Dogfight over Europe: Ryanair (A) Case Solution

1. Can the Ryan brothers make money at the I₤98 fare they propose? Please prepare a breakeven analysis to prove your point. NOTE:  Landing fees are fees that airports charge to airlines as part of the airport’s revenue base. A specified landing fee such as X dollars or X Irish pounds is charged to the airline for every passenger that lands or takes off on a given flight.

Considering that Ryanair operates at 100% capacity of its 44 seats plane, it will be able to serve only 176 customers a day, based on its 4 flights per day strategy. Total revenues would be 176*98= I£14700 per day and I£6.3 million per year.

Based on the (Exhibit 4) of the case study, the cost per passenger of British Airways is I£155. Since, Ryanair aims of providing the same service and catering to its customers as British Airways and Aer Lingus, it cannot cut down its cost under this head. Therefore, this leaves Ryanair with an option of cutting cost in other major heads like staff salaries, selling expense, landing fees etc. Ryanair can continue its services from secondary airport so as to bear lower landing fees and entire route charges, but the primary issue is that even after having attractive prices of I£98, Ryanair will not be able to adjust increased market base, unless the seating capacity or the number of trips are increased. Considering the average cost per passenger of I£155, Ryanair, despite cutting costs and operating at full capacity, will not be able to generate substantial or any operating profit from its current strategy as the cost of providing first class customer service is not affordable at such low price.

2. How do you expect Aer Lingus and British Airways to respond to the Ryanair entry into the Dublin/London market? Why? If you were Aer Lingus, what would you do in response to Ryanair’s proposed new route? Would you retaliate by lowering fares, to what level?

In my view, it is obvious for both Aer Lingus and British Airways to lower their prices to a certain extent in response to the launch of Ryanair’s Dublin – London route. This step in necessary as Ryanair aims of providing the same quality service as Aer Lingus and British Airways but at a considerably lower price. Because both the companies already have a special price of I£99 for advance booking it would not be a major hurdle for them to offer similar discount packages so as to hold their current customer base. Moreover, bearing a short term loss would be a better option rather than losing the market share to a new comer. It should be kept in mind that it is highly unlikely for Ryanair to operate at a lower operating cost and provide the same service as the already existing companies. Both the companies should slightly lower their prices and then use wait-and-watch strategy to evaluate the new comer.

In the case of Aer Lingus, it should be noted that not only the company has its government backing but also their focus is on providing engineering capabilities and hospitality services. Both of these businesses posted an operating profit of nearly I£30 million, in 1984-85 and were the major source of profit for the company. Despite of all these additional businesses and resources of Aer Lingus, the company will have to reduce its fares and match Ryanair pricing strategy so as to stay in the competition otherwise it will lose a considerable market share. If I were the manager of Aer Lingus, I would have reduced the prices by 25-30% initially for this route specifically, and would have focused more on other routes where there is considerably less competition.

3. How costly would it be for Aer Lingus and British Airways to retaliate against Ryanair's launch rather than allow it? You need to have a cost to the combination of British Airways and Aer Lingus in Irish pounds of accommodating the Ryanair entry (not cutting their fares) and a cost of retaliating against that entry with some sort of price change.

The current passenger market of Dublin – London route who prefer to fly is 500,000 * I£166.5 = I£83 million. The operating profit from this route is I£11.4 * 500,000 = I£5.7 million. This represents a considerably small amount of the annual operating profit of British Airways and Aer Lingus combined. Currently, 750,000 people use Rail and ferry route annually. If Ryanair, with its pricing strategy of I£98, succeeds in managing to switch minimum of 33% people from rail/ferry route to aerial route, this would add a new market of 250,000 * I£98 = I£24.5 million. While, there would be an addition of a new market, the already existing market revenue would decrease significantly because of the low fares. Based on the above assumption, the total market size would be 750,000 * I£98 = I£73.5 million. This means despite the addition of 250,000 people in the market; the total revenue would fall by nearly £10 million because of the lower ticket prices.

If British Airways and Aer Lingus decide not to retaliate by lowering their prices to the level of Ryanair, the maximum market share that Ryanair can grab considering its current seating capacity and number of round-trips is 176 * 98 * 365 = I£6.3 million. The remaining share is still safe with British Airways and Aer Lingus. But the strategy of not lowering the price would allow Ryanair to increase its number of flights per day; thus, resulting in higher market share. As discussed earlier, it would be feasible for both British Airways and Aer Lingus to bring in new discount packages or lower their prices to a certain extent so as to stay competitive in the market.

4. What is your overall assessment of Ryanair's launch strategy? Is it going to work?

Launching a Dublin-London route at a considerably lower price of I£98, almost 50% less than its competitors and offering the same service certainly seems attractive. Though, on paper, Ryanair’s launch strategy looks good, but the question is how long they continue their promise of high class service at this price. Providing a high class service at a considerably lower rate has never been profitable for companies in a longer run. At this moment, the target market of Ryanair is not clear; it cannot target both the first class and economy customers with a single price strategy. Presently, Ryanair is not only trying to grab market share from its competitors, British Airways and Aer Lingus, but it is also trying to attract rail and ferry customers who are highly price conscious.