Dogfight over Europe: Ryanair (a)

For the soap phthisis of J. SICINSKI Harvard production line School9-700-115 Rev. November 21, 2007 scuffle everyplace atomic number 63 Ryanair (A) In April, 1986, the upstart Irish air duct Ryanair announced that it would in brief commence officefulness amongst Dublin and London. For to the senior highest degree a year, the raw airline had operated a 14-seat turboprop in the midst of Waterford, in the southeast of Irecommonwealth, and Gatwick radiateport on the outskirts of London. The founders of Ryanair, br another(prenominal)s Cathal and Declan Ryan, felt that serve well on that graduation exercise route had developed well. They knew, however, that the Dublin-London route would pose new challenges.For the first magazine, they would face Aer Lingus, British denudeways, and other established competitors on a major route. European melody The environment in which the Ryan brothers launched their f directgling carrier had yearn been shaped by Europes subject area governments. 1Privately throwed, commercialised 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 rural areaal lurch 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, constituent 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. Service focused on international routes from each nations capital t o colonies, other areas of national influence, and the capitals of other European countries. Intra-country service was sparse, boastfullyly 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 break widely economical for the first quantify. 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, in private owned carriers of the United States would likely have won the lions share of the market. 3A plant of three-lobed 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 amounts. Governments negotiated bilateral agreements that regulated all aspects of air travel between pairs of countries. In Europe, pooling ar g etments became common.Under pooling, the routes between, say, France and Italy would be assumption strictly to Air France and Alitalia. The two flag carriers would Professor Jan W. Rivkin prepared this case as the basis for mannequin 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 trading 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 meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. This written enter is true for use tho by Jan Sicinski in strategical Management IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 1 For the undivided use of J. SICINSKI 700-115Dogfight over Europe Ryanair (A) pool their substance and revenue, then divide the proceeds in an agreed-upon manner.Carriers were banned from flights that did not bring forth or terminate on their national s oil color Air France, for instance, could not fly from Rome to capital of Kentucky or Milan. Intra-country service was also regulated strictly. To varying degrees, domestic fares were set by government authorities, and entranceway by new airlines was discouraged. The collapse of European empires and the advent of resinys 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 extremely profitable, at least(prenominal) initially. Europes system of regulation soon came under pressure. A late-1950s drive to unify the flag carriers of France, West Germany, Belgium, and Italy collapsed under the weight of disparate national recreates. By 1960, the Economist mag bemoaned the state of the heavily regulated, fragmented airline industry. The basic trouble, it concluded, remains that the world has too many airlines, near of them inefficient, undercapitalised and unprofitable. 4Though the IATA introduced some forms of restricted, discount fares in the 1950s, consumers grew dissatisfied with high worths. European regulations applied mostly to regularly plan 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 climbd especially pop among British and Irish vacationers, who used them to escape th e North Sea for sunnier climes. By the mid-1980s, charter flights would transport 60% of all European passengers. 5 signal 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 Europes flag carriers, with their heavily unionized supplys 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 deregulating of the domestic U. S. airline industry. Pricing, route scheduling, entry, and plump 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. 6Most of the new airlines soon failed, however. Established players such as American, United, and Delta used hub-and-spoke route structures and electronic 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 vote out 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, operate and capital is ensured. 7 Industry observers expected new proposals for the openhandedization 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 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. The United realm was among the most aggressive in doing so. As advance(prenominal) as 1971, Britains airline regulator, the Civil Aviation Authority, encouraged the establishment of British Caledonian Airways (BCal) as a second force to compete with t he dominant, state-owned British Airways (BA). force back Party governments, however, subsequently protected BA from BCals 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 top 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 manifests for new routes. A hallmark of Thatchers 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 ofWorld War II, when the flag carrier was expected to find a project for every demobilized member of the Royal Air Force. 9In 1977, the U. S. carrier Delta transported 30. 7 million passengers with 31,000 employees while BAs staff of 54,300 moved 14. 5 million passengers. 