Dog Fight free essay sample

By 1999, Ryanair was one of the most profitable airlines in the world. On the verge of bankruptcy in 1991, the company had removed absolutely all frills from its service, cut its costs to the bone, and dropped its fares to levels unheard of in Europe. Passengers flocked to the low fares, and revenue and profitability rose quickly. As Europe’s airline industry came closer to full deregulation, however, a host of new challengers—both startups and spin-offs of flag carriers—vied to mimic Ryanair’s success. Turnaround A last-minute infusion of cash from the Ryan family permitted Ryanair to make its payment to the Dublin Airport authority in January, 1991, but cash flow problems remained intense. Later in 1991, Michael O’Leary was promoted from the position of Finance Director to become Deputy Chief Executive of the struggling airline. O’Leary, then 29 years old, explained that he got the post â€Å"because no one else was left to take the position. †1 Colleagues assessed his qualifications more generously and, in particular, mentioned his ability to focus on objectives. â€Å"Michael would ignore gold on the side of the road if it distracted him from his main goal,† one commented. 2 Under O’Leary, Ryanair cut its costs radically. Loss-making routes were dropped and planes redeployed on a handful of remaining routes. The company’s earlier focus on customer service gave way to an obsession with cash. Efforts to preserve and generate cash became paramount. All inflight amenities, such as free coffee and snacks, were eliminated. Freed of coffee and snack service, flight attendants began to emphasize in-flight duty-free sales more prominently; over time, duty-free items became an important source of revenue and margin. Labor contracts were renegotiated so that pay reflected productivity. Flight attendants, for instance, began to be paid in part based the number of flights they flew and in part as a function of their duty-free sales. Staff members at headquarters reported that they would bring pens from home because pens were in short supply at the office. The space behind seat-back trays was leased out to advertisers. The company no longer distributed meal vouchers to travelers whose flights were delayed by bad weather. As it eliminated amenities, Ryanair dropped its fares substantially. Passenger volumes picked up. The company soon became a low-cost, low-fare airline. To hone the business model, senior managers visited Southwest Airlines, the most successful low-cost, low-fare carrier in the United States, and sought guidance from Southwest’s legendary founder Herb Kelleher. U. S. financial ________________________________________________________________________________________________________________ Professor Jan W. Rivkin prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright  © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www. hbsp. harvard. edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 700-117 Dogfight over Europe: Ryanair (C) analysts would later proclaim Ryanair â€Å"the Southwest Airlines of Europe,† and Ryanair’s top management would sometimes embrace this label themselves. Senior managers could not recall a moment, however, when they decided to mimic Southwest intentionally. Rather, cash constraints led the company to a set of decisions similar to the one that Southwest, once equally hard-pressed, had made. Indeed, in some ways Ryanair was even more frugal than Southwest. It offered no free snacks and drinks, not even the peanuts for which Southwest was well known. Unlike Southwest, it avoided expensive â€Å"air bridges† that linked parked planes to airport terminals. Passengers walked across the airport tarmac and boarded Ryanair planes by climbing metal stairs. Ryanair offered no frequent flyer program comparable to Southwest’s. Ryanair took a more confrontational stance toward labor and unions than did Southwest, which emphasized â€Å"luv† among employees and cooperation with unions. Ryanair returned to profitability by 1992 and remained profitable. Exhibit 1 shows financial and operating results from 1992 to 1999. Exhibit 2 lays out the revenue and costs associated with an average customer in the fiscal year ended March 31, 1999. Ryanair in 1999 Routes By September, 1999, Ryanair operated approximately 150 flights per day to thirteen locations in the United Kingdom, four locations in Ireland, and sixteen locations in continental Europe. 