Ryanair was found in 1985 by the Ryan family to offer airline services between Ireland and UK. After suffering the big losses in 1990, Ryanair began to follow the business model used by Southwest Airlines, and restructured its operation style to provide low-price airline service, and eventually, became the first low-fares, no-frills carrier in European airline industry. Up to now, its routes cover 153 destinations within 26 European countries, and it is also named as the most profitable airline in the world.
Ryanair's objective is to firmly establish itself as Europe's leading low-fares scheduled passenger airline through continued improvements and expanded offerings of its low-fares service. (www.ryanair.com/doc/investor/2007/20Fstatement07.pdf) The strategy implemented by Ryanair in order to achieve this objective is to offer the lowest price tickets to customers, the elements of this strategy includes: the use of Point-to-Point routes and secondary & regional airports as its main flight destinations, fully utilising its website, continuously increasing its staff productivity, offering massive non-flight related services to generate revenues and so on. This strategy enables Ryanair to drive down its operating costs, reduce the charges for its services and operate punctually & efficiently.
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In order to better understand Ryanair's strategy, in this essay, I will use Porter's Five Forces to evaluate the environment of Europe's low-fares airline industry that Ryanair is in. And then carry out an analysis of what key factors for success that Ryanair has for enabling it to become the leader of the low-fares airline market.
Analysis of Ryanair's External Environment
A good understanding of the organisation's external environment and structures will help organisation compete effectively in the market, due to it knows which factors are accelerating its competitive strengthens, and which are potential threats for its development. The Porter's Five Forces (The threat of new entrants, the power of suppliers, the power of customers, the competitive rivalry and the threat of substitutes) is a widely used tool for analysing industry environment and structures that organisation is operating in.
The Threat of new Entrants
Although the strategy of offering low price tickets can be easily copied and a huge number of new entrants entering into this low-fares airline industry every year, there were half of them went to bankrupt, been taken over or never got off the grounds. Due to the reasons of the existing airlines together create certain barriers for new entrants. Once the new entrants entered into this low-fares airline industry, they will immediately face a huge price competition from other budget airlines that have already operating inside the industry (i.e. Ryanair and Aer Lingus) and also from other national airlines (E.g. British Airline). Entering into this industry is also requiring a huge amount of financial and non-financial investments, and following strict safety & healthy regulations, and so on. Therefore, for Ryanair, as it has been operating in this budget sector for almost 25 years, and being in the leading position, the threat of new entrants is medium to it.
The Power of Suppliers
Form the case provided, we know that Boeing is the only one aircraft supplier of Ryanair, this leads the switching costs of transferring to another supplier to be high due to the reason of pilots and other staffs all need to be retrained. However, Ryanair can get a big economic scale from Boeing, as it places a large number of orders each time. For example, in 2006, it planned to purchase 138 new aircraft to be delivered over the next six years from Boeing. Up to now, Ryanair owns 232 Boeing aircraft and 82 more are on order.
The bargaining power of airports can be divided into two categories. The secondary & regional airports have a considerable low bargaining power, due to they depend on these airlines to bring businesses and tourisms to their local places. The big national airports have high bargaining powers when dealing with airline providers. From the case, we know Ryanair's policy is to avoid using these national airports as its operation destinations by mainly using secondary & regional airports. Therefore, during their negotiations, Ryanair has more power to drive down the airports' charges.
The supplier of fuel has an absolute power over all airlines; due to aircraft can not work without fuel. Fuel costs are also subject to unpredictable and volatile. However, for airlines, they can control their fuel costs by hedging or passing the costs to customers. The later option might be unwelcome by customers, as the customers who use service of low-fare airline are price sensitive, any increase in price, will cause them to use another provider. In the case of Ryanair, it uses hedging to control fuel costs, and also introduced environmentally-friendly aircrafts to reduce the fuel consumptions. Therefore, its fuel supplier's bargaining power is kept low by using these two policies.
