Dogfight over Europe: Ryanair

CASE ANALYSIS

8/13/2013
Section E, Group 3
Aditya Sood 2013PGP020
Nupur Sahni 2013PGP263
Salil Aggarwal 2013PGP338
Sruthi Thomas 2013PGP402
Sudhir Kumar Singh 2013PGP407
Vivek Devaraj 2013PGP450
 SITUATION ANALYSIS

The case at hand discusses the state aviation industry in Europe. The aviation industry started out as
a group of small, privately owned commercial airlines following World War 1. However, the
governments of various countries decided to consolidate these small players into a single, large
entity that would then represent the national carrier of that country. With the advent of jets
capable of economically travelling long-haul routes and the emergence of charter airlines to cater to
the tremendous demand for leisure air travel, there was pressure on national carriers to regain their
competitiveness. The deregulation of the domestic US airline market was the final trigger for the
liberalisation of European airline industry.

British Airways, the national carrier of UK, witnessed a tremendous turnaround in the early 1980s.
Excess staff was let go and loss-making routes were surrendered to competitors and maintenance
and training colleges were shut down. Focus was turned towards improving customer-service,
especially for full-fare business clients. By 1986, BA was operating one of the worlds most extensive
airline route networks. It carried the highest number of international passengers. It offered a
spectrum of ticket prices with varying restrictions and full range of classes of services from first
class to economy. BA was well-reputed within the business class clients for its in-flight services.

Another carrier that we are introduced to in the case is Aer Lingus, the national carrier for Ireland. It
started out as a joint venture between the British government and private players. It soon developed
trans-Atlantic routes, in order to reach the large ethnic populations in New York etc. However, owing
to the vagaries of tourist demand for air-travel the airlines suffered losses in several years and
decided to diversify to seek new sources of revenue and profit. In the air travel business, the
domestic and European routes earned a modest profit while the trans-Atlantic routes suffered heavy
losses. During the coming decade, the airline faced tens of millions of pounds of investment to
replace ageing jets. Government officials were contemplating sale of part of the company.

An upstart company, Ryanair, announced that it soon commence service on the London-Dublin
route, where both BA and Aer Lingus were operating. Ryanair also announced that it would be
selling tickets at a fixed price of 98 pounds and that they would be running four round-trips per-day
with a 44-seater turboprop.

THE PROBLEM

We need to evaluate the soundness of Ryanairs decision to operate on the London-Dublin route
from two standpoints:

1. Potential profitability in terms of operating profit per passenger

2. Response that the move will generate from the competitors and how equipped Ryanair is to
handle these responses
 SWOT ANALYSIS

STRENGTHS OPPORTUNITY

Delivering first class customer service. Three-quarters of a million round trip

Simple single fare for a ticket with no
restrictions.
Offer meals and amenities comparable
to what Aer Lingus British Airways
provided.
Publicized a Dublin-London service at a
fare of I 98.
travellers opted to use rail and ferries
rather than aircraft.
The journey took nine hours by rail and
ferry and 1 hour by air.
People travelling at I 208 at
competitor service.

WEAKNESS THREATS

Very small capacity planes compared to From Aer Lingus and BA which are
competitors. usually 60-70% full.
Prices of round trip rail- and ferry
tickets fell as low as I 55.
Aer Lingus and BA already operated on
the Dublin London route ,which is
quite lucrative for both carriers.

CRITICAL EVALUATION OF ALTERNATIVES

Wisdom to launch the proposed service

Below we have analyzed the decision of Ryanair to go into this new route.

Presently Round Trip customers per year on Dublin-London route: 500000

Customers per day: 500000/365 = 1370 passengers

Occupancy is 60% to 70% so it is safe to assume the occupancy as average of these two which is 65%

So the number of seats in total per day (occupied + not occupied) = (1370/65)*100 = 2107

Since both British Airways and Aer Lingus are presently on this route and it is mentioned that Ryanair
would like to come up with 4 round trips per day, it is safe to assume that its competitors are also
using 4 rounds trips each. Total round trips presently are 8.
Hence, seats required in one plane to cater 2107 seats are: 2107/8 = 263; out of which 171 will be
occupied.