3 Exhibit 3 gives details of individual routes. Nearly all flights originated or terminated at either London’s Stansted Airport or Dublin Airport. Ryanair did not, however, consider Stansted or Dublin a â€Å"hub† in the sense in which the word was commonly used in the airline industry; flights were not coordinated so that passengers could make connections easily. Rather, the company treated customers as if they were flying point to point. A typical flight lasted about an hour and covered over 500 kilometers, a figure that had increased in recent years. On well-established routes, Ryanair operated many flights a day. For instance, the carrier offered twelve round trips a day on the Stansted-Dublin route. Almost exclusively, Ryanair served secondary airports. Its Paris service, for instance, landed at Beauvais Airport, 65 kilometers from the city center, and its Brussels service landed at Charleroi, 55 kilometers out. Such airports were not congested, making it easy to obtain landing slots and likely that flights would land and depart on time. Prior to opening a new route, Ryanair negotiated vigorously with airport authorities for low landing fees, low turnaround costs, and other incentives. The company would negotiate with numerous airports at once. It might schedule a press conference to announce, say, six new routes and negotiate with more than six airports until mere days before the announcement. While airport fees at major European airports could run as high as I? 10 per passenger, Ryanair might pay no fee whatsoever at the secondary airports it served. * Indeed, several airports essentially paid Ryanair to serve their locales. Contracts with airports ran for 5-10 years. Total passenger traffic on a route typically skyrocketed after Ryanair initiated service, a pattern that analysts dubbed â€Å"the Ryanair effect. † See Exhibit 4 for some examples. â€Å"We will not enter a route if we cannot break even in three hours and grow the market by at least 100%,† declared O’Leary, who by now was full CEO. 4 The company carried about one-third of all passengers between Dublin and London and had over 50% market share on its routes between Ireland and other British cities. On routes to continental Europe, the company accounted for 32% of all 1998 traffic between London and Pisa, for instance, and 21% of traffic between London and Venice. 5 Passengers * In Dublin, London, and Manchester, airports charged Ryanair per passenger. Elsewhere, the company was charged per takeoff and landing. 2 Dogfight over Europe: Ryanair (C) 700-117 originating in or destined to Ireland were a large but declining portion of Ryanair’s total customer base. In 1999, 22% of the carrier’s passengers paid their fares in Irish currency. Ryanair’s customers were a mix of leisure travelers (70-75%) and business travelers, mostly from small and mid-sized businesses (25-30%). Differences in airfares could persuade some leisure travelers to visit one destination rather than another. â€Å"To some extent, we are in the business of taking people to places they never knew they wanted to go,† explained Michael Cawley, Chief Financial Officer. 6 Reservations A customer’s experience with Ryanair began when he or she made a reservation for a Ryanair flight. Roughly 40% of customers booked flights directly with Ryanair via its call center in Dublin, where 160 full-time reservation agents answered calls. Overflow from the call center and calls from France, Italy, Germany, and Scandinavia were routed to TeleTech UK, a third party that was paid on a per-call basis. Remaining tickets were booked via travel agents. In 1997, Ryanair reduced the commission it paid travel agents from the industry-standard 9% to 7. 5%. Groups of travel agents threatened to boycott Ryanair at that time, but an action in the Irish High Court prevented the boycott. Ryanair participated in several of the major computerized reservation systems through which travel agents commonly booked tickets. Starting in late 1999, customers could also book flights via the company’s web site, www. ryanair. com. On weekends, when many travel agencies were closed, the portion of tickets sold via the web site rose as high as 70%. Ground and in-flight operations The customer’s experience with Ryanair continued with pre-flight check-in and baggage handling. At a check-in desk, the customer received a boarding pass with no seat assignment and checked his or her luggage. Ryanair’s check-in procedure was less computerized than that of most airlines, and unlike many carriers, Ryanair did not permit passengers to check baggage through to connecting flights on other airlines. Only at Dublin Airport did the company perform its own ground operations. Elsewhere, Ryanair negotiated multi-year contracts with private companies or, in continental Europe, with airport authorities for check-in, baggage handling, and aircraft servicing. Starting in 1994, Ryanair shifted its fleet entirely to Boeing 737 