The following questions need to be addressed in your answer:
1) Did RyanAir have a good strategy upon launch of their service between Louton and Doublin? Please Explain
2) What do you anticipate the competitive response to be, if any, from British Air and Air Lingus? Please Explain. Naturally this might be related to your answer in question 1.
3) What real advantage does RyanAir have as an airline? Is this advantage sustainable long term? Bear in mind, there is always another company willing to come into the market should there be room for margin.
4) How do you see this industry evolving and why? You should answer this from the perspective of RyanAir, the competitive response, and the subsequent actions which would be taken by RyanAir
5) What are the guiding principles which are underpinning your set of answers? What beliefs do you hold about the market, competition, or firm actions that dictate your answers. These should be brief statements which logically follow your answers.
Dogfight over Europe: Ryanair (A) Harvard Business School 9-700-115 Rev. November 21, 2007 Professor Jan W. Rivkin prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2000, 2007 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 Dogfight over Europe: Ryanair (A) In April, 1986, the upstart Irish airline Ryanair announced that it would soon commence service between Dublin and London. For nearly a year, the new airline had operated a 14-seat turboprop between Waterford, in the southeast of Ireland, and Gatwick Airport on the outskirts of London. The founders of Ryanair, brothers Cathal and Declan Ryan, felt that service on that first route had developed well. They knew, however, that the Dublin-London route would pose new challenges. For the first time, they would face Aer Lingus, British Airways, and other established competitors on a major route. European Aviation The environment in which the Ryan brothers launched their fledgling carrier had long been shaped by Europe’s national governments.1 Privately owned, commercial airlines sprang up in Europe following World War I. Soon, however, the governments of Britain, France, Germany, and other countries began to amalgamate the first, small airlines into national “flag carriers.” Each of these airlines literally carried the flag of its nation on the tails of its aircraft. Figuratively also, each airline carried the flag, serving as an international emissary. Predecessors of British Airways, Air France, Lufthansa, and others gradually became owned by, and subsidized by, their national governments. The route structures of British, French, Dutch, and Belgian flag carriers developed to serve the colonial aims of their respective governments. For instance, the aircraft of British Airways’ predecessor, the aptly named Imperial Airways, were familiar sights in India, South Africa, Australia, and other British outposts by the 1930s.2 Service focused on international routes from each nation’s capital to colonies, other areas of national influence, and the capitals of other European countries. Intra-country service was sparse, largely connecting provincial cities to the capital. Fares on domestic routes were often kept high to subsidize international service. World War II brought advances in aviation that made air travel widely economical for the first time. The aftermath of the war also brought the threat of American dominance in air travel. Had free competition been permitted on international routes, the efficient, privately owned carriers of the United States would likely have won the lion’s share of the market.3 A set of multilateral and bilateral agreements averted this outcome. The International Air Traffic Association (IATA), essentially a government-endorsed cartel of the major airlines, emerged to set international fares. Governments negotiated bilateral agreements that regulated all aspects of air travel between pairs of countries. In Europe, “pooling arrangements” became common. Under pooling, the routes between, say, France and Italy would be given strictly to Air France and Alitalia. The two flag carriers would This document is authorized for use only by Aakash Gohil in Summer 2023 MGMT 65000-DY1-Y01 - Merge at Purdue University, 2023. 700-115 Dogfight over Europe: Ryanair (A) 2 pool their capacity and revenue, then divide the proceeds in an agreed-upon manner. Carriers were banned from flights that did not begin or terminate on their national soil; Air France, for instance, could not fly from Rome to Frankfurt or Milan. Intra-country service was also regulated strictly. To varying degrees, domestic fares were set by government authorities, and entry by new airlines was discouraged. The collapse of European empires and the advent of jets capable of crossing the Atlantic economically led virtually all European flag carriers to refocus their international efforts on routes across the North Atlantic in the late 1950s. Heavy and growing demand for transportation to and from North America made such routes highly profitable, at least initially. Europe’s system of regulation soon came under pressure. A late-1950s attempt to unify the flag carriers of France, West Germany, Belgium, and Italy collapsed under the weight of disparate national interests. By 1960, the Economist magazine bemoaned the state of the heavily regulated, fragmented airline industry. “The basic trouble,” it concluded, “remains that the world has too many airlines, most of them inefficient, undercapitalised and unprofitable.”4 Though the IATA introduced some forms of restricted, discount fares in the 1950s, consumers grew dissatisfied with high prices. European regulations applied largely to regularly scheduled service between destinations. To bypass these regulations and to tap pent-up demand for leisure travel, charter airlines appeared and grew rapidly during the 1960s. These start-ups, funded in part by shipping companies, offered holiday makers cheap fares on non-scheduled flights and “inclusive tours” that bundled flights with lodging. Charter holidays proved especially popular among British and Irish vacationers, who used them to escape the North Sea for sunnier climes. By the mid-1980s, charter flights would transport 60% of all European passengers.5 Flag carriers responded to the independent charter airlines both by establishing new discounts within the IATA structure and by starting charter subsidiaries themselves. The 1970s took airlines around the world into financial straits (Exhibit 1). The introduction of wide-bodied aircraft such as the Boeing 747 increased capacity on the North Atlantic route dramatically. The OPEC oil embargo raised the price of jet fuel, and the ensuing recession cut demand for air travel. These events hit Europe’s flag