Business Essays – Ryanair Airlines Transportation
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Published: Tue, 08 Mar 2016
Ryanair Airlines Transportation
Ryan Air Case Study
Ryanair was set up by the Ryan family in 1985. The company went public in 1997 and the Ryan’s subsequently sold the bulk of their share to other shareholders. Ryanair traditionally developed organically, i.e. by growing its assets by itself. Every year, it opened new hubs in Europe, started flights from new airports, and added to its aircraft fleet. This model proved to be rather successful. By 2003, Ryanair was the most profitable and valuable airline in Europe ahead of Lufthansa and doubling its value over British Airways.
However, as the market started to saturate and as the competition got tougher, the company decided to buy Buzz, another low-cost airline. It did so in 2003. Many said that Buzz was a financial disaster but acquiring it was strategically important for Ryanair that wanted to increase its market share and get Buzz’s airport slots and other facilities.
1.1 Ryan air’s objectives are:
- To open at least one new base in Europe each year for the next three or four years
- To grow at a rate of thirty percent (30%) for the next two years to just under twenty million passengers
- To maintain its position as Europe’s leading low fares airline
- To operate frequently point-to-point short haul flights, mainly out of regional and secondary airports
1.2 Mission and Vision
The mission of Ryanair is to keep the lowest fares among all the other European airlines and to have a friendly and efficient service that satisfies the customer’s needs.
The vision to the future of Ryanair is to keep going up and be Europe’s largest airline in the next six years.
The heart of its strategy is based on providing a no-frills service with low fares designed to stimulate demand, particularly from budget conscious leisure and business travellers, who might otherwise have used alternatives forms of transportation, or who might not have travelled at all.
2.0 No-frill Ryan Air (refer to appendix A for more details)
Over the last decade, European Aviation has moved from a highly regulated market, based on bilateral agreements between countries, towards an oligopolistic structure and finally to a highly monopolistic competitive single market. In this new situation the discretionary powers of the authorities have been curbed and airlines have enjoyed greater freedom to set fares, open new routes and determine what capacities to offer. This has eroded the dominance of the Flag Carriers like British Airways, Lufthansa and Air France, due to the upsurge of low cost airlines.
In the United Kingdom however, the industry is still oligopolistic in nature, as there are many barriers to market contestability:
- Availability of desired take-off and landing slots at airports.
- The necessity of entering a new route on a large enough scale to achieve acceptable cost levels.
- The costs of leasing or buying new fleet of aircrafts.
- Securing contracts with ground-handling companies who may already have contracts with other airlines.
- Retaliatory behaviour by rivals.
- The necessity of applying for and securing an air operators’ licence from European Union.
- Overcoming existing customer loyalty achieved by companies who have exploited their advantage of being the first carrier.
- Direct intervention in the industry to control externalities e.g. aviation taxation.
Ryanair a ‘no frills’ low cost airline was able to introduce pricing strategies that worked.
Financial statements from 2002 – 2003 were compared; the results showed that Ryanair enjoyed after tax profit growth of fifty-nine percent (59%). This was possible through an aggressive pricing policy.
3.0 Internal and External Analysis
In reference to the competitive structure of this newly formed low fares airline market in Europe and how it has developed during the 1990’s.
3.1 The Porters
Five forces model shown in Appendix A, summaries these dynamics under the various influencing factors. The most influential of these are discussed.
As entrants developed in this market, rivalry increased although no major head-to-head battles with the mainline global airlines occurred due to the ‘low fares’ market developing their own routes. Competition only existed from various new airlines catering for this growing sector, along with tailor made sub-divisions of the major airlines e.g. GO parent group British Airways.
As the market became over crowded, however, the threat of entry was reduced, not only due to the large capital investment required. But the basic factors of congestion in the skies and the lack of take-off and landing slots at airports deterred potential new entrants.
The suppliers of aircraft to the sector have relatively low power, second-hand aircraft entailed high maintenance & low fuel efficiency costs and some new entrants required new aircraft to promote their new image. Although new aircraft suppliers also have low power due to the fierce competition within their manufacturing industry (Airbus, Boeing), the main force of supplier’s power comes from the price of aviation fuel which is directly related to the cost of oil, as individual companies within the airline sector they do not have the power to alter this.
Customers have little power due to their large number and relatively small individual contribution to sales revenue, although this level of power will vary on the travel route in question depending on its level of competition.
Porter (1998) highlighted potential risks that companies adopting any of the three generic strategies might face. For a strategy competing on costs, the main risks are when competitors are able to imitate the strategy itself, or technology changes. When the target segment becomes structurally unattractive, it also poses a risk to the company.