aircraft, the most widely used aircraft model in the world. By buying at the end of a worldwide recession in the airline industry, Ryanair acquired its initial 737s at very low prices. (Aircraft prices at the trough of a recession might be as low as half the prices at the peak of a boom. ) As of September, 1999, the fleet consisted of 21 737-200A aircraft manufactured between 1980 and 1983 and five brand new 737-800s. The new 737800s were the first of a package of 25 aircraft purchased from Boeing, after extensive negotiations with Boeing and Airbus. The remaining 20 new planes were scheduled to arrive by January 2003. The operational life span of a 737 was typically 25 years. All aircraft in Ryanair’s fleet were configured with the maximum number of seats (130 in the 737-200As and 189 in the 737-800s) and one class of service. After a single general boarding announcement, customers clambered abroad a Ryanair flight by climbing up metal stairs at the front and rear of the aircraft. In contrast to â€Å"air bridges,† company managers explained, metal stairs were inexpensive, did not require an operator, did not break down, and could be put in position faster. Once on board, passengers chose their own seats. In flight, three or four flight attendants sold drinks, snacks, and traditional duty-free items such as liquor, cigarettes, and perfume. As of June 30, 1999, the European union eliminated duty-free sales on intra-EU flights. Ryanair continued to sell such items on its flights, but now had to pay duties. In 3 700-117 Dogfight over Europe: Ryanair (C) recent years, beverage, snack, and merchandise sales had constituted 5-7% of Ryanair’s revenue. Flight attendants also distributed in-flight magazines and collected them at the end of the flight. After a flight landed, passengers disembarked and baggage was unloaded quickly. The aircraft was cleaned, serviced, and refueled. New passengers and baggage were loaded on board. Twentyfive minutes after reaching the airport, the plane was ready to depart on its next flight. Contractors involved in ground operations were rewarded if they met the targeted turnaround time of 25 minutes and were penalized if they failed to do so. Rapid aircraft turnaround helped Ryanair maintain its record for on-time departures and arrivals. Exhibit 5 compares the company’s on-time performance to selected rivals’. Management emphasized that the â€Å"no frills† approach did not extend to its maintenance operations and safety efforts. The company was proud that its 15-year operating history included no major injuries to passengers or flight crew or damage to aircraft. â€Å"As a low-fares operator, we’d be punished especially harshly by the public if we were to have an accident,† noted Conor McCarthy, Director of Group Operations. â€Å"But our engineers and maintenance personnel are cost conscious. If half a tin of lubricant were lying around the hangar, they’d reshelf it and use it later. †7 Pricing and marketing Ryanair marketed itself as â€Å"the low fares airline. † It typically entered a market with fares 50% below previous levels. In September, 1999, its round-trip fare between Dublin and London Stansted was I? 35 for a restricted ticket, I? 129 for a same / next-day ticket, and I? 149 for an unrestricted ticket. Aer Lingus’ comparable fares were I? 69, I? 139, and I? 169 on the same route, and I? 69, I? 222, and I? 289 between Dublin and London’s primary airport, Heathrow. 8 The company tried to make 70% of its seats available in the two lowest fare categories. A full-service airline might reserve 15% for comparable categories. Ryanair typically imposed fewer restrictions on its tickets than did full-service competitors. Passengers did not, for instance, have to remain at their destination over a Saturday night in order to qualify for the lowest fare. The company launched promotional fares on new routes and routes facing competition. Advertisements for its I? 19. 99 one-way fare from London to Dublin emphasized that the fare â€Å"includes the ridiculous I? 10 airport fee. † Managers monitored the prices offered by competitors and made adjustments to ensure that Ryanair always offered the lowest fare on a route. Like other airlines, Ryanair engaged in â€Å"yield management†Ã¢â‚¬â€efforts to adjust prices in order to make each flight more profitable. Senior managers felt, however, that while other airlines used their yield management efforts primarily to find opportunities to raise fares without losing customers, Ryanair looked mostly for opportunities to attract many new customers with a small decrease in a fare. 9 Ryanair advertised in newspapers, on radio, and on television. The company also relied heavily on word-of-mouth