Strategic Management Analysis At Ryanair Plc
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The organization chosen for the above question is Ryanair PLC, Europe's largest low cost airline. Ryanair was established in 1985 by Tony Ryan with the main objective of operating low cost flights from Waterford and Dublin in Ireland to London. During the initial years of operation, they were not financially successful. The current Chief Executive of the company, Micheal O'Leary was convinced of bringing the company on track and Tony Ryan allowed him to do so.
The strategy developed by O'Leary was heavily influenced by Southwest Airlines in the United States which is also known to be the world's first low cost carrier. This not only brought down losses the company was facing but also turned Ryanair into a huge success. They are looking at a yearly profit after tax of between 380 to 400 million pounds in 2011. They operate more than 1500 flights a day from 44 bases across 27 countries which connect 160 destinations. They now have a fleet of 263 Boeing 737-800 aircrafts and are in the process of increasing by 56, which will take place by 2013. Their employee numbers have risen to 8000 people and are expecting a passenger count of 73.5 million in 2011. (www.ryanair.com, 2011)
Although Ryanair is the market leader among the low cost carriers, it does face a few strategic issues based on its Brand Management. The company does not have brand loyalty among customers due to poor customer service and bad publicity. This report analyses Ryanair's strategy in terms of customer service and brand reputation.
The objective of the company has been to firmly establish itself as Europe's leading low fare passenger airline by using the following strategies:
Low Fares: Ryanair' low fare strategy is used to stimulate demand, their market targets price sensitive business and leisure travelers who are looking into other substitutes such as rail, road etc. Ryanair seats are sold on a one-way ticket which is different from legacy carriers. The fares are set based upon demand for particular flights and the time period between the purchase and the departure date. Averages of 70% seats per flight are sold at minimum rates after which the price per seat rises. Also, Ryanair boasts of not charging the customers fuel surcharge.
Frequent point to point flights, mostly short-haul: Ryanair has frequent point to point flights on short-haul routes to regional and secondary airports which are situated in and around major travel destinations and business hubs. Short-haul routes allow Ryanair to not be obligated to provide "frill' services to customers as expected on legacy carriers. By using secondary airports, it allows them a low turnaround time and less manpower requirement for baggage handling and connecting flights.
Choice of Routes: Ryanair operates in secondary airports that are located near major population hubs or regional airports which are not covered by other airlines. This gives the company 'the first mover advantage as they provide frequent and high number of passengers to the airports which allow them to get competitive airport charges. This concept also provides higher on-time departures, less delays, quick turnaround time (the time taken to unload and reload passengers at smaller airports is faster in comparison to large terminals such as Heathrow). This increases the flight frequency thereby increasing the number of flights and resulting in higher turnover
Low Operating costs: Ryanair boasts of one of the lowest airline operating costs among European carriers. The four major expenses that Ryanair is able to control are as follows:
Aircraft Equipment Costs - The initial strategy was to purchase a single type of used aircrafts which did not work out therefore Ryanair invested in purchasing Boeing 737-800 aircrafts. Their current fleet size is 272 aircrafts and due to this high volume, Boeing gives them a very competitive deal which reduces their procurement costs. Also the fact that they have a specific fleet from a specific supplier enables them to reduce and limit costs involved in personnel training, maintenance of the aircrafts & purchase and storage of spare parts.
Personnel Expenses - Ryanair's labor cost reduction strategy involves keeping highly efficient and motivated employees. They emphasize on productivity based incentives for cabin crew to sell in-flight services. They also pay according to number of hours flown although making sure that no one exceeds the maximum working hour regulations. The only drawback in their personnel strategy is not recognizing trade unions, which is a strategic issue that will be discussed further in the report.
Customer service Costs- Baggage handling and passenger handlng at the airport requires manpower. Ryanair has entered into contracts with third party contractors which is more cost effective for the company. It reduces manpower training costs and is handled efficiently by contractors. Ryanair also saves on commissions for Travel companies by generating 99% of their sales through their website www.ryanair.com. The use of travel agents is only vital during system downtime or destination promotion.
Airport Access Fees - Ryanair focuses on airports that provide them with competitive rates and charges. Their management claims that the delivery of high passenger volume has significantly increased the passenger turnover at the airports that in turn negotiate favorable contracts with the company. Ryanair has the 'first mover advantage' at practicable and reasonable airports which benefits the company due to turnaround times and efficiency as well as keeps the cost low.
The company's cost cutting can be shown in the following Value Chain by Michael Porter.(1985)
Maximizing the use of the Internet: Ryanair is known to have taken advantage of the internet. Their sales are through their website and they don't use travel companies for ticketing, neither do they have ticketing call centers. This reduces the cost to the company and pays for promotion of the company and the website through media. Ryanair does 99% of its sales through the internet and this also increases the ancillary revenue of the company through advertising and online booking of hotels, rail tickets, rented cars etc. The negative effect of the system is not giving a personal touch to the customer which affects the loyalty towards the airline.
