Memo Question for Ryanair.

Ryanair Memo

Memo Question for Ryanair:

Can Ryanair make money at the launch fare price of £98? Please quantify your answer and be specific to the extent possible.

Note: all ticket prices discussed in the case refer to a round trip ticket.

According to the exchange rate implied by Exhibit 4, I£1=£0.908

Answer:

Forecast of Market Size at I£ 98

According to the case, figures shown on the Exhibit 4 indicates average revenues and costs for BA and Aer Lingus. Therefore, at the average price level of I£ 166.5, the demand for round-trip flight from Dublin to London was 0.5 million per year. Still, there were 0.75 million passengers travel by rail-and-ferry, price of the round-trip ticket was I£55.

If we lower the flight ticket price to I£55, we would expect that these 0.75 million people would all choose to travel by flight because it is more time efficient. The demand for round trip flight from Dublin to London would rise to 1.25 million.

We assume that the demand curve of round-trip flight from Dublin to London follows a straight-line D = aP(price) + b, then we have:

1250000 = 55a + b, and 500000 = 166.5 a + b. a = -6726.46, b = 1619955

D = -6726.46P + 1619955

At the price level of I£98, the total demand would be -6726.46 x 98 + 1619955 = 960762. The extra demand would be 960762 – 500000 = 460762. Ryanair was going to fly 4 round-trip per day with a 44 seats turboprop, therefore, it was able to provide 4 x 44 x 365 = 64240 round-trips per year. Which is much less than the extra demand and we can assume that, even if the customers of BA and Aer Lingus were extremely loyal, at the price of I£98, Ryanair would be operating at 100% capacity because of the excessive demand.

Cost Structure

Although we do not have the cost structure of Ryanair, we are using the figures from the Exhibit 4 below to make an estimate of Ryanair’s cost. However, as it indicates average revenues and costs for BA and Aer Lingus, we need to make certain adjustments to the figure.