advertising by satisfied customers. Many customers found their way to Ryanair not because of advertising, but because they asked their travel agent for the absolute lowest fare. Ancillary services In addition to air fares and in-flight sales, Ryanair had several other sources of revenue. On its flights, the spaces behind seat-back trays and on headrests were sold to advertisers. Advertisers could also emblazon the exterior of a Ryanair plane with a corporate logo for a fee of I? 150,000 200,000 per year. Aircraft were painted as a Jaguar or a pint of Kilkenny beer, for instance. Ryanair’s in-flight magazine consisted purely of advertisements. While most carriers strove to have their magazines break even, Ryanair made a profit on its publication. Charter flights and car rental referral fees brought in additional revenue. 4 Dogfight over Europe: Ryanair (C) 700-117 Human resources Exhibit 6 shows how Ryanair’s 1,200 employees were arrayed across the airline’s functions. Almost all employees were paid, to some extent, based on their productivity. Flight attendants, for instance, received a fixed salary, a payment based on how many â€Å"sectors,† or flights, they flew, and a commission on in-flight sales. For a typical flight attendant, each component was a third of the overall compensation package. On average, Ryanair flight attendants earned more in total than their counterparts at other airlines. Similarly, Ryanair pilots earned a fixed salary and a payment per sector flown. The pilots earned 10% more than the typical pilot in the industry and flew 50% more sectors. Following the initial public offering of Ryanair’s stock in 1997, stock options were granted widely to employees. Additional options were granted each year that net profit after tax grew by more than 20%. Unlike many European airlines, Ryanair did not pay employees based on the length of their tenure with the company. Only engineers and maintenance personnel were paid on the basis of their formal qualifications. Employees responsible for aircraft maintenance were not paid for productivity. Ryanair promoted largely from within the company, and the company’s rapid growth created numerous internal opportunities. One hundred and seventy-one employees, over 14% of the workforce, were promoted in 1999 alone. 10 Job mobility across functions was not uncommon. A flight attendant, for instance, might take a job in the yield management operation at headquarters. Ryanair was not unionized. In 1998, thirty-nine baggage handlers in Dublin went on strike in an effort to introduce a union. Employees from O’Leary down handled bags during the strike, which was abandoned after two months. Following the strike, senior management redoubled its efforts to communicate with employees. Employee Representation Committees were elected in order to voice concerns to top managers. An internal newsletter and television station played prominent roles in the communication effort. The newsletter provided information on what was going on in the company, offered updates on competitors’ moves, and gave employees opportunities to poke fun at one another. The television station displayed daily performance figures (e. g. , stock price, load factors, number of passengers carried, number of flights, on-time performance) as well as inside jokes. One news flash announced that â€Å"Michael O’Leary is attending a pre-marriage course this weekend† and offered advice to O’Leary like â€Å"the fee for the course is not normally open to negotiation. † Employees described the firm as â€Å"fiercely competitive† and â€Å"ferociously cost conscious. † The stationery cupboard in its spartan Dublin headquarters was kept under lock and key, and when on the road, employees commonly lifted pens from hotel rooms. Reflecting on the youth of the company, in which the average age was below 30, Eddie Wilson, Director of Personnel, commented, â€Å"We’re very sure of ourselves, and we don’t take ourselves too seriously. Outside of safety issues, we keep things informal and flexible. †11 The company operated without a rigid organizational chart, without a mission statement, and with a minimum of formal long-range planning. A meeting of the top management team, held each Monday morning, identified the week’s priorities. Personnel and resources were then deployed as needed to address the firm’s most pressing issues. Competition Full-service airlines such as Aer Lingus and British Airways had difficulty matching Ryanair’s low fares. By 1999, neither carrier was Ryanair’s primary competition in the eyes of most industry analysts. British Airways withdrew from the Dublin-London route in 1991, soon after Ryanair began its turnaround. A BA feeder airline, CityFlyer Express, subsequently entered the route to serve 5 700-117 Dogfight over Europe: Ryanair (C) Dublin travelers who were making connections in London. Both Aer Lingus and BA had gradually shifted their focus toward full-fare business travelers. In 1993, the European Union introduced a third and final package of airline liberalization measures. Under the package, carriers were given full freedom to set fares. Any company was allowed to start an airline provided that it had majority European ownership, adequate financial backing, and the ability to meet safety 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. 