Currently, British Airways and Aer Lingus cannot compete in price at therange that Ryan Air is planning to operate. I believe that British Airways and Aer Lingus would be better off maintaining current prices and differentiating through the service that they offer, in thesame way that they are.
The current cost breakdown offered by the case shows that if British airways and Aer Lingus were to reduce the prices to 98 they would be losing 57.1£ per passenger. Computedyearly, the industry would be losing 28,550,000£. How this figure is distributed between Aer Lingus and British Airways depends on the breakdown of sales of the 500,000 passengers that pick that routeyearly.
Current price (155.1£) Price war (98£) RyanAir (98£) Cost type?
Staff 35.7 35.7 21.4 Fixed
Depreciation & amortization 8.6 8.6 0.0 Fixed
Fuel & Oil 31.8 31.8 31.8Variable
Engineering and other aircraft costs 9.8 9.8 0.0 Variable
Selling 18 18 1.8 Fixed
Aircraft operating leases 3.4 3.4 2.0 Fixed
Landing fees and en route charges 11.7 11.7 7.0 FixedHandling charges, catering & other 16.6 16.6 16.6 Variable
Accommodation, ground equipment & other 19.5 19.5 11.7 Fixed
Subtotal 155.1 155.1 92.4
Operating profit (Loss) 11.4 (57.1) 5.6
Can theRyan brothers make money at the fare that they propose?
To make money at that fare I would expect that they have a distinctive cost advantage over the current operators, say British Airways and AerLingus. Being a small operator I would expect some efficiencies and reduced costs that the other two airlines cannot realize. I would expect Ryan Air to lease its plane as opposed to buying it (as theyonly have one route, no scale efficiencies from owning their fleet can be realized) that would nullify their depreciation expense and other aircraft costs and their selling effort would be less...