MBA TC XIX MIM

Business Economics

Solution of:

Dogfight for Europe: Ryanair

Group Number: 1

Group Members:

1. Arias, Diego

2. Ipanaque, Marcos

3. Ribeiro, Vanessa

4. Sánchez, Pamela

Professor: Jose Acha

Date of Submission: July 15, 2015

1. How costly would it be for Aer Lingus and British Airways to retaliate against

Ryanair´s launch rather than accommodate it?

In the Table 1, it is assumed that Ryanair achieves 100% utilization rate. As a result,

the number of its passengers would be 64240 in a year. Therefore, its revenues with a

price of 166.50 pounds would be 10’695,960.00 pounds.

Figure 1. Total Revenues of Airways and Aer Lingus in an accommodate scenario.

For the price war, it is assumed that the new price will be 95 pounds in order to gain

customers. As a result the company cease to perceive a total amount of 35’750,000 pounds.

Figure 2. Revenues that they cease to perceive

2. Can the Ryan brothers make money at the I£98 fare they propose?

There is not provided the Ryanair’s cost

structure, but it will be assumed:

- Raynair have the same cost structure than British Airways and Aer Lingus

- Load of British Airways and Aer Lingus were 60-70%, it will be the mean (65%),

the load of Ryanair will be 100%.

- Ryanair will have the same staff efficiency than US airlines (708.2 passengers per

staff), actually in British Airways staff was not as efficient (482.9 passengers per

staff) as in US. The staff of Ryanair is 68.19% more effective.

 British Airlines - Aer

Lingus Ryanair Ryanair

  70% 70% 100%

Revenues 166.5 98 98

Operating Expenses      

Staff 35.7 35.7 15.82

Depreciation & amortization 8.6 8.6 5.59

Fuel & oil 31.8 31.8 20.67

Engineering and other aircraft cost 9.8 9.8 6.37

Selling 18 18 12.27

Aircraft operating leases 3.4 3.4 2.21

Landing fees and en route charges 11.7 11.7 7.61

Handling charges, catering & others 16.6 16.6 10.79

Accommodation, ground equipment & other 19.5 19.5 12.68

       

Sub-total 155.1 155.1 94.01

       

Operating Profit 11.4 -57.1 3.99

Margin 6.85% -58.27% 4.07%

Ryanair can be profitable (I£3.99 per passenger) with I£98 fare. They transport

64,240 passengers in a year, Raynair would make an operating profit of I£256.317.6

3.  What is your assessment of Ryanair´s strategy?

Ryanair is a new entrant into the Airline industry. It has recently acquired the

permission to commence service between Dublin and London. Its main competitors are

British Airlines (BA) and Aer Lingus (AL), who have been in the business for a long time

and its strategies are aimed at offering customers incentives so as to steal them from their

competitors.

Firstly, Ryanair has decided to increase the bargaining power of the customers. The

company is charging 98£ for a simple, single fare ticket without any restrictions. This price

is even lower than the BA’s discounted air fare which is 99£ but needs to be booked 1

month in advance. Thus, this decrease in the air fare provides Ryanair with a better edge

over its competitors

Secondly, Ryanair has decided to run 4 round trips per day with a 44-seat turboprop.

This strategy has dual benefits. First with the increase in frequency of trips, it provides the

customer with greater flexibility of choosing their time of travel. Secondly, with a low-seat

aircraft of only 44, it almost guarantees Ryanair a load of 90% as compared to only a load

of 67% load for BA.

Thirdly, Ryanair has decided to land at one of London’s secondary airports, Luton

rather than Heathrow. Since, Heathrow is the busiest airport in London; the landing charges

are quite high. Instead, by choosing to land at a secondary airport, Ryanair will reduce its

operating expenses.

Fourth, its employees would offer first-rate customer services. By offering meals and

amenities comparable to BA and AL, Ryanair has made sure that it is on level ground with

its competitors. Moreover, by offering first-rate services, it is trying to retain its first-time

customers.

Fifth, the low air fare of Ryanair has made it possible for it to get new customers:

travelers who use rail and ferry. With only 40 £ difference between the air ticket and the

ferry ticket (as compared to about greater than 100 pound difference in the case of BA and

AL), Ryanair has made customers think about which is more important, time or money.

With far more reasonable fares, the customers will have to make a trade-off between 40£

excess fee and 8 hours of wasted time.

Thus, the launch strategy applied by Ryanair is highly competitive and will grab the

attention of its competitors. By distinguishing itself from the flag carriers in three of the

most important aspects for customers (price, frequency and service), Ryanair is bound to

attract customers

4. How do you expect Aer Lingus and British Airways to respond

Aer Lingus and British Airways had two different choices to react: maintaining their

current level of prices, or start a price war with Ryanair.

But both companies have a significant disadvantage, they have a cost structure very

difficult to cut (Staff , Accommodation, ground, Selling, Handling and catering represents

more than 45% of the costs per passenger, approx 90L and they need to add landing fees

and oil).

Also it was too difficult to start an strategy based in differentiation because Ryanair

was trying to offer a service of a similar quality to these companies (first-rate customer

service).