12 Deregulation brought a new wave of competitors. One hundred thirty-one new carriers entered the European market between 1993 and 1998 despite a shortage of landing slots at primary airports and a crowded air traffic control system. Of the 131 entrants, 57 were still flying at the end of 1998. 13 Deregulation in Europe did not bring the precipitous price declines that it had in the United States in the late 1970s. Exhibit 7 shows the price of a 1,000-kilometer trip within Europe over time. An October 1996 study found that 64% of intra-EU routes were served by a single airline, 30% by two airlines, and 6% by three or more carriers. 14 The wave of entrants included a set of low-cost, low-fare carriers that resembled Ryanair to some degree. These carriers included both entrepreneurial startups and spin-offs of established airlines such as British Airways. Exhibit 8 compares the route structures of the leading low-cost European airlines, and Exhibit 9 shows financial and operating results for the carriers that released such data. By 1999, scheduled no-frills carriers accounted for 3% of the European air travel market (vs. 24% of the U. S. market). 15 Virgin Express Brussels-based Eurobelgian Airlines was launched as a charter carrier in 1992 and initiated scheduled air service to Spain and Italy soon after. 16 In 1996, the fledgling airline was purchased for $60 million by Richard Branson, the highly visible entrepreneur behind Virgin Records, Virgin Atlantic airlines, Virgin Cola, Virgin Rail, and other ventures. Renamed Virgin Express, the company was kept wholly separate from Virgin Atlantic. While Virgin Atlantic was primarily an intercontinental airline, Virgin Express was positioned as a low-cost, intra-European carrier. To run the new carrier, Branson hired a number of managers from the United States, including managers with experience at Southwest Airlines, America West, and Continental Express. In 1998, Virgin Express operated roughly 40 flights per day in Belgium, Britain, Denmark, France, Ireland, Italy, and Spain. Nearly all originated or terminated at Brussels’ main airport. The carrier served a mixture of primary airports (e. g. , Fiumicino in Rome and Heathrow in London) and secondary airfields (e. g. , Stansted). Charter flights continued to account for 35-40% of revenue. Virgin Express operated only Boeing 737-300s and 737-400s, twenty-one aircraft with an average age of 5. 5 years. Virgin’s in-flight service lacked frills, much as Ryanair’s did, though passengers did receive a free drink. Virgin Express took all reservations through its own call centers in Brussels and Shannon, Ireland. There, as many as 80 operators offered service in nine languages. The company did not participate in any multi-airline computerized reservation system. In 1998, Virgin Express became the first low-cost airline to accept bookings through its web site. In 1999, the site processed approximately 10-15% of all bookings. The airline issued no physical tickets, relying instead on computer records of bookings. 6 Dogfight over Europe: Ryanair (C) 700-117 In its marketing, the company emphasized its low fares and the Virgin name. Virgin pitched itself especially to the young backpacking set. Charity efforts, including a campaign to transport illegally imported turtles to wildlife sanctuaries, had led to favorable press coverage. Starting in 1996, Virgin Express reached a series of agreements with Sabena, Belgium’s struggling flag carrier. Under these agreements, Sabena committed to buy a number of seats, typically most of the seats, on certain Virgin flights from Brussels to Heathrow, Gatwick, Rome, and Barcelona. Sabena subsequently resold the seats to its passengers, including business-class customers. Virgin and Sabena continued to compete on other routes out of Brussels. Sabena purchased 45% of all seats on Virgin flights in 1997 and 57% in 1998. Despite healthy growth in revenue and number of passengers flown, Virgin Express’ financial results were considered shaky. Pretax income fell from 497 million Belgian francs in 1997 to 47 million (US$1. 