Dogfight over Europe Airlines

Market status and structure before Ryanair's entry

The current market is a stabilised market, with strong players like British Airways and Aer Lingus. Both airlines established routes in the lucrative Dublin - London markets and tap on profits from this route to finance their other less profitable operations. British Airways, in particular, has been hungry for profits after emerging from losses sustained in the early 1980s due to the high fuel prices and the liberalisation and deregulation of the aviation industry in Europe, particularly in United Kingdom. Now that the aviation market is expanding, these airlines are enjoying the revenues from the market share which they have helped to stabilise over the last 10 years. Ryanair was bracing itself against these big players for a share of the lucrative market with the announcement of its entry.

Status of British Airways

- competing with strong US carriers in Europe and US in an environment that was towards free market competition

- focusing on international routes which provided nine-tenths of its revenue

- high cost of operations

 high number and wide variety of aircraft

(thus high maintenance cost)

 high employment costs with vast ground handling and representative staff

 extensive network (high IT cost) ticket sale system

Status of Aer Lingus

- partially Government owned, thus obligated to operate on certain routes (eg international routes) despite years of operating losses

- 40% owned by BA

- main revenue came from tourist passengers who were price sensitive

- involved in several more profitable side lines (as computer reservation consultants, providing maintenance and engineering services, etc)

- having aging fleet which needed heavy investment to replace. Possible sale of company partially to finance expenditure

Ryanair's strategy

The demand for air travel between the Dublin and London has probably stabilized over the 10 years from the stagnant market share of half a million air travellers. With the introduction of Ryanair's low cost strategy, the following may be expected:

- with the competitive price of IЈ98, many travellers from this stabilised market pool would choose to fly with Ryanair, especially if Ryanair could maintain the proclaimed high quality service to its passengers.

- Ryanair's 4 daily flights provide much flexibility to the travellers who could travel at their time of convenience in a day

- Ryanair's usage of 44-seater turboprop would greatly enhance its occupancy rate and at the same time, cost Ryanair much less to operate when compared to BA's operational cost since BA used bigger capacity planes for this route

Market analysis:

- the low price of Ryanair will attract many travellers from the established stabilised market, resulting in a decrease to the market share of the other competitors (eg BA & Aer Lingus). These competitors would be forced to lower their fare prices as well and could even remove the restrictive conditions of their low fare tickets in order to retain their market shares. Consequently, there will be an overall decrease in the airfare for the Dublin- London market in the short run. New travellers, i.e. those who would not have travelled before, may emerge to take advantage of Ryanair's new lower prices.

Meanwhile...

- Consumers would probably take the competitors' offer of low airfare with scepticism because travellers have the existing knowledge on the practice and conditions associated with low air fares provided by the competitors, such as BA.

- Competitors would probably need to convince and win back their customers' trust, possibly by spending money to sent out 'signals' (eg through advertisements, press releases, travel agents, etc) in order to convince the travellers of the genuineness of their offered fares.

- In addition, Ryanair has its fare share of convincing the travellers of its service, reliability and safety since it is a relatively new to the market as compared to its competitors. The service training, marketing costs, etc would also be a costly challenge for Ryanair given that its air fare is so lowly priced.

Elasticity of demand

The demand for low air fare will probably be highly elastic due to following reasons:

-The time taken to adjust to the competition is fairly short given that the established competitors already have the resources and capabilities to meet the low fare priced by Ryanair.

- Closeness of substitutes are easily available with the competitors providing neck to neck services at competitive prices.

Hence, the entry of Ryanair