Ryanair (A) & (B)Key Take-AwaysHaas School of BusinessUniversity of California, Berkeley

How can we anticipate competitors moves?Ryanair vs Aer Lingus / BAWill these players retaliate against Ryanair? If so, how?Given the assumption of retaliation, should Ryanair enter? If so, how?

How can we anticipate competitors moves?Game Theory Identify structure of the game that is being playedIn static setting, predicts limited competitive response of AL / BA to Ryanairs entry---but its a close callWith targeted response, retaliation starts to look attractiveWith non-pecuniary incentives, retaliation starts to look attractive

Competitor analysisDevelop model of pecuniary and non-pecuniary incentives, views of the game, etc. based on Competitor response profile

Competitor analysisCompetitor analysis can be helpful in anticipating competitor movesA competitor profile includes an assessment of a competitors strengths and weaknesses, its strategic intent, and its behavioral predispositionsCompetitor analysis is inherently qualitativeComplements quantitative analyses

Competitor analysis (II)Questions to ask:What are the goals of my competitor?May be different from pure greed (profit maximization)What is the strategy of my competitor?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?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

A Framework for Competitor Analysis

Source: Michael E. Porter, Competitive Strategy, p. 49What the Competitor Is Doing and Can Do What Drives the CompetitorFuture GoalsAt all levels of managementand in multiple dimensionsCurrent StrategyHow the business iscurrently competingCompetitors 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?

Competitor profile of British Airways (1986)GoalsSuccessful flotation / privatizationKey step for Thatchers programFocus on near term profitability

Resources and CapabilitiesGovernment interestHeathrowExtensive networkReputation for safe, reliable service; improving reputation for customer service(neg) still operationally inefficient(neg) needs capex to upgrade intl fleetStrategyDifferentiation in service: The worlds favorite airlineFocus on business class customers

AssumptionsCompetition is coming to EuropeBA will benefit from airline de-regulation in Europe given extensive international experience

What does this tell us about how BA is likely to respond?

Competitor profile of Aer Lingus (1986)GoalsSafety, efficiency, reliability, and profitabilityPromote national interests

Resources and CapabilitiesGovernment backingReputation & reliability among IrishEstablished operations in EU, Boston, NYShannon airfieldTechnical skills that other airlines need(neg) inefficient(neg) needs capex

StrategyBreak even on air services and profit from diversificationProvide service levels comparable to flag carriers

AssumptionsAirline service is a public good government will payOne true way to run an airlineAirlines cooperateGentlemanly competitionWhat does this tell us about how AL is likely to respond?

Ryanairs 1986 entry strategyInitial success100% load factor on Dublin-London RouteAL & BA dropped restricted fares to I95 vs. Ryanairs I95 unrestricted fare: a rather mild reactionPositive press managers believed they had a winning strategy

Expansion27 routes; 5 jets by 1991rapidly increasing customer volumesstrategy: driven by customer service

Aer Lingus respondsmatches prices, increases capacity on routes served by Ryanair

Problems with Ryanairs 1986 entry strategyLimited cost advantagein high fixed cost, low marginal cost industries competition is intense for incremental customerseven though Ryanair may have had a cost advantage, AL was willing to produce below average costs (but above marginal costs) to pay off fixed costsAL had deeper pockets and other sources of profit

No service advantagefirst rate customer service no difference from BA or ALpotential disadvantagesflying into Luton rather than Gatwick or Heathrowflying turboprops rather than jets

A me-too strategyIn the words of Porter, Ryanair attempted to compete on operational effectiveness without making any explicit tradeoffswe 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 Dells EntryCompaq was very strong in retail. A new marketing an distribution strategy was something new, however. --- Michael DellDells entry:Not head-to-head with established playersAchieved significant variable cost advantage (7 versus 65 days inventory)Stealth strategy --- direct channel undervalued by established players

Ryanair rising from the ashesOLeary, 29, appointed Deputy CEONo one else was left to take the position

Focus on cost reduction & cash generationDrop loss-making routesNo in-flight amenities Renegotiated labor contracts to pay based on productivityEmphasized duty-free salesBecome 1/3 of flight attendant compensationSell advertisements on seat-backsGoal: become a low-cost, low-fare airlineSenior managers visit Herb Kelleher at Southwest

Even more frugal than SouthwestNo free snacks or drinksNot even peanuts!No air bridges linking plans with airport terminalsAll boarding via metal stairsNo frequent flier program

Average fare falls to I42 / passengerAverage cost ~ I25In 1999, OLeary claimed marginal cost was - I2

Ryanairs Route Map Todayhttp://www.ryanair.com/site/EN/dests.php?flash=yes

Relative Efficiency of Major AirlinesStrategy or being on the right side of history i.e., luck?

Employees (approx)Revenue per employee (est)Market Value of EquityRyanair2,302Euro 450,000$6.7 BillionSouthwest31,011$210,570$11.3 BillionContinental38,255$254,607$855 MillionDelta69,150$217,919$566 Million