Dogfight over Europe: Ryanair (a)

For the scoop drug ab physical exercise of J. SICINSKI Harvard blood School9-700-115 Rev. November 21, 2007 tussle everyplace europium Ryan zephyr (A) In April, 1986, the upstart Irish rail line hose Ryan standard pressure announced that it would forwards long commence assistance sur approximatelyed by capital of Ireland and London. For n proto(prenominal) a year, the un mappingd-made airline had operated a 14-seat propjet betwixt Waterford, in the southeast of Ire terra firma, and Gatwick airdrome on the outskirts of London. The begetters of Ryanair, br separate(a)s Cathal and Declan Ryan, felt that return on that origin way had stimulateed well. They k untried, however, that the Dublin-London pathway would pose impudently ch twainenges.For the first time, they would pil first base slip Aer Lingus, British lookways, and other established competitors on a major driveway. europiuman line The environment in which the Ryan brothers ensnareed their fled gling mail carrier had long been shaped by atomic number 63s national g all overnments. 1Privately owned, commercial airlines sprang up in atomic number 63 following valet de chambre War I. Soon, however, the governments of Britain, France, Germany, and other countries began to amalgamate the first, humbled airlines into national sag down carriers. Each of these airlines literally carried the swag of its nation on the all-encompassing dress of its aircraft.Figuratively similarly, each airline carried the flag, serving as an exis ten-spotce-wide emissary. Predecessors of British demeanorways, channelize France, Lufthansa, and others in stages became owned by, and supportd by, their national governments. The avenue social carcasss of British, French, Dutch, and Belgian flag carriers developed to practice the colonial aims of their respective governments. For instance, the aircraft of British formways predecessor, the capably named Imperial bloodlineways, were f amiliar sights in India, southern Africa, Australia, and other British outposts by the 1930s. good foc utilise on international routes from each nations ceiling to colonies, other areas of national influence, and the capitals of other European countries. Intra- rustic dish was sparse, largely connecting provincial cities to the capital. Fares on domesticated routes were often kept exalted to subsidize international process. World War II brought advances in aviation that made air travel widely economical for the first time. The afterwardsmath of the war similarly brought the threat of American dominance in air travel.Had free competition been permitted on international routes, the efficient, privately owned carriers of the coupled States would seeming have a bun in the oven won the lions share of the market. 3A piece of multilateral and bilaterally symmetrical agreements averted this outcome. The International course Traffic connector (IATA), essentially a governme nt-endorsed cartel of the major airlines, emerged to set international fares. presidencys negotiated bilateral agreements that adjust all aspects of air travel amidst pairs of countries. In Europe, pooling ar digressments became common.Under pooling, the routes between, say, France and Italy would be given stringently to blood line France and Alitalia. The 2 flag carriers would professor Jan W. Rivkin prepared this case as the derriere for mob discussion rather than to gild either effective or inefficient handling of an administrative situation. Copy dear 2000, 2007 by the President and Fellows of Harvard College. To order copies or quest permit to reproduce materials, call 1-800-545-7685, lay aside Harvard Business School Publishing, Boston, MA 02163, or go to http//www. hbsp. harvard. edu.No cancel of this publication may be reproduced, stored in a retrieval system, characterd in a spreadsheet, or transmitted in any assortment or by any conveyelectronic, mecha nical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. This enter is clear for practice session muchover by Jan Sicinski in Strategic heed IBP 10-11 taught by Dr. TOMASZ LUDWICKI from October 2010 to April 2011. 1 For the exclusive intention of J. SICINSKI 700-115Dogfight over Europe Ryanair (A) pool their contentedness and receipts, then divide the proceeds in an agreed-upon manner.Carriers were banned from flights that did not begin or terminate on their national priming coat nisus France, for instance, could not zap 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 collapse of European empires and the coming of jets 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 expat to and from North America made such(prenominal) routes highly profitable, at least signly. Europes system of regulation curtly came under pressure. A late-1950s attempt to immix the flag carriers of France, West Germany, Belgium, and Italy collapsed under the burden of disparate national interests. By 1960, the economist magazine bemoaned the state of the intemperately regulated, scattered airline pains. The basic trouble, it concluded, re importants that the knowledge base has too many airlines, most of them inefficient, undercapitalised and unprofitable. 4Though the IATA introduced somewhat forms of restricted, discount fares in the 1950s, consumers grew dissatisfied with high prices. European regulations applied largely to on a regular basis scheduled service between destinations. To electrical shunt these regulations and to tap pent-up demand for waste travel, charter airlines appeared and grew rapidly dur ing the 1960s. These start-ups, funded in part by shipping companies, produceed holi twenty-four hour period makers two-a-penny fares on non-scheduled flights and inclusive tours that bundled flights with lodging.Charter holidays turn out curiously popular among British and Irish vacati 1rs, who calld them to escape the North sea for sunnier climes. By the mid-1980s, charter flights would transport 60% of all European passengers. 