The Power of Customers
Always on Time
Marked to Standard
In this low-fares airline industry, customers have a high bargaining power, as the strategy of offering low fare services can be easily copied by other airlines, and there are many existing and potential low budget airline carriers operating in or trying to enter into this industry, such as EasyJet, Ryanair, Air Berlin/Niki and so on. The customers who use services of low-fares airline industry are price sensitive; they often compare the price offered by different carriers, and then go for the lowest one, as there is neither switching cost (almost all airline companies have internet services) for going to another carriers, nor loyalty between customers and airlines.
Ryanair's guarantee of not to pass fuel costs to its customers and its policy of using secondary & regional airports and Point-to-Point routes can enable it to meet the customers' requirements of lower price, punctual and frequent departure better than its competitors. However, the bad experience customers had with Ryanair, and its policy for imposing wheelchair charges to all tickets might increase the risk of losing customers that Ryanair faces. Hence, in order to further drive down the bargaining power of customers, Ryanair has to improve the quality of its customer services.
The Threat of Substitutes
As facing the inconvenience, expenses of checking in luggage and extra time spend in airport for security checking (due to past terrorist attacks on airline, the increased security measurements in airports), customers might want to use other transports, such as trains, coaches and so on. Ryanair's policy of using secondary & regional airports and badly scored services might also lead some customers to use other carriers or land travel transports.
However, if the customers are price sensitive and prefer a quick travel time, this low-fare airline is still attractive and convenient to them. And Ryanair's lowest price tickets are also more preferable to them than other carriers.
The Competitive Rivalry
The competition in low-fares airline industry is very high, as there are many national and low-fares airline carriers operating in the market.
In order to achieve its objective, Ryanair uses secondary & regional airports as its destinations for providing a more punctual service and keeping the airports' charges low. This policy enables Ryanair to avoid competing directly with its competitors as well. However, there are some disadvantages of using these airports, as those airports are far away from the city centres, its customers might find this is very inconvenient, and sometimes, might mislead its customers. For example, in December 2003, one passenger turned up at Lyon Airport, and then found out the flight actually leaves at St Etienne, which is 75 kilometres away form Lyon Airport. Due to this inconvenient, some customers might use other carriers for flying directly to their final destinations. And if other carriers also use Point-to-Point routes and secondary & regional airports as Ryanair does (Aer Lingus already did), it might bring a heavy pressure to Ryanair on its prices and services, as well as increasing the competition.
Overall, despite the high existing competition, heavy investments required initially & substantially, and considerable amounts of other types of transports which can provide same services, this low-fares airline industry which Ryanair is operating in is still attractive to new entrants as the most of cost-cutting policies can be copied easily and customers for its short travel time and lower prices.
Analysis of Ryanair's Key Factors for Success
Although Ryanair went to litigation with some pilots and airports, and viewed as the least favourable airline in the world, it is the most profitable airline based on its net profit margins, and it is also named as the most punctual airline in Europe.
The Key Factors for Success that Ryanair has are its capabilities of offering the lowest price tickets, operating punctually & efficiently and generating high level of ancillary revenues. In detail, these factors can be analysed into following:
As in the budget airline sector, the services provided by any airlines are almost the same; the only difference is the ticket price. The lower the price is offered, the more chance to win a customer. Therefore, Ryanair always tries to offer its customers with the lowest price tickets as possible as it can. Its policy of using secondary & regional airports as its main flights destinations helps Ryanair drive down the airports charges considerably and avoid competing directly with competitors. And the use of Point-to-Point routes minimises the turnaround time in airports, enables Ryanair to meet customers' requirements of punctual & frequent departure easily and successfully.
The utilised website
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Ryanair' website has been claimed as the largest travel website in Europe and named as the most recognised brand by Google. The most of all Ryanair's tickets are booked and sold through the website, which eliminates the costs of using travel agencies. From the website, you can easily search for cheap hotels, car hiring, travel insurance, and so on. These advertisements bring a huge amount of profits to Ryanair which can be used to support the operations. The On-line check-in service helps Ryanair reduce operation costs on check-in staff and airport facilities, and also enables its flights to depart punctually.
