What is your assessment of Ryanair’s launch strategy? Is it sensible? Will it succeed? We believe that Ryanair’s launch strategy was successful and we will justify this statement with information that was provided in the Ryanair’s case. To begin with, Ryanair airline was not that hard to establish for Cathal and Declan Ryan because of the capital that Ryanair’s founders managed to get from their father, Tony Ryan, who was a co-founder of Guinness Peat Aviation, which was the largest aircraft leasing company.
This was a very good start for the brothers because they did not need to search for investors or convince banks to give them loans, which would probably be very difficult because of the amount of money they needed. Furthermore, we believe that those two brothers were the right persons to make such a big step and establish an airline company because as it was mentioned in the case their father worked in airline industry for a long time, so he had huge experience and he was able to share it with his sons and advise them on certain steps and help them to explore the market from different kinds of perspectives.
Another smart choice of them was to start their business with a small plane that had only fourteen seats. We believe it was clever because they spotted the weakness of their competitors in having utility rates of just around two thirds. By having small aircrafts they increased the likelihood of being fully booked and therefore more profitable. Further, they did not spent a lot of money and other resources for the first step just in case it would not work later on and that they would not have huge loses at the very beginning.
Also their first plane started to operate between Waterford (southeast of Ireland) and London Gatwick airports and here you can notice that they have chosen secondary airports to operate because we assume they wanted to reduce their cost by going to less crowded airports to save some time while landing and taking off because these airports where not as huge and busy as, for example, Heathrow airport in London.
Furthermore, Ryanair founders’ one of the goals was to show that their company was able to operate perfectly as a scheduled airline and they succeeded, which gave them a good first impression among the people. By entering the market with small planes and just one route, gave them a better position for success. In addition, another factor, which shows that Ryanair’s launch strategy was a success, was that in a short period of time (approximately one year) from the first route they managed to gain a license for flights between Dublin and Luton airport, which is another secondary airport in London.
Also we may assume that the choice to operate on this route was a good strategic move because they noticed that even though, British Airways and Air Lingus already operated on this route these airline companies had only about 60-70% of their planes capacity full, despite the fact that it was a busy route. In the case it was mentioned that there was more or less a constant number of passengers on this route for a long time, so Ryan brothers saw a good way of gaining new customers.
Moreover, because of a quite high round-trip prices (?189) BA and AL were losing a lot of customers for rail and ferry companies because people were able to buy tickets only ?55 even the trip with rail and ferry took them about 9 hours. As a result, Ryan brothers decided to have four round trips per day with their 44-seat turboprop for a price of only ?98, so they easily managed to gained customers. Another thing that helped Ryanair to earn loyalty and satisfy customers was their main focus to deliver first-rate customer service and offer meals and amenities similar to their rivals.
A clever idea as well, was to charge a simple, single fare for a ticket with no restrictions, as it generates some level of initial trust on the customers side. Overall, we believe that the launch strategy was very successful and every step they made was sensible and important for their success. We assume, after reading the case, that they did the right thing in order to be profitable, their strategy was to lower its airline cost as much as possible and operate there, where they saw good opportunities.
Also they did a great job in collecting data and analysing their competitor’s true market research. In order to find out weaknesses and opportunities to gain competitive advantage by using their weak points and using them to Ryanair’s advantage. We believe that Ryanair will for sure be successful if they will manage to follow their set targets and directions, including being a low cost airline. How do you expect Air Lingus and British Airways to respond? Why? In our opinion British Airways and Aer Lingus should have reacted resolutely, using their economies of scale and their market position.
However, being aware of the difficult situation we think they should not dropped their prices on the route DublinLondon to the same level as Ryanair, but creates an affiliated company that does so in order to prevent the new competitor from establishing in the market. This way we think they could have avoided any image- or other damage for their band but at the same time not give the field to a competitor. We are aware British Airways would face a certain degree of cannibalization of their core business as they would loose some of their own customers to their own affiliate, which will result in smaller margins.
