The macro environment at RyanAir Airline

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Ryanair is an Irish airline, founded by the Ryan family and headquartered in Dublin. Since its establishment in 1985 the airline has grown from modest beginning as a small airline flying short hop from Waterford to London, into one of Europe's largest and leading carriers.

The company restyled itself from 1990 as a low-cost scheduled passenger airline that serves short haul, point to point routes between Ireland, the United Kingdom and Continental Europe, a business modelled after the US Southwest Airline

By 1995 Ryanair was carrying 2.25m passengers and undoubtedly became the largest carrier on its routes. With the deregulation of the airline industry in Europe in 1997 Ryanair expanded its operations into continental Europe.

By the end of 2009 the airline has over 32 bases and over 830 routes across over 20 countries connecting 148 destinations with the biggest operational base at London Stansted Airport in the UK.

Ryanair's strategy is to position itself as Europe's largest low-cost short haul airline.

This case study is meant to analyse the business strategy of Ryanair and assess other possible strategic choices available with a view to recommending feasible options for the company

The macro-enviroment consists of broad environmental factors that impact to a agreater or lesser extent on almost all organisations. It involves political, economic, socio-cultural, technological, environmental and legal issues which affect the company's strategy. The analysis is to determine which of these factors are most important at present and in the future.

2.1.1 POLITICAL ISSUES

Political integration in the EU: has made migration within the EU possible thereby making Ryanair to extend its routes to other countries within the EU.

Increase in trade union pressure.

Ryanair does not recognise the trade union. With increase in agitation from the employees Ryanair may have to succumb to this pressure with the result that employees may press for better working conditions. The formation of union by the air-crew will place the company in danger of strikes and lock-outs, restrictions of flights per employee and possibly raise the cost of wages and benefits.

Increase in route charges

Governments may increase route charges and this may affect the profitability of the airline

The expansion of EU membership will help Ryanair to expand its routes and earn more revenue.

Abolishing duty-free sales on board

On board sales revenue is an ancillary income and if duties are imposed on such sales the result could be price increase, which may lead to revenue loss, as passengers may not buy the goods thus sold.

Increase in security measures (terrorism)

With the threat of terrorist attacks governments are demanding increased safety measures to combat such attacks. The use of scanners to scrutinise passenger may cause delays in flights thereby increasing Ryanair's turnaround time to more than 15 minutes. Besides passengers who find it risky travelling by air may resort to other safe means thereby jeopardising the company's revenue potentials.

Governments support for their national carriers - it limits the company's ability to compete with the national carriers on level playing grounds.

2.1.2 ECONOMIC

Increase in fuel prices

With global fuel prices being so erratic any astronomical increase will lead to rise in fares and may erode the company's low cost operations. Ryanair hedges about 90% of its fuel cost.

Regional subsidies

National governments may grant subsidies to their national carriers to make their fares competitive. This may trigger price wars and further erode Ryanair's profitability.

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High speed trains and fuel efficient cars

The introduction of high speed trains result in some travellers shifting to trains rather than air travel. Besides the introduction of fuel efficient cars will make some people travel road if they find it more convenient and cheaper to go by road. This will result in loss of passengers.

Global recession

The global recession has resulted in the reduction in leisure travelling because travellers' because people do not have the financial means to travel anymore.

The upside of the recession for Ryanair is that travellers have become price- conscious thereby shifting customers from high price airlines to the low fare counterparts such as Ryanair.

Weak Pound: Ryanair's financial reports are denominated in the Euro and with the weakening pound against the Euro travellers will have to pay more pounds

2.1.3 SOCIAL ISSUES

Grey market increase: Certain social groups that champion the course of environmental degradation such as global warming are putting pressure on governments to be serious about implementing regulations that will cut the amount of pollution.

Increasing travelling life style: People travel for leisure to other tourist centres in the EU. There is increasing travel among the youth and others who generally could not afford to travel due to low income but can now afford to travel as a result of low cost airfares. Ryanair's gains more revenue as the lowest cost budget airline.

Increase business travelling: There is increase in business travelling as a result of the low cost model.

Aging population within the EU: With ageing population within the EU the aged may prefer staying home rather than spending their meagre income on travelling as recession heats them hard. This reduces Ryanair's revenue from such members of its customer base.

