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Dogfight Over Europe : Ryanair

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  • Pages: 3
  • Word count: 550
  • Category: Economics

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Ryanair’s strategy is mainly focused on low costs and increase in market demand

The current market is a stabilized market, with a duopoly amongst the two strong players: British Airways and Aer Lingus. Both airlines established routes in the lucrative Dublin – London markets and tap on profits from this route to finance their other less profitable operations. The demand for air travel between the Dublin and London has probably stabilized over the 10 years from the stagnant market share of half million air travelers. Ryanair’s strategy is focused on breaking this duopoly with the introduction of Ryanair’s low costs and efficient service on the same route. The strategy entails to achieve the following:

1. With the competitive price of I£98, many travelers from this stabilized market pool would choose to fly with Ryanair, especially if Ryanair could maintain the proclaimed high quality service to its passengers.

2. Ryanair’s 4 daily flights provide much flexibility to the travelers who could travel at their time of convenience in a day.

3. Ryanair’s usage of 44-seater turboprop would greatly enhance its occupancy rate and at the same time, cost Ryanair much less to operate when compared to BA’s operational cost since BA used bigger capacity planes for this route (67% occupancy).

Ryanair will not make money at the IP 98 fare structure

Due to Ryanair’s constrained capacity, the long-term increase in demand of air-travelers which switch from other modes of surface transportation would probably be more beneficial to its larger competitors and hence the economies of scale would not considerably bring down the costs. Ryanair would also have a slightly higher operating cost than BA/AL because of their capital expenditure in the new aircraft and training/hiring of staff to operate this new aircraft. With the same level of service and catering in the flight, Ryanair cannot subsidize its costs through its operations. BA also has record operating profits in the industry (6.9%), which are quite slim, and undercutting these profits would mean operating at a loss.

Aer Lingus and British Airways will lower their prices and start a price-war

The entry of Ryanair would probably pose serious price war competition with the established carriers in the short run. Existing airlines, BA and Aer Lingus, are expected to lower their fares to compete in the new situation, while increasing their expenditure to send out ‘signals’ to convince the public of their offers. Despite its high overhead costs, BA has the size and operating profits to compete on this one route on price, but for Aer Lingus, the politics involved in having to continue on with routes despite operational losses, eg its trans-Atlantic routes, would probably not allow the airline to maintain the low airfare it offered for too long. Aer Lingus needs to maximize the profit on this Dublin to London sector to sustain its other less profitable operations. There would probably be a subsequent increase in the demand for air travel from the pool of customers that used to travel by ground transportation due to the attractive fares and services offered by the airlines. The real challenge for Ryanair would probably come in the long run when the air carrier, and possibly the ground operators will start to make losses from the price-war.

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