However, it would be a very fair price for adapting to the change in demand and not losing market share and at the same time stick to their core values and competences. Moreover, they could reduce the number of flights with the parent company in order to increase efficiency and avoid an oversupply. This would lead to higher utilization rates and decrease their cost per passenger. In Exhibit 4 we can see that most of their cost are fixed cost. These cost would dramatically decrease if they could be spread over more passengers as the load could be increased for example from 60-70% to around 90% and above.
Another big benefit of founding a new affiliated company is the possibility reorganize the internal structure and not be tied to old agreements with unions and other stakeholders. This helps to improve the effectiveness and efficiency. You could also consider it as a kind of outsourced tariff response, as it’s a quite difficult task for traditional companies due to the large number of criteria. Moreover, the established companies have built up a reputation as high quality airlines that should not be damaged by the reaction for one single route.
Also when advertising, the low cost subsidiary can give priority to price in function of number of seats available, while the established parent company has to propose prices and advertising campaigns that match with their different segmentation (economy, business class, first class…) Tariff response relies on two different aspects. Firstly implement low prices following the example of low cost companies and secondly a modification of the tariff structure in purpose to simplified the segmentation.
Of course it’s essential for traditional companies to maintain their commercial specialization particularly their capacity to target business clients with the density of their flight network, lounge, customers client relation and many distribution channels. In fact we can see that in the early 2000’s many big European airlines founded subsidiary companies to compete in the low budget segment. However, by then Ryanair (and easyjet) were already established and very hard to compete against.
If however, British Airways would have decided to take this step in the beginning Ryanair would have never become big as they are unlikely to compete against an affiliated company of British Airways that competes in the same segment with access to British Airways’ huge distribution network and their larger resources for marketing and other fields. Otherwise, we would expect Air Lingus’ and British Airways’ sales to decline, shortly after Ryanair’s launch on the same route. They will become a real competitor, as their cheaper prices will soon attract new customers and help them to grow fast.
So in order to be more competitive, with the low fees that Ryanair offered, they might find themselves in a situation where the new competitor will force them to lower their prices in order to not quit the field. Alternatively British Airways could also change their policy on the one month restriction period that they had on their cheaper tickets in order to be more flexible. How costly would it be for Aer Lingus and British Airways to retaliate against Ryanair’s launch rather than accommodate to it?
When answering the question how costly it would be for Aer Lingus and British Airways to fight against Ryanair’s launch with lower prices, rather than to abide to it, it is impossible to give a precise number. Instead we tried to find which influences different decisions would imply. We identified several factors that had to be considered and others that might have influenced or hindered different decisions. Give up profit margin First of all it is always a difficult and unpopular decision to give up a high profit margin and change a profitable route.
The case stated that for both of the companies, Aer Lingus as well as British Airways, the route Dublin-London was very profitable, due to the fact that these two were the only companies offering this route. Owing to their special ties in the past they were not competing for the price but benefiting from bilateral agreements. With Ryanair suddenly a new competitor emerged and challenged the status quo. Underestimate the threat A big mistake might have very well been that the established firms have underestimated their new competitors.
As the case gives an example of the US market where in the late 1970’s many new low-cost carriers entered the marked of which most failed short after, we think Aer Lingus and British Airways might have expected the same from Ryanair. The impression of a low threat might have been supported by the fact that to that time Ryanair was not permitted to flight a larger jet aircraft then a 44-seat turboprop. Thus, they did not see the threat as such and did not feel the need to react accordingly. High cost of change : These necessary reactions would have entailed high costs as especially the fixed costs of Aer Lingus and British Airways were higher.
This is due to different factors: • Choice of airports – Aer Lingus and British Airways used primary airports such as Heathrow, which increased the customer service and convenience but also increased the price compared to Ryanair who made use of secondary airports such as Gatwick and Luton. However, beside the effects on convenience and service, there were also other reasons why it would have been difficult for British Airways to another airport in London. The switching cost would have been very high but difficult to measure, as the whole system structure of British Airways was relying on the Heathrow Airport. Number of employees – as the case explained that in London, British Airways provided its own passenger and ground services as well as the catering. To do so it required a high number of employees, this made the company rather inflexible to changes.
