Ryanair (A) & (B)

Key Take-Aways
Haas School of Business
University of California,
Berkeley
How can we anticipate competitors 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 competitors moves?
Game Theory
Identify structure of the game that is being played
In static setting, predicts limited competitive response of AL /
BA to Ryanairs entry---but its 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 competitors
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

Source: Michael E. Porter, Competitive Strategy, p. 49
What the Competitor Is Doing
and Can Do
What Drives the Competitor
Future Goals
At all levels of management
and in multiple dimensions
Current Strategy
How the business is
currently competing
Capabilities
Both strengths
and weaknesses
Assumptions
Held about itself
and the industry
Competitors 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?
Competitor profile of British Airways (1986)
Goals
Successful flotation /
privatization
Key step for Thatchers 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
intl fleet
Strategy
Differentiation in service: The
worlds 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

What does this tell us about how BA is likely to respond?
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
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?
Ryanairs 1986 entry strategy
Initial success
100% load factor on Dublin-London Route
AL & BA dropped restricted fares to I95 vs. Ryanairs I95
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 Ryanairs 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 Dells Entry
Compaq was very strong in retail. A new marketing
an distribution strategy was something new, however.
--- Michael Dell
Dells 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
OLeary, 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 I42 / passenger
Average cost ~ I25
In 1999, OLeary claimed marginal cost was - I2
Ryanairs Route Map Today
http://www.ryanair.com/site/EN/dests.php?flash=yes
Relative Efficiency of Major Airlines
Employees
(approx)
Revenue per
employee (est)
Market Value of
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?