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Competitive Stances Breed Competitive Stances

Robin Copland

The two biggest world aircraft producers are Boeing and Airbus. These companies have enjoyed a duopoly for the past twenty years, according to Ryanair's chief executive, Michael O'Leary. Ryanair currently operate 275 Boeing aircraft. The airline is the largest low cost airline in Europe. O'Leary changed Ryanair's traditional business model to a low-cost model based on Southwest Airlines. He has since refined that model and famously trails what seem at the time to be outrageous ideas before implementing them and seeing them become part of the traditional way of doing business (scratch cards, paying for drinks and food on board the aircraft, credit card charges and the like).

He is a notorious "hard ball" negotiator. In December 2009, he pulled out of negotiations with Boeing for a new contract, starting in 2013 for the supply of new 737 aircraft. He fired some bait in the direction of Airbus but its chief executive, John Leahy, was dismissive saying, "I would have no problem selling aircraft to O'Leary at reasonable prices, but I have not seen anything reasonable from him" (CAPA 15 December 2009).

Both Airbus and Boeing have been slow to introduce new, more economic models in the single-aisle 200-seater market, preferring instead to milk profits from the Boeing 737/Airbus A320 variants currently on sale. To be fair, both companies have had their fingers burned recently with new product launches, the Boeing 787 and the Airbus A380. Neither company is willing to bet its future on a new product when both have tried and tested products already in the marketplace. Ryanair, as well as other airlines - most famously perhaps EasyJet, has been frustrated by this lack of product development.

What was initially seen as a negotiator's ploy - threatening an existing supplier with their competition - has turned into a real negotiating opportunity for O'Leary with his announcement on 21 June 2011 at the Paris Air Show that he is cooperating with a Chinese aircraft manufacturer, Comac to help them develop a 200-seater version of their new plane, the C919.

That said, he was quick to point out that Ryanair "remain in continuing discussions with both Boeing and now Comac for a replacement aircraft order of at least 200 aircraft". In other words, he is trying to set up a competition between Boeing and Comac. Also interesting is the fact that the Comac C919 will cost roughly US$32m per plane - a lot of money, but still 10% less than the offerings from either Boeing or Airbus. This suggests that though price will undoubtedly be an issue for Ryanair, O'Leary does not want to burn his boats with Boeing just yet. It remains to be seen how willing the market is to fly on an untried plane made by a country and company whose products have yet to develop a reputation in Europe. He needs to be very careful indeed before foisting a Chinese plane on a sceptical European market.

These are interesting times for all concerned and this is one of the few commercial negotiations that is being played out in the full glare of press publicity.

Rynair's "previous" may count against it in its negotiations with Boeing and the increasingly distant Airbus. When negotiators decide to adopt an adversarial stance with the other side, they need to make sure that the power balance is well and truly in their favour. They also need to recognise that in a long-term relationship aggravating the other side may not work in your favour in the long run.

Robin Copland

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