Issues About The Low Cost Airline Ryanair Business Essay
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Published: Mon, 5 Dec 2016
In this assignment is analyzed a number of issues about the low-cost airline Ryanair. Below it is analyzed its strategy, the elasticity of demand for its service, its profitability objectives and experience curve effect, its performance objectives and its ability to be efficient, effective and adaptive, the critical factors that constitute potential threats, how it will be able to take advantage of the present conditions, its marketing mix and finally a brief research proposal for the management of the company to understand its consumers in order to launch an advertising campaign.
Ryanair is a low-cost Irish airline headquartered in Dublin. It was founded in 1985 and its first route was from Waterford in Ireland to London Gatwick. Now, it has 44 bases and 1100 routes in 27 countries. It has a fleet of 250 new Boeing 737-800 aircraft and its number of passengers in 1986 was 82.000, while in 2009 is about 66.500.000 (ryanair.com, 06/02/2011).
1. Business Strategy of Ryanair
Business strategy refers to the decision making of a company as a whole, when it is acting in a single field of production of goods and services. The kinds of business strategies are: cost leadership, differentiation and focus strategy, according to Porter (1985), who suggests to the firms to choose one of these strategies, which can give to the firms a competitive advantage. In the case of Ryanair, the strategy chosen is the cost leadership strategy, having as objective to become the most low-cost producer of air transportation service. Being the company with the lowest cost of service production inside the airline industry gives to Ryanair the competitive advantage to dispose its service in lower than the other companies, and as a consequence more competitive price (Georgopoulos, 2006, p. 235). However, Ryanair’s strategy has some elements from the focus strategy as well, as it is concentrated in a customer segment of market that includes businessmen and travelers that cannot afford the cost of fares of the existing airlines. But the main objective of Ryanair is to provide low-price tickets in order to stimulate demand, obtain competitive advantage and become the low-cost leader in Europe.
2. Price Elasticity of Demand in Ryanair
Price elasticity of demand measures the way in which the demanded quantity reacts when the price of the good or the service changes (increases or reduces). In other words, elasticity measures the degree of sensitivity of the demanded quantity in the changes of the price of a good or service. The elasticity of demand of Ryanair can be considered elastic. The degree of elasticity is really important for the firms, because they can estimate what will be the impact of the change of price on their income or profit. So, if the demand is elastic, a decrease in the price augments the revenue of the firm, in our case Ryanair. On the other hand, an increase in the price will cause a decrease in income. As well the elastic demand, indicates for a firm the existence of many substitutes. For this reason, Ryanair has to keep its prices low in order to achieve success, and keeping its customers, as there are a lot of other low-cost airlines (close substitutes) or ordinary airlines, who making a discount on their tickets can easily be preferred by the consumers. (Cole, 1987)
3. Profitability objectives of Ryanair and Experience Curve
The experience curve effect is that the most often a goal or procedure is performed, lower cost will be required in every following repetition. Every time the total volume of production is getting double, the costs are falling by a stable and predictable percentage and this makes the firm more profitable (Georgopoulos, 2006, p235). For Ryanair that is a low-cost company, experience curve is a really useful tool for attaining its profitability objectives. A factor that allows the company to use the experience curve as measure of its profitability is that it uses one kind of aircrafts (Boeing 737) and this has as result the absence of differentiation in maintenance and operations of the aircrafts through time. This decreases the costs of training the employees for obtaining new operational and mechanical skills and minimizes the service costs. Except of the experience curve effect, there are also other strategies adopted by Ryanair that help it to remain profitable, like the “seat-only” policy, charging all the additional services like luggage, snacks etc, direct distribution keeping away the intermediates, such as travel agencies, flights from secondary airports with low taxes, different price charge for every seat and wages of the personnel in the minimum.
