Introduction
Ryanair, a small Irish airline, planned to establish a new route from Dublin to London’s Luton airport in 1986, charging a fixed charge of 98 Irish pounds for all tickets and flying four times per day (Rivkin, 2007). This assignment aims to examine Ryanair’s cost structure and assess the feasibility of its planned endeavor. The analysis will use Exhibit 4 in the case as a benchmark, and the assumptions and computations will be meticulously documented. The project will also analyze how Ryanair may outperform British Airlines in terms of efficiency and capacity utilization.
Financial Analysis
First, Exhibit 4 demonstrates that Ryanair’s total revenue is 151.3 million UK euros, accounting for 100% of its revenue (Rivkin, 2007, p 231). The operating costs for Ryanair, divided into numerous categories, can then be examined. The staff makes up the majority of operating expense categories (21.40% of total operating expenses). Other significant expense categories include selling (10.80%), lodging, other ground equipment, and petrol and oil (19.10%) (Rivkin, 2007). When all operational costs are combined, Ryanair’s total operating expenses reach 140.9 million UK euros or 93.10% of its income (Rivkin, 2007, p 231).
Several assumptions regarding how Ryanair might be more effective than British Airlines (BA) and how much capacity utilization can be expected from Ryanair must be made to determine if Ryanair can earn a profit at 98 Irish Pounds. Exhibit 2 demonstrates that the finest US carriers had a cost per available seat mile (CASM) of 4.17 cents in 1978, but BA’s CASM was 6.94 cents in 1985. Assuming Ryanair can attain the same efficiency as the best US carriers, its CASM is predicted to be roughly 4.17 cents (Rivkin, 2007, p 230). Also, it can be expected that Ryanair will be able to utilize its capacity more efficiently than BA, which in the case had a capacity utilization of less than 100%.
Ryanair’s revenue per available seat mile (RASM) can be roughly 5.75 cents, assuming a capacity utilization of 80%. With 80% capacity utilization, the estimated income is €2,507.6 million (Rivkin, 2007). The expected operating expenses would be €108.99 million if all operational costs were reduced by 10% compared to British Airways, except fuel and oil, which would be reduced by 20% (Rivkin, 2007). Thus, the operating profit is anticipated to be €2,398.61 million.
Table 1. The cost structure for Ryanair.
Therefore; Assuming 80% capacity utilization:
- Available ton-kilometers: 6,269 million.
- Passengers: 25.076 million (6,269 million / 0.25).
- Total Revenue: €2,507.6 million (25.076 million passengers x €100 per passenger).
- Operating Profit: €225.45 million (€2,507.6 million – (€2,703.5 million / 1.12)).
Table 2 Operating Expenses.
Therefore, from table 2 above, the operating profit is (€2,507.6 million in revenue – €108.99 million in operational expenses), which is 95.58% of the revenue. These presumptions allow for the calculation of Ryanair’s breakeven load factor, which is the minimum capacity utilization necessary for Ryanair to recover its entire expenditures. Ryanair’s breakeven load factor can be computed using the expected CASM and RASM statistics, assuming a total cost of 98 Irish Pounds per passenger (Rivkin, 2007, p 227). Ryanair would, therefore, need to use its capacity at a rate of at least 72% to cover its costs and make a profit of 98 Irish Pounds.
Given the results of this study, several recommendations can be made for Ryanair in the future. Ryanair must first focus on achieving high operational efficiency to keep costs as low as possible. Hence, to do this, the airline may need to invest in more fuel-efficient aircraft, streamline its route system, and, when practical, reduce overhead costs. Second, Ryanair should aim for high-capacity utilization to boost its revenue per available seat mile. This aspect can entail establishing a dynamic pricing scheme that motivates travelers to make reservations and travel off-peak hours. Thus, to maintain profitability, Ryanair should continually assess the performance of its costs and revenues and adapt as necessary (Rivkin, 2007). Furthermore, Ryanair should increase its load factor by charging low prices and advertising its reputation as a low-cost airline to ensure profitability (Rivkin, 2007). Ryanair should also focus on cutting costs by using a youthful fleet, speeding up turnaround times, and lowering other operating expenses.
Conclusion
In conclusion, Ryanair’s proposed venture may be successful if the airline can maintain a low-cost structure compared to its rivals and achieve a high load factor. Ryanair’s ability to provide low fares, maintain operational efficiency, and boost capacity utilization will be the key to its success. These aspects will necessitate meticulous planning and execution, as well as efficient resource management and collaboration with suppliers and other stakeholders.
Reference
Rivkin, J. W. (2007). Dogfight over Europe: Ryanair (A). 225-231. Web.