Porters Analysis of the British-Irish Airline 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 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 reduce (-) 2. Buyers Bargaining Power (Medium) 2.1) Buyers have few options of airline operators to choose from (-) 2.2) Premium and frequently used route, hence, the companies may indulge in price war benefitting the Buyers (+) 2.3) Low service differentiation, hence buyer indifferent about choosing a airline operator (+) 3. Threat of Substitute (Medium) 3.1) Substitutes such as Rail and ferry available to Buyers at low prices as compared to air travel (+) 3.2) Considering the sizeable amount of time saved in air travel, threat from these substitutes looks weak (-) 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 (-) Industry Rivalry (low) 5.1) Pooling allowed amongst operators (-) 5.2) Duopoly in the market (-) 5.3) Similar prices offered by operators (-)

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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 hence its strategies are aimed at offering customers better 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 BAs 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

2. 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 3. Thirdly, Ryanair has decided to land at one of Londons 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 will reduce its operating expenses 4. 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 customers 5. 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 I208. Though discount fares as low as I99 are available but the booking has to be done one month in advance which is not feasible for the instant travellers. Also three fourths of one million round trip travellers 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 I55 to I208. This is probably the reason the total 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 I98 for a ticket then its 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 travellers 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% travellers 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 Defence or the Pre-emptive Defense approach. In Flank Defense BA and AL can start budget airlines to counterattack the rising threat of Raynair. This shall help them to attract the target segment of Raynair by their already existing brand image. Further innovation and value addition like increase in safety measures shall help them to assure that new customers dont 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 cant be a solution as the economic costs involved can be huge though temporary measures can be taken to completely eliminate new competition. BA and AL might also decide to withdraw from the London to Dublin route. International journeys account for nine-tenths of BAs 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 looks more likely that AL will withdraw from the competition and BA may withdraw or retaliate by using its brand name and reducing air fares to match Ryanair. Ryanairs 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 I98 which is much cheaper than that offered 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 be having a turnover of approximately I17500 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 Ryanairs 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 industry

Revenue and Cost per Passenger (I), 1986 Parameters Revenue Operating Expenses Staff Depreciation & amortization Fuel & Oil Engineering and other aircraft costs Selling Aircraft Operating Expenses Landing fees and en route charges Handling charges, catering and others Accommodation, ground equipment Subtotal Operating Profit British Airway at 70% utilization(I) 151.3 32.4 7.8 28.9 8.9 16.4 I I I