As given in exhibit 2, the staffs per aircraft required are 264 for British airways in 1978. Since
Eastern which is a US carrier is operating at 156 staff per aircraft which is quite high in productivity
as compared to BA. In 1985, BA cut the work force down to 38000 from 54645 (exhibit 2) and the
passengers in total were 18.4 million (exhibit 3). This gives the passenger per staff member as 473
(previously it was 308) and staff per aircraft (163 aircrafts as of 1986) as 233 (previous being 266),
still there is a lot of improvement to be achieved.

Ryanair being a new player and a low cost carrier would like to optimize to the level of 156 staff per
aircraft. This would bring down its cost down from I 35.7 to I 35.7 *(156/233) = 23.90. Thus there
is a cost decrease of around 33%.

Similarly, the selling cost of BA per passenger is 18, because they have high number of agents and
centres. Ryanair being a low cost carrier wouldnt have to invest so much on the sale of tickets.
There USP is that they are low cost, hence there would always be demand (considering that they
maintain quality).

As per exhibit 4 we see the cost per passenger for British Airways. Here we see BA spends a large
amount on staff, accommodation, ground equipment, catering and selling. This is the area where
Ryanair is saving on to make sure the ticket price is at I 98.

Taking Market share from its competitors: Out of 263 seats in a single flight on an average 171 are
occupied. The price charged is 208, but is 99 when the tickets are booked one month before. Since
the average price charged by British Airways is given as 166.5, take X as passengers giving I 99 and Y
as passengers giving I 208. X + Y are the total passengers in one trip, i.e. is 171.

166.5*171 = 99X + 208Y; X + Y = 171

Solving this we get X as 65 and Y as 106. Since 62% people are buying tickets at I 208. Therefore
Ryanair being a low cost carrier has a great potential to take the consumer base of British Airways
and Aer Lingus. Since the present flight is of capacity 44 only and at a certain point of time 171
consumers are travelling out of which 106 are giving I 208, there is a high probability that the
Ryanair will travel at 100% capacity because of its low cost.

Taking market share from Railways and Ferries: As it is given in the case 750000 customers per year
travel by either rail or ferry due to the low cost of these modes of transports. At I 55 railways offer
an attractive option to price sensitive customers even though it takes 9 hours to reach the
destination and flight takes only 1. With Ryanair coming into the picture and offering flight tickets at
I 98 flat rate, there is a huge opportunity. Many consumers would like to shift from traditional
modes of transport to air travel because of less travel time. Therefore the planning of Ryanair to
operate with a larger jet aircraft makes complete sense.
 Competitors Response

The major threat in terms of competition is British Airways and not Aer Lingus. Aer Lingus as a
business entity is very much diversified with its major profit coming from airline related service and
non airline related services. Also Aer Lingus makes heavy losses on Trans Atlantic routes and also
require a massive investment to replace their aging fleet. Because of these reasons officials are
contemplating to sell a part of the company. With this situation lingering in Aer Lingus they would be
in no position to challenge a low cost carrier.

British Airways on the other hand is a major competitor as they have a strong financial situation. As
seen in exhibit 3 British Airways had operating profits before taxes of 292 million pounds in 1985.
They can get into a price war with Ryanair but presently 53.9% of their operating costs are coming
from Staff, Accommodation, ground equipment, selling, handling and catering charges. To reduce
their costs to reach revenue per passenger of I 98 would be a daunting task in the short run.

ANALYSIS OF COMPETITIVE STRENGTH AND POSTION

Threat of new entrants Very

Low

-Large capital requirement

-High government regulation
-Limited number of slots in airports

Supplier Power High Competitive Rivalry - Buyer Power - Low

- Only two aircraft manufacturers
Boeing and Turboprop, so can
charge high prices
- Limited fuel suppliers can also
charge high prices
Low
- Two well established airlines
BA and Air Lingus
- Both offering same price
- No other competition
-In given route, only 2 existing
operators BA and Air Lingus
- Not enough choice
- Cant take advantage of
competitive pricing
- Also both operators are high
priced carriers, having a monopoly
power at the moment

Threat of substitutes - Moderate

Rail and sea ferries

- Offers reduced costs
- Larger capacity
 PROPOSITION

As we see from our critical evaluation of the alternatives and the competitive analysis using Porters
five forces, Ryanair has a great chance in this domain. It can become a lone low cost carrier in the
region and has a huge potential to grow. As we see in the Porters five forces apart from supplier
power all the others forces are low which means there is a huge potential in this domain at the
present. Supplier power alone shouldnt prevent Ryanair from entering as the other factors are
weighing heavily in favour of entering the market.