What competitive strategy should Aer Arann formulate to survive in this industry? What key steps should it take to implement this strategy?
Strategic option 1: stand and fight
The question is whether Air Arann wants to compete pricewise or benefitwise. Pricewise competition seems not very promising as Ryanair can exploit more economies of scale and thereby has lower operating costs. Air Arann fuel efficiencies depend heavily on the load factor which is very likely to decline due to a decreasing overall demand and Ryanairs competition on the same routes. Hence, as long as Air Arann and Ryanair are competing in the same market, the scale benefit will be on Ryanair’s side. Also, Ryanair is not depending on the inter-Ireland market and thus can follow an aggressive price strategy even with negative profit for some time in order to eliminate Air Arann. An increase in market share for Air Arann due to lower costs seems thus unrealistic.
Benefitwise, due to a higher service level, AirArann has a competitive advantage but the question is whether customers are willing to pay higher prices for that. Given the fact, that inter-Ireland flights are very short, it might be the case that customer do not value additional services, as the flight will only take 20-40 minutes. They want to come from A to B at the lowest cost possible. Even if they would value the better services of Air Arann, Ryanair could further lower the prices (see explanation above) and thereby make it even less attractive for customers to fly with Air Arann for higher prices.
Strategic option 2: cut and run
We doubt that there are many similar markets left which offer enough potential for Air Arann. Air Arann can for example focus on other, less frequented routes, but these are also less pr ...