RyanAir Case Study

1.) What are the characteristics of the European aviation environment at the time of the case? (20 points) When Ryanair was established in April of 1986, there were many factors to consider in order to properly assess their current environment. In order to attain a firm grasp of their current atmosphere, we must delve deeply into its external, general, industrial, and competitive facets.European aviation at the time was dealing with different pressures from innovation and quickly advancing technology.

Additionally, privately owned commercial airlines began to emerge in addition to the “flag carriers” of several European nations. Before long, the airlines service began to focus on international routes while at the same time tagging domestic routes with high fares so as to allow the subsidizing of international service. Eventually, there arose a large threat of the Americans dominating the skies due to the free competition and privatization. To avoid this monopoly of sorts, the International Air Traffic Association (IATA) set international fares through government regulation of the major airlines, to include all aspects of air travel between countries.

Looking at the general environment, we must consider its demographic, economic, political/legal, sociocultural, technological, and global segments.Demographically, at this point in time there was a large, diverse population just waiting to discover air travel. Since the airlines introduced another travel alternative, the service providers began to show a large geographic distribution across country borders.Due to “pooling arrangements”, the industry had a rough economic start due to the pooling of the providers’ capacity, routes, and revenues. However, despite the European flag carriers shifting their focus to international flights/routes across the North Atlantic, which proved quite lucrative, these carriers eventually collapsed due to disparate national interest.

“The basic trouble”, as was concluded, “remains that the world [had] too many airlines, most of them inefficient, undercapitalized and unprofitable (Rivkin 2).” Additionally, by the mid-1980’s, charter flights were transporting sixty-percent of all European passengers.This led to a large boom within the Flag carriers since their reaction was to create new flight discounts and by also starting their own charter subsidiaries. Just when things were looking economically sound, the OPEC oil embargo in the 1970’s created a dramatic increase in the price of jet fuel, and subsequently a large disinterest in air travel.

Looking at Exhibit 1, it is obvious how there has been a rollercoaster of highs and lows when speaking of economics- one boom and recession after the next. One would argue that the industry was economically volatile at this point.Politically, there were several types of regulation throughout the time of this case. For example, there were the European regulations, American regulations, and the deregulation of the U.

S. airline industry. Moreover, the European Commission proposed the abolition of “pooling arrangements, price fixing, and government subsidies. What’s more, the 1986 Single European Act created a unified European market so they could “comprise an area without internal frontiers in which the free movement of goods, person, services and capital [was] ensured… (Rivkin 2).

”As far as the sociocultural and technological aspects, along with the pendulum of profits, the amount of employees varies depending on the productivity of the airline. Exhibit 2 shows a range of approximately 17,000 to over 50,000 employees. Since this was a quickly growing industry, it became a significant target for job-seekers. Speaking of a growing industry, the technology had a large impact on the company’s welfare (and competitive advantage).

For example, American, United, and Delta each used a hub-and-spoke route structure and enjoyed the convenience of computerized reservation systems. Globally speaking, it is quite evident how these airlines are all branching out across oceans and continents in hopes of tapping a larger population.When looking at the “environment”, it is important not to exclude the industry, since it can directly influence a firm’s competitive actions and responses, as well as competitor rivalry. Since things have evolved into an “innovation race” in the airlines (meaning new products, new customers) it is darn important for the companies to stay on top of their technologies and services because there is always the threat of substitutes, new suppliers, and new entrants. “The greater a firm’s capacity to favorably influence its industry environment, the greater the likelihood that the firm will earn above-average returns (Hit 38).

” In this case, we are talking how new routes, pricing, and equipment can make or break the company. The industry perspective allows an airline, per se, to focus on the factors and conditions that influence its profitability, but in turn this also influences the company’s vision, mission, and strategic actions.As far as the external components of the aviation environment go, there were several trends to recognize. For example, the trend of drawing larger, international routes (a competitive move) spread like wildfire through the industry.

