Assignment Ryanair(a)

8/10/2019 Assignment Ryanair(a)

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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

(in 1985)

Ryanair

(Expected)

Normal Price(I) 208 98

Discounted Price*(I) 99 98

No of seats(per flight) 400 44

No of Round trips(per day) 6 4

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


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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.


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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:

Cost (in I) per

passenger at 65%

capacity utilization

Cost (in I) per

passenger at 95%

capacity utilization

Staff 35.7 24.4

Depreciation &

Amortization

8.6 5.9

Fuel & Oil 31.8 21.8

Engg. & other costs 9.8 6.7

Selling 18.0 12.3Aircraft operating leases 3.4 2.3

Landing fees & en route

charges

11.7 8

Handling charges,

catering & other

16.6 11.4

Accommodation, ground

equipment & other

19.5 13.3

Sub-total 155.1 106.1


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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 servicefrom 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.


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Therefore, when Ryanair enters the market, it has the potential to give a

heavy blow to Aer Lingus.

4. Porters five force analysis:4.1Bargaining 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.

4.2Bargaining 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.

4.3Threat 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


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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.

4.5Industry 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.

Assignment Ryanair(a)

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