Ryanair

1
Ryanair

• Jonathan Leonard

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Anticipating a Competitors moves

• CSG
• How are you doing it?
• Ryanair vs Aer Lingus and BA
• Can these players retaliate against Ryanair?
  Will they? If so, how?
• Given the assumption of retaliation, should
  Ryanair enter? If so, how?

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Game Theory for Strategic Analysis

• You dont operate in a vacuum.
• Understand Market Environment
• With strategic interactions, your best move
  depends upon competitors/ suppliers/distributors
  response to your moves.

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Game Theory for Strategic Analysis

• What are you committing to? A capacity? A price?
  A response?
• What would make your promise/ or threat
  credible?
• Can you change the game to your advantage?

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Game Theory

• Whats my rivals most profitable response to my
  move? (Best Response Function)
• Nash equilibrium every player makes best move
  given moves of other players. No player wants to
  change, given other players moves. (The Response
  Functions Cross)

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Not Just Hand-waving

• Can estimate costs to Incumbents (BA and AL) of
  fighting or accommodating Ryanairs entry.
• Can bound importance of some unknowns
  cannibalization, ferry passengers
• In static setting, limited competitive response
  of AL / BA to Ryanairs entry
• Puppy Dog Can Ryan commit to staying small?

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Cost Structure

• High fixed-costs, Low Marginal Costs
• With multiple firms and undifferentiated
  products, vulnerable to price war
• PV of industry profits for US airline industry
  since invention of jet roughly approximates zero.

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Softening Price Competition

• Differentiation With differentiated products,
  how much will your rival gain from a price cut?
• Capacity Constraints What does your rival stand
  to gain by a price cut if she is at capacity?
• Dynamic Pricing Games Can you use the future to
  influence the present?

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Competitor Analysis

• Augment Game Theory predictions based on
  Competitor response profile
• Assess a competitors
• strengths and weaknesses,
• its strategic intent, and
• its behavioral predispositions

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Competitor analysis

• Questions to ask
• What are rivals goals?
• May differ from pure profit maximization
• What is rivals strategy?
• Do the prior strategic actions (or statements) of
  the competitor suggest a direction that the
  competitor now might take?

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Competitor analysis (III)

• What are the resources and capabilities of my
  competitor?
• 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?
• 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

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Competitor profile of British Airways (1986)

• Goals
• Successful flotation / privatization
• Key step for Thatchers program
• Focus on near term profitability
• Assumptions
• Competition is coming to Europe
• BA will benefit from airline de-regulation in
  Europe given extensive international experience

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Competitor profile of British Airways (1986)

• Strategy
• Differentiation in service The worlds favorite
  airline
• Focus on business class customers

• Resources and Capabilities
• Government interest
• Heathrow
• Extensive network
• Reputation for safe, reliable service improving
  customer service
• still operationally inefficient
• needs capex to upgrade intl fleet

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Competitor profile of Aer Lingus (1986)

• Goals
• Safety, efficiency, reliability, and
  profitability
• Promote national interests

• Assumptions
• Airline service is a public good ? government
  will pay
• One true way to run an airline
• Airlines cooperate
• Gentlemanly competition

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Competitor profile of Aer Lingus (1986)

• Strategy
• Break even on air services and profit from
  diversification
• Provide service levels comparable to flag
  carriers

• Resources and Capabilities
• 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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A Framework for Competitor Analysis
What the Competitor Is Doing and Can Do
What Drives the Competitor
Future Goals
Current Strategy
How the business is currently competing
At all levels of management and in multiple
dimensions
Competitors 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?
Source Michael E. Porter, Competitive Strategy,
p. 49
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Ryanairs 1986 entry strategy

• Initial success
• 100 load factor on Dublin-London Route
• AL BA dropped restricted fares to I95 vs.
  Ryanairs I95 unrestricted fare a rather mild
  reaction
• Positive press managers believed they had a
  winning strategy
• Expansion
• 27 routes 5 jets by 1991
• rapidly increasing customer volumes
• strategy driven by customer service
• Aer Lingus responds
• matches prices, increases capacity on routes
  served by Ryanair

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Problems with Ryanairs 1986 entry strategy

• Limited cost advantage
• in high fixed cost, low marginal cost industries
  competition is intense for incremental customers
• MC -not FC- tells you how intense price
  competition can get.
• AL had deeper pockets, other revenue sources, and
  other goals
• No service advantage
• first rate customer service no difference
  from BA or AL
• potential disadvantages
• flying into Luton rather than Gatwick or Heathrow
• flying turboprops rather than jets

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A me-too strategy

• Ryanair attempted to compete on operational
  effectiveness without making any explicit
  tradeoffs
• 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

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A Better Strategy ?
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Ryanair rising from the ashes

• OLeary, 29, appointed Deputy CEO
• No one else was left to take the position
• Focus on cost reduction cash generation
• Drop loss-making routes
• No in-flight amenities
• Renegotiated labor contracts to pay based on
  productivity
• Emphasized duty-free sales
• Become 1/3 of flight attendant compensation
• Sell advertisements on seat-backs
• Goal become a low-cost, low-fare airline
• Senior managers visit Herb Kelleher at Southwest

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More frugal than Southwest

• No free snacks or drinks
• Not even peanuts!
• No air bridges linking planes with airport
  terminals
• Board via stairs
• No frequent flier program
• Average fare falls to I42 / passenger
• Average cost I25
• In 1999, OLeary claimed marginal cost was - I2

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Ryanairs Route Map Today
http//www.ryanair.com/site/EN/dests.php?flashyes
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Revenue/Employee
Strategy or being on the right side of history
i.e., luck?
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Reverse Engineering

• What Can You Learn About Your Rivals From Their
  Moves?
• Capacity as a Signal of Cost Structure.
• Capacity as an Entry Deterrent.
• Capacity as an error, or a bluff. Are they
  clever, credibly low scoring on their GMATs,
  and/or incredibly lucky?