This can happen when the demand for low fares disappears due to changing consumer taste. From the fact of the case study, Ryan air is a dominant player in the sector, and this risk is particular high at this stage. Ryan air ‘no-frill’ policy may have to change as they are actively expanding their flight route network and distance.
It would be impossible for Ryan air not to provide meals on longer haul flights and as a result their cost focus strategy may become blurred. Ryan air continues to set prices lower than mist of their competitor. Bowman’s Strategic Clock may be a better tool for analysing the case study as it focuses on pricing (refer to appendix C).
3.2 Swot Analysis
Opportunities for Ryanair
There is still potential for more regional departures to satisfy business travel demand and the growth in short breaks. The Internet can provide a simpler route to the market for consumers and businesses. It makes searching for availability and the lowest fares easier and reduce distribution costs for airlines. There is potential for more direct bookings to reduce distribution costs.
Increasing collaboration with alliance partners and code sharing partners can increase sales and reduce costs. This could lead to higher levels of cross-shareholdings and consolidation in the industry. There is also considerable potential for further development of low-fare services in Europe. Ryanair can use its reputation as a resource to expand into Internet café’s or car rental services. They can also cut down on the use of intermediataries who sell their tickets for them by getting to publicise through the Internet or airports
3.3 Threat for Ryan Air
The threat of substitutes is however a main area of power, smaller geographical space and shorter distances between major agglomerations allow a greater competition from alternative transportation, notably the high-speed train. The main business challenge during the 1990’s for the ‘low fares’ airline sector was how to convince customers to take the plane instead.
The threat of September 11 has proved traumatic for the mainstream European airlines. By contrast, in the no-frill airline sector, traffic calmed sharply, buoyed by strong sales promotions and heavy discounting. However, for Ryanair, the mainstream airlines’ losses were the budget airlines’ gains, strengthening their bargaining position with respect to aircraft procurement, airport deals and staff recruitment.
3.4 Strengths for Ryan Air (refer to Appendix B for more details)
By looking at the strengths in appendix B, by the end of 2003, Ryanair’s route system had expanded from its primarily Irish-UK emphasis to serve 86 destinations on 133 routes across 16 countries. Ryanair’s no-frill services allowed it to priorities features important to its clientele, such as frequent departures, advance reservations, baggage handling, and consistent on-time services.
Ryanair’s strength (appendix B) is that it offers travel insurances, car rental and connecting rail services, and commission on sales of other services such as hotel reservation. Ryanair website is acclaimed as being one of the most user-friendly and visited travel websites in Europe. (Refer to Exhibit 6 in the handbook for details on operating statistics for Ryanair)
3.5 Pestle Analysis: (refer to appendix A for more details)
By looking at the Pestle Analysis, its suggests that Ryan air has to keep a lot of things in mind before taking any further step to increase it awareness. It has to make sure that it follows that law. Also, have to look at the people behaviour on spending the money and keep its price reasonable to attract its rival customers.
4.0 Financial Status:
In 2003 Ryanair had delivered its 13th consecutive years of increased profitability. Its net margin had increased by 4% to 28%, surpassing its own long-term net profit margin target of 20%. The staff efficiency ratio had improved by 15% (see exhibit 1 in the handbook).
The group’s market capitalisation had grown from £392m in 1997 to £4.7 by 1 July 2003, as its profitability was seen to be unique among airlines worldwide. In fiscal 2003, Ryanair had delivered extra ordinary growth in fleet, routes; traffic, revenues and profitability (refer to exhibit 1a, b and c in the handbook).
Ryanair advertises its low fairs, primarily on its website, in newspapers, and on radio and television. In 1997, Ryanair was one of the first European airlines to cut its rate of commission to travel agents, from 9% to 7 and half percent. In 2002, Ryanair launched its website. This has had the effect of saving money on staff cost, agents’ commissions and computer reservation charges, while significantly contributing to growth.
Comparing Ryanair to other airline companies is almost impossible, while the airline industry is blurring through competitive activity and industry convergence. Airlines offer nowadays a lot of extra services, for example, car rental, internet access in the plane et cetera. All those extra services don’t belong to the core product, the flight.
Because of every airline company offering something else it makes it hard to compare Ryanair with them. Ryanair could compare itself to other low-budget airlines, despite the product Ryanair offers is very unique and Ryanair is one of the most profitable low-budget airline.