Commitment to Safety and Quality maintenance: Ryanair treats safety as top priority of the management. They ensure the hiring and training of their pilots and cabin crew to top quality standards. They ensure maintaining highest quality standards for their aircrafts. During its 23 years in operation, they have never had an accident involving major injuries. The management ensures that although they keep their operating costs low, they don't compromise on safety, quality assurance, maintenance and training.
Ancillary Revenue: The Company pays more attention to their ancillary services as they have a high amount of revenue generation from the services they offer. They have on board merchandise and snacks, accommodation reservation services, rail and coach tickets and car rental services. They generate 20% of their profit through on-board services which are incentive based for the crew. They have a major focus on ancillary revenue which helps them increase profitability.
Growth In Focus: The management has laid a lot of emphasis on the growth of the company since the beginning. They have now acquired 272 aircrafts and are the largest operators in Europe at the moment. The deregulation of the industry opened European skies for the company where it has established operations in 27 countries and 160 locations. The recent Open Skies agreement has now opened up the US and Europe routes which has tremendous opportunity for Ryanair to grow. The management always keeps the growth of the company in their plan. Even during the economic downturn, Ryanair although was affected by it decided to invest in many aircrafts so as to increase routes as the price sensitive market were starting to favor low cost airlines.
All of the above mentioned strategies of the company work effectively and have aided Ryanair in achieving their objective of being the largest low cost airline in Europe. They are growing at an excellent rate and have established a brand for themselves thanks to their age. The only drawback Ryanair faces is being reputed as the airline 'people love to hate'. There are a few issues in Ryanair's strategy as they are known to not pay enough attention to customer services.
A price/quality matrix has been developed to show Ryanair amidst its competitor base of low cost carriers and give an understanding of the company and its priorities in terms of delivering quality at a low cost.
The table above gives an insight into Ryanair's competitors and where they play out in a matrix. Ryanair is very cost sensitive giving pricing the priority by ensuring they don't let any other LCC overtake them. They boast about cheap tickets and no frill services but so do the other airlines who may provide greater value for money in terms of customer satisfaction. The table below highlights Ryanair's positioning in context to price/quality/customer support etc.
As it can be noticed above, Ryanair pays less attention to the customer support and is more interested in providing a competitive price to the clientele. This can be observed in various illustrations, some of which have been highlighted below:
Internet booking - Ryanair ticketing is 99% through its website - www.ryanair.com. This aids the company by reducing operating cost as they eliminate the need for travel agent commissions and also call center ticketing agents. The website, although extremely comprehensive and user friendly does not allow passengers to have complete customer service by creating a helpline on premium telephone charge and not responding to query/complaint emails for a maximum of 30 days. Customers may not like to have everything done online without an assurance of speaking with a representative for any problems or queries they may have. Also the website is a generator of ancillary revenue as they provide many tie up services such as hotel bookings, rail/coach booking, car rental options while booking a seat. This may come across to the customer as a 'rip off' tactic. Ryanair is also known to have a high credit card surcharge of almost 40 pounds per booking if the passenger does not use a visa electron debit card. The booking also makes the customer pay per piece of baggage being carried and for extra services such as wheelchair. This is not favorable to customer service as it lessens the image potential of the brand and gives it a reputation of being a rip-off. They take 'no frill' services to a different level.
Check-in and Baggage Handling - Ryanair does not have its own staff at the airport for check-in and baggage handling. The check-in is done online on a fee of 5 pounds and in case one wants to check-in at the airport, they have to pay 40 pounds for the service. Many tickets cost lesser than their check-in fee and this helps them reduce cost by hiring third party contractors to take care of baggage. This is again not necessarily favorable to the customers the lack of personal service and assurance to customers can affect Ryanair negatively in the long run.
Seat Allocation - Ryanair operates on a first come first serve basis and does not have any seat allocation for their passengers. Although this aids the company in keeping costs low by reducing manpower and printing costs, they make it inconvenient for passengers to travel as they have to arrive well in advance to get a seat of their choice. Although this comes across as a no frill service, the customers may not appreciate the wait at the airport and may opt for other low cost carriers where they are assured a particular seat according to preference.
Staff-customer interaction - Numerous complaints have been written by customers criticizing the on board staff for being rude and not helpful. Ryanair must improve on their training and development of cabin crew in order to make the customers feel comfortable on the aircraft. In 2005, many customers had a grievance mentioning that the cabin crew in Ryanair was not well versed in English which is the most commonly spoken language among the traveler demographic. (The economist, 2006)
COMPETITIVE ADVANTAGE OF RYANAIR
To achieve competitive advantage, an organization must have an edge over its competitors while attracting buyers (Baines et al, 2008). Any strong market has a base made by competition. All companies try to find their respective places among and opposed to their rival companies. Creation of a competitive advantage is the prerogative of the company which may be achieved by high product differentiation or by having lowest cost to customers in the industry.