3 million) in 1998, due largely to a shortage of pilots. The company’s stock price lost two-thirds of its value between its 1997 IPO and the end of 1999, and Branson admitted that he wished he had started an altogether new airline rather than purchase Eurobelgian. 17 In September, 1999, Branson replaced both the managing director and the chairman of Virgin Express. easyJet In contrast to Branson, Stelios Haji-Ioannou opted to pursue a greenfield startup. With UK? 5 million from his father, a self-made Greek-Cypriot shipping magnate, the 28-year-old Haji-Ioannou founded easyJet in 1995. Flights on Southwest Airlines inspired Haji-Ioannou’s entry into the airline business. â€Å"If I didn’t bring the concept to Europe,† he said, â€Å"someone else would. †18 The new company sent management hires to Southwest’s Texas headquarters for 2-3 days to observe operations and issued all employees a copy of Nuts! , a book describing Southwest’s recipe for success. 19 In November, 1995, easyJet launched service from London’s Luton Airport to Edinburgh and Glasgow. At first, the carrier subcontracted nearly everything—leasing its planes, â€Å"renting† pilots from third parties, even operating on another carrier’s license. As the service grew, the company hired its own staff, obtained its own license, and began to build its own infrastructure. Most prominently, in July, 1997, easyJet signed a UK? 300 million contract to take delivery of 12 brand new Boeing 737s. Additional investments of UK? 50 million from Haji-Ioannou’s family supported the expansion. Despite the construction of infrastructure, easyJet remained more committed to subcontracting than did any of its rivals. The company relied on third parties not only for ground services, but also for fleet maintenance, flight scheduling, and daily personnel planning. â€Å"Our role really is to manage contracts and transport people,† explained easyJet’s chief engineer, â€Å"We do the cerebral activities, the sub-contractors are the fingers, and the contract is the communication down to the fingers. †20 Nearly three times as many people were employed indirectly as subcontractors as were employed directly by easyJet. 21 In 1999, easyJet operated 18 737-300s on 29 European routes. The airline’s primary base of operations remained London Luton, where it accounted for roughly 60% of all flights. easyJet was also developing additional bases in Geneva and Liverpool. 22 A large portion of its flights operated within the United Kingdom (e. g. , Luton to Glasgow) or between London and Southern Europe (e. g. , Luton to Athens, Nice, or Barcelona). Outside of London, easyJet often served primary airports. In choosing routes, Managing Director Ray Webster, a New Zealand airline veteran, said that easyJet â€Å"won’t compete with the other low-fare guys. † Instead, it looked for overpriced routes served by two flag carriers. â€Å"When there’s two, you know the cartel’s been working. †23 7 700-117 Dogfight over Europe: Ryanair (C) easyJet’s in-flight service offered absolutely no frills. Passengers could buy drinks and snacks, but not traditional duty-free merchandise. Orange pervaded each flight; the color dominated flight attendant uniforms and the in-flight magazine, for instance. The airline’s reservation number, painted in bright orange, adorned the 737 fuselages. easyJet operated from a bright orange aircraft hangar, dubbed â€Å"easyLand,† at Luton. There, reservation agents working purely on commission sold flights directly to customers. The company prided itself on its 100% direct-selling model and altogether avoided travel agents and multi-airline computerized reservation system. easyJet also avoided physical tickets and, on some days, booked as much as 40% of its total sales via its Internet site. Among its employees, easyJet encouraged an informal and fun-loving environment reminiscent of the culture for which Southwest was noted. A Culture Committee, elected by the staff, established policies concerning the working environment, communicated with senior management, and planned social events. Senior managers felt that the company’s culture distinguished it from current and potential competitors. 24 easyJet invested a great deal in marketing, especially when launching a new route. Its advertisements focused on its low fares and on-time record, but also conveyed irreverence for the traditional, high-cost airline establishment. Haji-Ioannou showed a flare for promotion and would readily don helmet, goggles, scarf, and flying jacket to attract press coverage. 25 easyJet lost UK? 5. 5 million pretax in the fiscal year ended September 30, 1996 and UK? 3. 3 million the following year, but made a UK? 2. 