Available resources can be grouped under the following four headings:
- Physical resources
The nature of these resources, such as the age, condition, capability and location of each resource, will also determine the usefulness of the resource. Ryanair possesses everything that is needed to have the company operating in the airline industry. For example, an aircraft fleet (the average age was considerably higher than that of the fleets of Ryanair’s current or potential competitors), headquarter in Ireland, secondary airports to use for landing et cetera.
- Human resources
Ryanair has several hundred employees who issued a statement asserting that they are happy to work for the company.
- Financial resources
Ryanair has different shareholders:
- The Ryan family
- The employees
- Michael O’Leary
- An investment group led by David Bonderman
- Irish Air
- EU nationals
- Intellectual capital
The intellectual capital is the intangible resources of an organisation and is often overlooked or undervalued. The intellectual capital of Ryanair consists for example of the knowledge that the individual employees have. They are all well trained, are able to use the customer databases and have good relationships with the customers. These resources are not tangible, but very important in this knowledge-based economy.
7.0 BUZZ – A Low Price Purchase:
Ryanair protects and strengthen its position in the current EU Budget airline market through acquired BUZZ, and appointed two deputies, however, in the fierce competition; Ryanair should seek to some other new markets or new products. Enter the long-haul flight market with the existing cheap, no-frills flights or launch the business class in flight for the business travellers are both the good future directions for Ryanair, because these options are more or less relate to the current business which Ryanair is doing, it is easier for sharing the resources and controlling.
Diversification into long-haul market with business class flights, seems not a wisdom choice for Ryanair, since choose to do something is not linking to Ryanair’s current business at all; it would make Ryanair into a very risky situation.
7.1 Robustness: (see appendix D)
Michael O’Leary has a lot of experience and knowledge that can be seen as a unique resource for Ryanair. In 2004, the Financial Times named Michael O’Leary as one of 25 European ‘business stars’, who are expected to make a difference. Ideas can not be patented; they are in the public area.
So advantage of Michael O’Leary will be short-lived and only if Ryanair is good at learning, adapting and moving to new bases of competition, Ryanair will be the long-term winner. Another rarity of Ryanair is the extremely low costs and low prices. This can be imitated by other airlines by introducing a new cost-cutting policy and by doing a lot of research.
Entering the airline industry is very hard. Surviving in the airline industry as a low budget company maybe even harder, while Ryanair is so unique, innovative, with a very aggressive marketing policy, Ryanair is impossible to imitate.
Ryanair operates only in Europe, so the cultural differences are not so big, and does not give any problems.
- Casual ambiguity
Other airline companies know that the basis of success for Ryanair is the cost-cutting policy. But how Ryanair manages this policy is unclear to them. It is hard to imitate.
Ryanair is Europe’s first low-fares and no frills carrier, and it believes that it has made a sufficient gap over its competitors. But the question is can Ryanair maintain its objectives and strategies within the next 2-5years.
8.0 The detailed proposals recommended and previous objectives that can be enhanced.
The Strategy that can help Ryan air to increase its competitiveness in the airline industry in short term and long term and the things that it can do to attract more customers.
8.1 Short-term strategy (refer to appendix C for more details about Ryan air strategic position)
In short-term strategies, Ryanair must ensure that they are very competitive in terms of their low cost services. By keeping customers satisfied with the price of their tickets, thus reducing the complaints from flight changes and price changes, and ensuring that their day-to-day activities are constantly kept up-to-date with the constant use of the value chain analysis.
8.2 Medium-term Strategy
In medium-term Ryanair face continuous competition, due to the fact that they are not number one in the low fare airlines market share even with the merger with BUZZ holding the largest low fares airline, BA and its seven alliances are number one. There should be some goals to under pin other competitors in a market penetration and new product development. Maybe by implementing own branded items into the market, as well as the subsidy’s, to maximise profits with the aid of research and development.
Ryanair want to compete against BA. In which Ryanair is continuing its long-term goals of expansion, in order to compete with the larger companies. But they can only achieve this by undercutting BA, i.e. in sectors they fail to break even.
8.3 Additional Service for Customers:
The use of secondary airports causes people to catch other modes of transport to reach the main city. Ryanair can take advantage, by offering an additional service to drop people at their locations. This can be done through contracting to a taxi service or a coach company.
With a well-researched marketing strategy that can be used to attract the customers thereby boosting Ryanair’s passengers in unfilled seats and thus aiding in the reduction of complaints in short-term strategy.
By having more people working on the help desks as the Internet has no middle man, thus no commission has to be paid to travel agencies. In terms of the Internet direct sale, it not only can reduce labour administration costs, but convenience for customers and save their time.
