Dogfight over Europe: Ryanair (a)

For the max aim of J. SICINSKI Harvard Business School9-700-115 Rev. November 21, 2007 Dogfight everyplace atomic number 63 Ryan job (A) In April, 1986, the upstart Irish descentway Ryan business line announced that it would soon commence function between Dublin and London. For n proto(prenominal) a year, the new skyway had insured a 14-seat turboprop between Waterford, in the s protrudeheast of Ire province, and Gatwick publicizeport on the outskirts of London. The fo under(a)s of Ryanair, br new(prenominal)s Cathal and Declan Ryan, mat up that service of process on that first route had developed well. They knew, however, that the Dublin-London route would affectedness new ch all in allenges.For the first prison term, they would face Aer Lingus, British walkoverways, and other established competitors on a major route. europiuman breeze The environment in which the Ryan brothers launched their freshman holder had long been shaped by atomic number 63s home(a) orga nizations. 1Privately owned, commercial airlines sprang up in Europe following World struggle I. Soon, however, the governments of Britain, France, Ger legion(predicate), and other countries began to amalgamate the first, small airlines into matter flag carriers. Each of these airlines literally carried the flag of its nation on the tails of its aircraft.Figuratively withal, each airline carried the flag, percentage as an supranational emissary. Predecessors of British snapways, shine France, Lufthansa, and others gradually became owned by, and support by, their national governments. The route structures of British, French, Dutch, and Belgian flag carriers developed to serve the compound aims of their respective governments. For instance, the aircraft of British stripways predecessor, the aptly named Imperial shipways, were familiar sights in India, southbound Africa, Australia, and other British outposts by the mid-thirties. Service foc utilized on multinational route s from each nations cracking to colonies, other areas of national influence, and the capitals of other European countries. Intra- state of matter service was sparse, man-sizedly connecting provincial cities to the capital. Fares on home(prenominal)ated routes were lots kept spicy to subsidize global service. World War II brought advances in aviation that made air travel widely stinting for the first time. The later onmath of the war also brought the threat of American command in air travel.Had free competition been permitted on international routes, the efficient, in camera owned carriers of the pass away together States would likely pick up won the lions share of the market. 3A set of multi new-fangledral and bilateral agreements averted this outcome. The International Air commerce Association (IATA), essentially a government-endorsed cartel of the major airlines, emerged to set international fares. Governments negotiated bilateral agreements that regulated all aspect s of air travel between pairs of countries. In Europe, pooling ar electron orbitments 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 prof Jan W. Rivkin specifyd this case as the basis for class discussion kind of 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 liberty 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 dodging, utilize in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. This document is sure for pulmonary tuberculosis solitary(prenominal) by Jan Sicinski in strategical Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 1 For the exclusive use of J. SICINSKI 700-115Dogfight over Europe Ryanair (A) pool their power and revenue, then portion out the proceeds in an agreed-upon manner.Carriers were banned from flights that did not begin or preempt on their national soil Air France, for instance, could not fly from capital of Italy 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 break down of European empires and the advent of jets capable of crossing the Atlantic economically light-emitting diode virtually all European flag carriers to refocus their international efforts on routes across the North Atlantic in the late 1950s.Heavy and growing have for transportation to and from North America made such routes highly profitable, at least signly. Europes 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 metric weight down unit of disparate national interests. By 1960, the Economist magazine bemoaned the show of the severely regulated, fragmented airline industry. The basic trouble, it concluded, re master(prenominal)s that the area has too many airlines, approximately of them inefficient, undercapitalised and unprofitable. 