In this industry, there are high substitution power because if one airline decides to raise prices then customers are going to switch to a cheaper airline company. The majority of passengers are price sensitive and have the option of taking other forms of transportation such as the rail or ferry. Customers are willing to travel longer if they can pay for a cheaper fare.
The round fare for ferry and rail is 55 compared to airplane, which can range from 98 to 208 depending on which airline company they take.Airline companies understand that they offer homogenous products, therefore, they try to add complements such as meals, reservation systems, vacation packages (4) to make their services unique and different. Supplier power: Supplier power is high in this industry with little room to negotiate due to limited number of airplane manufacturers. Suppliers have the power to increase prices.
Airline companies cannot build airplanes by themselves, so they have to purchase them.This is an oligopoly market with few airplane manufacturers. Due to the high costs of airplanes, airline companies will have small operating margin because of the high fixed costs. Entry of Barrier: The airline industry has high entry to barrier with few rivals, high fixed costs and route licensing issues. There is a large gap between new competitors and current airline companies, particularly the ones that dominate the industry with years of knowledge and experience.
Aside from tangible costs, there are intangible spending we need to consider such as service training cost. In order to maintain high quality level of customer services; airline companies need to spend a large portion of its budget to train employees to service different groups of passengers such as first-class, economy, business, etc. There is also high switching costs because customers are not particularly loyal to a specific company because they prefer to go with companies with the cheapest airfare.The licensing issues and government policies play an important role in this industry because government protects their privatized, airline companies by limiting licensing to protect potential competitors from further expanding their business to gain more market share.
Buyer Power: Consumers have high high purchasing power because the service of purchasing the plane ticket is homogeneous, but is further differentiated through providing different services to first-class, business and economy. Passengers in the economy class are price-sensitive and would prefer to buy the cheapest airfare.Therefore, airline companies engage in price competition to retain or attract more passengers. Customers have other alternatives of transportation such as riding the rail or ferry.
There is no switching cost for customers to switch to another airline company, but this is not applicable to riding the rail or ferry due to travel time and convenience. They can choose what they want according to their personal preference without paying extra fees. This makes it difficult for airline companies to increase profit and market share due to price sensitivity and homogeneous service.It is impossible for customers to integrate backward in the supply chain because they do not have the network and resources to start an airline company. Rivalry and Competitor Analysis: Ryanair Ryanair chooses different policies to cope with the competition. Ryanair displays “cost leadership” (Haselhuhn, Lecture 4) in this competition by using smaller planes, providing one airfare price, and choosing suburban area as its airport to lower their costs.
Ryanair doesn’t provide first-class or business-class seats and charges a simple fare for a ticket.It operates at secondary airports with less competition. On the other hand, one of the main competitors, British Airways, also has its own costs policy by reducing its staff to 38,000 by 1985 to reduce cost (3). British Airways British Airways has an extensive airline network with “145 destinations in 68 different countries” ( 3), while Ryanair focuses on specific routes and gain licenses from some secondary airports. In addition, BA is known for its technology, like reservation system, to help agents make booking flights more easy and convenient (3). Aer Lingus:Losses in the 1970s prompted Aer Lingus to seek new sources of profit by offering maintenance service, consulting, data processing, and engineer training to other airlines (4).
Investment is made in the hotels and tourism industry (5). 2. How will Ryanair’s competitor likely to respond? Ryanair’s competitors, BA will not respond because it is not one of its main competitors. Ryanair does not pose a great threat in terms of gaining a substantial amount of market share from BA. BA has an extensive airline route of “145 destinations in 68 countries” (3), and it would not be in BA’s advantage to devote resources and time to compete.BA’s main focus is in catering to international passengers at London’s main airport in Heathrow (3).
BA invests greatly in purchase of new aircrafts, which means fix cost is very high and would need to generate a lot of revenue to compensate for it. Therefore, if BA decides to compete with Ryanair, it would force BA to engage in a price war since the service they are offer is homogeneous. The price war might enable BA to maintain or gain more market share due to brand recognition or consumers’ preference, but it will force BA to incur a thin profit margin.The fact that BA is privatized put it at a disadvantage that it cannot react quick enough in pricing compared to public airline companies. On the other hand, Aer Lengus will compete with Ryanair because “Dublin-London is the only route on Aer Lengus network that has the volume of business to allow of itself a reasonable return on capital” (5).
Therefore, if Ryanair is competing with lower airfare, it would have the potential to gain a larger market share, which hurts Aer Lengus’ revenue stream.Aer Lingus relies greatly on tourism to sustain its operation especially from domestic and international routes (4). Ryanair currently does not have permission to fly this route and is in the process of working to obtain approval. Aer Lengus has the upper hand due to first-mover with experience and understanding of the airline industry, which it can utilize to create a stronger stance against Ryanair beside solely competing on airfare price. 3. Will Ryanair’s price strategy be profitable/sustainable? Approximately 0.
5 million people travel annually and BA charges round-trip airfares’ price of I? 166. 5 (Exhibit 4), which means this Dublin-London route can make an annual revenue of I? 83,250,000.With annual expense of $77,550,000 deducted, the profit of $5,700,000 (appendix, Exhibit 5). BA and Aer Lingus are normally 60-70% at full capacity, which means that with both companies combined, they are expected to fly 769,231 customers, whereas Ryanair is expected to fly 64,240 flyers. Ryanair carries only 44 passengers per plane and is expected to make 4 trips daily, 365 days (Appendix, Exhibit 6).Ryanair is going to focus on providing “first-rate customer service” (pg 5) and amenities similar to its competitors.
Ryanair’s expense is made on the assumption that it is the same as BA at $100. 8 per seat (Appendix, Exhibit 6). The break-even can be calculated and used to determine the market share for all parties involved. BA and Aer Lingus together will need to achieve 372,837 passengers annually to break even. The companies need to obtain 48% full capacity to break-even, which is approximately 75% of the market share.Ryanair needs 33,043 passengers per year at 51% full capacity for each flight to break-even.
Therefore, Ryanair only needs 7% of the market share to break-even (Appendix, Exhibit 7). The dramatic difference is due to high staff and fuel expenses for both BA and Aer Lingus (7). In order for the both airlines to cover their costs, they would need a higher capacity rate. However, for Ryanair, it needs a smaller market share because it focuses on targeting travelers from London’s secondary airports to “ operate a scheduled airline successfully” (5), which less competitions.Will Ryanair gain a sustainable competitive advantage? Ryanair can gain a sustainable competitive advantage because it provides systematic services. Ryanair’s objective is to provide low airfare compare to other airline companies.
Since Ryanair provides only a single price for airfare, it can reduce its operational cost. Ryanair can treat passengers equally without having to provide separate services to different groups of customers. There would not be a need to delegate different services and protocols because service is the same to all customers.Secondly, Ryanair can simplify the way it trains and reduce the frequency of training its employees for different groups of customers.
Ryanair’s low fare may stimulate demand and attract price sensitive customers from Aer Lingus and BA for additional market share. Customers, who use the rail and ferries, may switch over to using airplane due to cost, time and convenience. Moreover, Ryanair uses and focuses on secondary airports in London, instead of major airports, which reduce expenses.In most situation, there is less traffic, which will increase cost to airplane companies like extra fee pay to customers and employees due to airplane delay, in secondary airports than in major airports. Ryanair gains its competitive advantage by offering similarly-beneficial services at lower cost. Ryanair gains first-mover advantage because it is the first airline company to provide only single low price airfare.
Ryanair will not receive high contribution margin per ticket, thus other companies might be unwilling to do the same. Therefore, Ryanair can maintain its sustainable competitive advantage.