3 million profit in its third year. Other airlines explored the possibility of investing in easyJet, but â€Å"our view is to avoid them like the plague,† Webster explained. The company relied instead on family backing. â€Å"The most important thing for a new entrant is deep pockets. Nothing promotes anticompetitive behavior more than an airline’s thinking it can run you out of business. †26 The company reacted vigorously to actions that it felt were anticompetitive. KLM, the Dutch flag carrier, responded to easyJet’s London-to-Amsterdam entry by undercutting the upstart with a new â€Å"EasyChoice† fare, less than half its original price. easyJet subsequently hauled KLM in front of European antitrust authorities and uncovered an internal KLM memo recommending that easyJet be forced from the route. The case generated a great deal of sympathetic publicity for the new carrier. British Airway’s Go In November, 1997, British Airways unveiled Operation Blue Sky, a plan to launch a low-cost, nofrills subsidiary. The new airline, named Go, began operations in May, 1998, with eight 737-300s flying from London Stansted to Rome and Milan. Flights to Copenhagen, Lisbon, Bologna, and Edinburgh were soon added. BA tapped Barbara Cassani, an American and long-time U. S. general manager for BA, to head the new venture. The airline received UK? 25 million in startup funding from BA. BA and Go claimed that, beyond the initial investment, Go was on its own and separate from its parent. Go’s low-fare competition responded immediately to BA’s initial announcement. easyJet’s HajiIoannou complained, â€Å"They are using the same type of aircraft with the same number of seats (148), they’re operating the same reservations system and using the same pilot training organisation. Like us, there’ll be no business class, they won’t pay commissions to travel agents, they’ll be 100 per cent ticketless and everything on board will be for sale—there’ll be no freebies. In effect, they’re copying us. †27 Haji-Ioannou pointed out that BA officials had considered an investment in easyJet in early 8 Dogfight over Europe: Ryanair (C) 700-117 1997, but after a tour of easyJet’s operations, had declined to invest. A letter from BA’s director of investments and joint ventures cited regulatory concerns. easyJet asked the courts to block Go’s launch and, though unsuccessful, continue to pursue legal action. A suit charged that BA supported Go indirectly by underwriting its airplane leases and providing insurance, advertising, and other services at a discount. 28 It further alleged that BA intended to use Go to put other low-fare airlines out of business. easyJet advertised vigorously against Go. One ad argued that BA would lose money on the venture and concluded, â€Å"If they’re not doing it for the money, the only possible reason is to eliminate smaller competitors like easyJet and then put their fares up again! †29 In a new promotion, easyJet offered free flights to customers who correctly guessed Go’s first-year losses. Haji-Ioannou and his management team booked seats on Go’s first flight, donning their orange sweatshirts for the occasion. Cassani enclosed a personal welcome in Haji-Ioannou’s ticket. 30 Richard Branson, whose Virgin Atlantic airline had had its reservations system illegally tapped by British Airways in the past, commented: â€Å"BA has done a lot of anticompetitive things over the years. I think they are determined to get rid of low-cost carriers and subsidize Go to make it happen. †31 He encouraged consumers to boycott Go. Virgin Express dropped its fares from London to Milan and Rome (via Brussels) to be UK? 2 lower than Go’s introductory fares. Competitors claimed that Go could not possibly be making money at its initial pricing levels, but Cassani responded, â€Å"We have never said we plan to maintain these prices. Like any introduction, they are promotional prices. †32 A day after BA made Operation Blue Sky public, senior management from easyJet allegedly met with Richard Branson and his attorney to discuss a merger. Talks stalled, however, over the cost of the deal and the name of a joint operation. 