Nova School of Business and Economics
DOGFIGHT OVER EUROPE: RYANAIR
This set of questions refers to Version (A):
1. Which kind of customers was Ryanair trying to attract when, in 1999, Michael O’Leary took charge of the firm? Those with a low price elasticity of demand or those with a high price elasticity of demand? Explain.
Considering that we are talking about the same product, in an industry with many firms, where producers and consumers know all quoted prices and where the consumers can identify the product as homogeneous, it is fair to say that we are talking about a scenario close to perfect competition, thus demand for the product is very elastic. So, Ryanair is trying to attract high price elasticity customers. Accordingly to the article: Ryanair marketed itself as “the low fares airline”; before open new routes, the company cared about low landing fees, low turnaround costs in order to be able to charge low fares to customers; it made agreements with secondary airports, where they did not pays fees (in fact those airports paid to Ryanair to use their locales); it tried that 70% of the available seats in the two lowest fare categories; it made fewer restrictions on its tickets (important for who had extra bags, or who wants to change the flights in order to pay less); it observe competitors, so it would be able to apply a lower fare; its customers were a mix of leisure travelers (70-75%) and business travelers, mostly from small and mid-sized businesses (25-30%). differences in airfares could persuade some leisure travelers to visit one destination rather than another; it has chosen the cost leadership so it seeks to be the lowest cost producer in Europe by selling standardized, mass products and Ryanair’s profit maximization was through lower fares in order to attract more customers contrarily to competitors where they maximize their profits through find opportunities to increase fares without losing customers. So accordingly to the customers with a high PED (price elasticity demand) following the formula (Q/P) x (P/Q): a little negative variation in prices (decrease in fares), will originate a big positive variation in the amount sold.
2. Why was cost cutting so essential for the strategy chosen?
First of all it is important to refer that in 1991, Ryanair was facing a bankruptcy. In response, ‘the company removed all frills from its service, cut its costs to the bone, and dropped its fares to levels unheard of in Europe’. It became priority, to connect all the efforts to preserve and generate cash. Company’s main concern was charge lower fares in order to attract high elasticity price demand customers, with this new strategy, the company became low-cost or low-fare airlines and to maintain it within these measures the firm needed to adapt its strategy to new restrictions, which means, cost cutting. The flag airline faced a really competitive market (in 1999), and to keep competitive the firm had to keep its strategy, and for that was necessary cost cutting. Cost cutting, if it is efficiently done, brings more profits. Besides, using the model used in classes, “Bertrand – Asymmetric Model” where it says that if certain firm charges ‘P1’ for its product, and other firm charges ‘P1-e’ (because it is able to reduce its marginal cost), so the second firm will get all the demand. Well, Ryanair did not get all the demand, but is observable in ‘Exhibit 4’ that the company carried approximately 60% (353/575) and 56% (180/321) of the passengers on the route ‘Dublin-Manchester’ and the route ‘Dublin-Glasgow’ respectively.
3. Ryanair uses a performance-based pay scheme to compensate its flight attendants. Why?
A performance-based payment scheme combines the interests of both flight attendants and the company. . This happens because obviously, the flag airline will gain more if the attendants are working efficiently (making an effort to sell the snacks, drinks, or whatever...
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