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In 1995, Michael OLeary became CEO of Ryanair, intent on shaking-up the traditional high fares approach within the European aviation industry. Ryanair achieved market dominance and consistent growth by implementing a highly successful 'no frills' business model. However, in 2009 they posted relatively poor financial results, underpinning the notion that the low cost carrier (LCC) industry faces a potentially difficult period.
This report will investigate Ryanair's strategic capabilities by employing analytical models. PESTEL analysis will explore a wide range of external influences; detailing how Ryanair manages threats and opportunities. Porter's Five Forces will evaluate external influences more specific to Ryanair's operating environment; analysing its position, strategy and interaction within the LCC industry. The core competencies model will evaluate the resources and competencies of Ryanair, indicating their capabilities for competitive advantage. Value chain analysis will illustrate how Ryanair's business activities fit together to achieve competitive advantage by focusing on its low cost leadership strategy. The Strategy Clock model studies the generic strategy of the airline and the pros and cons of being in the 'no-frills' sector. A SWOT analysis will draw together the findings and highlight particular areas of strategic concern.
The report will conclude by recognising the strengths of Ryanair's business model in its focus on brand awareness, core customer services and its adherence to its market leading low cost, 'no frills' strategy. However, a number of externally influenced issues raise concerns over Ryanair's market position; these include an inability to effectively absorb oil price increases and the possibility of costs and forced adaptations related to potential 'green-environmental' litigation and legislation. Such concerns bring Ryanair's strategic capabilities into question. The key difficulty for Ryanair will be its ability to sustain the required growth and profit for maintaining its low cost strategy and market dominance.
EXECUTIVE SUMMARY 2
External Environment 4
Porter's (1998) Five Forces Framework 8
Strategic capabilities and competitive advantage: 10
Internal Environmental analysis 16
Airline's Generic Strategy: 18
Swot Analysis 19
Our Strategy Is Like Wal-Mart: We Pile It High And Sell It Cheap.
Ryanair, love it or hate it, you just can't ignore it! The budget carrier is now one of the biggest airlines in Europe with a 67 million customer base who are "plane-mad, luggage light and crouched over the computer ready to pounce on the latest damn-near-free offers" (BBC, 2009). The company's success has been achieved through benchmarking, and largely replicating, Southwest Airlines 'no frills' business model to obtain European market dominance.
This report will examine internal and external factors affecting Ryanair's strategic capability, with particular focus on the effectiveness of its 'no frills' business strategy. Various strategic models will be used to analyse Ryanair's competitive advantage and its future outlook within the LCC industry.
Model 1: Pestel Analysis
PESTEL analysis is used to understand the opportunities and threats that an organization faces in its external environment. The PESTEL Factors are Political, economic, socio-cultural, technological, environmental and legal. "Managers need to understand the key drivers of change and also the differential impact of these external influences and drivers on particular industries, markets and individual organizations," (Johnson, Scholes and Whittington, 2008).
Even though the European Union (EU) standardises many business regulations and laws, not all EU countries have identical taxes, or even the same levels of political stability - this can affect Ryanair's operations and their bottom line (Newcomer and Norsworthy, 2008). Conflicts like the Iraq war and the outbreak of diseases such as Swine flu can hinder travel plans, adversely affecting the whole aviation industry.
Exchange rate fluctuations, the amount of disposable income available to travellers, and changes in interest rates and levels of unemployment are all factors which directly impact Ryanair. The current economic crisis has seemingly had a positive impact, with many travellers switching to low cost airlines. However, fluctuations in global oil prices have affected Ryanair's operating costs substantially.
Roth and Ricks (1994 in Mintzberg, Ahlstrand and Lampel, 1998) 'point out how national cultures influence the way the environment is interpreted, creating different strategic responses by the same company in different countries'.
The 9/11 terrorist attacks prompted a shift towards LCC, with mainstream carriers and flag carriers aversely affected, this benefitted Ryanair with increased sales. Many passengers prefer to travel as cheaply as possible and are attracted by sales promotions and online discounts offered by budget airlines. Furthermore, holidaymakers tend to spend less on travel and more on other holiday costs, which they perceive more valuable.
Installations of noise-reducing 'hushkits' were made compulsory by the EU. The increased weight due to installation has lead to higher levels of fuel consumption, prompting moves toward more fuel-efficient aircrafts. After the 9/11 attacks, the security-check technologies at airports were upgraded, resulting in added costs. On one hand the internet has limited some traveling - especially for business meetings, which can now be done by using teleconferencing tools. However, it has allowed Ryanair to create its website which has proved a great source of revenue through direct sales.