4Though 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 circulate 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 turning away the North Sea for sunnier climes. By the mid-1980s, charter flights would transport 60% of all European passengers. 5 stick carriers responded to the mugwump charter airlines both by establishing new discounts in spite of appearance the IATA structure and by starting charter subsidiaries themselves. The 1970s took airlines around the world into financial straits ( present 1). The introduction of wide-bodied aircraft such as the Boeing 747 increased capacity on the North Atlantic route dramatically.The OPEC oil embargo raise the price of jet fuel, and the ensuing recession cut demand for air travel. These events hit Europes flag carriers, with their heavily unionized modules and high fixed cost, especially hard. Exhibit 2 compares the supply 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 clients.Twenty-two new, low-cost carriers entered the market between 1978 and 1980. 6Most of the new airlines soon failed, however. set up players such as American, United, and Delta used hub-and-spoke route structures and computerized arriere pensee systems to encourage a new wave of consolidation. Following consolidation, prices and profitability remained low and unstable. weapons-grade 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 ar regularizements, price fixing, and government subsidies. Trade unions and flag carriers confederative 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 intend to comprise an area without internal frontiers in which the free movement of goods, persons, work 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 Jan Sicinski in strategic Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 2 For the exclusive use of J. SICINSKI Dogfight over Europe Ryanair (A)700-115 British Aviation and British Airways turn 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. The United Kingdom was among the most aggressive in doing so. As early as 1971, Britains airline regulat or, 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). comminute Party governments, however, subsequently protected BA from BCals incursions. Though supreme airlines such as BCal and British Midland becomed in the U. K. during this result, momentum for airline deregulation picked up only after the election of the Conservative, market-minded Prime attend 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 Thatchers government was the privatization of state-owned enterprises, and a centrepiece 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 predecessor s had been high at least since the end ofWorld War II, when the flag carrier was expected to find a job for every demobilized member of the Royal Air Force. 9In 1977, the U. S. carrier Delta transported 30. 7 trillion passengers with 31,000 employees while BAs staff of 54,300 moved 14. 5 meg passengers. 10After thin kale in the late 1970s, BA suffered a loss of UK? 102 one thousand million on revenue of UK? 1,760 million in 1981. A new chairman, John Kinga self-made millionaire with experience in the ball-bearing industrywas brought in to revive BA and prepare it for privatization.With generous severance packages, King reduced BAs 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 personal line of credi t customers. By 1984, BA was earning record profits (Exhibit 3), and its privatization was being planned for 1987. Deregulation slowed during the period of BAs turnaround.A Civil Aviation Authority proposal to teddy some of BAs routes to BCal, for instance, was defeated in 1984, largely because the exchequer Ministry opposed the plan. In 1986, BA operated one of the worlds most extensive airline route internets, serving 145 destinations in 68 countries. 11No 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 Londons main airport at Heathrow, one of the worlds busiest transportation hubs.Plying the network was a fleet of 163 aircraft, ranging from 44-seat turboprops to Boeing 747s with room for nearly four hundred. Since 1980, BA had invested roughly UK? 700 million to purchase 55 new aircraft, mostly for service within Europe. The c onjunction was beginning to upgrade its interContinental fleet. In the United Kingdom and virgin 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 BAs own system. Such agents accounted for 83% of the companys scheduled passenger revenue.BA pitched its services to a wide range of This document is authorized for use only by Jan Sicinski in strategical Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 3 For the exclusive use of J. SICINSKI 700-115Dogfight over Europe Ryanair (A) business and leisure travelers. Accordingly, it offered a spectrum of ticket prices with varying restrictions and the full range of classes of servicefrom first class to economy. Especially among business travelers, BA was know for its improving in-flight amenities. Exhibit 4 shows BAs revenue and operate cost per scheduled passenger.The 6. 