Low-cost airline environment and industry

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1.0 Introduction

Organisations need to establish clear corporate strategies in order to gain full competitive advantages. This objective report is to carry out an in-depth analysis of the both the internal and external environments of Ryanair by using the strategic models. Ryanair is a low cost passenger airline that operates short haul between Ireland, UK and Continental Europe (Gill, 2005). The analyses are important in order for the company to improve its competitive strategies and also achieve its organisational objectives. This will fulfill Porter (1996) theory that organisations need to continually evaluate their strategies in order to improve their business operations (Richard Lynch, 2000)

2.0 The analysis of low-cost airline environment and industry

There are many strategic models that can be used to analyse an organisation's internal and external environments (Richard Lynch, 2000). This includes PEST, SWOT, Value Chain, Porter's five forces, Porter's generic model etc. For the purpose of this report, the appropriate tools would be used in order to identify the problems and issues that are confronting Ryanair and find lasting solutions through the development of appropriate strategies.

2.1 Environment analysis of Ryanair using PESTLE model

Political factors affecting Ryanair's operations

Political situation in the Middle East is causing a hike in fuel prices and high maintenance costs which is affecting Ryanair's low price strategy (Penelope Butcher et al, 2005). Other political factors including terrorists' activities have prompted Ryanair to increase its security measures thereby increasing high costs. This has adverse effects and impact on its low price objective.

The changes in government policies such as the enforcement of climate change charges on airlines is affecting Ryanair' business strategies (Penelope Butcher et al, 2005). The European Union (EU) abolished the duty free sales which affected the numbers of tourist passengers (Scholes et al, 2005). In February 2004, the EU ruled that Ryanair has been receiving state subsidies for its base airport at Charleroi Airport and this led to the repayment between €2.5 million to €7million to the regional government (Scholes et al, 2005). The EU also devised new rules to cover overbooking of flights and automatic compensation for cancelled flights (Scholes et al, 2005).

Economic factors that affects Ryanair operations and strategies

Fuel price increases: The continuous increase in the price of fuels has made it difficult to meet it low cost objective (Penelope Butcher et al, 2005). The increase in air-flights price has made passengers to seek alternative cheaper means of transport such as rail thereby leading to loss of earnings.

Fluctuating currencies: The instability in the price of US dollars, Euro and the British Pound is affecting the business operations of Ryanair because Ryanair engages in Fuel hedging and this could lead to high business risks.

Potential economic recession and downturn: economic recession has had adverse effect on the airline industry due to a reduction in the number of travelers.

Social/cultural factors effecting Ryanair business environments

Aging populations: Aging populations travel less and also factors such as 'cocooning effect' have prevented passengers from travelling i.e. terrorist activities countries like Afghanistan, Iraq, Pakistan etc (Penelope Butcher et al, 2005)

Low cost strategy/wider demography: Lower cost of fares provided by Ryanair means that they attract wider demography of consumer

The expansion of EU: The EU has increased the number of passengers travelling across Europe and been also been increase in business trips will lead to more customers' base.

Technological factors affecting Ryanair business environments.

Wireless technology expansion: The development of internet has increase online sales of air ticket and it is now used for online checking in

Information and communication development: technological developments such as video conferencing, instant messaging, and mobile communications has led to less travelling for business travelers.

Other developments: such as high-speed trains i.e. Euro star will lead to a decrease in air passengers and it will affect air passengers

Legal factors

Many new EU laws and regulations have affected the operations of Ryanair air. Other new EU laws which have legal rulings that are affecting the operations of Ryanair include overbooked passenger compensation, cancelled flight compensation and other laws.

Environmental factors

The promotion of environmental sustainability by the regulatory, governmental and non-governmental organisation has led to the introduction of other charges on the airline. These include carbon emission charges, climate change protection charges etc. The environmental factor has also lead to the introduction of voluntary carbon-offset charge from the airlines to the passengers.

2.2 Environmental analysis of Ryanair using Michael Porter's five forces

The first forces is applied to Ryan air and Porter (1996) identified five forces namely; threat of new entrants, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.

Figure 1: Porter's five forces

Source: www.smartkpis.com accessed online on 09 November 2011

Threats of new entrants: New entrants protection by EU regulation- Many new competitors such as BMI, Easy Jet and other European airlines are being protected by the EU laws and price regulations according to European Union101 article 86 regarding competition and fair trade.

There are barriers to entry that are faced by Ryanair in the past but some of these barriers have been reduced due to the increase in regional and secondary airports that are very lucrative for Ryanair business operations because the airports are less congested.

