Case Study – Study – Ryanair
Section C – Group 11
Consumer Behaviour Section - C Group – Group – 11
Name Aman Srivastava Deepak Sudhakar Krishna Bajaj Prasanna Patange Richa Singh Saikiran Pollamarasetty Vivek Gupta
PGP 2011-13
Roll Number PGP2011532 PGP2011617 PGP2011696 PGP2011770 PGP2011823 PGP2011843 PGP2011944
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Case Study – Study – Ryanair
Section C – Group 11
Porter’s Analysis of the Industry 1.
Suppliers’ Bargaining Power (Medium) 1.1) The industry has few suppliers of important commodities such as fuel and oil and hence they can exercise greater bargaining power on the players in the industry (+) 1.2) There are a few plane manufacturers m anufacturers and hence, airline operators do not have much options to chose from (+) 1.3) The suppliers have a few airline operators to supply to, hence, in order to maintain relationship with their clients their bargaining power may re duce (-) Overall, the suppliers’ suppliers’ bargaining power is medium.
2.
Buyers’ Bargaining Power (Medium) 2.1) Buyers have have few options of airline airline operators operators to choose from from (-) 2.2) Premium and frequently used used route, hence, the companies may indulge in price war benefitting the Buyers (+) 2.3) Low service differentiation, hence buyer indifferent about choosing choosing a airline operator (+) Overall, the buyers’ buyers’ bargaining power is medium.
3.
Threat of Substitute (Medium) 3.1) Substitutes such as Rail and ferry available available to Buyers at low low prices prices as compared to air travel (+) 3.2) Considering the sizeable amount of time saved in air travel, threat from these substitutes looks weak (-) Overall, the threat of substitute in the industry is medium.
4.
Threat of New Entrants (Low) 4.1) Low barriers to entry as infrastructure such as airport and other utilities readily available (+) 4.2) Government policies inclined towards nationalization of services and hence inclined against providing licenses for large aircrafts (-) 4.3) Since this involves high fixed cost, it is not easy to exit the industry (-) Overall, the threat of new entrants in the industry is low.
5.
Industry Rivalry (low) 5.1) Pooling allowed amongst operators (-) 5.2) Duopoly in the market (-) 5.3) Similar prices offered by operators (-) Overall, rivalry in the industry is low.
Assessment of Ryanair Strategy: Ryanair is a new entrant into the Airline industry. It has recently acquired the permission to commence service between Dublin and London. Its main competitors are British Airlines (BA) and Aer Lingus (AL), who have been in the business for a long time and its strategies are aimed at offering customers incentives so as to steal them from their competitors. 1.
Firstly, Ryanair has decided to increase the bargaining power of the customers. The company is charging 98£ for a simple, single fare ticket without any restrictions. This price is even lower than the BA’s discounted air fare which is 99 £ but needs to be booked 1 month in advance. Thus, this decrease in the air fare provides Ryanair with a better edge over its competitors
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Case Study – Study – Ryanair 2.
3.
4.
5.
Section C – Group 11
Secondly, Ryanair has decided to run 4 round trips per day with a 44-seat turboprop. This strategy has dual benefits. First with the increase in frequency of trips, it provides the customer with greater flexibility of choosing their time of travel. Secondly, with a low-seat aircraft of only 44, it almost guarantees Ryanair a load of 90% as compared to only a load of 67% load for BA Thirdly, Ryanair has decided to land at one of Londo n’s secondary airports, Luton rather than Heathrow. Since, Heathrow is the busiest airport in London; the landing charges are quite high. Instead, by choosing to land at a secondary airport, Ryanair w ill reduce its operating expenses Fourth, its employees would offer first-rate customer services. By offering meals and amenities comparable to BA and AL, Ryanair has made sure that it is on level ground with its competitors. Moreover, by offering first-rate services, it is trying to retain its first-time c ustomers Fifth, the low air fare of Ryanair has made it possible for it to get new customers: travelers who use rail and ferry. With only 40 £ difference between the air ticket and the ferry ticket (as compared to about greater than 100 pound difference in the case of BA and AL), Ryanair has made customers think about which is more important, time or money. With far more reasonable fares, the customers will have to make a trade-off between 40£ excess fee and 8 hours of wasted time.
Thus, the launch strategy applied by Ryanair is highly competitive and will grab the attention of its competitors. By distinguishing itself from the flag carriers in three of the most important aspects for customers (price, frequency and service), Ryanair is bound to attract customers.