9% direct margin shown there reflects BAs entire route network. In Europe alone, the carrier acquire 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 Yet in 1936, a mere 15 years after Irelands initial political separation from Britain and 13 years sooner full independence, government and private interests in Ireland ca me together to form Aer Lingus, a flag carrier for the emerging state.Government support proved crucial in the airlines early days. Annual losings in the 1930s and 1940s commonly ran between 20% and 100% of revenue. Not until the early 1950s did the airline earn a profit in sequent years, and then only for a short period. Early on, passenger merchandise focused on routes between Ireland and Britain, where a large population of Irish emigrants resided. To develop these routes, the Irish and British governments struck an unusual arrangement in 1946. Through BAs predecessors, the British government took a 40% stake in Aer Lingus, leaving 60% in the hands of Ireland.Aer Lingus was given monopoly rights to routes over the Irish Sea. BAs predecessors gained the valuable right to land at Shannon Airport on Irelands west coast, refuel, and continue on across the Atlantic. (Aircraft ranges at the time required such a refuel stop. ) In exchange, Aer Lingus was allowed to land in Manchester , take on passengers, and continue to continental Europe. Such onward rights were rare in Europe and marked the beginning of relatively liberal bilateral agreements between Britain and Ireland.The British partnership continue for a decade until Aer Lingus desire to develop its own trans-Atlantic routes, to reach the large ethnic Irish populations in New York and Boston, created a rift. Amicably, the British government reduced and eventually relinquished its stake in Aer Lingus. The predecessors of BA and independent carriers such as British Midland began to fly routes between Britain and Ireland. Problems on the North Atlantic corridor in the 1970s hit Aer Lingus especially hard. Compared to other carriers on the route, Aer Lingus drew its passengers especially heavily from the ranks of tourists.Tourist passengers actively sought promotional fares, created erratic peaks of seasonal demand, and largely stayed at home during the recession of the mid-1970s. The Irish government insiste d that Aer Lingus continue to fly the North Atlantic corridor despite losses on the route. 13 Aer Lingus first published its objectives in 1971 and had, by 1986, reviewed and approved the statement a number of times. The statement called on Aer Lingus to provide an air transport service that was safe, efficient, reliable, and profitable. The airline touted the many benefits it brought to the Irish community national development, promotion of tourism, employment, a contribution to the balance of payments, and educational, social, and cultural services. 14 losses in the 1970s prompted Aer Lingus to seek new sources of revenue and profit. We perceived that an airline with a limited home market, limited financial resources and a cyclic product would have to diversify, reflected one of Aer Lingus chief executives. 15Aer Lingus began to offer maintenance service and engineer training to other airlines.Successful introduction of its computer reservation system led Aer Lingus to offer co mputer consulting and data processing services. The company also entered the hotel business in London, Paris, and New England. By 1986, This document is authorized for use only by Jan Sicinski in Strategic Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 4 For the exclusive use of J. SICINSKI Dogfight over Europe Ryanair (A)700-115 so-called assistant businesses include hospital management in Baghdad and an investment in robotics. In 1984-85, air transportation, irline-related services such as maintenance, and non-airline businesses provided Aer Lingus operating profits of 0. 5 million Irish pounds (I? ), I? 12. 7 million, and I? 17. 1 million, respectively. 16Within air transportation, Aer Lingus domestic and European routes earned a modest operating profit while its trans-Atlantic flights sustained operating losses for the sixth time in seven years. 