Nevertheless, it should be mentioned that according to Exhibit 3 British Airways was drastically reducing their members of staff from approximately 54,300 in 1977 to 38,100 in 1985. However, this is more likely to be preferable to be a reaction to the second oil crisis. In contrast Ryanair was outsourcing most of these tasks, which made them more flexible and also reduced cost. Union – the case stated that the established European carriers were highly unionized which gave them a disadvantage towards upcoming new competitors, as the fixed cost would be higher. This is due to the bargaining power of the different parties. A union has way more power than individuals and can negotiate better deals for the employees. This of course will increase the expenses of the company. • Capacity utilization – Ryanair identified that the load of Aer Lingus and British Airways was between 60-70% and thus, and average of around one third of the airplane capacity was unused.
They realized that with a higher utilization rate the total cost per passenger would decrease as the fixed costs were spread over more customers. • Business model – Ryanair was new in the marked and could position themselves with a new and different business model. They saw an opportunity how to also target those people who tended to fall back on the rail-and-ferry tickets. Therefore, they were able to layout it according to their needs, having their strategy in place before launching. In contrast Aer Lingus and British Airways had their established business model and their established customer base.
For them this route was just a relatively small part of their business, which might not have been considered worth to change the whole model for it. British Airways for example was acting globally and had built up a reputation of being a high quality service airline. This allowed them to compete internationally and to get a better margin. To reduce their costs of the DublinLondon route might have influenced the customer’s perception of the brand towards being a low quality budget airline, as they could have just achieved a similar price by cutting costs.
This would have caused an undefined damage to the company! Moreover, with a single fare for the tickets, they would have not been able to offer business and first class tickets anymore and thereby some of their important high-margin customers. Taking a look at Porter’s five forces (Hill and Jones) you can see that Ryanair’s chances for success would have been fractional, if existent at all. It is crucial to understand the huge influence that a formation of a subsidiary of British Airways would have had on the upsides of Ryanair’s strategy!
As in this case both (Ryanair and BA’s affiliate) would be would be new competitors in a new sector of the market (budget airlines) they would both face similar threats by new competitors if there were any about to come. However, it is a big change compared to the original case where British Airways was threatened by looking customers to Ryanair, while now they could easily abide to lose customers to their own subsidiary. Similar things apply for the threats of substitutes, as without the British Airways’ affiliate Ryanair would have no competitor when it comes to approaching the travellers that opted to use the rail-and ferry.
Further, they would be a threat to the established airlines as they are a cheaper alternative. In contrast to that, if British Airways founded a affiliate, this would be a massive threat to Ryanair as with the price advantage they lost their major upside. The bargaining power of suppliers would definitely be much higher against Ryanair, who was just a small player, than to the affiliate who has a global player behind them. Therefore, the affiliate could get better deals and therefore have lower cost. The buyers will bargain for a best possible quality for the cheapest possible price.
Due to the affiliate Ryanair cannot outperform its competitors in price anymore and as they are a new company with no reference of credibility that could attract the customers it will be hard for them to get established. The affiliate again will benefit from credibility of their parent company. Thus, they should easily be able to become the market leader in the budget airline segment. The Rivalry among establish firms was very little as there were just two airlines competing in that area at that time, Aer Lingus and British Airways, which had close ties in the past and now acting under bilateral agreements.
Following these ideas we argue that if British Airways had founded an affiliate like we suggested, this affiliate could be in the position where Ryanair is now. Reference Hill, C. W. L. and Jones, G. R. ,(2008), Strategic Management: An Integrated Approach, Houghton Mifflin Company, Boston, USA, 8th Edition (p. 45) Rivkin, W. Jan. (2000) Harvard business review, Dogfight over Europe: Ryan air, Case study uploaded on Moodle.
