Ryanair was set up in 1985 by Cathal and Declan Ryan, as one of the first independent airline servicing the Dublin-London (Luton) route. Ryanair launched its service focusing on delivering first-rate customer service and lowest – simple, single – fare @ I£ 98, compared to I£ 208 full fare and I£ 99 discounted fare offered by competition, Aer Lingus and British Airways.
Ryanair Executives believe that Aer Lingus and British Airways’ flights are typically 60-70% full on the Dublin-London route, which means that the Average Revenue earned per available seat is 60-70% of the total revenue. Also, the total number of air passengers is 0.5 million compared to 0.75 million rail and ferry passengers, paying only I£ 55 for a round trip compared to I£ 208 full fare and I£ 99 discounted fare by airlines. In this market scenario, if Ryanair were to offer a round trip fare of I£ 98 round fare with no restrictions and similar service levels, we might expect Aer Lingus and British Airways customers and Rail/Ferry passengers to user Ryanair services instead.
However, when we examine the cost structure, we see that even at 100% load, Ryanair’s Operating Profits are negative at I£ 98 ticket price per passenger. And even though the lowest price strategy might help Ryanair win more customers from competition and simulating demand from rail-ferry passengers, its over all Operating Profit margin may not improve drastically, unless Cost structure is revised and reduced.
Assumptions for the Cost Leader strategy (Column E) –
•Exhibit 2 illustrates the staff productivity of various US and European airlines. Assuming an average of 157 staff per aircraft (average American, Eastern, TWA, United) is an optimum number for start up Ryanair, compared to 264 staff per aircraft employed by British Airways - to sustain a price strategy of I£ 98 per passenger, Ryanair would need 59 staff only, and hence can limit staff costs to I£ 7.98 per...