Strategic Interactions Ryanair & Easyjet Don’t Be Blinded by the Price, Sunglasses to See the Whole Picture

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Strategic interactions
Ryanair & easyJet
Don’t be blinded by the price,
Sunglasses to see the whole picture

Table of Contents:
1. Introduction………………………………………………………………………. 2 2. Game theory – A strategic decision………………………………………………. 2-3 3. Game theory related to real-life decisions………………………………………… 4 4. The market structure of the budget airline sector…………………………………. 4 5. Factors affecting competition between budget airlines……………………………. 5 6. The big picture – How full- service airlines affect competition…………………… 5-6 7. Conclusion…………………………………………………………………………. 6

1. Introduction
The airline industry has always been a fiercely competitive sector. Since the invention of low-cost carriers, also known as no-frills or low-cost airlines, this industrial sector has become even more competitive. In Europe in 1990, the airline company Ryanair was the first to adopt the low-cost strategy successfully where service and other costs are significantly reduced resulting in cheaper flights (Ryanair Ltd, 2011). Consequently, many airline companies copied the strategy; for example easyJet. “In the current fiscal year, Ryanair expects to carry 73.5 million passengers” (Ryanair Ltd, 2011) whereas easyJet assumes to transfer over 50 million passenger this year (easyJet, 2011). Both airlines are among the largest operating firms in the airline industry in Europe, with Ryanair being second largest and easyJet fifth (Nations Online, 2011). This paper examines the strategic interactions between the two low-cost rivals by especially focusing on competition between them. It is a particularly important topic as competition is growing stronger and more powerful, due to consumers appearing to care less about service and brands and more about low prices and spending less money on flights partly resulting from “the sharp traffic decline” in the financial crisis (Graham & Vowles, 2005). This in turn presses the airlines to examine their competitors’ actions and reduce costs as much as possible. Therefore, what strategic decisions do budget airlines have to make and how does competition, particularly in terms of prices, influence them? This paper starts by applying a two player-game theory, namely the Nash bargaining problem, to both airlines. It focuses on game theory related to real-life situations and after that it describes the market for budget airlines. It then concentrates on the factors affecting competition between low-cost airlines and the competition arising from the full-service airlines. 2. Game theory - A strategic decision

“Game theory is the formal study of decision-making where several players must make choices that potentially affect the interests of the other players.” (Turocy & von Stengel, 2001). Should easyJet fly the route London Heathrow – Hamburg more frequently? Suppose that Ryanair and easyJet are the only low-cost airlines that fly daily from London Heathrow to Hamburg. It is assumed that they operate in a perfectly competitive market. Ryanair and easyJet are the players of the game and their strategies would be to fly more frequently between London Heathrow and Hamburg or to remain with their current flight rate. To facilitate the different payoffs each player receives for choosing one of the two strategies, the numbers 500, 750, 1000 and 1500 are used in terms of profit in Pounds £.

Ryanair’s choice
Raise frequency Remain
1000,1000| 1500,500|
500,1500| 750,750|
Raise frequency
easyJet’s choice
Remain

Figure 1 Payoff matrix – Ryanair & easyJet (Author's own, 2011)

Note the assumption that the driving force for both airlines is to maximize profits. The payoff matrix in figure 1(Author's own, 2011) shows the four different game-theoretic solutions for Ryanair and easyJet. For a good...
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