European airline industry and the budget sector



To answer this question there is need of to discuss about the three points. First the examine of all European airline industry, through to the budget sector, second project strategic groups in the budget sector and the last one is to evaluate the individual competitors to know that whether there are any who give a specific threat to Ryanair. To start with the first point the Porter's five forces model is used.

(a) Porter's five forces model: This can be use to evaluate the industry structure because it easly make the external influence (PEST) and way for success that airline face in Europe and especially who are in budget sector.

(i) Competitive contend

In general view-

-Attempts by airline to raise the customer loyalty by frequent flyer programmes, various benefits to regular customers.

-Most of the airlines compete for premium business passengers by giving extra service, benefits and comfort.

Lady using a tablet
Lady using a tablet


Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

-Airlines increase competition by making strategic alliances.

-Merges and acquisition, for e.g. Air France and KLM

-Due to increase in competition and freeness in regulation, many competitors creating overcapacity in many routes and growing the power of buyers.


-Cost is very critical for airlines to compete with low fares.

-Some differentiation based on airport locations, but more expensive for carriers.

-Increased in number of competitors who entered this sector, due to that competition increased and there was cut to throat competition on the same route.

-Other factor which was responsible for increasing competition was capacity utilisation which was difficult for low margin industries.

Ryanair perspective - intense and increasing competitive rivalry

(ii) Threat of entry


EU deregulation has removed barriers to entry for airlines based in Europe.

New entrants into different EU national markets can be other existing EU based airlines or newly established airlines taking advantage of deregulation.

Airlines from 10 new EU member states can now gain access. Some already competing strongly, e.g., from Hungary and Poland.

Newly established airlines or established airlines on new routes might have to be prepared to lose money for a period of time requires strong financial backing.

Scarcity of landing slots, and reserved slots for national carriers, serves as barrier to entry at certain airports, e.g. British Airways slots at Heathrow, Air France at De Gaulle.


Perceived customer demand attracting new entrants to budget sector.

Established airlines can enter budget from different market bases, e.g. mainstream airlines go 'downmarket' like Aer Lingus, or set up separate budget subsidiary, as Lufthansa has done with Germanwings. Or charter airlines can enter by moving into low fare scheduled services.

Ryanair perspective - moderate threat of entry

(iii) Power of suppliers


Aircraft suppliers - oversupply of aircraft and fierce rivalry between Airbus and Boeing.

Stronger airlines, larger orders get better deals.

Route cutbacks since 2001 by mainstream airlines have released almost-new second-hand aircraft on to the market, reducing aircraft suppliers' power.

Fuel suppliers - depends on supply, and subject to fluctuations. Oil is a finite commodity. In 2004, oil prices rose sharply because of uncertainty about supplies from Nigeria, Russia and Iraq, three of the world's top producers.

Airports - range from primary to secondary; primary have greater power, but generally power of airports increasing as air traffic in Europe is increasing.

Airport services suppliers - bigger demand for such services thanks to deregulation, growth and outsourcing, but EU legislation ensures competition, reducing power of suppliers.


Aircraft suppliers - hegemony of Boeing in budget sector broken by Airbus giving Boeing less power.

Larger orders get better deals like Ryanair deals.

Fuel - as in general case, but budget airlines have less capacity to pass on fuel cost rises to price-conscious passengers.

Airports - smaller secondary airports want business from budget airlines, offering good deals

- but subject to EU constraints

- but demand on secondary airports increasing, e.g. popularity of Stansted

- removal of intra-European duty free a bigger blow to revenue of smaller

airports, used by budget carriers, without compensating extra-EU traffic;

Lady using a tablet
Lady using a tablet


Writing Services

Lady Using Tablet

Always on Time

Marked to Standard

Order Now

therefore, more likely to increase prices to airlines to compensate for loss of duty free revenue.

5. Airport service suppliers - as in general case, but budget airlines more likely to outsource.

Ryanair perspective - low to medium power of suppliers

(iv) Power of buyers


75 million new consumers from 10 new EU member states.

Passengers have more choice and access to information via the Internet - although this can be confusing re special deals hedged with conditions and limited seats availability.

Distribution - power of travel agents decreasing vis-à-vis airlines; passengers can shop for flights on the Internet; also, trend to direct booking; travel agents try to win back business by offering 'complete travel solutions' to customers.


Budget airline fares appeal to price-conscious travellers.

Increasing numbers of value-conscious business travellers use budget airlines -especially valued for flight frequencies on routes and punctuality.

Distribution - direct Internet booking very convenient for simple point-to-point travel typical of budget airlines, and cost effective for airlines; network bookings less suitable for 'complete travel solutions' offered by travel agents.

