Ryanair (A) & (B)
Key Take-Aways
Haas School of Business
University of California,
Berkeley
How can we anticipate competitor’s moves?
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Ryanair vs Aer Lingus / BA
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Will these players retaliate against Ryanair? If so, how?
Given the assumption of retaliation, should Ryanair enter? If
so, how?
How can we anticipate competitor’s moves?
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Game Theory
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Identify structure of the game that is being played
In static setting, predicts limited competitive response of AL /
BA to Ryanair’s entry---but it’s a close call
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With targeted response, retaliation starts to look attractive
With non-pecuniary incentives, retaliation starts to look attractive
Competitor analysis
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Develop model of pecuniary and non-pecuniary incentives,
views of the “game”, etc. based on “Competitor response
profile”
Competitor analysis
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Competitor analysis can be helpful in anticipating
competitor moves
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A competitor profile includes an assessment of a competitor’s
strengths and weaknesses, its strategic intent, and its
behavioral predispositions
Competitor analysis is inherently qualitative
Complements quantitative analyses
Competitor analysis (II)
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Questions to ask:
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What are the goals of my competitor?
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What is the strategy of my competitor?
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Do the prior strategic actions (or statements) of the competitor suggest a
direction that the competitor now might take?
What are the resources and capabilities of my competitor?
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May be different from pure greed (profit maximization)
Does the competitor have a particular set of strengths or weaknesses
that might make some of its reactions more or less likely to succeed?
What assumptions is the competitor making about the
business?
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Competitors may hold a set of assumptions about the industry that lead it
to make systematically different choices from the ones that you would
make, were you in their shoes
A Framework for Competitor Analysis
What Drives the Competitor
What the Competitor Is Doing
and Can Do
Future Goals
Current Strategy
How the business is
currently competing
At all levels of management
and in multiple dimensions
Competitor’s Response Profile
Is the competitor satisfied with
its current position?
What likely moves or strategy
shifts will the competitor make?
Where is the competitor
vulnerable?
What will provoke the greatest
and most effective retaliation by
the competitor?
Assumptions
Held about itself
and the industry
Capabilities
Both strengths
and weaknesses
Source: Michael E. Porter, Competitive Strategy, p. 49
Competitor profile of British Airways (1986)
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Goals
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Successful flotation /
privatization
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Key step for Thatcher’s program
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Focus on near term profitability
Resources and Capabilities
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Government interest
Heathrow
Extensive network
Reputation for safe, reliable
service; improving reputation for
customer service
(neg) still operationally inefficient
(neg) needs capex to upgrade
int’l fleet
Strategy
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Differentiation in service: “The
world’s favorite airline”
Focus on business class
customers
Assumptions
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Competition is coming to Europe
BA will benefit from airline deregulation in Europe given
extensive international
experience
What does this tell us about how BA is likely to respond?
Competitor profile of Aer Lingus (1986)
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Goals
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“Safety, efficiency, reliability, and
profitability”
Promote national interests
Strategy
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Break even on air services and
profit from diversification
Provide service levels
comparable to flag carriers
Resources and Capabilities
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Government backing
Reputation & reliability among
Irish
Established operations in EU,
Boston, NY
Shannon airfield
Technical skills that other airlines
need
(neg) inefficient
(neg) needs capex
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Assumptions
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Airline service is a public good
 government will pay
One true way to run an airline
Airlines cooperate
‘Gentlemanly’ competition
What does this tell us about how AL is likely to respond?
Ryanair’s 1986 entry strategy
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Initial success
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Expansion
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100% load factor on Dublin-London Route
AL & BA dropped restricted fares to I₤95 vs. Ryanair’s I₤95
unrestricted fare: a rather mild reaction
Positive press – managers believed they had a winning strategy
27 routes; 5 jets by 1991
rapidly increasing customer volumes
strategy: “driven by customer service”
Aer Lingus responds
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matches prices, increases capacity on routes served by Ryanair
Problems with Ryanair’s 1986 entry strategy
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Limited cost advantage
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in high fixed cost, low marginal cost industries competition is
intense for incremental customers
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even though Ryanair may have had a cost advantage, AL was willing to
produce below average costs (but above marginal costs) to pay off fixed
costs
AL had deeper pockets and other sources of profit
No service advantage
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“first rate customer service” – no difference from BA or AL
potential disadvantages
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flying into Luton rather than Gatwick or Heathrow
flying turboprops rather than jets
A me-too strategy
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In the words of Porter, Ryanair attempted to compete
on operational effectiveness without making any
explicit tradeoffs
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“we tried to be all things to all people” – Kevin Osborne, CFO,
Ryanair (B) case
Not differentiated and not enough of a cost advantage
to profit from the restructuring of the industry that they
began
Comparison to Dell’s Entry
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“Compaq was very strong in retail. A new marketing an
distribution strategy was something new, however.” --Michael Dell
Dell’s entry:
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Not head-to-head with established players
Achieved significant variable cost advantage (7 versus 65
days inventory)
“Stealth” strategy --- direct channel undervalued by
established players
Ryanair rising from the ashes
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O’Leary, 29, appointed Deputy CEO
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“No one else was left to take the position”
Focus on cost reduction & cash generation
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Drop loss-making routes
No in-flight amenities
Renegotiated labor contracts to pay based on productivity
Emphasized duty-free sales
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Become 1/3 of flight attendant compensation
Sell advertisements on seat-backs
Goal: “become a low-cost, low-fare airline”
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Senior managers visit Herb Kelleher at Southwest
Even more frugal than Southwest
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No free snacks or drinks
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Not even peanuts!
No “air bridges” linking plans with airport terminals
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All boarding via metal stairs
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No frequent flier program
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Average fare falls to I£42 / passenger
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Average cost ~ I£25
In 1999, O’Leary claimed marginal cost was - I£2
Ryanair’s Route Map Today
http://www.ryanair.com/site/EN/dests.php?flash=yes
Relative Efficiency of Major Airlines
Employees
(approx)
Revenue per
employee (est)
Market Value of
Equity
Ryanair
2,302
Euro 450,000
$6.7 Billion
Southwest
31,011
$210,570
$11.3 Billion
Continental
38,255
$254,607
$855 Million
Delta
69,150
$217,919
$566 Million
Strategy or “being on the right side of history” i.e., luck?