Migration within the EU: This has resulted in the movement of people from less developed countries within the EU to the developed ones thereby increasing traffic with the consequence of increase in revenue for Ryanair.

Concern for public opinion

2.1.4 TECHNOLOGICAL

Internet sales: Apart from scheduled revenue Ryanair's next line is ancillary revenue through partners such as EXPEDIA advertising via Ryanair's website for travel packages.

Low fuel consumption cars - With fuel price increases becoming a common phenomenon, automobile manufacturers are finding ways to produce fuel efficiency or electronic cars that will not eat into the pockets of travellers. If this will make the cost of travelling cheaper, and if the shifting cost is low, travellers may resort to travelling by road.

High-speed trains: The emergence of high-speed train services such EuroStar, may shift some travellers from air travel to trains if the fares are comparable.

Internet competition: The Internet has allowed travellers to book via the websites of the airlines. This eliminates the travel agents thereby boosting the profit of the airlines. Ryanair customers are to check in via the company's website and to print their boarding passes thereby reducing the time spent on checking in and eliminating the cost of printing boarding passes. Customers who fail to produce their printed passes are charged for issuing new ones to them at the airport.

Video and Teleconferencing: With this technology it is possible to hold business meetings with partners and colleagues without having to travel for the meeting. This reduces business travelling and hence revenue for Ryanair.

Fuel efficient engines and airframes: Technology has enabled the manufacture of aircrafts that do not burn much fuel thereby making them much fuel efficient. This will cut down on the amount of fuel consumed thereby enhancing profit.

2.1.5 ENVIRONMENTAL ISSUES

Pollution: The industry is said to be responsible for about ????? of carbon emission and it is also said that the tax on carbon emission will increase by about 2-3%. This will reduce Ryanair's cost base and hence profits.

Green issues:

Global warming

Noise level control

Land for growing airports

2.1.6 Legal

Pending litigations: French Pilots and Cabin crew's case; Dublin Air Authority case against Ryanair's refusal to pay extra landing charges

Allegations of misleading advertisement: Ryanair has been accused of advertising prices and destinations which are not near the reality.

Health and safety: With increase terrorist activities there is need for vigorous checks such as body scanning. This will cause delays in take off reducing the turnaround time.

EU Open sky policy: deregulation of the air industry has opened up opportunities to acquire more routes into continental Europe.

2.2.0 THE INDUSTRY ENVIRONMENT

These are internal factors that have a direct impact on the industry. A business has to understand the dynamics of its industry and markets in order to compete effectively in the market place.

Porter classifies these forces into five categories known as Porter's Five Forces.

2.2.1: Internal rivalry within the industry (competition).

Internal rivalry within the industry stands at the heart of Porter's Five Forces according to Porter. Since the airline is saturated this is the most important force today in my view. Nevertheless, Ryanair has a first-mover advantage in the low-cost airline industry. Many others followed but failed. Since the deregulation of the European airline industry, of the 80 low cost operators that had begun operations, 60 had gone bankrupt, (Lee 2000). The market is highly competitive as there are more service providers than needed in both local as well as international markets.

Ryanair's most competitive rival is EasyJet, however the competitive rivalry between the two of them is just very moderate because each of these airlines operates on different routes to avoid head to head competition. There is very low differentiation in the market as the difference is only the price charged.

If any company decides to compete on the same basis as Ryanair, there will be heavy pressure on prices, margins and hence profitability.

2.2.2: Threat of Entry into the market

The threat of entry analyses the threat that new entrants into the industry may pose by way of diminishing the returns of established companies.

The barriers to entry into the low-cost carrier sector include:

High capital investment

Restricted slot availability

Need for low cost base -economy of scale

Flight authorisation by the respective EU countries

In the case of Ryanair a strong brand identity built up over the period since deregulation has meant that any potential new entrants would have to spend quite an amount of money in terms of sunk costs in advertising to compete on level playing field. Besides, direct bookings on the Ryanair website has meant that there have been enormous savings in marketing and distribution costs.

The price cutting strategy of Ryanair will send any new entrant that tries to compete with the company crushing out of the market due to erosion of margins.