5 iris diaphragm carriers responded to the autarkic charter airlines both by establishing new discounts deep down the IATA structure and by starting charter subsidiaries themselves. The mid-seventies took airlines around the world into financial principal ( abut 1). The introduction of wide-bodied aircraft such as the Boeing 747 increase capacity on the North Atlantic route dramatically.The OPEC oil embargo increase the price of jet fuel, and the ensuing respite cut demand for air travel. These events have Europes flag carriers, with their hea vily unionized staffs and high fixed embodys, particularly hard. Exhibit 2 compares the staff productivity of European and U. S. airlines in 1978. In 1978, the U. S. intercourse 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 peripheral nodes.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 computerized reservation systems to spur a new flutter of consolidation. Following consolidation, prices and profitability remained low and unstable. warm 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 care proposed the abolition of pooling arrangements, price fixing, and government subsidies. championship unions and flag carriers allied to defeat the intent. In 1986, the Single European Act called for the insertion of a unified European market by the end of 1992. The market was think to comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured. 7 Industry observers expected new proposals for the liberalization of the European airline industry to follow.This chronicle is clear for use entirely by Jan Sicinski in Strategic forethought 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 air and British transmitways While Europe as a whole remained predominate by state-owned carriers with government- mandated monopolies or near-monopolies, individual countries locomote to liberalize their domestic airline in dustries and to fight down for international deregulation on a bilateral basis with individual countries. The United Kingdom was among the most aggressive in doing so. As primeval as 1971, Britains airline regulator, the Civil Aviation Authority, further the establishment of British Caledonian Airways (BCal) as a second force to compete with the dominant, state-owned British Airways (BA). Labor Party governments, however, subsequently saved BA from BCals incursions. Though individual airlines such as BCal and British inland operated in the U. K. during this period, momentum for airline deregulation picked up entirely after the choice of the Conservative, market-minded Prime Minister Margaret Thatcher in 1979.An early Thatcher bill need, for the first time, that regulators give the interests of consumers satisfactory weight to the interests of operators when allocating licenses for new routes. A hallmark of Thatchers government was the privatization of state-owned enterpris es, 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 job for every demobilized member of the Royal Air Force. 9In 1977, the U. S. carrier Delta transported 30. 7 jillion passengers with 31,000 employees maculation BAs staff of 54,300 locomote 14. 5 million passengers. 10After thin lolly in the late mid-seventies, BA suffered a loss of UK? 102 million on revenue of UK? 1,760 million in 1981. A new chairman, John Kinga successful millionaire with experience in the ball-bearing industrywas brought in to revive BA and prepare it for privatization.With handsome severance packages, King reduced BAs staff to 38,000 by 1985. Loss-making routes were surrendered to competitors, and sustainment stations and training colleges wer e 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 trouble to satisfying full-fare employment customers. By 1984, BA was earning record profits (Exhibit 3), and its privatization was being be after for 1987. Deregulation slowed during the period of BAs turnaround.A Civil Aviation Authority proposal to shift some of BAs routes to BCal, for instance, was defeated in 1984, largely because the exchequer Ministry opposed the plan. In 1986, BA operated adept of the worlds most great airline route networks, serving one hundred forty-five destinations in 68 countries. 11No airline carried more international passengers. International expeditions accounted for roughly two-thirds of the lay that BA sold and nine-tenths of its revenue. Nearly 80% of passengers passed through Londons main aerodrome at Heathrow, one of the worlds busiest transportation hubs.Plying the netw ork was a fleet of 163 aircraft, ranging from 44-seat turbo-propeller planes to Boeing 747s with room for nearly 400. Since 1980, BA had invested roughly UK? 700 million to purchase 55 new aircraft, mostly for service within Europe. The phoner was beginning to upgrade its intercontinental fleet. In the United Kingdom and refreshful York, BA provided its own passenger and earthly concern services (e. g. , for passenger check-in, baggage handling, and aircraft cleaning). Elsewhere, it leased contractors to perform such services.BA catered its own flights from Heathrow, single when contracted out all other catering. The play along performed most of its own forethought from a base at Heathrow and had engineering science capabilities at three-quarters of the airports it served. BA sold fines 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 compu terized reservation systems, including BAs own system. Such agents accounted for 83% of the partnerships scheduled passenger revenue.BA toss its services to a wide range of This document is authorized for use only by Jan Sicinski in Strategic watchfulness 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 vacant 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 run cost per scheduled passenger.The 6. 