Ryanair (A) & (B)

Key Take-Aways
Haas School of Business
University of California,
Berkeley
How can we anticipate competitor’s moves?

! Ryanair vs Aer Lingus / BA

" Will these players retaliate against Ryanair? If so, how?
" Given the assumption of retaliation, should Ryanair enter? If
so, how?
How can we anticipate competitor’s moves?

! Game Theory
" Identify structure of the game that is being played
" In static setting, predicts limited competitive response of AL /
BA to Ryanair’s entry---but it’s a close call
# With targeted response, retaliation starts to look attractive
# With non-pecuniary incentives, retaliation starts to look attractive

! Competitor analysis
" Develop model of pecuniary and non-pecuniary incentives,
views of the “game”, etc. based on “Competitor response
profile”
Competitor analysis

! Competitor analysis can be helpful in anticipating

competitor moves
" A competitor profile includes an assessment of a competitor’s
strengths and weaknesses, its strategic intent, and its
behavioral predispositions
! Competitor analysis is inherently qualitative
! Complements quantitative analyses
Competitor analysis (II)

! Questions to ask:
" What are the goals of my competitor?
# May be different from pure greed (profit maximization)
" What is the strategy of my competitor?
# Do the prior strategic actions (or statements) of the competitor suggest a
direction that the competitor now might take?
" What are the resources and capabilities of my competitor?
# Does the competitor have a particular set of strengths or weaknesses
that might make some of its reactions more or less likely to succeed?
" What assumptions is the competitor making about the
business?
# Competitors may hold a set of assumptions about the industry that lead it
to make systematically different choices from the ones that you would
make, were you in their shoes
A Framework for Competitor Analysis
What Drives the Competitor What the Competitor Is Doing
and Can Do

Future Goals Current Strategy

At all levels of management How the business is
and in multiple dimensions currently competing

Competitor’s Response Profile

Is the competitor satisfied with

its current position?
What likely moves or strategy
shifts will the competitor make?
Where is the competitor
vulnerable?
What will provoke the greatest
and most effective retaliation by
the competitor?

Assumptions Capabilities
Held about itself Both strengths
and the industry and weaknesses

Source: Michael E. Porter, Competitive Strategy, p. 49

Competitor profile of British Airways (1986)
! Goals
" Successful flotation /
privatization
# Key step for Thatcher’s program
" Focus on near term profitability
! Resources and Capabilities
" Government interest
" Heathrow
" Extensive network
" Reputation for safe, reliable
service; improving reputation for
customer service
" (neg) still operationally inefficient
" (neg) needs capex to upgrade
int’l fleet
What does this tell us about how BA is likely to respond?
! Strategy
" Differentiation in service: “The
world’s favorite airline”
" Focus on business class
customers
! Assumptions
" Competition is coming to Europe
" BA will benefit from airline de-
regulation in Europe given
extensive international
experience
Competitor profile of Aer Lingus (1986)
! Goals
" “Safety, efficiency, reliability, and
profitability”
" Promote national interests
! Resources and Capabilities
" Government backing
" Reputation & reliability among
Irish
" Established operations in EU,
Boston, NY
" Shannon airfield
" Technical skills that other airlines
need
" (neg) inefficient
" (neg) needs capex
! Strategy
" Break even on air services and
profit from diversification
" Provide service levels
comparable to flag carriers
! Assumptions
" Airline service is a public good
è government will pay
" One true way to run an airline
" Airlines cooperate
" ‘Gentlemanly’ competition

What does this tell us about how AL is likely to respond?

Ryanair’s 1986 entry strategy

! Initial success
" 100% load factor on Dublin-London Route
" AL & BA dropped restricted fares to I₤95 vs. Ryanair’s I₤95
unrestricted fare: a rather mild reaction
" Positive press – managers believed they had a winning strategy

! Expansion
" 27 routes; 5 jets by 1991
" rapidly increasing customer volumes
" strategy: “driven by customer service”

! Aer Lingus responds

" matches prices, increases capacity on routes served by Ryanair
Problems with Ryanair’s 1986 entry strategy

! Limited cost advantage

" in high fixed cost, low marginal cost industries competition is
intense for incremental customers
# even though Ryanair may have had a cost advantage, AL was willing to
produce below average costs (but above marginal costs) to pay off fixed
costs
# AL had deeper pockets and other sources of profit

! No service advantage
" “first rate customer service” – no difference from BA or AL
" potential disadvantages
# flying into Luton rather than Gatwick or Heathrow
# flying turboprops rather than jets
A me-too strategy

! In the words of Porter, Ryanair attempted to compete

on operational effectiveness without making any
explicit tradeoffs
" “we tried to be all things to all people” – Kevin Osborne, CFO,
Ryanair (B) case

! Not differentiated and not enough of a cost advantage

to profit from the restructuring of the industry that they
began
Comparison to Dell’s Entry

! “Compaq was very strong in retail. A new marketing an

distribution strategy was something new, however.” ---
Michael Dell
! Dell’s entry:
" Not head-to-head with established players
" Achieved significant variable cost advantage (7 versus 65
days inventory)
" “Stealth” strategy --- direct channel undervalued by
established players
Ryanair rising from the ashes

! O’Leary, 29, appointed Deputy CEO

" “No one else was left to take the position”

! Focus on cost reduction & cash generation

" Drop loss-making routes
" No in-flight amenities
" Renegotiated labor contracts to pay based on productivity
" Emphasized duty-free sales
# Become 1/3 of flight attendant compensation
" Sell advertisements on seat-backs
" Goal: “become a low-cost, low-fare airline”
# Senior managers visit Herb Kelleher at Southwest
Even more frugal than Southwest

! No free snacks or drinks

" Not even peanuts!
! No “air bridges” linking plans with airport terminals
" All boarding via metal stairs
! No frequent flier program

! Average fare falls to I£42 / passenger

" Average cost ~ I£25
" In 1999, O’Leary claimed marginal cost was - I£2
Ryanair’s Route Map Today

http://www.ryanair.com/site/EN/dests.php?flash=yes
 Relative Efficiency of Major Airlines

Employees Revenue per Market Value of

(approx) employee (est) Equity
Ryanair 2,302 Euro 450,000 $6.7 Billion

Southwest 31,011 $210,570 $11.3 Billion

Continental 38,255 $254,607 $855 Million

Delta 69,150 $217,919 $566 Million

Strategy or “being on the right side of history” i.e., luck?