In 1986, upstart airline Ryanair proposed to expand its business to the London-Dublin route, in direct competition with British Airways (BA) and Aer Lingus (AL).
While BA focused primarily on business passengers, and was profitable on the London-Dublin route relying on travel agents being responsible for 83% of its scheduled revenues, AL was loosing money and was in business primarily due to Irish government support. However, international routes accounted for 2/3rd of seat sales and 90-percent of BA’s revenue. Despite these differences, BA and AL competed amicably until AL entered the trans-Atlantic market to serve Boston and New York. British Airways had made tremendous strides during pre-1986 to improve its profitability, and was preparing to go private in 1987. By 1986, BA had operating margins of 6.9% for its entire roster of routes and only 4.4% for Europe. The company had reduced its staff by 30% to 38,000, exited non-core business programs and ceased service on many smaller unprofitable routes surrendering them to competitors.
Aer Lingus, on the other hand was government sponsored and by 1986 served both local and trans-Atlantic markets, primarily subsisting on tourist fares. While AL was not profitable on those trans-Atlantic flights, its regional flights were modestly profitable, especially London-Dublin route which earned a reasonable return on capital. AL Management had diversified into other areas and earned significant profits on its maintenance, training services, computer reservation system, and even hospital management businesses. As a result management was contemplating a sale of the airline.
Given that BA has a recent history of ceding unprofitable routes to competitors and that AL was considering selling the airline business, we believe Ryanair was positioned right to seek an entry opportunity to compete on the London-Dublin route with BA and AL.
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