Restricted slot availability makes it very difficult for a new entrant to find suitable airports to operate.

Some people assert that aircraft purchase cost can be a big barrier for a new entrant but it can also be argued that this may not be the case because planes can be leased instead being purchased.

In addition any new airline must commit to environmental and security issues which might deter such entrants from entering.

2.2.3: Bargaining power of suppliers

This analyses how much power suppliers wield on the industry and the firm. A higher power of suppliers may result in unfavourable terms to the firm with the consequences of erosion of profitability.

Apart from ancillary services the basic suppliers in the airline industry are made up of suppliers of aircrafts and fuel.

The main suppliers of aircrafts are Boeing and Airbus. This may make the bargaining power of these aircraft suppliers to be very high. Switching cost between suppliers is high because all mechanics and pilots will have to be retrained as a result.

Ryanair's main supplier is, however, Boeing with which it has a healthy relationship. Apart from the supply of aircrafts to the company, Boeing supplies other ancillary goods and services to Ryanair. These include technical support and training, spare parts, training of the flight crews, software and field services engineering. Nevertheless, Ryanair announced on 15 December 2009 that their negotiation with Boeing for the purchase 200 Boeing 737- 800 of aircrafts has been withdrawn. Besides, the company indicated that it will not resume negotiation for the purchase of new aircrafts and that it will concentrate on the existing business. (Centre for Aviation news, 2009).

In terms of fuel, the price of aviation fuel is directly related to the price of crude oil. There is little that Ryanair can do because world trade and the action of OPEC govern the price. The Middle Eastern countries dominate the market; conflicts in this region and other factors help to trigger any price increases. The bargaining power of suppliers is very high. Ryanair hedges against any price increases.

Other suppliers are airport authorities that allow slots, and regulators. The power of these suppliers is very high as they can withdraw the license to operate.

2.2.4 Bargaining power of buyers

Buyer power in the European airline industry is quite strong because switching costs are very low. Customers can find the fares being charged by rival airlines by checking on their websites. The fact that most low cost carriers sell their seats via the Internet means that any price discrepancies can be found very easily. In addition there is no loyalty from the customers to the airline; all they want is low price. This means Ryanair have to keep their prices competitive in relation to the industry level.

2.2.5: Threat of Substitutes

The threat of substitutes to the airline industry comes in three main forms. These are road, rail (e.g. Eurostar), and to a lesser extent boat service. Of these, rail seems to offer the greatest threat because, certainly around Europe, it offers excellent continental services around the major cities that Ryanair fly to. Rail travel has several advantages over air in terms of the fact that they can be more localised and more accessible but one must endure a longer journey also,

Because of very low switching cost for the customer and no customer loyalty, any dissatisfaction from Ryanair's customers will result in fall in traffic of some customers. The threat of substitutes may be deemed as medium to low.

The emergence of video conferencing facility that is made possible by the development of technology may result in business meetings with associates abroad being made unnecessary. Even though this phenomenon is not a means of transport, yet it can be viewed as potentially a threat to business traveling.

2.2.6: Value network and business partners

Ryanair enters into alliances with other firms for the supply of certain products and services.

Ryanair's partners include:

Boeing: supply of aircraft, maintenance and training of pilots

DALMAC: recruitment and training of cabin crew

EXEPEDIA: for hotels (now abrogated); replaced with Priceline

MBNA - credit cards

BCP for airport car parking

HERTZ: for car rentals

Acumus Insurance Solutions (AXA): for travel insurance

Hispano Igualadina: for bus services in Spain

3.0 RESOURCES AND CAPABIITIES

Resources are tangible and intangible assets a firm uses to choose and implement its strategies. Resources can be divided into many categories.

3.1 Valuable Resources and Strategic Assets

a. Physical Resources

The fleet of aircrafts: - ????

Airports for landing: Ryanair uses secondary and regional airports for its operations. Even though the company does not own these airports, they are assets to it because they offer the company cheaper operating cost base.

Headquarters in Dublin

A well known brand name

b. Human Resources

Well-trained pilots: Ryanair's pilots are among the best trained in the industry

Motivated employees: The company has 3000 employees as at ??????

c. Financial Resources

Financial resources are provided by the Ryan family, shareholders and creditors.

d. Intellectual Capital

This is knowledge and skills and expertise of the pilots, engineers and cabin crew and directors and managers that help enable the company to create value and compete.

