What is the industry structure that Ryanair entered?
Ryanair entered the industry with a competition with two airlines to the route of Dublin-London. Ryanair came up with 4 round trips on daily British Airways with a 44-seat turboprop. Moreover, they are planning to expand with permission for fly larger jet aircraft on this route.
Ryanair’s main goal is to become Europe’s greatest scheduled passenger airline by using more offerings and improvement at low fares.
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In 2016, Ryanair was the largest European airline by scheduled passengers flown and carried more international passengers than any other airline. In this time the government of Britain, France, Germany and other countries began to amalgamate the first, small airlines in to national Flag Carriers. Predecessor of British airways, Air France, Lufthansa and others gradually become owned by and subsidized by their national governments.
What is your assessment of Ryanair’s launch strategy?
In 1986, the Ryan siblings are getting ready to start competing against British Airways and Aer Lingus on the Dublin-London route. This route was one of the most travelled air routes in Europe, which meant that Ryanair was taking a big risk by deciding to enter this market. At the moment the airline passenger market was a complex one, since the governments would highly control it.
Additionally, the airline industry has high fixed costs, which was something that Ryanair needed to consider if the company wanted to face its already experienced competitors. However, the Ryan brothers knew that it was important to fly this route, and so they decided to follow an aggressive strategy: sell cheaper Dublin-London tickets (PRICE).
The problem with this strategy was that they did not highly differentiate from their competitors, and as a result a “price war” took place. By 1989 prices were as low as 70 pounds, and even though Ryanair started flying other routes, by 1991 it seemed that bankruptcy was around the corner for the airline.
The main problem that led Ryanair to this poor performance was that the company’s strategy focused on competing on operating efficiency, without altering its cost structure against experienced and somehow protected companies by some of their stakeholders. The strategy followed by the airline could hardly enhance the “competitive advantage” Ryanair had (operational efficiency), because at that moment the airline did not have a good number of customers; and additionally, it did not realize that its competitors could easily reduce their price to the marginal cost, which they were already able to cover.
The strategy was not sustainable by any means. Another problem that arise thanks to the poor strategy chosen by the company, was that it did not gave the client a certain level of added value that would be attractive for him/her. Therefore, Ryanair lacked a clear competitive positioning, which enabled a quick retaliation from BA and AL. And as a result, if Ryanair wanted to continue in business, it had to completely change its strategy and revise is goals by figuring out a way in which the perceived added value they could give to the customers was good enough to, later, capture value from them.
How do you expect Aer Lingus and British Airways to respond? Why?
Aer Lingus and British Airways were already well-established in the Dublin-London route and this route provided a high-volume of business and return on capital, especially for Aer Lingus. But then…Ryanair appeared and, as we know, the entry of a new competitor represents an entry price below the market’s price. So now what? What should these two companies do? Aer Lingus and British Airways have two options: either they maintain their current level of prices or start a price war.
In order to decide which way to go, they have to think how costly it would be for them to retaliate against Ryanair’s launch rather than accommodate it. 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, approximately 90£ and they need to add landing fees and oil).
As if this wasn’t enough, it is also very difficult to start a strategy based in differentiation because Ryanair, at that time, was trying to offer a service of a similar quality to these companies (first-rate customer service.) Both Aer Lingus and British Airways are supported and hence policies are also controlled by respective governments. Offering low cost airfare requires whole systemic change which is not practically possible just for the reason of retaliating Ryanair.
However, these two companies are competitors with deep pockets and there’s a possibility of them driving Ryanair out of business by reducing price to their marginal cost, even if that marginal cost would be higher than marginal benefits. So, considering all of this plus the fact that Ryanair is a very nascent to fully fledged airline service and the very volatile revenues of Airline industry, we think that Aer Lingus and British Airways will not retaliate on Ryanair’s price strategy.
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