The aviation industry has always been a very competitive industry. The end of the 20th and the beginning of the 21st century have seen the introduction of a new kind of airlines: The Low-Fare Airlines (LFAs). One of the leading LFA in Europe is the Irish operator Ryanair. Ryanair has the cheapest air fares of all LFAs operating in Europe. Its commercial department establishes how much it costs the airline to operate on a specific route and adds a margin for their profit. Tickets are sold according to these figures, allowing Ryanair to have a very high profit margin (Calder, 2003; Lawton, 2002). A recent ruling by the European Court, reported in the Telegraph (Marston, 2004), established that Ryanair had been allowed to receive illegal subsidies.
This short essay will try to establish the economic impacts of the European Court ruling on the air fares, the share prices and the future of Ryanair as a competitive LFA in Europe.
Impact of court ruling on air fares
Low Fares Airlines attract people because of their very competitive fares. The first article from the telegraph (Marston, 2004) goes on describing that the impact of the court ruling on the fares will be an increase of ÃÂ£5 according to the EC president. Ryanair suggest that the real impact will be a more realistic ÃÂ£10. This might seem to be an exaggeration but it is not. The Ryanair LFA model is built according to the following formulae: lower fares = more passengers = lower costs = lower fares (Lawton, 2002). By increasing the fare of ÃÂ£5 pound initially we can see that the passenger numbers will drop on the route, which will increase the cost of operation and again increase the fares.
It is worth noting although that a ÃÂ£5 to ÃÂ£10 pounds...