Ryanair: Two parts to this assignment: 1) Figure out Ryanair's cost structure, and 2) Predict the competitive response from BA/AL. Turn in an excel sheet showing your calculations. On the same sheet as your calculations, give a short summary explaining whether Ryanair can be profitable, and how you expect BA/AL to respond. I don't need lengthy prose, this assignment is about the calculations Ryanair's Cost Structure Calculations Can the Ryan brothers make money at the 898 fare they propose? How much of an attack Ryanair can withstand? (i.e. How much of a price reduction below this point can they withstand?) HINTS: Start with the cost structure for BA (Exhibit 4). Ryanair is hoping to have 2 sources of cost reduction from BA's cost structure: 1. Assume that Ryanair will have US style efficiency (Exhibit 2) in their use of staff. 2 . Ryanair is hoping to fly their planes 100% full (compared to the 60-70% load factor of BA & AL). This means that the fixed costs of flying a plane can be spread over more passengers. For the Ryanair case, I've asked you if Ryanair can get their costs below 98 Irish pounds. To do this, you'll need to get a feel for Ryanair's cost structure. The cost savings comes from increased staff efficiency, and Ryanair's expectation of flying at 100% capacity (meaning the fixed costs are spread over more passengers). Which costs are fixed and which are variable in Exhibit 4 is not obvious from the case, so I'll just tell you: For the cost structure in exhibit 4, assume that BA's selling expense is half fixed and half variable. all of the landing fees are variable costs, and the handling charges are half fixed and half variable. All other costs can be considered fixed. Competitor Response Calculations How costly would it be for Aer Lingus and British Airways to retaliate against Ryanair's launch rather than accommodate it? HINTS: Essentially, you are being asked to assess how British Airways and Aer Lingus will respond. You should begin by considering what types of responses are available to them. For example, they might accommodate Ryanair's entry by not changing their prices and allow them to fill their seats. The other option is to retaliate (across the board fare cuts in an effort to price below Ryanair's cost and drive them out). The action they choose depends on the loss they expect to experience due to Ryanair's entry and the cost of retaliating. BA/AL can respond in one of two ways: Accommodation: In its most optimistic plan, Ryanair's hopes to serve about 64,240 passengers annually (4 x 44 x 365 = 64,240). How many would come from the other airlines? How many from the ferries (new business)? (This gives you a range of the potential loss the airlines may experience.) This is the cost of the accommodation strategy (no retaliation). Retaliation: Retaliation means reducing the price on all 500,000 passengers between Dublin and London (the route that Ryanair has entered) to 1698 or less (below costs in an effort to drive Ryanair out). As always, Show calculations. Cite page numbers for data. Where data isn't available, clearly state assumptions (and make sure your assumptions aren't contradicted by the data)