Additionally, there was a sinusoidal trend of profitability after interest given certain global and technological factors (introduction of jet engines, first and second oil crisis, etc). Based on these trends, many industry observers suspected that there would be more liberalization of the European airlines as a means to help them thrive and compete in a free market.2.) What is your assessment of Ryanair’s business strategy? What assumptions are the Ryan brothers making that lead them to formulate this strategy? Ryanair had a very humble beginning, but because of their ingenuity and innovation, they were able to distinguish themselves from other airline tycoons and enter the industry as a competitor. First and foremost, Ryanair’s business strategy was to not only offer an affordable price to customers, but also to give them an enjoyable experience via excellent customer service and food! Everybody loves food! Ryanair would offer its customers a meal during their flight and then would provide a first-rate customer service.

Since they were familiar with Aer Lingus and British Airways, they knew that the standard deviation of their ticket prices was close to £100.Therefore, their flights were a low, fixed cost of £98 with no restrictions. In addition to creating an enjoyable flying atmosphere, the Ryan brothers flew four round trips per day. Their initial strategy involved flying a fourteen-seat turboprop from Waterford, Ireland to Gatwick Airport, London, England.

It was not until they looked closer at Aer Lingus and BA that they found an opportunity which they could exploit. Because they had offered a comparable product with differentiation, they would be able to steal-away some of the consumer market from the larger airlines, as well as offer flying service to places without it.They knew that since there were 500,000 round-trip passengers flying the Aer Lingus and BA routes, and that roughly another 750,000 more were traveling by rail and sea ferries (a nine hour trip compared to one hour by flight). With such a vast potential market, the Ryan brothers acted quickly and began providing service from Dublin to London with their new forty-four seat turboprop.

3.) How do you expect Aer Lingus and British Airways to respond to Ryanair? Why?Aer Lingus and British Airways, both substantially larger companies than Ryanair, had already established their routes and airspace agreements. But even though they were two successful companies, their product was lacking in certain areas which made them vulnerable to the new entrant Ryanair. As a reaction to their new competition, Aer Lingus and British Airways would have to lower the price of their airfares in order to maintain a certain level of competitiveness in the industry. Right now, Ryanair is implementing a cost leadership strategy by providing the same service at better efficiency and quality (making them a serious competitor), but for significantly less money to the consumer.

If AL and BS did not lower their airfares, then they would go out of business. However, they should avoid pricing their products so low that their ability to operate profitably is reduced. It would be understandable if the customers were paying more for a better good, but that’s not the case. Also, Aer Lingus’ core competencies are resources and capabilities that serve as a source of competitive advantage for the firm over its rivals. With the capacity to improve, Aer Lingus could innovate and upgrade its competencies and expect to not only meet, but hopefully exceed the customers’ expectations over time.Furthermore, in order to become competitive once more, AL and BA could use a differentiation strategy and put plush, leather seats in the plane and offer many different luxuries that Ryanair does not.

Lastly, I would say it might be beneficial to adopt a total quality management system so they can put a stronger emphasis on the company’s total commitment to the customer and continuously improve every process through the use of methodical approaches. This system typically increases customer satisfaction, cuts costs, and reduces the amount of time required to introduce innovative products to the marketplace.4.) What is the potential size of the market (number of passengers) that Ryanair could command? What is the maximum revenue decrease for British Airways and Aer Lingus combined? The potential size of the market that Ryanair could command has the potential to be as large as the major airlines’ of today (millions). With a strong marketing campaign and continual service on flights, Ryanair will eventually reach across the Atlantic like so many other companies have done in order to remain competitive and stay financially afloat.

Since 1977 British Airways’ number of passengers has risen from 14.5 to 18.4 million people in 1985 which goes to show a rather steep increase in customers.However, at the same time, another curve just as steep was that of operating expenses.

From staffing and fuel, to landing fees and ground equipment, the airlines spend over ninety-three percent of their revenue, leaving their profits at a dismal 6.9%. As more and more fees and charges come through the years, there is a potential problem here that just may bring these airlines close to bankruptcy. Given an estimated 18.4 million passengers per year, and an average airfare of £150, British Airways (and more or less Aer Lingus too) could gross £2.76B.

A quite impressive number, but with all the costs and upkeep, they should spend approximately £2.57B just in maintenance (93.1% revenue decrease), leaving them with a considerably smaller amount of £190M.