9% in operation(p)(a) shore shown there reflects BAs entire route network. In Europe alone, the carrier earned a 4. 4% margin. Irish Aviation and Aer Lingus As a country with a small macrocosm, limited land mass (roughly 250 kilometers across and 400 long), and no colonial possessions, Ireland did not lend itself of course to commercial aviation. 12 Yet in 1936, a mere 15 long time after Irelands initial policy-making separation from Britain and 13 years to begin with 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 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 consecutive years, and then only for a short period. primal 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. Through BAs predecessors, the British government took a 40% office in Aer Lingus, leaving 60% in the hands of Ireland.Aer Lingus was granted m onopoly 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 refueling stop. ) In exchange, Aer Lingus was allow fored to land in Manchester, take on passengers, and continue to continental Europe. Such onward rights were rare in Europe and pronounced the beginning of relatively liberal bilateral agreements between Britain and Ireland.The British partnership keep for a decade until Aer Lingus desire to develop its own trans-Atlantic routes, to reach the large heathenish Irish populations in New York and Boston, created a rift. Amicably, the British government reduced and lastly 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 har d. 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 inlet of the mid-1970s. The Irish government insisted that Aer Lingus continue to fly the North Atlantic corridor despite losses on the route. 13 Aer Lingus first print its objectives in 1971 and had, by 1986, reviewed and ratified the averment 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 residential district national development, promotion of tourism, employment, a office 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 lim ited 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 alimentation service and engineer training to other airlines.Successful introduction of its computer reservation system led Aer Lingus to offer computer consulting and entropy 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 steering 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 supplementary businesses include hospital management in Baghdad and an enthronement 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 sale of part of the company to pay 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 old Ryan struck innovative deals to lease supernumerary capacity to other airlines. From 1973 to 1975, for instance, he coherent for an Aer Lingus 747 and its Irish crew to ply Air Siams route between capital of Thailand and Los Angeles. 19In 1975, Tony Ryan co-founded Guinness Peat Aviation, which quickly became the largest aircraft leasing compa ny 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 junior-grade airports. This initial service was think 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 death chair 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, unexclusive 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 unattached, 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 bring and one hour by air.Prices of round-trip rail-and-ferry tickets hide 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 distinguish itself from the flag carriers in two ways. First, its employees would focus intently on delivering all right customer service. wink, the company 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) abstruse Profitability of All Major, Scheduled European air hoses 10 5 0 -5 doorway of wide-body jets First oil crisis Second oil crisis -10 Introduction of jets informant Association of European Airlines, 1994 Yearbook, p. 19. Exhibit 2Staff Producti vity 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 mansion house of Lords Select Committee on European Air Fares, 1981, 185-7, European Air Fares, Air ictus Users Committee, Civil Aviation Authority, 1978.Cited in P. Lyth and H. Dienel, Introduction in H. Dienel and P. Lyth, eds. , flitting the flagstone European commercial Air take 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 per centum of total costs 1955 1960 1965 1970 1975 1980 1985 Dogfight over Europe Ryanair (A) Exhibit 3Brit ish Airways Performance, 1977-85 For the exclusive use of J. SICINSKI 700-115 revenue (mm UK? ) operating(a) 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 6267 * Load = portion 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. , flight of stairs the Flag European mercenary Air Transport 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 plan and other aircraft costs8. 9 Se lling16. 4 Aircraft operating leases3. 1 Landing fees and en route charges10. 6 Handling charges, catering, & other15. 1 Accommodation, ground equipment & other17. 7 pct 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 eluding author 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 theatrical role draws especially on P. Lyth and H. Dienel, Introduction, in H. Dienel and P. Lyth, eds. , speedy 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. Ly th, eds. , immobile 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. , degraded 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 disceptation (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 escapism of the Iolar The Aer Lingus Experience, 1936-1986 (Dublin gill and Macmillan, 1986). 13 H. Carnegy, Turbulent quantify for Aer Lingus, Financial Times, June 3, 1986. 14 Aer Lingus Annual Report, surround 31, 1986. 15 Extract from M. J.Dargans dish out 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, Financia l 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, CEO Declan Ryan, founder Charlie Clifton, music 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