Post 9/11 many passengers started choosing other forms of transport. This caused pressure on various airline companies but worked well for Ryanair as in hard times people seek less expensive travel alternatives. In response to climate concerns, the EU imposed a 'climate protection charge' on aircraft taking off and landing in the EU. This charge has the potential to double LCC airfares. Furthermore, increasing concerns about carbon emissions has led to various steps like taxing aviation fuel and emissions trading schemes, which could cost up to â‚¬9 per ticket.
Legal factors such as EU Non-Discrimination Legislation have prevented airports from offering differential deals to airlines. In February 2004, EU Commission ruled that the airline had been receiving illegal subsidies for its base airport at Charleroi Airport. Subsequently other deals with public airports came under scrutiny. Also no state subsidies could be given to airlines, which Ryanair had been receiving since 2000 when it established a base at Charleroi. In 2005, new rules for compensation to the passengers who face any inconvenience came into effect. Furthermore, abolishment of the intra-EU duty free sales by EU legislation resulted in a direct loss of revenue. This also means that flight attendants will now earn less as they will lose about one-third of their compensation from commissions on the sale of duty-free goods and beverages.
Porter's (1998) Five Forces Framework
The five force's model will assess the attractiveness of European aviation; providing an analysis of Ryanair's strategic capabilities by highlighting industry interaction, dynamics and economic positions (ten Have et al, 2003).
Source: POrters Five Factor FrameworkPotential Entrants:
The level of threat posed by new rivals entering the industry is assessed by the number and degree of barriers to entry (Johnson, Scholes and Whittington, 2008). Industry deregulation by the EU in the 1990's reduced legal hurdles for entrants, however, Ryanair's market dominance and 'no-frills' business model has enabled it to achieve economies of scale which increase barriers to entry (O'Higgins, 2004). High investment requirements (e.g. airport accessibility and fuel) coupled with Ryanair's high volume and service turnover, causes difficulties for entrance in matching airfares, surviving retaliation and breaking into the industry (Johnson, Scholes and Whittington, 2008). This was evidenced by Ryanair's effectiveness in undercutting the fares of the airline Go, to prevent the establishment of a serious competitor at Dublin Airport (O'Higgins, 2004).
Substitutes compete for Ryanair's customers by providing a similar service through different processes. Key substitutes include alternative forms of transportation such as trains and automobiles. Ryanair has reduced this threat by maintaining an attractive price/performance ratio whereby its services are more cost effective or an improvement over alternatives (Johnson, Scholes and Whittington, 2008). Ryanair achieves this by focusing on fundamental service issues whilst constantly offering lower fares, thus providing cheap and quick transport. However, Ryanair has struggled to compete with substitutes in certain European markets, especially where state subsidised high-speed rail exists or travelling by car is more suitable for reaching holiday destinations (O'Higgins, 2004).
The bargaining power of buyers can impact upon Ryanair's ability to maintain profit margins. While the industry has successfully reduced the commission rates paid to travel agents (as buyers), this force remains a powerful competitive factor (O'Higgins, 2004). Online ticket purchasing provides consumers with a huge database of competitor and substitute offerings, thus lowering the cost of switching between airlines (Johnson, Scholes and Whittington, 2008). Ryanair's strategy of reducing fares empowers buyers, enabling them to squeeze airline margins by forcing rivals to remain competitive.
This force highlights the bargaining position of suppliers as those who provide the aviation industry with the necessary materials and equipment to operate. To counter this force, Ryanair operates a uniform fleet ensuring favourable supply and maintenance terms (O'Higgins, 2004). Furthermore, Ryanair limits the cost and exposure of labour supply by contracting third party service providers through competitive long-term contracts (O'Higgins, 2004). Finally, Ryanair controls airport supply costs by opting for regional, over expensive main, airports (O'Higgins, 2004). However, this position is at risk as regional airports are attracting competitors, increasing their bargaining power when rates are renegotiated (O'Higgins, 2007). Ryanair are particularly exposed to oil price fluctuations as its low cost business model restricts its ability to pass extra costs to passengers (O'Higgins, 2007).