Bargaining power of suppliers

In the airline industry, the aircraft suppliers are two major players Boeing of the US and Airbus (European Consortium). There has been great competition between Boeing and Airbus which has averted price fixing and thus creates advantages for the airlines. In 2002, Ryanair set up a Dutch auction between Boeing and Airbus, and Boeing won the auction based on the fact that it gives better discounts to Ryanair (Stanley, 2005).

The power of buyers

The customers are more associated with lower costs and the internet has been used to exploit this. The strong desire for customer loyalty because of low switching costs is affecting Ryanair negatively.

Threat of substitutes

Alternative systems of transportation

The alternative systems of transportation affect the market of airlines operations such as Ryanair. These include:

Bus services such as Euro lines that have a European network of road transportation (Penelope Butcher et al, 2005)

Rail services including Euro Star is creating a stiffer competitive environment for Ryanair.

Videoconferencing: Technologies such as video-conferencing, web-mail, etc. have reduced the need for face-to-face meetings. This has greatly affected the turnout of business travellers.

Rivalry among existing firms - Ryan Air has many rivals including BMI baby, MytravelLite, Easy Jet, and Buzz. This competition has affected Ryanair's markets (Penelope Butcher et al, 2005)

The analysis of the fives forces of porter and the PESTLE analysis indicate that Ryanair business environment is dominated by stiff competition which are affecting its operations. This has led to the development of new competitive strategies by the CEO. The strategies are entirely customer focused, based on providing low and competitive prices, excellent quality services and less operational charges on passengers as will be discussed below.

3.0 The analysis of the strategic capability of Ryanair and the identification of the key strengths and weaknesses

3.1 Strengths of Ryanair

Low cost due to its 'no-frills' approach

High financial capability- Ryanair has good financial capability that has a great impact on its finances and its ability to withstand increasing legislations and unfavourable economic conditions such as fuel price increase, unstable foreign exchange markets etc. (Ryanair corporate report, 2010)

Good Customer Service- Ryanair's strategy is to deliver the best customer service performance among its competitors. Based on Association of European Airlines reports and its own published statistics, Ryanair has achieved highest punctuality, fewer lost luggage and fewer cancellations because it operates from low congested airports.

Good technological base - By utilising the power of Information technology such as internet, in January 2000, Ryanair converted its host reservation system from the BABS (British Airways Booking System) to a new system called Flightspeed, which it operates under a 10 year hosting agreement with Accenture Open Skies ("Open Skies").

High publicity: due to its chief executive Michael O' Leary's controversial issues

High financial capability: see Appendix 1

3.2 Weaknesses of Ryanair

Legislative issues with authorities - Ryanair has been engaged in legislative issues with the Airline regulators and the EU commission.

Secondary and provincial airports - The use of secondary and regional airports by Ryanair has adverse effects on the passengers who spend more money to get to the cities. Over time customers may find this as big inconvenience.

Prone to bad press - Ryanair is perceived as arrogant and the slightest incident gets a lot of press coverage.

Niche market - Restricted expansion possibility

3.3 Ryanair strategic capabilities: value chain and core competences

Low fares: The provision of low fare air tickets by Ryanair is the strategy in order to gain full market leadership. The low fares stimulate demand and the targets are business and leisure travellers.

Ryanair's frequent Point-to-Point Flights on Short-Haul Routes. Ryanair provides frequent point-to-point service on short-haul routes to secondary and regional airports in and around major population centres and travel destinations has a major impact on the passengers who are keen to take short flights to their destination

Low Operating Costs: Ryanair achieves its low operating costs by operating in secondary and regional airports where there are low congestion and less airport charges (Gill, 2005)

Maximising and Utilising and the use of the Internet and other technologies: Ryanair has been utilising the internet technologies to improve its sales through online sales and the renting of its own servers for operations (Gill, 2005). This has led to an increase in its sales figures as shown in the account of the company.

Improvement of operations by offering ancillary services: Ryanair provides ancillary services such as hotels, car rentals, in-flight sale of beverages, hostel rentals, internet services and holiday bookings in order to increase its sales and customer base. These services have increased the competitive positioning of the company over its main rivals such as BMI baby, easy Jet etc.

Contracting out of services.

Ryanair only maintained its own staff and services at Dublin Airport, aircraft handling, ticketing, baggage handling and other functions had been contracted out to third parties (Gill, 2005).

4.0 Conclusion

Ryanair is a reputable European airline that has gained competitive advantages over its competitors through the implementation of appropriate corporate, business, marketing strategies. The application of low operational costs discussed such as use of regional and secondary airports, customer satisfaction and low price strategies have all made Ryanair a highly competitive airline that will continue to dominate the market. While its external environment has proved to be highly competitive and not very conducive to business, it appears that Ryanair strategic capabilities have helped to build and maintain its success.

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