17During the coming decade, Aer Lingus faced tens of millions of pounds of investment to replace maturation jets in its fleet. Government officials were contemplating the sale of part of the company to finance the capital expenditures.Ryanair Cathal and Declan Ryan had essentially grown up in the airline industry. 18Their father, Tony Ryan, had long worked for Aer Lingus. As the flag carriers aircraft leasing manager, the elder Ryan struck innovative deals to admit excess capacity to other airlines. From 1973 to 1975, for instance, he arranged for an Aer Lingus 747 and its Irish crowd to ply Air Siams route between Bangkok and Los Angeles. 19In 1975, Tony Ryan co-founded Guinness Peat Aviation, which promptly became the largest aircraft leasing company in the world.Tony Ryans 10% stake in Guinness Peat Aviation gave him sufficient wealth to invest a million Irish pounds in his sons efforts to launch an airline. Both sons were in their 20s when Ryanair initiated service in 1985. At first, Ryanair used a 14-seat turboprop aircraft to run a scheduled service between Waterford in the southeast of Ireland and Gatwick Airport, one of Londons secondary airports. This initial service was intend to prove the companys ability to operate a scheduled airline successfully. In 1986, Ryanair gained a license to operate between Dublin and Luton, another of Londons secondary airports.Aer Lingus and BA already operated on the Dublin-London route, which was reputed to be quite lucrative for both carriers. Indeed, Aer Lingus head noted that Dublin-London is the only route on the Aer Lingus network that has the volume of business to allow of itself a reasonable return on capital. 20Aer Lingus and BAs least expensive, unrestricted round-trip fares on the route were priced at I? 208 (equivalent to UK? 189 at the time). Discount fares as low as I? 99 were available, though they had to be booked one month in advance.Observers felt that the figures shown in Exhibit 4 were typical of Aer Lingus and BAs average revenues and costs for a Dublin-London round trip. Ryanair managers believed that the flights of Aer Lingus and BA were typically 60-70% full. According to airport authorities, half a million round-trip passengers flew the route each year. The total number of air passengers on the route had been stagnant for ten years. Roughly three-quarters of a million round-trip travelers opted to use rail and sea ferries rather than aircraft. The journey took nine hours by rail and ferry and one hour by air.Prices of round-trip rail-and-ferry tickets fell as low as I? 55. 21 On their new Dublin-London service, the Ryan brothers intended to run four round trips per day with a 44-seat turboprop. They did not have permission to fly larger jet aircraft on the route, but hoped to get permission soon. Ryanair would offer meals and amenities comparable to what Aer Lingus and British Airways provided. The company would choose itself from the flag carriers in two ways. first, its employees would focus intently on delivering alright customer service.Second, the compa ny would charge a simple, single fare for a ticket with no restrictions. In announcing its Dublin-London service, Ryanair publicized a fare of I? 98. This document is authorized for use only by Jan Sicinski in Strategic Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 5 700-115 Exhibit 1 For the exclusive use of J. SICINSKI Dogfight over Europe Ryanair (A) Composite Profitability of All Major, schedule European Airlines 10 5 0 -5 entranceway of wide-body jets First oil crisis Second oil crisis -10 Introduction of jets witnesser Association of European Airlines, 1994 Yearbook, p. 19. Exhibit 2Staff Productivity of U. S. and European Airlines, 1978 Airline U. S. carriers American Eastern Pan American TWA United European carriers Air France Alitalia British Airways KLM Lufthansa Staff 40,134 35,899 26,964 36,549 52,065 32,173 17,040 54,645 17,812 29,400 Passengers per staff memberStaff per aircraft 762158 1,099156 358355 665156 657156 333314 374279 3 08264 231326 460320 Source House of Lords Select Committee on European Air Fares, 1981, 185-7, European Air Fares, Air transportation system Users Committee, Civil Aviation Authority, 1978.Cited in P. Lyth and H. Dienel, Introduction in H. Dienel and P. Lyth, eds. , Flying the gladiola European commercial Air gestate Since 1945 (London Macmillan, 1998), p. 8. This document is authorized for use only by Jan Sicinski in Strategic Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 6 Profit after interest as a percentage of total costs 1955 1960 1965 1970 1975 1980 1985 Dogfight over Europe Ryanair (A) Exhibit 3British Airways Performance, 1977-85 For the exclusive use of J. SICINSKI 700-115 Revenue (mm UK? ) run profit onwards taxes and interest (mm UK? )Passengers (mm) Staff (thousands) Available ton-kilometers (mm) T on-kilometersused(mm) Load* (%) 197719791981 1,073. 