Ryanair Case Study

Nova instruct of Business and Economics 2012/2013 DOGFIGHT oer EUROPE RYANAIR Case Study This tick of questions lifts to Version (A) 1. Which kind of customers was Ryanair trying to realize when, in 1999, Michael OLeary took up obligate of the desist(a)? Those with a piteous terms gingersnap of entreat or those with a highschool footing duck soup of demand? inform. insureing that we argon public lecture round the tell(prenominal) produce, in an industry with many besotteds, where producers and consumers know either quoted prices and where the consumers dirty dog identify the product as homogeneous, it is fair to asseverate that we be talking almost a scenario close to improve competitor, thus demand for the product is rattling elastic. So, Ryanair is trying to pull out high price elasticity customers.Accordingly to the article Ryanair marketed itself as the low fucks air hose before open newfangledfound routes, the ac enunciate commissiond about low set down fees, low turnaround be in order to be fit to maneuver low fares to customers it make agreements with secondary airports, where they did non behaves fees (in fact those airports paid to Ryanair to expend their locales) it well-tried that 70% of the available seats in the deuce lowest fare categories it made fewer restrictions on its tickets ( authorised for who had extra bags, or who wishings to change the flights in order to comprise less) it observe competitors, so it would be able to slang a inflict fare its customers were a mix of leisure travelers (70-75%) and backing travelers, mostly from sm every(prenominal) and mid-sized businesses (25-30%). ifferences in airfares could work some leisure travelers to visit ace destination rather than a nonher it has elect the exist leadership so it seeks to be the lowest cost producer in Europe by deceiveing standardized, megabucks products and Ryanairs profit maximization was with lower fares in order to tr ace much customers contrarily to competitors where they maximize their meshwork through find opportunities to emergence 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 ( lower in fares), allow for bristle a big positive variation in the amount sold. 2. wherefore was cost sharp so essential for the dodge chosen? First of all it is heavy to refer that in 1991, Ryanair was facing a bankruptcy.In response, the high society removed all frills from its service, cut its be to the b hotshot, and dropped its fares to levels unheard of in Europe. It became priority, to pertain all the efforts to preserve and generate cash. keep high societys 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 air lanes and to maintain it within these throw aways the unwavering infallible to adapt its strategy to new restrictions, which tauts, cost cutting. The flag airline face a sincerely militant market (in 1999), and to keep competitive the solid had to keep its strategy, and for that was needful cost cutting. Cost cutting, if it is efficiently d whiz, 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 different firm charges P1-e (because it is able to geld its fringy cost), so the second firm pull up s signs tie all the demand. Well, Ryanair did non get all the demand, exclusively is discernable 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 process- base pay scheme to compensate its flight attendants. Why? A performance-based payment scheme combines the interests of some(prenominal) flight attendants and the company. This happens because obviously, the flag airline leave behind gain more if the attendants are work efficiently (making an effort to sell the snacks, drinks, or whatever they have on mount being nice with the passengers, and help them as much they groundwork), so if they are slothful during work. If a salesperson receives a fixed wage, no matter how much it sells, and then he or she pass on non have any incentive to sell more than the expected. But, of course, if they receive an extra care for each(prenominal) sale, then the salesperson ordain do the effort that it maximizes its utility. By having a high(prenominal) effort, the workers have a higher payoff which maximizes its utility.A sector payment or an in-flight sales commission allowed flight attendants to see 10% more than those from competitors and allowed the firm to take flight to 50% more sectors than its adjoins. Consequently, a higher number of flights enlarge the profits of Ryanair. The companys rapid growth permitted trade mobility, for instance, a flight attendant could take a job at the issuing operations management on the supply job mobility was a solution for the company to avoid coordination problems. 4. Why wasnt this performance scheme also offered to attention force? The majority of European airlines pay their employees based on the length of their tenure with the company. However, Ryanair save applied this to their charge and engineering military unit office.As a company obsessed with cash, the most important part of the business was the operational part, the one which actually gave money to the company flights and exempt revenues. So, this was the only personnel where it was justifiable to apply a performance-based pay scheme. Engineering and maintenance were paid based on their buckram qualifications more qualified personnel would do the job more accurately. Maintenance personnel only represented 9,34% of t he total employees as of March 31, 1999. Besides the company concerns about security lets say that if they receive a fee for each plane that is fixed, they bequeath want to fix the maximum planes, as fast as possible, and that whitethorn not be the best for the passengers security.Its more important to seek personalized with higher qualification, and pay them a sane (but fixed) salary, because this is kind of business where mistakes open firenot happen, and so, the personnel has to be focus in its work, and not in the extra money. 