1.

Wisdom to launch the proposed service by Ryanair

Assumptions:

It is assumed that the price publicized by Ryanair (I98) is done after all the
operating costs associated with the execution of flights on this route using
Turboprop aircraft results in a net profit per flight.

The flights used by British Airways/Aer Lingus on the Dublin-London route are Boeing
747 with a capacity of 400 seats.

British Airways/Aer Lingus

Ryanair

(in 1985)

(Expected)

Normal Price(I)

208

98

Discounted Price*(I)

99

98

No of seats(per flight)

400

44

No of Round trips(per day)

No of Round trips(per year)

2083

1460

Revenue(million I)

83.25

#6.29

*Discounted Price given only if tickets are booked 1 month in advance

#assuming occupation of seats in each Ryanair flight from Dublin to London is 100%
Calculations
No of round trips (per year) for British Airways = 500000/(0.6*400)
=2083.333 ~2083
Maximum expected Revenue for Ryanair = 44*4*365*98
=6295520 ~6.29 million I
Revenue Generated by British Airways/Aer Lingus = 166.5*50000
= 83,250,000 ~ 83.25 million I

Analysis:
Positive aspects of Ryanair operating on Dublin-London service:

On the basis of above analysis of revenue generated in the first year, it seems a
profitable proposition for Ryanair to operate on the route.

Major reasons for this outcome are:

750000 passengers who travel through rail and ferry route annually and
spend I55 for 9 hours journey would be attracted towards Ryanair airlines at
a nominal cost of I98 for 1 hour journey.
Moreover, the clients who are travelling on British Airways/Aer Lingus and
paying I208 for the same route would be undoubtedly attracted towards
this new inexpensive option of air transport.
However, the passengers who are booking the flight tickets in 1 month
advance would prefer British Airways/Aer Lingus as there is no major
difference in cost and moreover, the established name of British Airways
would have a major impact.
The meals and amenities offered are comparable to that offered by British
Airways/Aer Lingus.
First-rate customer service shall be delivered to the customer.

Negative aspects of Ryanair operating on Dublin-London Airport:

The Ryanairs flight would land at Luton airport which is Londons one of the
secondary airports. However, the British Airways/Aer Lingus flights would
land at the Heathrow airport which is the main airport at Heathrow. This
might turn out to be the reason, when business travellers give higher
preference to British Airways/Aer Lingus in comparison to Ryanairs flights.
Ryanair does not provide a spectrum of varying range of services i.e. from
first class to economy. Therefore, the customers who prefer first class
travelling experience might not get attracted towards Ryanair.

2. Incumbents Response

Total no. of seats captured by Ryanair at 100% booking = 64240

Maximum % of Market Share expected to be captured by Ryanair in one year
= 64240/500000
= 12.84%

Therefore, maximum market share captured by Ryanair is not significant as

compared to what is being operated upon by the British Airways/Aer Lingus.
However, the British Airways/Aer Lingus are expected to respond to this market
share being captured by the new entrant.
Therefore, there are two options in which British Airways/Aer Lingus would respond:
When the capacity utilisation of British Airways/Aer Lingus is 65%, the
minimum amount that they must charge to meet their operating expenses is
I 155.1.
Consider a situation, in which the capacity utilisation shoots upto 95%. The
net operating costs would come down as under:

Staff
Depreciation &
Amortization
Fuel & Oil
Engg. & other costs
Selling
Aircraft operating leases
Landing fees & en route
charges
Handling charges,
catering & other
Accommodation, ground
equipment & other
Sub-total

Cost (in I) per

passenger at 65%
capacity utilization
35.7
8.6

Cost (in I) per

passenger at 95%
capacity utilization
24.4
5.9

31.8
9.8
18.0
3.4
11.7

21.8
6.7
12.3
2.3
8

16.6

11.4

19.5

13.3

155.1

106.1

 Therefore, in case of 95% capacity utilisation, minimum cost that British Airways/Aer
Lingus must charge is I106.1 to meet the minimum operating expenses per
passenger. This cost is still higher than what is offered by Ryanair. Hence, this does
seem to be a feasible option for British Airways/Aer Lingus.
Second and more expected reaction on a longer term is that British Airways/Aer
Lingus replaces the Boeing 747 aircraft on this Dublin-London route by an aircraft
with less capacity so that the net capacity utilisation increases and operating costs
decreases (in terms of fuel &oil costs, accommodation etc.) which will thereby lead
to reduction in fare being charged by British Airways/Aer Lingus from customers.

3. Good competitor/Bad competitor

Good Competitor: British Airways
Worlds most extensive airline route networks, serving 145 destinations in 68
countries.
The company has a strong financial status. In Europe alone it earned 4.4%
margin of its total of 6.9% operating margin. It earned record profits of 292
million UK in 1985 and its privatization in planned for 1987.
In business travellers, it was known for its improving in-flight amenities.
It offered a spectrum of ticket prices with varying restrictions and full range
of classes of service from first class to economy.
49,000 independent travel agents can book tickets on British Airways via
computerised systems.
Bad Competitor: Aer Lingus
Aer Lingus is generating maximum profits from non-airline businesses(17.1)
and minimum from air transportation(0.5)
Hence, air transportation is not the core competency of the company.
Moreover, Dublin-London route is the only one route which allows it a
reasonable return on capital.
The jets in the fleet of Aer Lingus are aging and need investment for
replacement.

 Therefore, when Ryanair enters the market, it has the potential to give a
heavy blow to Aer Lingus.

4. Porters five force analysis:

4.1 Bargaining power of customers
Customers have only 3 options to choose from British Airways; Aer Lingus
and Ryanair.
Given the fact that the meals and amenities are comparable in the three
available options, the customers are expected to choose Ryanair(@ 98I)
rather than British Airways/Aer Lingus(@ 208I).
However, in case the customer books the ticket 1 month before travel,
he/she will preferably go for the established airlines, rather than the new
one as the cost of travel is almost equal.
4.2 Bargaining power of suppliers
Ryanair is currently supplying the service in its 44 seated turboprop and
British Airways/Aer Lingus in their Boeing 747.
Therefore, the bargaining power of Raynair is quite low as compared to
that of British Airways/Aer Lingus because the latter provide full range of
classes from first to economy.
However, the fact that Ryanair offers the lowest rate on the route and a
single fare for a ticket with no restrictions, provide some power in the
hand of the company.
4.3 Threat of Substitute Services
The economic substitute available to the customers is the rail and ferry
route which costs them I55 i.e. I43 less than what is offered by Ryanair.
However, the time taken by the rail and ferry route is 9 hours as
compared to air travel which is only 1 hour.
Therefore, an investment of I43 for a customer saves 8 hours and
transport him with first rate customer service.
Hence the threat from this substitute is quite low.
4.4 Threat of New entrants

 The threat is quite low because entry into aviation sector is a costly
business.
Even for a 14 seat turboprop aircraft running between Waterford to
Gatwick, 1n investment of 1million was required by Ryanair.
Moreover, the license for jet aircrafts between Ireland and London is
being reluctantly issued.
4.5 Industry Rivalry
Any explicit industry rivalry is not reflected from the given scenario.
Only two major airlines run between Dublin and London, out of which
only one British Airways has a strong financial condition.
The other one Aer Lingus is a bad competitor (as mentioned above) and
therefore does not pose any condition for rivalry.