carriers, with their heavily unionized staffs and high fixed costs, especially hard. Exhibit 2 compares the staff productivity of European and U.S. airlines in 1978. In 1978, the U.S. Congress approved the thorough deregulation of the domestic U.S. airline industry. Pricing, route scheduling, entry, and exit were freed up dramatically. Prices plunged rapidly as airlines competed vigorously for marginal customers. Twenty-two new, low-cost carriers entered the market between 1978 and 1980.6 Most of the new airlines soon failed, however. Established players such as American, United, and Delta used hub-and-spoke route structures and computerized reservation systems to spur a new wave of consolidation. Following consolidation, prices and profitability remained low and unstable. Strong U.S. airlines reached out for new routes into Europe. The U.S. experience brought calls for European deregulation from consumer advocates and supporters of competition. A 1984 memorandum from the European Commission proposed the abolition of pooling arrangements, price fixing, and government subsidies. Trade unions and flag carriers allied to defeat the proposal. In 1986, the Single European Act called for the creation of a unified European market by the end of 1992. The market was intended to “comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured….”7 Industry observers expected new proposals for the liberalization of the European airline industry to follow. This document is authorized for use only by Aakash Gohil in Summer 2023 MGMT 65000-DY1-Y01 - Merge at Purdue University, 2023. Dogfight over Europe: Ryanair (A) 700-115 3 British Aviation and British Airways While Europe as a whole remained dominated by state-owned carriers with government- mandated monopolies or near-monopolies, individual countries moved to liberalize their domestic airline industries and to push for international deregulation on a bilateral basis with individual countries.8 The United Kingdom was among the most aggressive in doing so. As early as 1971, Britain’s airline regulator, the Civil Aviation Authority, encouraged the establishment of British Caledonian Airways (BCal) as a “second force” to compete with the dominant, state-owned British Airways (BA). Labor Party governments, however, subsequently protected BA from BCal’s incursions. Though independent airlines such as BCal and British Midland operated in the U.K. during this period, momentum for airline deregulation picked up only after the election of the Conservative, market-minded Prime Minister Margaret Thatcher in 1979. An early Thatcher bill required, for the first time, that regulators give the interests of consumers equal weight to the interests of operators when allocating licenses for new routes. A hallmark of Thatcher’s government was the privatization of state-owned enterprises, and a centerpiece of her privatization programme was a proposed flotation of BA on the stock market. The state of BA in 1979, however, precluded a rapid privatization. The cost structure of BA and its predecessors had been high at least since the end of World War II, when the flag carrier was expected to “find a job for every demobilized member of the [Royal Air Force].”9 In 1977, the U.S. carrier Delta transported 30.7 million passengers with 31,000 employees while BA’s staff of 54,300 moved 14.5 million passengers.10 After thin profits in the late 1970s, BA suffered a loss of UK£102 million on revenue of UK£1,760 million in 1981. A new chairman, John King—a self-made millionaire with experience in the ball-bearing industry—was brought in to revive BA and prepare it for privatization. With generous severance packages, King reduced BA’s staff to 38,000 by 1985. Loss-making routes were surrendered to competitors, and maintenance stations and training colleges were shuttered. King soon yielded the reins to Colin Marshall, a former executive of car rental agency Avis, who began to improve customer service. Marshall paid particular attention to satisfying full-fare business customers. By 1984, BA was earning record profits (Exhibit 3), and its privatization was being planned for 1987. Deregulation slowed during the period of BA’s turnaround. A Civil Aviation Authority proposal to shift some of BA’s routes to BCal, for instance, was defeated in 1984, largely because the Treasury Ministry opposed the plan. In 1986, BA operated one of the world’s most extensive airline route networks, serving 145 destinations in 68 countries.11 No airline carried more international passengers. International journeys accounted for roughly two-thirds of the seats that BA sold and nine-tenths of its revenue. Nearly 80% of passengers passed through London’s main airport at Heathrow, one of the world’s busiest transportation hubs. Plying the network was a fleet of 163 aircraft, ranging from 44-seat turboprops to Boeing 747s with room for nearly 400. Since 1980, BA had invested roughly UK£700 million to purchase 55 new aircraft, mostly for service within Europe. The company was beginning to upgrade its intercontinental fleet. In the United Kingdom and New York, BA provided its own passenger and ground services (e.g., for passenger check-in, baggage handling, and aircraft cleaning). Elsewhere, it hired contractors to perform such services. BA catered its own flights from Heathrow, but contracted out all other catering. The company performed most of its own maintenance from a base at Heathrow and had engineering capabilities at three-quarters of the airports it served. BA sold tickets over the telephone and in 171 retail shops worldwide, where agents also sold package vacations. In addition, 49,000 independent travel agents had the ability to book tickets on BA via computerized reservation systems, including BA’s own system. Such agents accounted for 83% of the company’s scheduled passenger revenue. BA pitched its services to a wide range of This document is authorized for use only by Aakash Gohil in Summer 2023 MGMT 65000-DY1-Y01 - Merge at Purdue University, 2023. 700-115 Dogfight over Europe: Ryanair (A) 4 business and leisure travelers. Accordingly, it offered a spectrum of ticket prices with varying restrictions and the full range of classes of service—from first class to economy. Especially among business travelers, BA was known for its improving in-flight amenities. Exhibit 4 shows BA’s revenue and operating cost per scheduled passenger. The 6.9% operating margin shown there reflects BA’s entire route network. In Europe alone, the carrier earned a 4.4% margin. Irish Aviation and Aer Lingus As a country with a small population, limited land mass (roughly 250 kilometers across and 400 long), and no colonial possessions, Ireland did not lend itself naturally to commercial aviation.12