In order to provide customers with an efficient and courteous service, it is inevitable that Ryanair have to improve their service. Generally such as the cargo services, well arrangement of booking tickets (in the internet and telephone) and while flights are being cancelled, they will give priority to resolve the situation.
8.4 Promotional Activity for Ryanair:
Ryanair needs large amounts of aggressive promotion, to be noticed by the whole world in similarity to Easy Jets marketing tactic of a TV programme that was successful in making a profit and its name being remembered. In comparison, the name Ryanair is not that well known but a market research would be needed to verify this.
Ryanair must achieve a new tactic to be known in the market but this may lead to a high risk factor, if they decided to focus on advertisements on TV with their special offers other than travel agencies using their airlines. Another option is the low risk factors by advertising on radio and billboards, then aiming the marketing strategy towards the targeted customers i.e. entrepreneurs and students
8.5 What Ryan air should in terms of its customer’s safety?
In points of safety for their customers since the US attacks during September 11th and the recent attacks that took place in 2003, the planes must be kept and insured that they are safe to use otherwise there will be no customers. For example, if a budget air-line had an accident it can be argued that the low costs on ticket prices, cost peoples lives. This strategy will always need constant up-to-date measures in short-term and long-term, because anything can happen.
The aim of this report was to carry out a strategy analysis of Ryanair, Europe’s largest low-cost no-frills airline. From this it became evident that the organisation operates in a complex environment with fast changing influences that affect its business both beneficially and unfavourably.
It also enabled identification of some of the sources of Ryanair’s competitive advantage: core competencies, unique resources, key linkages and the superior cost performance compared to its closest competitor. However, it also became clear that the organisation still has a lot to learn from best practice. In general, Ryanair’s strategies match its task environment although it fails to address certain crucial issues. If these are not dealt with they could lead to future problems and reductions in profits.
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Porters Five Forces related to Ryanair:
The Threat of Entry
- High requirements for capital investment
- Some economies of scale
- High marketing costs
- Experience in operation needed, established airlines already have trained staff
- High congestion of main airports, difficulty of obtaining landing and take-off slots
- Advantage in brand recognition, first mover advantage
- Expectation of retaliation from traditional airlines in price cutting and marketing strategies such as British Airways, Lufthansa, Scandinavian Airlines and BMI
- New EU ruling on overbooking can add to the increasing costs posed to airline companies
The Threat of Substitutes
- Mainstream airlines are losing market share due to September 11 aftermath
- Substitution depends on the relative strengths of other airlines such as daily flights frequency, punctuality, price and certain destinations
- Availability of other transport alternatives such as charter airlines, car ferries, high-speed trains and cars.
- Substitution for land travelling is dependent on journey time distances, destinations, convenience, flexibility, and customer preferences
Bargaining Power of Buyers
- Large population base in EU
- Switching cost is relevantly low as there is no high differentiation of services
- Internet booking allows customers to research relative costs between airliners easily; perfect knowledge
- Price is major factor in the choice of airlines apart from flight frequency and punctuality
- Services provided is similar among airlines
Bargaining Power of Suppliers
- Concentrated and small number of aircraft manufacturers i.e. Boeing and Airbus
- Many budget airlines have been opting for standardized Boeing 737 aircraft will lead to Boeing having more power.
- The power of main airports is increasing due to air traffic in EU is mounting. Secondary airports are desperate for business from budget airlines.
- The price of aviation fuel is directly linked to the cost of oil, hence budget airlines like Ryanair is difficult to alter this.
- The more Ryanair expands the more power it will possess over its suppliers.
- The European low cost airline industry is very competitive. Ryanair has fierce competition from Easy Jet, Virgin Express and Aer Lingus
- New competitors in the budget sector increase the buyer power.
- Mainstream airlines have more control over take-off and landing slots in main airports
- Mainstream airlines are trying to retaliate by decrease cost on domestic flights, introducing internet booking and set up low-fares subsidiaries
- Low switching costs and customer loyalty
- High costs of leaving market
Political and Legal
- Regulations for the air travel industry are getting even more stringent. The European Union authorities demand that airlines operate in an open, transparent manner. Any state subsidies to airline companies are prohibited in order to make working conditions equal to anyone and to boost competition in the industry. There are also regulations in place for airlines not to exceed certain levels of noise and air pollution. All of the legislation and regulations make operating in the industry harder.
- Europe is undergoing economic slowdown. People therefore spend less, in general, and tend to travel less, as a result.
- High oil prices inflate costs of fuel and impact margins negatively.