At the models centre, competitor analysis focuses on peer companies directly competing for customers. The industry is intensely competitive; in terms of European passenger market share Ryanair holds 29.90%, whilst Easyjet and Air Berlin, hold 25.90% and 11.80% respectively (O'Higgins, 2007). The high fixed costs in aviation (such as aircraft, airport rates and fuel costs) have led Ryanair to instigate a number of price wars in its pursuit to reduce airfares and increase traveler volumes (Johnson, Scholes and Whittington, 2008). This intense competition lowers profit margins, stimulating industry shake-out and has played a part in over 50 airlines going bankrupt or being taken-over (O'Higgins, 2007).
Strategic capabilities and competitive advantage:
Resources, capabilities and core competencies are the characteristics that make up the foundation of competitive advantage. Resources are the source of capabilities which are in turn the source of core competencies (Hitt, Ireland, & Hoskisson, 2005). The threshold and unique resources and competences of Ryanair have been assessed below.
â‚¬3.6 Billion long lived assets which are mostly aircrafts
Single aircraft type
Boeing 737 - 800
Aircrafts were owned rather than leased (O'Higgins, 2004), however in the long term Ryanair plans to lease a third of its fleet.
Boeing 737 only
Other Physical Assets
Hangar and Buildings, plant and equipment, fixtures and fittings and motor vehicles.
Ryanair owns its aircrafts, allowing maintenance costs to be considered as capital rather than variable costs (O'Higgins, 2004). They only use Boeing 737 to reduce costs, using older fully depreciated aircrafts to benefit from low depreciation costs. In 2005 Ryanair secured a 40% discount on new, fuel efficient aircraft with lower depreciation costs by utilising their long-term relationship with Boeing (Harrison, 2005). Whereas, competitors like Easyjet operate mixed fleets, incurring extra costs.
A uniform fleet allows for reduced training costs for pilots, maintenance engineers and mechanics. Aircrafts and parts are easy to maintain as 737's are the most widely flown commercial aircraft (Ryanair, 2009).
Market Capital (2009)
Operating Profit (2009):
Profit after taxation(2008)
390.71 (71.79% more than nearest competitor Easyjet).
Profit after taxation (2009)
15.6% more than nearest competitor in the same Industry
(London Stock Exchange, 2010)
The decrease in profit in 2009 is attributed to Ryanair absorbing higher oil prices due to its refusal to pass the cost on to its customers. Additionally the strength of the Dollar over the Euro and an impairment charge on the rejection of Ryanair's attempted purchase of Aer Lingus contributed to 2009 figures. However, in previous years, Ryanair has maintained higher profit rates compared to its peers in the industry.
Whilst Ryanair has 6,616 employees (Ryanair 2009b), CEO Michael O'Leary, the architect and driving force behind their business strategy, is their "competence that is truly distinctive"(Teece,Pisano & Shuen, 1997)
Ryanair uses employment agencies to hire additional staff on for short term needs (Ryanair, 2009). This outsourcing limits exposure to employee relations responsibilities and possible disputes (O'Higgins, 2004). Pay is related to performance and cabin crews are paid commissions on the basis of sales made. Ryanair refuses to recognize trade unions, again reducing the scope for disputes.
Ryanair looks to avoid slot-controlled airports, however airports in Edinburgh and Reus, which became Ryanair bases in 2008 require slot allocations. The purchase of Buzz airline in 2003 increased Ryanair's slot allocation at Stansted Airport to 49.5%. The European Commission's secondary trading of airport slots between airlines allows Ryanair more flexibility, creating more slots which will benefit Ryanair at its Stansted base.
Ryanair's logo and the slogans "Ryanair.com The Low Fares Website" and "Ryanair The Low Fares Airline" have created an image in the mind of the consumers.
Capabilities for Sustainable Competitive Advantage:
Ryanair's value proposition is providing low fares for cost conscious customers, with prices starting from two pence. (BBC, 2009) Further, Ryanair has achieved better punctuality, fewer lost bags, and fewer cancellations than its peer group in Europe.
Ryanair provides point-to-point travel to avoid passenger transit assistance costs, operating from low cost secondary airports with good transport links. These provide 'higher rates of on-time departures, faster turnarounds and lower handling costs'. (Ryanair, 2009, p. 49)
Ryanair can be considered as non-robust because a current level of dependence on CEO Michael O'Leary's leadership and negotiating skills is undeniable. However, competitors have struggled to achieve similar levels of success when imitating the 'no-frills' strategy.
Ryanair's average fare of â‚¬40 is unmatched, (Ryanair, 2009) due to its position as the market leader it can seemingly achieve insurmountable economies of scale. This is evidenced in special offer 'free fares'.
