Critical Assessment of Ryanair's Launch Strategy

The two airlines BA and Aer Lingus had a duopoly on the route between London and Dublin and had complete control of the route. Ryanair was trying to enter this route because they felt they could do it cheaper and more efficiently. They also felt that the prices for the two airlines was making people use the rail and ferry system, which took much longer. The strategies that they used to enter the market were through distinguishing themselves in service and price. They focused on creating an equitable service to the two other airlines. This was done through offering meals, top tier customer service and other benefits. The price was 40% less than the competition and very close to the cost of the tram/ferry system that they could get people from that market much easier. This also allowed them to be at capacity most of their flights, which the other airlines were at 60-70%. This strategy was a solid strategy, however, their costs were too high and they couldn’t keep up offering the same service at a much reduced cost.

I would expect BA to respond in a different way than Aer Lingus. They could lower their prices to directly compete with Ryanair and try to out price them and push the company out of the market. This would be possible because BA has the cash to cover the losses incurred. However, this would also tarnish their brand, so I believe they make look into changing up capacities on flights and decreasing aircraft flying the route to increase passengers per flight. This would reduce gas and employment costs, while maintaining the same revenue if implemented correctly. They also could increase their customer service and try to become a more prestigious airline.

Aer Lingus on the other hand did not have as much investment in commercial air and it wasn’t its biggest activity on its books. They could either continue to offer the route with a decreased amount of flights, however, this would mean having to compete with two other players who were both in the same category. When Aer Lingus had other options to pursue rather than this route they should have taken it and started investing more into the companies other activities. Cost per passenger remained the same regardless of capacity.

Scenario 1: With a cost per ticket of 89 Pounds Ryanair will work at 100% capacity. This will mean that AL and BA will lose 64,240 passengers a year (4 routes*44 seats* 365 days). This means that Ba and Al will have 435,760 customers. For this scenario AL and BA lose 64,240*151.3 in revenue directly from Ryanair, and then they have to reduce their prices to compete which means losing (151.3-89) per passenger. This means they will have a Operating Profit of -25,950,000 for this route.

Scenario 2: AL and BA lowered their prices to push Ryanair out of the market. They set their prices at 82 Pounds and would recover the lost passengers to Ryanair due to the lower costs. However, this means an even bigger loss in operating profits for the route. This would not be viable for Aer Lingus because they do not have the operating profits to sustain this type of war since they only have an OP of 500,000 pounds.

Scenario 3: This is in the case where BA and AL want to start taking over the ferry and tram system too and operate at capacity. They drop the price to 76 pounds to compete with the 55 for the ferry. Assuming they have 100% capacity that would mean they got about 269,231 extra passengers from the 750,000 ferry customers. This number comes from assuming that AL and BA would be at capacity and that the 500,000 currently make up 65% of their capacity. This will be the biggest lose in operating profits. Aer Lingus will not be able to compete at this capacity as they would be losing money the entire war.

Can the Ryan brothers make money at the £98 they propose. Since we do not have the costs for Ryanair we have to make some assumptions about their costs.

• Staff are to be efficient as the US. BA has 1 staff to 308 passengers. US companies have 1 to 1099. This means the cost is about 28% of the cost for BA if Ryanair uses a US strategy.
• The depreciation per customer will be cheaper for Ryanair due to being more at capacity so BA being at 65% capacity has a 8.6 depreciation so at 100% it would be 4.63
• Selling expense are cheaper due to the cost of tickets so lets say 75% of BAs cost 13.5
• Handling/catering is slightly cheaper due to the significantly lower price
• Fuel is expected to be constant for both companies