Ryanair has been recognized and established as a low cost airline in European aviation. (Miller et all 1997). Low pricing of the fares was to attract passengers and achieve a large market share. The low pricing strategy has assisted Ryanair in achieving the position of 'Cost Leader'.
Based on the above diagram, it is observed that the cost leadership strategy is being used by Ryanair. The operating costs are low and these benefits are further passed on to the passenger.
Porter's 5 Forces
Porter used 5 forces of competitive advantage to analyse strategies used and the effect of the competition. Here we discuss the low cost strategy.
As it can be noticed in the above elaboration of Porter's five forces model, the bargaining power for buyers is low. Buyer bargaining power shows the customer's influence on demand (Jobber 2010). During pricing of the product, the bargaining power is high as Ryanair believes in providing lowest fares to the consumer and their demand is related to their pricing structure (Sean Brophy and Dominic St. George, 2003). In all other areas (customer services), Ryanair does not take into account what extras the passenger wants. The brand image for customers is merely an airline they would fly by in case they are looking for the lowest prices. In a BBC survey conducted by their panorama series, maximum people said they would not travel Ryanair unless it is a compulsion. (www.bbc.co.uk) The Company looks at youth as a target market for the airline as students and young leisure travelers are price sensitive and don't mind the basic service of the airline. Some students take advantage of their promotional deals and travel to various locations at a price as minimum as 2 pence. They don't order anything on the flight, pay by Visa Electron debit card (no card charges on ryanair.com) and don't check in their baggage which limits their total cost. (www.bbc.co.uk).
Conclusion and Recommendations
In the above analysis, Ryanair has been discussed in terms of its strategies and issues that the company may face due to the application of these strategies. The company has been compared to its competitive set on the basis of price and quality (customer service). Models have discussed how Ryanair follows a low price strategy to attract customers rather than value added services and how this works for them.
Michael O'Leary has been acclaimed as a shrewd leader who has complete control of the company and its strategies. He has been known to be blunt and sometimes downright rude to customers, an illustration of which is mentioned: As the airlinr achieved the status of becoming the largest Carrier in Europe and was amidst celebration, a few agitated customers were waiting for a delayed flight at Stansted airport. One such customer on his way to Cork to meet his family loudly claimed that the company doesn't actually have a clue whether its customers actually reach their destination. The famous CEO inquired how often this person travels to Cork. "every few months", the man replied at which O'Leary asked him how many times he would frequent this route prior to Ryanair's inception. The man replied in a puny voice that he would travel once a year or maybe lesser. The shrewd businessman then replied "This is what I have done for you and you are here complaining about a minor delay?" (Creaton, 2007).
The example stated above shows the attitude of Ryanair towards its customers. They are purely cost leaders and the strategy is working very well for them although according to analysts, it may not last. Ryanair does not plan to add any value added services for the customers which has worked very well for price-sensitive customer bases and during the economic downturn but they may face pressure in the future due to the increase in spending power of the people and companies along with the threat of competitors. Ryanair has also suffered bad publicity due to controversial advertising, rude customer handling and many other complaints. There have been numerous books and blogs written about Ryanair's poor service. Although the airline boasts extreme efficiency with timely departures and arrivals, no major injuries, efficient baggage handling and the tie-ups with ancillary service companies, it does not have a reputation of being passenger friendly and has been proclaimed as the airline people love to hate.
Ryanair must improve its customer handling to maintain its market leadership and eliminate all threats of substitutes and new entrants. Many recommendations can be given to improve customer satisfaction but the company wants to maintain their cost leadership and not spend on customer services. The steps Ryanair should take to improve must be cost effective and should not affect their pricing strategy.
One major issue with Ryanair is the portrayal of their attitude towards customers. They should give an impression of caring about the feedback of their passengers. One simple system for improvement of the same would be through a survey. A simple customer satisfaction survey can be designed and emailed to the customer while being attached to the self generated ticket. This is a cost effective strategy as it does not involve major spending on printing etc. These surveys will not only provide the customer with a feeling of being cared for, it will also help the airline understand where they lack and how they can improve.
Another way of increasing brand loyalty would be to introduce a frequent flier program for regular passengers. This will assist in generating more sales as the loyalty card will motivate customers to use the airline. Ryanair launches many promotions during the year. If they add a loyalty program and restrict availability of the promotion to the members, people will prefer to travel by Ryanair to accumulate miles and travel for a few pence. This will increase the switching costs for customers thereby increasing the brand loyalty of the airline.
Although Ryanair does not have a dearth of passengers or routes or aircrafts, they definitely do lack the reputation of a fair and good airline. Ryanair at this stage should concentrate on building a positive image with its customers and put their requirements first. The 'pile 'em high, sell 'em cheap' strategy can only work to a certain extent, Ryanair has to move towards a customer centric revenue management system as a way of the future.
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