33 Ryanair largely welcomed Go to Stansted, but promised vigorous competition. â€Å"I know as much about travelling on Concorde as [BA’s CEO Robert] Ayling knows about running a low-cost airline— and I’ve never been on Concorde,† said Ryanair’s O’Leary. â€Å"BA should stick to what it does best— charging high prices for an excellent service. We at Ryanair are going to give Ayling the kind of competition he’s never encountered before. †34 As Go launched its service, Ryanair dropped its fares to 22 destinations. Despite Haji-Ioannou’s protest that Go was simply a copy of easyJet, Go did differ from other lowcost airlines in certain ways. When checking in, passengers received a seat assignment. Go awarded its on-board food franchise to a relatively upscale caterer, and CEO Cassini touted Go’s awardwinning coffee. The airline was launched with the U. K. ’s first, full-scale television advertising campaign for a low-cost carrier. Media observers praised Go for its consistent branding effort. Chief Operating Officer Ed Winter explained:35 â€Å"The vision for Go came from outside the airline business†¦. The result is a way of working that allows Go to offer low fares combined with style and quality. In a way we’re trying to achieve what IKEA has done for furniture, Gap has done for casual clothing and Swatch has done for watches. † Unlike its low-cost rivals, Go recognized employee unions from the outset. The company’s collective bargaining agreement allowed it to pay employees on the basis of their productivity. In its first year of operations, Go announced a pre-tax loss of UK? 20 million. (The participants in easyJet’s competition had guessed UK? 12. 5 million on average. ) Its load factor over the period, 53%, was lower than rivals expected. 36 In September, 1999, the company announced its first profitable quarter. 37 Go’s original business plan called for 2001 to be its first profitable year. 9 700-117 Dogfight over Europe: Ryanair (C) Debonair Franco Mancassola, a 25-year veteran of the American airline industry, founded Debonair in late 1995 to take advantage of Europe’s airline liberalization. In June, 1996, the company began to operate flights from London Luton to Barcelona, Dusseldorf, and Munich. Routes from London to Copenhagen, Madrid, and Rome were soon added, as were flights connecting Barcelona to Rome and Munich to Rome, Copenhagen, Barcelona, and Dusseldorf. Debonair operated under a philosophy of â€Å"lower fares with minimal restrictions and no compromise on comfort. †38 The company offered a simple menu of bookings: one-class, one-way fares with few restrictions. Fares were comparable to those charged by no-frills carriers such as Ryanair. The company sought â€Å"to offer a level of seat comfort and passenger service that is comparable to, if not better than, other higher-cost, higher-fare airlines. †39 On its uniform fleet of BAe-146 aircraft, Debonair arranged rows to be 33 inches apart, farther apart than the industry standard for economy class. As a result, the aircraft fit 96 seats rather than the maximum of 112. On board, passengers received free drinks and snacks. An in-flight entertainment system offered movies, children’s programs, video games, and casino gambling; a third party installed the system at no cost to Debonair in exchange for 60-80% of resulting revenue. Debonair also offered passengers a simple frequent flyer program. Debonair’s marketing targeted â€Å"price conscious customers that are†¦visiting friends and relatives†¦and travelling on holiday and business. †40 Business travelers accounted for 58% of its passengers. 41 The company sold 38% of its tickets directly through its own reservations office, but hoped to raise that portion to 60%. 42 In its first fiscal year of operations, ending March 31, 1997, Debonair reported a loss of UK? 15. 7 million. Management attributed the loss to its rapid expansion. â€Å"We have moved ahead of deregulation to claim our territory in Europe,† Mancassola commented. 43 Despite its losses, Debonair raised UK? 28. 2 million in a July, 1997, IPO that was three-times oversubscribed. 44 Losses mounted to UK? 16. 6 million in the year ending March 31, 1998. In June, 1998, the airline announced improvements in its in-flight snacks, enhancements to its frequent flyer program, and the introduction of a smart card that would allow passengers to get boarding passes from machines. 45 Later in 1998, the company added a business class section. Go’s launch in mid-1998 with flights from London to Rome and Copenhagen prompted Debonair to turn to the European Commission. â€Å"We want them to put a leash on a dangerous, aggressive animal,† Mancassola explained. â€Å"In sport you never match a lightweight against a heavyweight, especially one whose bulk has been developed through cross-subsidy. †46 The European Commission rejected the complaint. 47 On October 1, 1999, Debonair grounded its fleet and called in bankruptcy administrators. Lastminute maneuvers to attract customers, including an offer of day-long chauffeur service for business passengers, failed to generate enough revenue to avert bankruptcy. 48 Debonair’s failure left 750 U. K. residents stranded overseas. British Airways offered to bring the stranded passengers home for 25% of the cost of the flights. 49