New competitors in budget segment increase buyer power and force down prices.

Ryanair perspective - strong power of buyers

(v) Threat of substitutes


Fast rail and cross water tunnels and bridges enable faster and more convenient land travel.

Price of rail substitute is important.

European mainland vacationers often use cars.


Rail and road more likely to be viable substitutes for the shorter journeys typical of budget airlines.

More difficult for rail prices to compete with low budget airline fares for priceconscious travellers' business.

Ryanair perspective - fairly low threat of substitutes

(b) Competitive groupings within the budget sector

Having identified the challenges facing the budget sector of the European airline industry, it would be helpful to examine whether the sector can be broken down into subgroups with similar competitive postures. This exercise could help to identify those rivals who are most threatening to Ryanair. A strategic group map is an effective technique for identifying the relative strategic positioning of competitors. Chapter 3 of Exploring Corporate Strategy delineates how to draw and interpret strategic group maps. Firstly, students should identify the various key factors that discriminate among the competitors in the budget sector. These could include:

extent of route system, geographic markets served, average flight frequencies on routes served, extent of added frills, profitability, p/e ratios, ownership by another airline, use of strategic alliances, capital structure, capacity utilisation, etc. In addition to some information contained in the case, (especially Case Exhibits 1, 6, 7 and 8) the most up-to-date information on competitors can be obtained by students as part of the exercise of constructing the group maps, by visiting the websites of the various competitors. The most relevant rivals of interest are easyJet, Virgin Express, bmibaby, flybe, MyTravelLite, Germanwings, Aer Lingus. Students can develop a number of strategic group maps using all or some of the dimensions suggested above, and/or others they identify themselves, two at a time. By piecing together the different implications from the different maps, this will lead to a rich understanding of competition within the budget sector. An example of a strategic map is given in Teaching Note Exhibit 1. The dimensions used are (i) extent of route system and (ii) customer service perceptions (see Exhibits 4 and 5 in the case). The proportions of the circles reflect the relativities in market share. Students could be asked to draw some conclusions from Exhibit 1. Several useful observations about Ryanair's positioning can be elicited from studying the map. Firstly, Ryanair is obviously the largest in terms of market share, and has the most developed route system. It is definitively positioned as offering the most perceived basic of services. Its nearest rival, easyJet, does not have the extensive route system of Ryanair, and is not perceived as quite as basic.

The lower part of the map shows new, as yet small, entrants that fall into two types. One is following the basic model of Ryanair. The question is whether these new entrants can ever get to the critical mass to compete with Ryanair and beat Ryanair at its own game, if they encounter Ryanair head-to-head on the same routes. How can they outlast Ryanair in a price war? The other group in the lower part of the map is adding customer 'frills' and uses main airports, exemplified by flybe. The latter type may be trying to compete in what is perceived as an attractive gap between premium priced business class services and the most basic budget airlines, appealing to the price-conscious business traveller. The issue for the members of this cluster is their ability to organise the provision of added services and convenient airports without compromising the quintessential combinationof cost effective operations typical of Ryanair. So, instead of capturing a lucrativestrategic space, they could find that they are losing out to the mainstream carriers at thetop end and the budget carriers at the lower end. If this lucrative segment exists, the successful competitors will have to be able to provide for it at the lowest cost in the segment, i.e. an effective 'best cost provider' strategy.3 Many previous incumbents of this niche (Debonair, Go, KLMuk/Buzz) have disappeared and Virgin Express is

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

struggling. This suggests that in the budget airline sector, a best-cost producer strategy may not be viable. The map indicates that easyJet is definitely Ryanair's closest competitor. However, should Ryanair be worried about the likes of Aer Lingus, a mainstream airline that is capturing budget-conscious travellers and still making a profit? Is it possible that mainstream airlines like Aer Lingus can cross subsidise their budget operations from other longer-haul route profits?

As indicated above, further maps can be constructed to complement the one in

Teaching Note Exhibit 1, to provide a comprehensive picture of the competitive

strategic space of Ryanair.

(c) Evaluating selected individual competitors

The next stage in industry analysis is the evaluation of those competitors that compete

in the same arena as Ryanair. This evaluation helps to predict the actions of individual competitors and the impact of those actions on Ryanair. Again, the websites of the individual competitors detailed above should be sourced.