Ryanair's growth is traced below in airline traffic:
Despite the growth in customer numbers in 2009 and Ryanair's position as the largest LCC (in terms of passenger numbers), Ryanair's profitability decreased in 2009. Their no fuel surcharge policy shows an area of potential concern. The cost variations as pointed out in the 2009 annual report relating to fuel prices, dollar value, and potential markets for airport slots have caused Ryanair to lose more slots to its competitors. While, Ryanair's ability to drive a hard bargain has led the company this far, losing the deal with Boeing (Kollewe, 2009) and its inability to convince Aer Lingus to sell indicates the possibility of future difficulties.
Internal Environmental analysis
Value Chain Analysis
A value chain (VC) is a chain of activities carried out within the boundary of a firm. Products pass through all activities of the chain and at each activity the product gains value. VC analysis illustrates how various activities, capabilities and resources fit together to give competitive advantage (Johnson, Scholes and Whittington, 2008). The VC breaks down the whole production process to show the contribution made by each part which result in highlighting problems such as high cost or inefficient areas. Competitive advantage can be achieved either through low-cost leadership or through differentiation (Thompson and Strickland, 1998).
It is clear that Ryanair's strategy is to attain competitive advantage through low cost leadership.
Strategy of Low-cost Leadership: Centralised cost controls.
Management, planning, accounting and finance focus on lowering cost in numerous ways. Winning the international award for 'Best Managed Airline' as well as a number of awards received by CEO Michael O'Leary are testimonies to their excellence in management and planning based on low-cost model. Focusing on short-haul routes has enabled Ryanair to maintain centrality in fleet maintenance.
Human Resources Management
Strategy of Low-cost Leadership: Intensive training emphasises cost saving and encourages employees to look for new ways to improve methods.
The policy of fleet commonality keeps the cost of staff training and aircraft training as low as possible. The introduction of tailoring rosters has maximized individualised aircraft usage but increased time off for crew members; enabling Ryanair to comply with EU regulations whilst minimizing costs. New aircrafts with larger seat capacity minimised the ratio of crew per seat. Michael O'Leary is considered as an inspirational leader and Ryanair's key human resource.
Strategy of Low-cost Leadership: Economies of scale, R&D and technological development are crucial.
The usage of technology related to web based check-in reduces the cost of checking staff and airport facilities. The use of a newer fuel efficient fleet is a result of keeping tabs on R&D regarding fuel efficiencies and latest technologies.
Strategy of Low-cost Leadership: Economies of scale in plants: experience effects.
New aircrafts also minimize maintenance cost. The 'Winglet modification programme' resulted in achieving better aircraft performance and reduction of fleet fuel consumption. Charging for check-in bags has encouraged customers to travel with fewer check-in bags again reducing costs. Whilst, choosing secondary and regional airports to avoid congested main airports represents another major saving.
Strategy of Low-cost Leadership: Bulk or large order shipment.
The usage of web based check-in minimises the cost of check-in staff and airport facilities. Bulk purchases are made when possible.
Marketing & Sales
Strategy of Low-cost Leadership: Mass marketing, mass distribution: national and international campaigns.
Low cost pricing model - Most developed route system with frequent departures on many routes and reasonable punctuality at a comparatively lower price. Ryanair uses clever advertising campaigns and publicity stunts to court publicity and even controversy.
Airline's Generic Strategy:
In order to examine the competitive strategy of Ryanair we will consider Bowmen's Strategy Clock Model.
To start with Ryanair was a traditional full-fare airline company. But in the early 90s poor financial performance prompted restructuring towards a 'no-frills' model. Ryanair is now ranked as one of the most profitable global airlines (Johnson, Scholes and Whittington, 2008). To be successful Ryanair has strictly controlled operational costs. It made the strategic decision to focus on generating a high frequency of travellers, forgoing cargo delivery services, reducing turnaround times. Furthermore, it contracted out services such as aircraft handling, ticketing etc to obtain competitive annual rates. To alleviate the risk of short term fuel price increase, the company hedged about seventy to ninety percentage of the forecasted annual consumption. Lastly, it also reduced its in-flight services such as free meal, drinks and even ice, and concentrated on selling more ancillary services such as internet access. In summary, Ryanair provides frequent low fare flights; satisfying the basic requirement of its core customer base. According to the Strategy clock model, the no-frills sector aims at a narrow target area but Ryanair has aimed at a wide market, helping to change the view of industry analysts and other companies who have now adopted elements of its model to be successful in the aviation industry.