91,403. 31,760 95. 876. 0(102) 14. 515. 817. 0 54. 355. 953. 6 6,2337,1647,930 3,6074,4164,812 586261 19831985 2,0512,905 169292 16. 318. 4 45. 938. 1 7,2087,837 4,4615,267 6267 * Load = portion of available ton-kilometers used, a vizor of capacity utilization. Source British Airways Annual Reports. Cited in P. Lyth, Chosen Instruments The phylogeny of British Airways in H. Dienel and P. Lyth, eds. , Flying the Flag European Commercial Air steer Since 1945 (London Macmillan, 1998), pp. 2, 74. Exhibit 4British Airways Average Revenue and Cost per Passenger, 1986 UK? Revenue 151. 3 Operating expenses Staff32. 4 Depreciation & amortization7. 8 Fuel & oil28. 9 engineer and other aircraft costs8. 9 Selling16. 4 Aircraft operating leases3. 1 Landing fees and en route charges10. 6 Handling charges, catering, & other15. 1 Accommodation, ground equipment & other17. 7 percentage of I? Revenue 166. 5100. 0% 35. 721. 4% 8. 65. 1% 31. 819. 1% 9. 85. 9% 18. 010. 8% 3. 42. 0% 11. 77. 0% 16. 610. 0% 19. 511. 7% Subtotal 140. 9 Operating profit10. 411. 4Source Case writer calculations, based on British Airways Prospectus, February 11, 1987. This document is authorized for use only by Jan Sicinski in Strategic Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 7 155. 193. 1% 6. 9% For the exclusive use of J. SICINSKI 700-115Dogfight over Europe Ryanair (A) Notes 1 This department draws especially on P. Lyth and H. Dienel, Introduction, in H. Dienel and P. Lyth, eds. , Flying the Flag European Commercial Air Transport Since 1945 (London Macmillan, 1998), pp. 1-17. 2 P. Lyth, Chosen Instruments The maturation of British Airways, in H.Dienel and P. Lyth, eds. , Flying the Flag European Commercial Air Transport Since 1945 (London Macmillan, 1998), p. 50. 3 P. Lyth and H. Dienel, Introduction, in H. Dienel and P. Lyth, eds. , Flying the Flag European Commercial Air Transport Since 1945 (London Macmillan, 1998), p. 3. 4 Unfree as the Air, The Economist, May 28, 1960. 5 P. Lyth and H. Dienel, Introduction, in H. Dienel and P. Lyth, eds. , Flying the Flag European Commercial Air Transport Since 1945 (London Macmillan, 1998), p. 7. 6 N. Donohue and P. Ghemawat, The U. S. Airline Industry, 1978-1988 (A), HBS Case 390-025. A. P. Dobson, Flying in the Face of challenger (Hants Avebury Aviation, 1995), p. 192. 8 This section draws especially on P. Lyth, Chosen Instruments The evolution of British Airways in H. Dienel and P. Lyth, eds. , Flying the Flag European Commercial Air Transport Since 1945 (London Macmillan, 1998), pp. 50- 86. 9 P. Lyth, Chosen Instruments The Evolution of British Airways in H. Dienel and P. Lyth, eds. , Flying the Flag European Commercial Air Transport Since 1945 (London Macmillan, 1998), p. 65. 10 P. Lyth, Chosen Instruments The Evolution of British Airways in H.Dienel and P. Lyth, eds. , Flying the Flag European Commercial Air Transport Since 1945 (London Macmillan, 1998), pp. 72-73. 11 The following description of British Airways in 1986 draws on the companys February 11, 1987 , prospectus. 12 This section draws especially on M. ORiain, Aer Lingus, 1936-1986 A Business Monograph, 1987 and B. Share, The Flight of the Iolar The Aer Lingus Experience, 1936-1986 (Dublin Gill and Macmillan, 1986). 13 H. Carnegy, libertine times for Aer Lingus, Financial Times, June 3, 1986. 14 Aer Lingus Annual Report, March 31, 1986. 15 Extract from M. J.Dargans address to the 50th Anniversary Banquet of Aer Lingus in the Royal Hospital, Kilmainham, 27 May 1986. Quoted in M. ORiain, Aer Lingus, 1936-1986 A Business Monograph, 1987. 16 H. Carnegy, Turbulent Times for Aer Lingus, Financial Times, June 3, 1986. 17 Aer Lingus Annual Report, March 31, 1986. 18 This section draws especially on interviews conducted with Ryanair personnel between February 10 and February 17, 2000, including Michael OLeary, chief executive officer Declan Ryan, founder Charlie Clifton, Director of Ground Operations and Inflight and Kevin Osborne, Director of Purchasing and Administration. 9 B. Share , The Flight of the Iolar The Aer Lingus Experience, 1936-1986 (Dublin Gill and Macmillan, 1986), pp. 203- 206. 20 Aer Lingus Annual Report, March 31, 1986. 21 J. Fagan, Air Price War Hits Sea Route Traffic, Financial Times, September 24, 1987. H. Carnegy, UK-Irish Air Route Challenge, Financial Times, April 24, 1986. This document is authorized for use only by Jan Sicinski in Strategic Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 8