Ryanair

1. What is your assessment of Ryanair's launch strategy?
   

   
    

   Ryanair's strategy to launch airline with single fare no restriction ticket at price less than half of other players would certainly get it the market share quickly. However, the success of this strategy would require Ryanair to manage the expenses and keep costs low.
   

   
    

   Ryanair has decided to offer full service (meals and amenities) while offering lower price. This would definitely put strain on the costs. Moreover, they are planning to get a larger aircraft. This will increase aircraft maintenance costs as they will have to service 2 different types of aircrafts.
   

   
    

   Also it is important that Ryanair focus on this route turn it profitable before they decide to expand to other routes. Growing too fast will increase costs further.
   

   
    

   
    

2. How do you expect Aer Lingus and British Airways to respond? Why?
   

   
    

   Since, Ryanair will be providing comparable service for less than half the price, Aer Lingus and British Airways will have no choice but to lower their price. If they do not then it Ryanair will be running full flights and their flights would probably run at less than current 60-70% full. This would further erode the profit margins.
   

   
    

   The only silver lining for the airlines was to convert few of currently 750K people who used rail and ferry rather than aircraft. They would be able to increase the size of the market and make similar margins by increased volumes.
   

   
    

   
    

3. How costly would it be for Aer Lingus and British Airways to retaliate against Ryanair's launch rather than to accommodate it?
   

   
    

	Before Ryanair	Retaliate I (Price ↓ 25% Load ↑15%)	Retaliate I (Price ↓ 40% Load ↑10%)	Accommodate (Prices ↔ Load ↓ by 15%)
Revenue	166.5	125.0	100	166.5
Operating Expenses
Staff	35.7	29.0	30.9	46.4
Depreciation & Amortization	8.6	7.0	7.5	11.2
Fuel & Oil	31.8	25.8	27.6	41.3
Engg & other aircraft costs	9.8	8.0	8.5	12.7
Selling	18.0	14.6	15.6	23.4
Aircraft Operating Leases	3.4	2.8	2.9	4.4
Landing Fees	11.7	9.5	10.1	15.2
Handling charges, catering	16.6	13.5	14.4	21.6
Accommodation, Equipment	19.5	15.8	16.9	25.4
Subtotal	155.1	126.0	134.4	201.6
Operating Profit	11.4	-1.0	-34.4	-35.1

The above table was made using generic assumptions. It would need a more rigorous analysis to validate the above findings.

 

However, it can be seen that if BA & Aer Lingus accommodate Ryanair then most likely their load will fall a little. People who generally travel by air will prefer Ryanair and people travelling by rail and ferry will still not come to it.

 

If they decide to lower their prices by 25% and assuming their load rise by 15% (assuming they convert rail and ferry travelers) they will make lower their losses. Even assuming that they lower prices to match Ryanair and load goes up by 10% they still make lower losses as compared to the scenario where they try to accommodate Ryanair.

 

 

1. Can the Ryan brothers make money at the fare they propose?
   

   
    

	Aer Lingus & BA	Ryan Air	Comments
Revenue	166.5	98.0
Operating Expenses
Staff	35.7	17.9
Depreciation & Amortization	8.6	4.3
Fuel & Oil	31.8	31.8	This will be same
Engg & other aircraft costs	9.8	4.9
Selling	18	9.0
Aircraft Operating Leases	3.4	0.0	Assuming they have bought the aircraft and are depreciating it
Landing Fees	11.7	11.7	This will be same
Handling charges, catering	16.6	16.6	This will be same (as they will be providing similar service)
Accommodation, Equipment	19.5	19.5	This will be same (as they will be providing similar service)
Subtotal	155.1	115.7
Operating Profit	11.4	-17.7

 

Assuming a generous 50% savings on variable cost as compared to BA and Aer Lingus, Ryanair will still find it very difficult to make money at the proposed fare.

 

As it can be seen they will either have to reduce services (no frills) or increase prices to sustain. However, this assumes that Ryanair runs flights at historical 60-70% rate. If they are able to grow the market and increase flight load then they might be able to make money.