Aer Lingus:

legacy rival of Ryanair, full service Irish national carrier, 100% government owned, but government hoping to sell off; subject of MBO bid in July 2004;

traditionally high cost, almost completely unionised;

reinvigorated after near bankruptcy in 2001/02; recovery thanks to cutting one-third of staff and severe cost-cutting plan;

styled as a no-frills low-fares airline on many European routes, although still uses seat assignments, primary airports;

a direct competitor to Ryanair on some routes out of Dublin and out of the UK,

London generically;

• member of One World strategic alliance;

• North Atlantic routes very important.


most direct rival to Ryanair; inherited slots at Stansted from Go, rivals Ryanair on value-for-money image;

stabilising after aggressive growth spurt, including digesting Go;

better customer satisfaction and load factor than Ryanair, but poorer punctuality record;

shaky profit record less deep pockets than Ryanair for price war.

Virgin Express:

generally loss-making, no clear strategy;

past best cost provider strategy (legroom, pampering, primary airports, etc.) seems to be failing, because not taking in high yields high break-even load factor;

seeking expedient takeover by SN Brussels Airlines, as Richard Branson's interest and attention directed elsewhere;

leases most of its aircraft, may be expensive, creating low operating margin; cannot take advantage of fluctuations in supply of aircraft?

diminished threat to Ryanair.

Q2) Evaluate Ryanair's strengths and weaknesses.

Ans: According to the case study of Ryanair's there are some strengths and weakness which are discussed below:


1. Ryanair is a first budget airline in Europe and also a market leader with first mover advantage.

2. Customers happy with the value of money propose by Ryanair.

3. Ryanair always used to find new ways or resources for its revenue for eg. Onboard Entertainment and sales, provide mobile facilities in plane.

4. Michael O' Leary and management team are determined competitors.

5. "Ryanair's operating costs are among the lowest of any European scheduled passenger airline"(Ryanair). In fact the company focuses and try to control and reduce the four considered major costs for a passenger airline, which include aircraft equipment, personnel productivity, customer service and airport access and handling.

6. Good operating profit up to fiscal 2004. with clear strategy ,effective low cost operator activities fit together to create low cost which means it is difficult for competitors to undercut the ryanair on cost and price basis.


1. Cost organise: aircraft utilisation related with lower number of hours per day than easyJet also older aircraft consume higher fuel and maintenance cost and currency fluctuation make fuel price unpredictable.

2. Consider only cost factor: could be irritating to passengers. Customers are very dissatisfied with Ryanair other than value for money. It shows that low fares are the only factor that attracts customers to Ryanair.

3. Staff problems: EU legislation regarding mandatory trade unions, alongside history of Industrial relation issues; doubt on staff commitment and loyalty.

4. Outsourced services outside Ireland may decrease against employee commitment and intense company knowledge necessary to create proper customer service.

5. Very vulnerable to financial market sentiment and high expectations ,so profit warning was disastrous for share price also majority free floating shares could result in over 50% ownership outside EU.

Q3. Is Ryanair strategy sustainable?

Ans : Ryanair always depend on the low price charges to make a space or position in the market . It have to evaluate that whether the Ryanair' strategy enables the airline to go further in its leadership position of the budget sector of the Europeon airline industry and it can be clear by analysing two factors:

How the strategy able to meets the customer expectation compared to competitors How efficiently Ryanair is delivering the strategy in comparison with competitors. By going through these two points it will able to explain that how sustainable Ryanair strategy is.

From customer point of view:

(i). Ryanair has succeeded to enter in Irish,UK and mainland Europe markets. Case study shows that customer has low expectation related to the services but the reality is that Ryanair gets them to their destination, sometimes for nothing other than taxes, appeals to the customers.

(ii) Earlier recessions had very bad effect on budget sector. At that time the customers who paid less fares they neglect to pay higher even after the economic condition is improved.

(iii) Competition in the budget sector is increasing. Specially easy jet is a close competitor on many of the same routes of Ryanair. It may attract to those customers who think Ryanair's product to be too basic, some new entrants offer a less basic product like flybe. However the doubt is whether the basic service can be done at low enough cost to charge less fares and able to make profit. Beside that Ryanair seems good enough in punctuality than easyJet.

b. From efficiency point of view:

(i) Ryanair has organised well and keep everything in control to run a budget airline, as demonstrated by its low break-even load factor.

(ii) Well some cost advantages which Ryanair enjoys could disappear:

-Favourable treatment by airports and service suppliers. Due to EU become against anti-competitiveness, Ryanair will not be able to enjoy discounts any longer relative to competitors.