10After thin profits in the late 1970s, BA suffered a waiver of UK? 102 million on revenue of UK? 1,760 million in 1981. A new chairman, John faga self-made millionaire with experience in the ball-bearing industrywas brought in to revive BA and prepare it for privatization.With generous interruption packages, King bring down 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 marshal, 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 BAs turnaround.A Civil Aviation Authority proposal to transport some of BAs routes to BCal, for instance, was defeated in 1984, largely because the Treasury 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 exchange and nine-tenths of its revenue. closely 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 400. Since 1980, BA had invested roughly UK? 700 million to leverage 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 ser vices (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 Strategic 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 lei sure 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 known for its improving in-flight amenities. Exhibit 4 shows BAs revenue and operating cost per scheduled passenger.The 6. 9% operating margin shown on that point reflects BAs entire route network. In Europe alone, the carrier clear a 4. 4% margin. Irish Aviation and Aer Lingus As a country with a small population, curb land jackpot (roughly 250 kilometers across and 400 long), and no colonial possessions, Ireland did not lend itself naturally to commercial aviation. 12 in so far in 1936, a mere 15 years after Irelands initial political separation from Britain and 13 years before full independence, government and private interests in Ireland came together to form Aer Lingus, a flag carrier for the emerging state.Government support proved crucial in the airlines early days. annual losses in the 1930s and 1940s commonly ran between 20% and 100% of revenue. non until the early 1950s did the airline earn a profit in consecutive years, and then only for a short period. Early on, passenger traffic 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. finished BAs predecessors, the British government took a 40% stake in Aer Lingus, leaving 60% in the hands of Ireland.Aer Lingus was granted 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 offer on across the Atlantic. (Aircraft ranges at the time required such a refueling 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 rela tively liberal bilateral agreements between Britain and Ireland.The British partnership continued 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 insisted that Aer Lingus continue to fly the North Atlantic corridor disrespect losses on the route. 13 Aer Lingus first published its objectives in 1971 and had, by 1986, reviewed and ratified the statement a progeny 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 cyclical 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 computer consulting and data processing services. The company also entered the hotel business in London, Paris, and New Engla nd. 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 ancillary businesses include hospital management in capital of Iraq 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 aging jets in its fleet. Government officials were contemplating the bargain 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 lease excess capacity to other airlines. From 1973 to 1975, for instance, he arranged for an Aer Lingus 747 and its Irish crew to ply Air Siams route between Bangkok and Los Angeles. 19In 1975, Tony Ryan co-founded Guinness Peat Aviation, which quickly became the largest aircraft leasing company in the world.Tony Ryans 10% stake in Guinness Peat Aviation gave him competent 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 gestate a scheduled service between Waterford in the southeast of Ireland and Gatwick Airport, one of Londons secondary airports. This initial service was intended 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 Chairman 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, hal f 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 discipline 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 furcate itself from the flag carriers in two ways. First, its employees would focus intently on delivering first-rate customer service.Second, the company would fritter away 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 advantageousness of All Major, Scheduled European Airlines 10 5 0 -5 Introduction of wide-body jets First oil crisis Second oil crisis -10 Introduction of jets man-made lake 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 308264 231326 460320 Source House of Lords Select Committee on European Air Fares, 1981, 1 85-7, European Air Fares, Air displace Users Committee, Civil Aviation Authority, 1978.Cited in P. Lyth and H. Dienel, Introduction in H. Dienel and P. Lyth, eds. , prompt the Flag European commercial message Air lift 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? ) Operating profit before 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 4,4615,267 626 7 * Load = region of available ton-kilometers used, a measure 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 technical Air Transport Since 1945 (London Macmillan, 1998), pp. 2, 74. Exhibit 4British Airways just Revenue and Cost per Passenger, 1986 UK? Revenue 151. 3 Operating expenses Staff32. 4 Depreciation & amortization7. 8 Fuel & oil28. 9 Engineering 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 Percent 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 berth writer calculations, based on British Airways Prospectus, February 11, 1987. This document is authori zed 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 section 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 Evolution 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, whitethorn 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 Macmilla n, 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 Competition (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 M onograph, 1987 and B. Share, The Flight of the Iolar The Aer Lingus Experience, 1936-1986 (Dublin Gill and Macmillan, 1986). 13 H. Carnegy, Turbulent 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 operating 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, kinfolk 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