Expected Response of British Airways and Aer Lingus: The Dublin-London air route is reputed to be a quite lucrative for both Aer Lingus and British Airways. It is considered to be a network that avails them a reasonable return on capital. Thus they are the major players operating at this route. The current prices charged by Aer Lingus and BA stand at I£208. Though discount fares as low as I£99 are available but the booking has to be done one month in advance which is not feasible for the instant travelers. Also three fourths of one million round trip travelers prefer to go for a nine hours journey by rail and sea ferries rather than aircraft. This clearly shows that customers are highly price conscious as they prefer paying I£55 to I£208. This is probably the reason the number of air passengers on the route have been stagnant. Under these circumstances if a new airline like the Ryanair enters the route with a simple, single fare of I£98 for a ticket then it’s a great threat to the existing pla yers like the Aer Lingus and the BA. Though initially Ryanair proposes to run four round trips per day with a 44 seat turboprop i.e. maximum of 352 travelers in a day, it is optimistic of getting a license for flying bigger jets on the route. With a low fare the airline targets those 75% travelers who travel through rail and ferries as the prices for airline ticket are very high. It thus intends to change the traffic flow on the route which is stagnant for the last 10 years. Aer Lingus and BA could retaliate by following either the Flank Defense or the Pre-emptive Defense approach. In Flank Defense BA and AL can start budget airlines to counterattack the rising threat of Ryanair. This shall help them to attract the target segment of Ryanair by their already existing brand image. Further innovation and value addition like increase in safety measures shall help them to assure that new customers don’t trust a new airline. The existing players can protect themselves by following the marketing approach of defense which leads players to look for unknown and unmet demand by bringing more and more innovation in their processes. A sudden reduction in price fare can’t be a solution as the economic costs involved can be huge though temporary measures can be taken to completely eliminate new competition.
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Case Study – Study – Ryanair
Section C – Group 11
BA and AL might also decide to withdraw from the London to Dublin route. International journeys account for nine-tenths nine-tenths of BA’s revenue and BA has already spent UK 700£ on 55 new aircrafts which will be used mostly for service in Europe. Thus, BA might consider withdrawing from the domestic route and concentrating more on the international journeys. Similarly, AL might decide that most of its profit is provided by non-airline businesses and it might not be willing to enter a price war with competitors which would mostly result in losses for the airlines. Thus, looking at the current situation of BA and AL, it is more likely that AL will withdraw from the competition and BA may withdraw or retaliate by using reduced air fares to match Ryanair.
Ryanair’s Ryanair’s Financial Situation: Ryanair is an upstart air lines with an innovative approach to the pricing of air travel. Ryanair have started their service with 14 and 44 seater turboprop airplanes and the tickets are priced at a flat discounted fare of I£98 which is much cheaper than offer by established airlines like BA and AL. With a maximum of only 44 seats to be filled, Ryanair can expect a high occupancy rate. Frequency is also an advantage for Ryanair, since it offers 4 round trips from Dublin to London per day. This means that Ryanair has the capacity of providing services to about 175 passengers every day. This meant that at full capacity, Ryanair would have a turnover of approximately I£17500 every day. Ryanair flights would be landing at secondary airports around London such as Gatwick and Luton. Therefore Ryanair would be saving a considerable amount on landing fee en-route charges as well as handling fee. Being a small fledgling organization Ryanair has a small- staff size and less selling expenditure. Therefore all in all being a low-cost, no frills airlines Ryanair suited the needs of a large section of airline passengers. Ryanair also focuses on providing first rate customer services comparable to that offered by BA and AL and this would contribute to retaining customers. Though at first Ryanair might not be able to generate profit from its present strategy in the long run the return of investment looks positive and Ryanair's model looks promising in terms of making money. Analysis of the future prospects of the company can be done by evaluating the present operating expense break-up of a player in the t he industry.
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Case Study – Study – Ryanair
Section C – Group 11
Revenue and Cost per Passenger (I£), 1986 British Airway at 70% utilization(I£)
Ryanair at 70% utilization(I£)
Ryanair at 80% utilization(I£)
Ryanair at 90% utilization(I£)
Ryanair at 100% utilization(I£)
166.5
98
98
98
98
35.7
35.7
31.2
27.8
25.0
8.6
8.6
7.5
6.7
6.0
31.8
31.8
27.8
24.7
22.3
Engineering and other aircraft costs
9.8
9.8
8.6
7.6
6.9
Selling
18
18
15.8
14.0
12.6
Aircraft Operating Expenses
3.4
3.4
3.0
2.6
2.4
Landing fees and en route charges
11.7
11.7
10.2
9.1
8.2
Handling and catering charges
16.6
16.6
14.5
12.9
11.6
Accommodation, ground equipment
19.5
19.5
17.1
15.2
13.7
155.1
155.1
135.7
120.6
108.6
11.4
-57.1
-37.7
-22.6
-10.6
Parameters
Revenue Operating Expenses Staff Depreciation & amortization Fuel & Oil
Subtotal
Operating Profit
If we take the cost expense break-up of British Airway as the base and estimate the operating profit of Ryanair over various levels of capacity utilization, we obtain the above stated results. Following a similar trend in cost pattern, Ryanair would not be profitable even if it operates at 100% utilization. Hence, the company must look at reducing its expenses and other utility spend. We see as the utilization increases the profitability improves, however, the company still remains at a loss of I£10.6 per passenger. This would essentially amount to a considerable loss, however, Ryanair may use this as a short term strategy to capture market share and then gradually increase prices. It may also, try n obtain license for large jet aircraft for the route so as to increase the number of passengers per flight while maintaining the level of current expenses.
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