4. Ryanair’s performance objectives and Efficiency, Effectiveness and Adaptivity
Analyzing Ryanair’s performance objectives, it is possible to be judged if the company is efficient, effective and adaptive. So, about the quality of service Ryanair offers, low-cost tickets are not always enough to attract the customers, following a low-cost policy (not offering extra vacancies), Ryanair counts on its maintenance and safety, efficient booking and luggage handling and punctuality. As matter of speed of its service, Ryanair has a low turnaround time of aircrafts, something that decrease as well cost. It is considered to be also an airline with high dependability as for last year there were 93% on-time flights and a rate of 0.4 per 1000 passengers bags missed (Ryanair website, 06/02/2011). This airline offers a high degree of flexibility to the travelers as they are able to choose the level of service they will be offered as any additional convenience is additionally charged to the price of the ticket. Finally according to cost, all the above policies help Ryanair to remain in its low-cost strategy, making it efficient and effective, as it keeps the revenue higher than the costs, thus all performance ratios remain positive (Forbes.com, 06/02/2011). This permits company to become adaptive in recession times and to stand possible losses. (Table 1, appendix)
5. Critical factors that can be threats for Ryanair’s success
There are factors that during periods of growth, contribute to the company’s success, but during recession periods can work in reverse, become critical and even constitute a threat for the firm’s successful performance, especially for a low-cost airline, like Ryanair, that is very sensitive to the phases of the economic cycle. The basic critical factor, that could and did make Ryanair to have loss, during the nowadays recession, is the fuel prices (Cole, 1987). Ryanair has committed to a policy of not imposing fuel surcharges, which means that all fluctuations have to be absorbed by the company. Because of its dependence on oil (fuel) market Ryanair reported its first loss on 2009 (The Guardian of 02/01/2009). Also, during recession there is an increase in low-fare competition, not only by new low-cost airlines entering to the market, but also by ordinary airlines that making offers to their tickets to attract customers. It is true that during recession, customers are even more price sensitive, so every commodity offered in a low-price ticket is preferred. A last critical factor, is the opening of Ryanair to new routes in South Europe (Ryanair.com, 06/02/2011), while the South Europe is in deep economic crises and there is limited growth on South European market.
6. Taking advantage of New Conditions
Ryanair has for sure better performance than ordinary airlines in terms of airfares, punctuality and luggage reliability, but it still can make improvements for grabbing the opportunities that appear in present conditions. There are airlines going bankrupt and in this way Ryanair can take advantage taking their part of market. It can achieve this with aggressive marketing campaigns to attract more customers (e.g. 7 euro tickets for the new routes in Greece), cost reduction buying new aircrafts less fuel-consuming, more destinations, as there are not enough routes to Eastern Europe and deals with more providers of services, like hotels, car-rental companies. In this way, it will make its market position stronger among the competitors, create loyal customers that will prefer it cause they will go to their destination cheap and fast, gain a bigger share of the market, taking the place of airlines that went bankrupt and making good deals with its suppliers so it will be able to be provided with commissions or products in low cost.
7. Ryanair’s Marketing Mix
Product or Service
What offers as product Ryanair is low-cost, frequent flights to European destinations, following the “only seat” policy, as it is not offering anything else but the seat on the plane. Food, drink, luggage, pre-assigned seats, higher-quality services, like business class are additionally charged and sources of income for the company(Ryanair.com, 06/02/2011). Additionally, in its web-site, the client can find services like car-rental companies, bus tickets and hotels from which Ryanair takes a commission.
Ryanair has low fares. It has also, a special way to set the price of the tickets, according to the demand of the period, as the about 80% of the tickets are sold during low demand periods in low prices and the 20% in higher demand periods in higher prices as well.
Ryanair doesn’t use the intermediate travel agents and in this way doesn’t pay the amount of agent commissions. Instead, it uses its website to book the tickets of its customers and to promote the companies with which it is co-operating. This reduces the costs really a lot. Also, it uses secondary and provincial airports, in order to have low taxes and increase the demand of the region around the airport. This allows the airplanes of Ryanair to be turned around faster.
They spend as less as possible on advertising as they use mostly as mean of advertising the internet. They have low-cost advertising campaigns reminding simply to the passengers the low fares of Ryanair (Picture 1, appendix). Additionally, some of the aircrafts are used as advertising spaces from other companies.
Pilots in Ryanair are experienced pilots, but it also hires cadets and trains them until they will have the necessary experience to take a promotion. Cabin crew in the beginning is not directly working for Ryanair, but through companies that provide Ryanair with cabin crew. After one year of full time work, they can become direct employees of Ryanair with low salaries but with the opportunity to increase them with bonuses from onboard sales. After one year they have a small allowance for uniforms, ID’s and medicals (Ryanair.com, 06/02/2011)
The airplanes are the most expensive and costly asset of Ryanair. They try to spend as little as possible for them. As they have a fleet of Boeing 737 they outsource the maintenance of it and they get better prices as the kind of the airplanes doesn’t differentiate. Also, Ryanair buys its airplanes usually in discount when the other companies don’t want them.