Limitation of 'No-Frills' Sector:
Firstly, it might be inconvenient for certain passengers to use secondary airports, potentially leading to losses in market share. Secondly, to maintain lower operational costs, Ryanair is perceived to have compromised some areas of customer service. This is evidenced by the filing of lawsuits against them for failing to provide free wheelchairs to disabled passengers. Thirdly, low price strategies do not necessarily generate profits, hence, Ryanair's concentration on ancillary sales. Whilst every coin has two sides, it is undeniable that there are certain disadvantages in being a 'no-frills airline'.
SWOT analysis highlights the key strategic issues that a business is likely to face by identifying its internal strengths and weaknesses and opportunities and threats determined by its external environment. SWOT diagrams are often used to compare companies, however the diagram below focuses solely on Ryanair; bringing together many of the strategic issues highlighted previously.
Model 2: Ryanair Swot Analysis
Early Entrant/First mover advantage.
Avoided congested airports.
Low cost leader - economies of scale.
Range of Ancillary Services.
Substantial growth and profits over a sustained period.
Very recognisable brand.
Recognised as a key low cost carrier.
Market leading low cost carrier.
Great web presence, website used for 95% of bookings - few overheads.
Uniform modern aircraft fleet.
Huge bargaining power and aggressive negotiation style = cost cutting deals. Leads to low cost deals with suppliers and airport authorities.
Flexibility of outsourcing many areas of the business.
Safety and punctuality record.
Poor employee relations.
Perception of and some examples of poor customer relations/service.
Recently the average fare price and overall revenue per passenger has dropped.
Ancillary sales slowing - over reliance on these for profits.
Poor public and media perception.
The use of secondary airports may put off some potential consumers, like the business traveller, as they can be many miles from major cities.
Addicted to growth? Is growth too vital and central to the business model?
Steps of cost reduction - like moving operations away from high cost, high tax countries.
Innovation - New fare types and promotions. E.g. 'fly for free' or standing room on flights.
Further expansions into the EU and/or potentially cross Atlantic services.
Negotiations of further discounts from Boeing and airport authorities.
Current economic conditions.
Increasing Competition - New entrants/ Mergers.
Negative attitude of EU towards the airline.
Growth of substitute transportation.
Current economic conditions.
Image worsening, courting too much controversy.
Boeing and Airbus = only potential supplier of aircrafts.
Potential rises in oil price and refusal to pass costs to consumers.
Over reliance on Michael O'Leary
Over-focus on acquiring Aer Lingus.
A weakness of SWOT analysis is the generation of long generalised lists; reviewers need to make an attempt to identify crucial issues; five key strategic issues for Ryanair's future have been highlighted (bold text in diagram). These issues have been identified in the various strategic models and are central to Ryanair's strategic concerns.
The strategic models have demonstrated Ryanair's strategic position and capabilities.
PESTEL Analysis depicts the last decade as a tough time for Ryanair in terms of external influences; nevertheless the airline has done well to adapt to the changing environment and customers' expectations.
Porter's Five Forces describes Ryanair's strategic capabilities as effective within their operating environment. The airline faces minimal threat from new entrants and substitutes and competitors. Ryanair's strategy shows significant drawbacks in its limited bargaining position with its buyers and its vulnerability to fluctuating oil prices. These factors could severely impact on Ryanair's profit margins and significantly weaken their strategic position.
The core competence analysis shows Ryanair's asset positions "(Teece et al.,1997), indicating its ability to maintain itself as a leader in LCC industry. This hinges on Ryanair's negotiations, brand image and the implications of its future plans and strategic decisions.
The Value Chain illustrates the successful strategy of low cost leadership adopted by Ryanair and how this has enabled it to increase profit margins while remaining focused on fundamental customer services. This has been achieved through internal strategies focused on streamlining firm infrastructure, employing cost saving technologies, effective human resource management and achieving operational excellence.
Key issues identified by the SWOT analysis are the current economic climate, the growth of 'green-environmental' concerns and potential legal ramifications, possible fluctuations in oil prices and Ryanair's inability to pass extra costs to consumers, and the poor media and public perception of Ryanair's customer service. These factors could lead to reductions in Ryanair's growth and a resultant fall in profits and financial performance. This would represent a significant strategic challenge for a company accustomed to expansion and whose business strategy revolves around aggressive, consistent growth.