- At the same time, people are ready to travel for less and thus willing to opt for low-budget airlines.
- Business travel is on the surge. E.g., business travelers count for 40% of all Ryanair’s passengers.
- At the same time, overall traffic in the industry as well as profitability levels plummeted in the aftermath of 11 September and after the war in Iraq and the SARS. This had a devastating effect on the majority of airlines but also gave an impetus to the development of low-cost carriers.
- People’s mobility has been increasing during the last decades. People travel for leisure, business, and in search of new jobs.
- Personal disposable income of people is rising in Europe as well as the number of senior citizens who enjoy traveling.
- Traveling low-cost has become a norm.
- Airlines set up websites through which they sell tickets and other ancillary products and services such as car rentals and travel insurances. This led to cost decreases and to greater reach to customers.
- Airlines now provide satellite TV and phone services on board as well as broadband Internet and thus enhance value to customers.
- Information systems allow airlines collect data about passengers, cost, prices as well as ensure better service when boarding and handling luggage.
- Companies now have to comply with strict environment protection regulations and laws. Should they breach them, they may be liable to enormous fines or court hearings. This can have a greater impact on low-cost carriers as they have more take-offs and landings due to higher frequency of flights, and therefore need to pay more environment related taxes.
Strengths and weaknesses of Ryanair Airline
- Ryanair first budget airline in Europe, market leader.
- Most developed route system with frequent departures on Dublin–London route. Pre-empting potential competitors on the same routes, unless they can offer better value than Ryanair through lower prices (which requires them to have lower costs or take the pain of losses) and/or extra services (but customers must consider these worth paying for).
- Pursuing clear strategy, efficient and effective low cost operator; activities fit together to create low cost ® difficult to undercut Ryanair on cost, and therefore on price (but see weaknesses for some cost vulnerabilities). Low and reducing breakeven load factor, easily cleared, reduces financial risk. Similarly, average length of passenger haul is moving in the right direction, as is number of employees per aircraft ® reducing cost per available seat mile®good operating profit. In fact, in 2001 Ryanair was considered the most profitable airline in the world
- Low debt, relatively high p/e ratio makes it possible to raise finance for growth
- Leadership – testimony of awards for management. Michael O’Leary and Tony Ryan are determined competitors, turned Ryanair around very effectively
In an inverse way, Ryanair’s weaknesses can be listed and assessed to see whether any of them create critical vulnerabilities that impair Ryanair’s positioning and viability.
- Cost structure – aircraft utilisation in question with lowest number of hours per day of any budget competitors; older aircraft entail higher fuel and maintenance costs; currency fluctuations make fuel costs unpredictable.
- Overly cost conscious? Could be irritating to passengers, e.g. withdrawing free ice with paid for drinks – especially when budget rivals are actually adding perks, and mainstream airlines are discounting.
- Capital structure – very vulnerable to financial markets sentiment and high expectations, so any profit disappointment could be disastrous for share price, which is especially important in absence of dividends. Also, majority free floating shares could result in over 50% ownership outside EU ®loss of airline licence.
- Staff issues – EU legislation regarding compulsory trade unions, alongside history of industrial relations problems; question marks over staff commitment and loyalty.
- Outsourced services outside Ireland may mitigate against employee commitment and intense company knowledge necessary to create superior customer service.
- Ryanair penalized more than other airlines by loss of intra-EU duty-free because cabin staff remuneration dependent on it; Ryanair had to compensate staff.
The Value Chain
The value chain model was suggested by Michael Porter. He maintained that an organization can provide value to its customers in two major ways: by lowering costs in a particular operation or by enhancing perceived value-added through differentiation. A company can add value using both methods in its different operations. The value chain consists of primary activities and supporting activities.
Primary activities include:
a) Inbound logistics, i.e. suppliers, purchases, inventories, lead times;
b) Operations, i.e. manufacturing or processing; waste and distribution management; inventory control; efficiency; location management; customer service; information systems;
c) Outbound logistics: selling, delivering, transportation, distribution;
d) Marketing and sales;
e) Service: customer satisfaction and retention, customer loyalty.
Supporting activities entail:
f) Infrastructure: structure of the organization (centralized or decentralized etc); culture; managers’ involvement and support; vision; frequency of communication between managers and employees;
g) Human resources: motivation; respect of employees, which leads to happier staff and lower turn-around;
h) Technology development: Internet bookings, satellite communications, ERP information systems all lead to greater efficiency and lower costs;
i) Procurement: relationships with suppliers; storage. When bargaining power towards suppliers is high, then costs are low.
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