The ability of generating Ancillary Revenues
From Ryanair's annual reports, we can see that the degree of its ancillary revenues is usually increased higher than its core business (airline services) revenues. Its ability of providing massive non-flight related services, such as hotels booking, travel insurances, personal loans, and on-board sales & gambling and so on, enables Ryanair to generate a huge amount of ancillary revenues to support its continuously price-cutting practices and business expansion.
Ryanair's operations are based in Europe; it gains a competitive advantage from EU's stable regulations and expansion. Its routes developed to more than 1,100 within 26 European countries from its initial one route between Ireland and London in 1985. The expansion of EU brings more opportunities to Ryanair, as it can easily comply with EU regulations and introduce more routes to its existing business.
In order to reduce the aircrafts acquisition costs, Ryanair main use one single type of aircraft, Boeing 737. The purchase from one supplier enables Ryanair to get economic scales from the supplier, and reduce the costs for staff retraining, maintenance & repair, and negotiations. As the result of this, Ryanair is able to offer its customers with lower-price tickets and concentrate on improving customers' service and operation productivity.
For the success of Ryanair, its CEO Michael O'Leary plays an essential role. Michael's genius of helping Ryanair set strategy of providing low-fares services through use of secondary airports and Point-to-Point routes, increasing staff productivity, finding business opportunities, and attracting public & customers' attentions (i.e. wearing an arm uniform, when Ryanair went to a war with EasyJet), add a considerable amount of value to Ryanair's success. Despite some bad public opinions about him, he is actually a very successful CEO, as he made the investors of Ryanair happy and helped Ryanair stand in a competitive position of the low fares airline industry.
Therefore, for Ryanair's success, its ability of discovering and developing these key factors is essential. If it can carefully maintain & further develop these factors, Ryanair will become more successful in the future by following the expansion of EU.
From above analysis of Ryanair strategy through using of Porter's Five Forces (The threat of new entrants, the power of suppliers, the power of customers, the competitive rivalry and the threat of substitutes) and analysis of its key success factors, it is easily concluded that in order to achieve its objective: firmly establish itself as Europe's leading low-fares scheduled passenger airline through continued improvements and expanded offerings of its low-fares service (www.ryanair.com/doc/investor/2007/20Fstatement07.pdf), Ryanair implements a different strategy other than simply copy the strategies used by its competitors. And this strategy worked well in deed, as it enables Ryanair to gain competitive advantages over its competitors in marketplace.
Michael O'Leary's ability is an essential key factor for Ryanair's success, since he was appointed as CEO of Ryanair, his ability of helping Ryanair set strategy of providing low-fares service through using secondary & regional airports as its main destinations and Point-to-Point routes, as well as increasing staff productivity, enables Ryanair to minimise the operation costs and increase its operation efficiency & punctuality, and therefore, be able to meet customers' requirements of lower price and frequent & punctual departure better than other carriers. However, on the other hand, this might also be a potential threat for Ryanair if Michael O'Leary leaves, as he is so close to Ryanair's strategy & operation, his departure will adversely affect the company's operation.
The elements of low bargaining power of supplier (e.g. Boeing and secondary airports), barriers for new entrants (i.e. high competition level) and ability of offering the lowest price tickets are enabling Ryanair to become the leader of the low fares airline industry.
Following the expansion of EU, if Ryanair is able to introduce more routes to its existing business, find more ways to drive down operation cost and increase operation productivity, as well as improving customer services, there will be opportunities for Ryanair to expand and firmly maintain its leading position in this low-fares airline industry.
Now, I can reach my final conclusion that Ryanair has a clear strategy that enables it to achieve its business objective of expanding and being the leader of the low-fares airline industry successfully.