There is not check-in with the ordinary way, as there are not seats in the aircrafts of Ryanair. The passengers simply demonstrate their documents and the first that comes the first served (Ryanair.com, 06/02/2011). Also, the passengers walk to the airplane or they are driven by a bus if it is away and they give directly their luggage to the terminal, which is fast but not safe for the luggage.
8. Brief Research Proposal
Problem Statement: Ryanair is intending to launch a new advertising campaign, inside the frame of the intense competition in the mature airline market.
Research Objectives: The aim is to collect data that will assist company’s management to listen and understand better its customers before launching the new campaign.
Data Collection: Both primary and secondary data will be used. The biggest part of data will be primary, as management wants to have the opinion of the firm’s customer the present period of recession and intense competition. A smaller part of the data will be secondary, from sources like the web-site of Ryanair, financial and statistic reports of previous periods, as well as the data of the online booking data bases, so that will be compared to the date that will be gathered.
Kind of Research: Research will be quantitative as scales and numbers will be used to the questions and also it has to be reliable and the data gathered measurable for the management to make decision out of the information provided to it.
Research Design: As researches and data about Ryanair has been made and gathered again in the past, the present research will be descriptive. It will throw light to the behavior of the consumers of Ryanair under the present circumstances.
Target Market: Travelers-customers of Ryanair, that travel with low-cost flights in Europe and book their tickets though internet, including the business-class travelers.
Information Sought: The preferences of the customers and their opinion about Ryanair during the period of recession and the intense competition and the level of their satisfaction of the service offered to them.
Questionnaire Design and Form of Response: The questionnaire of this research has to be short with few, simple, straight-to-the-point and easy to understand questions as it will be given to the customer digitally so it must not tire him. Open-ended questions have to be avoided and the responses given have to be as specific as possible. Finally, the questionnaire has to provide to the manager the necessary information about the preferences and the opinion of the consumers. (A sample questionnaire in appendix)
Contact Method: As contact methods could be used either the online interview or the e-mail method. The advantages of these methods comparing to the others are that they have no or really low cost, which is compatible with the low-cost strategy of Ryanair, and that the booking of tickets is made through internet. So, an online interview, on one hand can be uploaded in the existing web-site, but in this way we cannot control who is answering the questionnaire, weather he is client or not. On the other hand, in e-mail interview it is sure that those who reply are client of Ryanair but sending the questionnaire with the confirmation e-mail of their booking we are not sure that they will send it back. Also, both of these ways have low response. In this research, is proposed an online contact method with special features. It will be placed between the page that the client is writing his personal data for buying the ticket and the final confirmation of the user for making the booking. In this way, the answering of the questionnaire will be compulsory for the user to proceed to the confirmation and makes sure that this person is a Ryanair’s client. This hybrid method has as condition the fact that the questionnaire will be short and not tiring at all.
Sampling Issues: Will be used a probabilistic, random method of sampling as the answers of all the clients of Ryanair during the period of the research will be gathered and the questionnaire will be compulsory for booking the ticket. This will be something easy, as the data gathered will be stored to data-bases of the company, ready for statistic processâ€¼
Validity and Generalization of the Findings: As the method of the research will be probabilistic, its results will be valid and will be able to be generalized to the population. In this way, the management of Ryanair can take valid information and make conclusions about the preferences and the opinion of their target market.
Summarizing, Ryanair is a low-cost airline that follows the cost leadership strategy trying to minimize its costs and it has an elastic demand, which means that its consumers are really sensitive to the changes of the price. As a tool for reducing its costs Ryanair can use the experience curve effect, but not exclusively this policy. According to its performance objectives it is an efficient, effective and adaptive company, while one of the most critical factor, that can be a threat for it is the fuel price and generally it is very sensitive to the changes of economical cycle. Although, Ryanair is the leader of the existing low-cost companies can improve itself based on aggressive marketing and reducing of costs.
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