, maintenance, ground
crews and other aspects of the service could also be outsourced. In addition to low barriers to
entry, pricing rivalry in the industry is fairly high. While initially regulated by the government,
deregulation likely will lead to increased price rivalry with airlines forced to compete on quality
and service. Transparency of prices makes it much easier for consumers to compare prices and
the new entrants made friendly coopetition (informal collusion) less feasible. Switching costs for
consumers were also low and consumers prove to be very elastic, willing to switch airlines to
chase the lowest costs, particularly within the tourist segment.

Ryanair has some key competitive advantages in entering the industry
Ryanair definitely has some competitive advantages in entering this market. Ryanair has the
capacity to strike “innovative deals to lease excess capacity of other airlines”. Additionally, both
sons have grown up in the airline industry and likely have good connections through their own
work and through their father’s history with Aer Lingus.

Profitability of Dublin-London Route if Incumbent Firms Fail to React
The case states that the revenues and costs of the Dublin-London route are similar to the average
revenues and costs from Exhibit 4. We also know that a total of 500,000 round-trip passengers
fly the route each year. This means that, at £151.3 average revenue, the total market size of this
route is currently £75M English or £83M Irish. Operating profit is £10.4*500k English or £570k
Irish annually. This represents a very small percentage of BA and Aer Lingus’ total revenue and
operating profit. The size of the market could be larger if cheaper Ryanair flights cause people to
switch from inconvenient ferries and rail transport. Currently, 750k passengers use these
alternatives annually. If a £98 Irish price causes all of these passengers to switch over, the total
market size could be 1.25M*£98 = £122M Irish. The primary problem with charging such a low
fair, however, is that the revenue would not cover the projected costs per Passenger based on
the 1986 numbers in exhibit 4. These numbers suggest that the average cost for serving a Dublin-
London passenger is £155.1 Irish which would definitely exceed the revenue brought in at £98
per passenger.

If Ryanair does enter the market at £98, there is a question of what portion of this total market of
£83M Irish Ryanair would be able to take. With 4 flights per day of 44 passengers per flight,
Ryanair would have 176 total seats available per day. At 365 days per year, the total available
seats would be 64k. This represents 13% of the total market of 500,000 passengers or 5% of the
1.25M market if all ferry and rail passengers convert. At £98 Irish per passenger, the most
Ryanair would be able to make from this route in revenue would be 64k passengers times £98
Irish = £6.3M. Since Aer Lingus and BA provide £99 discounts and these discount passengers will
likely be the first to leave the regular flights for Ryanair, this means that if Ryanair starts its flights
Competitive Strategy - Ryanair – Philip Larson, Satyan Merchant, Michael Cheung

it will likely reduce the revenue from the Duplin-London flights for the other airlines by at least
£6.3M which represents about £700k Irish in profit each year.

Summary of Ryanair’s Launch Strategy
Whether Ryanair’s launch strategy makes sense can be thought of in the context of a few simple
questions. The first decision for Ryanair is whether or not to enter the market. If they decide to
enter, we must see what their payoffs will be if the other airlines match the price and what their
payoffs would be if the other airlines choose not to match the price. Additionally, we must
anticipate what the other airlines are likely to do based on their own payoffs. Here, under the
best case scenario, in which the other airlines choose not to lower their price, Ryanair’s strategy
appears flawed. Even if the other firms do not react, Ryanair will be generating only £98 Irish per
passenger on a route whose average cost per passenger appears to be £155.1. It is unlikely that
Ryanair will have substantially lower costs than these two other airlines. BA’s productivity per
staff member has been rising steadily over the last 5 years and is beginning to approach the
numbers of the American firms that are believed to be the competitive levels. Therefore, while
staff costs could potentially be reduced somewhat, it will not make up the difference. Currently,
only £35.7 Irish are being spent on staff per passenger. Even if this number were £0, pricing the
flight at Ryanair’s level would not be profitable. Additionally, it is unlikely the other costs
(depreciation, fuel, engineering, aircraft leases, landing fees, handling charges, ground
equipment) could be reduced substantially. While the brother’s have relationships that might cut
aircraft operating lease costs, this only represents £3 per passenger of the total cost and
therefore is de minimus. Ryanair would have to figure out a way to substantially reduce the fuel,
engineering, staff, landing fee or handling charges for it to make sense to enter at their proposed
price.

Therefore, in the best case scenario in which the firm’s choose not to react to Ryanair’s entry,
Ryanair will not be profitable. Furthermore, it is likely that the two other airlines will choose to
react in some capacity. Currently, their London-Dublin flights are only 60-70% full meaning there
is unused capacity on existing flights. Given that many of the costs for a particular flight are
relatively fixed with regard to the number of passengers (you still need basically the same
amount of fuel, the same staff to fly the plane, the same operating leases, landing fees, handling
charges and ground equipment, it would make sense for these airlines that already have routes
to try to fill their excess capacity. Therefore, it is highly likely that Aer Lingus and BA will provide
additional discounted fares similar to their existing £99 deals which would cut into Ryanair’s
potential market opportunity. Moreover, Aer Lingus and BA have a history of taking a loss on
international flights and making up the difference on domestic flights. Therefore, it is possible
that Aer Lingus and BA could be willing to significantly reduce their existing margins on these
flights in order to force Ryanair out of the market.

Conclusion
We do not like Ryanair’s launch strategy. They are entering a competitive market at a price level
that is unlikely to be profitable and in a competitive environment in which the other airlines are
highly likely to react to Ryanair’s entry by cutting their own prices in an attempt to increase
capacity on existing flights. They could seriously hamper Ryanair’s launch without dramatically
increasing their fixed costs. In particular, Ryanair’s maximum # of annual passengers of 64k
would already fit on existing BA and Aer Lingus flights given that they are currently flying at 60-
70% capacity. Ryanair should not enter this market.
Competitive Strategy - Ryanair – Philip Larson, Satyan Merchant, Michael Cheung

								
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