1. Ryanair (A) & (B) Key Take-Aways Haas School of Business
University of California, Berkeley

2. How can we anticipate competitor’s moves?
Ryanair vs Aer Lingus / BA
Will these players retaliate against Ryanair? If so, how?
Given the assumption of retaliation, should Ryanair enter? If so, how?

3. How can we anticipate competitor’s moves?
Game Theory
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
With targeted response, retaliation starts to look attractive
With non-pecuniary incentives, retaliation starts to look attractive
Competitor analysis
Develop model of pecuniary and non-pecuniary incentives, views of the “game”, etc. based on “Competitor response profile”

4. Competitor analysis
Competitor analysis can be helpful in anticipating competitor moves
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

5. 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

6. A Framework for Competitor Analysis
What Drives the Competitor
What the Competitor Is Doing
and Can Do
Future Goals
Current Strategy
At all levels of management
and in multiple dimensions
How the business is
currently competing
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?
Capabilities
Both strengths
and weaknesses
Assumptions
Held about itself
and the industry
Source: Michael E. Porter, Competitive Strategy, p. 49

7. Competitor profile of British Airways (1986)
Goals
Successful flotation / privatization
Key step for Thatcher’s program
Focus on near term profitability
Resources and Capabilities
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
Differentiation in service: “The world’s favorite airline”
Focus on business class customers
Assumptions
Competition is coming to Europe
BA will benefit from airline de-regulation in Europe given extensive international experience
What does this tell us about how BA is likely to respond?

8. Competitor profile of Aer Lingus (1986)
Goals
“Safety, efficiency, reliability, and profitability”
Promote national interests
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
Strategy
Break even on air services and profit from diversification
Provide service levels comparable to flag carriers
Assumptions
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?

9. Ryanair’s 1986 entry strategy
Initial success
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
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

10. Problems with Ryanair’s 1986 entry strategy
Limited cost advantage
in high fixed cost, low marginal cost industries competition is intense for incremental customers
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
“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

11. A me-too strategy
In the words of Porter, 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

12. Comparison to Dell’s Entry
“Compaq was very strong in retail. A new marketing an distribution strategy was something new, however.” --- Michael Dell
Dell’s entry:
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

13. Ryanair rising from the ashes
O’Leary, 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

14. Even more frugal than Southwest
No free snacks or drinks
Not even peanuts!
No “air bridges” linking plans with airport terminals
All boarding via metal stairs
No frequent flier program
Average fare falls to I£42 / passenger
Average cost ~ I£25
In 1999, O’Leary claimed marginal cost was - I£2

15. Ryanair’s Route Map Today

16. 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?