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In 1986, the Ryan siblings are getting ready to start competing against British Airways and Aer Lingus on the Dublin-London route. This route was one of the most traveled air routes in Europe, which meant that Ryanair was taking a big risk by deciding to enter this market. At the moment the airline passenger market was a complex one, since the governments would highly control it. Additionally, the airline industry has high fixed costs, which was something that Ryanair needed to take into account if the company wanted to face its already experienced competitors.
However the Ryan brothers knew that it was important to fly this route, and so they decided to follow an aggressive strategy: sell cheaper Dublin-London tickets (PRICE). The problem with this strategy was that they did not highly differentiate from their competitors, and as a result a “price war” took place. By 1989 prices were as low as 70 pounds, and even though Ryanair started flying other routes, by 1991 it seemed that bankruptcy was around the corner for the airline.
The main problem that led Ryanair to this poor performance was that the company’s strategy focused on competing on operating efficiency, without altering its cost structure against experienced and somehow protected companies by some of their stakeholders.The strategy followed by the airline could hardly enhance the “competitive advantage” Ryanair had (operational efficiency), because at that moment the airline did not have a good amount of customers; andadditionally it did not realize that its competitors could easily reduce their price to the marginal cost, which they were already able to cover.
The strategy was not sustainable by any means. Another problem that arise thanks to the poor strategy chosen by the company, was that it did not gave the client a certain level of added value that would be attractive for him/her. Therefore Ryanair lacked a clear competitive positioning, which enabled a quick retaliation from BA and AL. And as a result, if Ryanair wanted to continue in business, it had to completely change its strategy and revise is goals by figuring out a way in which the perceived added value they could give to the customers was good enough to, later on, capture value from them.
Both Aer Lingus and British Airways were already well-established in the Dublin-London route and this route provided a high-volume of business and return on capital, especially for Aer Lingus. But then…Ryanair appeared and, as we know, the entry of a new competitor represents an entry price below the market’s price. So now what? What should these two companies do? Aer Lingus and British Airways have two options: either they maintain their current level of prices, or start a price war. In order to decide which way to go, they have to think how costly it would be for them to retaliate against Ryanair’s launch rather than accommodate it. Both companies have a significant disadvantage, they have a cost structure very difficult to cut (staff + accommodation, ground…+ selling + handling and catering represents more than 45% of the costs per passenger, approximately 90£ and they need to add landing fees and oil). As if this wasn’t enough, it is also very difficult to start a strategy based in differentiation because Ryanair, at that time, was trying to offer a service of a similar quality to these companies (first-rate customer service.) Both Aer Lingus and British Airways are supported and hence policies are also controlled by respective governments.
Offering low cost airfare requires whole systemic change which is not practically possible just for the reason of retaliating Ryanair. However, these two companies are competitors with deep pockets and there’s a possibility of them driving Ryanair out of business by reducing price to their marginal cost, even if that marginal cost would be higher than marginal benefits. So, considering all of this plus the fact that Ryanair is a very nascent to fully fledged airline service and the very volatile revenues of Airline industry, we think that Aer Lingus and British Airways will not retaliate on Ryanair’s price strategy.
Both for British Airways and Aer Lingus, retaliating against Ryanair’s launch strategy would end in a price war as Ryanair’s only focus is cost leadership. The costs of entering this price war would be higher than potential advantages. British Airways calls itself “The world’s favorite airline” – a clear differentiation statement – and has a successful flotation and privatization as one of its mail goals. Entering a price war would show its abilities to fight against competitors, however price pressures can cut profit margins to the bone, especially as the airline might have to face not only Ryanair but more low-cost competitors in the future. Restoring its high fares might result in operating losses. After Colin Marshall joined the company, British Airways focused on satisfying full-fare business customers. If it were to retaliate against Ryanair, it might lose those business class customers and its reputation for safe, reliable flights and an outstanding customer service.
International journeys accounted for two thirds of British Airway’s sold seats and 90% of its revenue. As Ryanair is focusing on short-haul, intra-Europe flights, British Airways’ focus should be on overseas flights which typically generate more money. British Airways has the advantage of an extensive network and its location at London Heathrow Airport which distinguishes it from Ryanair as a low-cost operator. Exhibit 4 in the case shows that British Airways had £140.9 cost per passenger. So if it were to retaliate against Ryanair, it would have to cut costs by almost 30% which would result in a harsh decline in perceived value by its high-end customers. If the airline accommodates Ryanair’s launch strategy, it can focus on its differentiation strategy and experience in international flights which makes Ryanair a less dangerous competitor as target groups are different. The costs of retaliation are similar for Aer Lingus. If it enters a price war, it will probably lose more money because it cannot even operate profitably with the prices charged above Ryanair levels.
Furthermore, it would need high capital expenditures to modernize its fleet. Although it might lose some passengers to Ryanair, the disadvantages of retaliation would still exceed possible gains. The airline’s goal is mostly to promote national interests and be safe, efficient, reliable and predictable. As Aer Lingus can be seen as a public good, it can count on extensive government support. Furthermore, it even has the chance to break even with its diverse portfolio that includes maintenance services and engineer trainings to other services. In order to keep its good reputation, accommodating Ryanair’s launch strategy would be the best thing to do despite potential lost customers. Aer Lingus would, just like British Airways, be confronted with a tough price war which it can barely win because of its inefficient cost structures and its differentiation strategy appealing to its loyal customers.
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