Staff costs. EU legislation diminish working hours and making worker participation mandatory could simultaneously diminish worker flexibility and increase the staff costs. Participate option for staff could also lose their interest related to a wage rise, given the drop in the share price.While the factors cut the Ryanair's profits, still other disadvantages for Ryanair against some of its competitors, since its advantage is irresistibly dependent on low fare, in turn dependent on low cots.

c. Sustainability:

Ryanair gets a good response on value for money but about the customer

satisfaction factor Ryanair could not be placed in the high category on comprehend customer value delivery. The customers were rate the component of Ryanair experience poorly. Ryanair succeeds in achieving its target by offering the customers low fares for short route journey but the question comes that this achievement still serves company good profit, as it might be unsafe to attack from competitors which offer a more satisfactory experience. The main target of Ryanair is to attract more and more customers who is cost conscious as well as the new ones by offering low prices to them. How far Ryanair is successful to do this, it can be only possible by keeping costs down. This is demonstrated in its low and diminishing break-even load factor, considerably lower than easyJet. However it seems that Ryanair could face the difficulty to hold down its costs for the long tenure. Ryanair able to fill the empty seats by providing free seat giveaways which is quite interesting but will the Ryanair able to create a loyal customer for long period? Free seats are the tactic to grab the customers from the competitors who cannot afford to provide such type of facilities. Ryanair might be sacrificing for its revenue for short term period but this is a way of ensuring in long term supremacy.

Q4. Would you recommend any changes to Ryanair's approach?

Ans: Ryanair have to understand its customers especially the new customers, as rolls out routes and opens up hubs in mainland EU. Ryanair have to understand the expectation of customers apart from the low fares charges. Ryanair have to understand that the outsourcing is a limited factor or not and how it can be addressed without sacrificing the costs, especially in the high salary and flexible work environment. Ryanair have to think seriously whether and how it should get involved in the 10 new Europe member countries. On the one side, these present an opportunity , since, by and large, airline markets have been highly regulated and fares are very high. So there is a chance of to restrict demand for low fares, easyJet already enter in these market . Though Ryanair is already suffering from overly rapid growth. Ryanair have also think about the staff loyalty and relations. If Ryanair give more attention on this it will give unquestionable competitive benefit as it opens up a new ways, pre-empting its competitor as they struggle to become established but this is not easy proficient. Ryanair also encouraged to entertain other possibilities, for e.g. is Ryanair go in any strategic commitment or interlining arrangement? Southwest does not do this and it does not seem to make logistic sense on point to point route system. But are there is any situations where it would make sense for Ryanair? Should Ryanair will try to keep grow by means of accomplishment as it did with Buz?

Profitable markets must also have a large leisure-and private-travel component--the support of the customer base of most low-cost carriers. A majority of these carriers follow the same basic rules, but with some differences in approach. Ryanair, which is as low-priced as it gets, operates routes from London Stansted to many secondary airports--for example, to Carcassonne and Biarritz, in southern France, and to Pisa and Verona, in Italy. Low airport fees help keep the carrier's costs 65 percent below those of a typical scheduled airline. Ryanair can thus offer cheap fares and still make a profit if more than 55 percent of its seats are occupied.  Thus it must proceed its goal in expanding to more little known routes and increasing more passengers in their planes while offering more premium services that the customers will end up purchasing for a more convenient flight.

 Q5) Evaluate the strategic leadership of Michael O'Leary?

Ans: Michael O'Leary was Ryanair largest shareholder with 4.53 percent of share capital. He always praise his management team, Ryanair was well identified by its chief executive. He was credited with single handedly transforming European air transport airline won different awarded in the time of Michael O'Leary. He has certainly made investors very happy and even detractors would credit Ryanair with opening up the era of inexpensive air travel.The characteristics that have driven the company forward is his enthusiasm and energy, his strategic insight his determination and mission orientation can be carried too far . Infact some schools of thought would have Michael O'Leary persistent energy and his thriving on hardship. It shows lack of self satisfaction- quite the opposite of what Finkelstein points out as danger signal. The capacity to irritate may dispute and change. Also, in Michael O'Leary favour, as Ryanair largest single shareholder, he literally put his money where the mouth is. The strength of Ryanair was Michael O'Leary brash, no compromise attitude that truly drives the company because a low-cost and low-fare airline would really need a leader who will be daring enough to pedal the company towards profitability despite the circumstances.  By his outrageous and oftentimes risky moves, he is able to attract attention and promotion to its favour.  Customers cannot resist Ryanair despite the lack of convenience because the seats are sometimes virtually free (or totally free) with the airline making money of the premium services such as food and drinks aboard.  It gives customers what they want in a fee that will only pay for the travel which is what airlines are supposed to do primarily.  The lowest cost airfare is always sure to win the competition even in the direst, most intense circumstances.