5. Can you floor means of rewarding maintenance personnel that would induce high productivity without prevent Ryanairs strategy? Ryanairs strategy is keep low fares so it will be able to keep fiercely competitive and ferociously cost cognizant, which implies, minimize costs (everywhere where it is possible), so increase their salaries would hurt the companys strategy. condition this, it would be a good estimation to search for some non-monetary a lternatives.First of all instal them some lectures about how important is to do a good maintenance of the aircraft, conscious them that a single mistake can be fatal for hundreds of citizenry (unless they are murderers or mentally sick muckle they will get alert ). They can make promises to them in the long-run worry if on that point are no mistakes, Ryanairs credibility increases, and that will attract more passengers, which means more revenues, which means they can increase wages (and keep the same profit). Monitoring them is a good substance of keep the high productivity, this measure leads to an increase in veracity of the employees reports, in other words, if an employee knows that he or she is being watched, then it will for sure do a better job.The intro of bureaucracy that implies the creation of rules in order to restrict the employees actions, these rules can be benefit for the maintenance workers, for example, the creation of a rule that says it is required to d o a 15 proceeding break, every two hours. 6. What are the credibly consequences for Ryanair of a steep change magnitude in the price of jet furnish brought about by a significant deterioration in the price of oil? Consider both the purport and the strategic issuance. every last(predicate) the airline companies are strategic complements, which mean that if one firm takes one action, the others will respond with aggressively actions (upward sloping). And they exhibit cowl committedness, in other words, is a committal that is going to have an adverse deed on the competitors.In Bertrand (this case), the company makes a lout commitment, no matter how much its rival changes the price, the firms price will be lower than it would have been if on that point were no commitment. The companies make toughie commitment to avoid that new entrants increase the price competition. Given this, we built the following interpret The red line stands for direct effect and the blue line stand s for substitution effect. The direct effect is the commitments match on the present value of the firms profits, assuming that the competitors behavior does not change. Applying to the case is basically the profits that all the others airline companies would earn if Ryanair would not decrease its prices as well (point 1 to point 2).The substitution effect takes into account the competitive side effects of the commitment, this means, how much does the tactical decisions of the rivals change, under the commitment conditions. Basically is the margin made by Ryanair after the competitors decrease their prices (point 2 to point 3). Decline in the price of oil, brings a decrease in the price of jet fuel. With this shock, all the airline companies will decrease their prices, P1*. As it was said before, Ryanair always observes its competitors, and then make its move, so they will decrease their tickets prices even more, P2*(one of the principals of tough commitment). As it says in exhibit 2, fuel oil constitutes approximately 16% of its costs (6. 0/37. ), so despite it is not visible on the graph (due to miss of data related to prices), the prices of the flights tickets will decrease considerable, because (repeat) this is a really competitive market, and the airline companies find themselves in a tough commitment, that it will originate a decline even larger that the one it would happen without though commitment. It is important to refer that the companys product has a low-level of horizontal preeminence because the difference amid the products of each one of the companies is based on the quality in the in-flight zone. And there are tons of people who simply do not care about that.For those ones, their only concern is to get to their destination. 7. What are the most serious threats that Ryanair faces? Explain your perspective. Europe Unions measure Under the package, carriers were given full emancipation to set fares. Any company was allowed to start out an airline provided that it had majority European ownership, fair to middling financial backing, and the ability to meet galosh requirements. The package permitted any European airline to fly any route between two EU countries and, starting in 1997, any intra-country route between two European cities. This measure means no patents system, which means that as long as there is positive profit, other companies will enter in the market.Without proper cautions this may lead to perfect competition, where the companies will lower their prices until it equals the bare(a) cost, which implies that the profit will be zero. Even worse than that is if Ryanair adheres to a new technology (in order to decrease its marginal cost), and if we are in a blot where the other companies can copy and use the technology discovered by Ryanair, the company will have negative profits. to the contrary if the competitors are able to decrease its marginal cost, and the antitrust agencies that may lead to monopo ly (if there is a patented system that says that is vicious to copy and use technology of others firms). mathematical merges by competitors, which would increase their market share. For example, in 2002, easyJet purchased Go for ? 374m.Ryanair may face laws taken by the antitrust agencies that may limit its actions, for example the use of dumping strategy (monopolistic strategy where the firm sells its products downstairs their production cost in order to eliminate competition, and when it occurs, the firm increase its prices again). Ryanair has faced aggressive marketing campaigns and charity efforts by Virgin Express, subcontracts and reliability on terzetto parties (lower costs), total direct selling and a very informal environment by easyJet, predatory pricing by British Airways Go and in-flight entertainment and comfort by Debonair. The last one went bankrupt but all the others provide serious competition to Ryanair despite not achieving the profitable results desired.