Ryanair (A) & (B)

Key Take-Aways Haas School of Business University of California, Berkeley

How can we anticipate competitors moves?

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Ryanair vs Aer Lingus / BA

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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

What Drives the Competitor What the Competitor Is Doing and Can Do Current Strategy
How the business is currently competing

Future Goals
At all levels of management and in multiple dimensions

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?

Assumptions
Held about itself and the industry

Capabilities
Both strengths and weaknesses
Source: Michael E. Porter, Competitive Strategy, p. 49

Competitor profile of British Airways (1986)

Goals
Successful flotation / privatization
Key step for Thatchers program

Strategy
Differentiation in service: The worlds favorite airline Focus on business class customers

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

Assumptions
Competition is coming to Europe BA will benefit from airline deregulation 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

Strategy
Break even on air services and profit from diversification Provide service levels comparable to flag carriers

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

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
Southwest Continental Delta

2,302
31,011 38,255 69,150

Euro 450,000
$210,570 $254,607 $217,919

$6.7 Billion
$11.3 Billion $855 Million $566 Million

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