Assets

Physical

Fleets -

Destinations-

Countries -

Human resource

Total employees-

CEO - Michael O'Leary

Other officers-

Financial

Cash reserve-

Total assets-

Equity-

Debts-

Intellectual capital

The knowledge and expertise of staff

Threshold and core resources and competences

Threshold resources

Threshold competences

Headquarters

Well experienced management and employees

Financial resources

Aircrafts and equipment

1. On-line booking and check-in

Point-to-point routing

On-time service delivery

Quick turnaround time

Low maintenance cost

High load capacity

Low marketing cost

Core resources

Core competences

Competent management team headed by Michael O'Leary

Pilots, crew and other staff

No frills

Route policy

Ability to continuously drive cost of operations down

3.2 Capabilities for competitive advantage

Capabilities are the skills and knowledge possessed by a company, which enables it to convert the resources to create value. Ryanair's capabilities include:

Large brand awareness: Ryanair is a notoriously well-known brand that rings in the mind of travellers as a low cost airline.

Low airfares: The Company with its low-cost strategy charges the lowest airfares in the industry in comparison to its competitors. The ability to manage its costs results in the low fares charged.

Quick turnaround time: Ryanair's turnaround time is about 15 minutes and delays are not tolerated. The low turnaround time suits those customers who are time conscious. Besides, it minimises waiting time at the airports.

Efficient processes: Ryanair's no-frills strategy has improved their efficiency and productivity. The traditional flight services such as seat allocation, complementary drinks and meals, and free newspapers have been eliminated. The airline instead charges the in-flight services and other travel expenses such as travel insurance and for the use of the toilet.

Focus on particular market segment: The airline targets Continental Europe's population of price sensitive travellers including business travellers (with a flight to Morocco in Africa).

Innovative strategies on cost cutting: It designs a better service system that will keep costs low. The company comes up with innovative strategies from time to time. For example, the use of the internet for flight bookings and to check in, the use of standard type of aircraft - Boeing 767-800

An astute Chief Executive: Michael O'Leary, the Chief Executive who comes up with cost cutting strategies that he pushes through and whose controversial character creates great publicity for Ryanair.

Outsourcing ancillary services

Unique Resources

Core competences

In-flight sales

Frequent flight

Powerful, fearless and knowledgeable chief executive and management team

Popular website

The best low-cost airline

Cost cutting strategy

Best on-time in the industry

Low rate baggage lost

Fast turnaround time

First mover advantage

SWOT ANALYSIS

Strengths

Weaknesses

High load factor

Low cost leader

Innovative cost reduction strategy

First mover advantage

Fast turnaround time

Established routes/network

Ancillary services

High safety record

On-time delivery (punctuality)

High seat density

Common fleet

Modernised fleet

High aircraft utilisation

Small headquarters

The business is largely based on Europe

The poor perception of the CEO as being arrogant, this attracts bad press coverage

Distance of airport from city centres: customers may overtime find it inconvenient

Poor customer service

Sensitivity to fares

Opportunities

Threats

Further EU enlargement will result in possible new routes

Benefits from geopolitical risk as business is based mainly in Europe

Economic downturn: makes customers more price sensitive

Advertising space on website to generate more revenue

Power of the CEO. If his successor is not as ruthless as he is in cost-cutting strategy

Rise in fuel cost - increase cost

Increase of low fare competition

Limited growth in the market

Regional airports may gain bargaining power and increase charges

Limit of growth posed by Ryanair and EasyJet

Increase in air traffic control charges as more planes fly

Introduction of duty for fuel or environmental charges

Unionised employees may ask for better conditions of servicewithout which they may resort to lockouts and other means to press their demands.

3.3.0 Structure, culture and value added

3.3.1 Structure

Power, authority, responsibility structure

Standard Board of Directors made up of 8 non-executive directors and one Executive Director (Michael O'Leary)

A chief executive who wields enormous power to do whatever he thinks fit for the airline.

Mostly un-unionized workforce: Ryanair does not allow the workforce to form unions.

3.3.2 Corporate culture

The culture of Ryanair is built around efficient operations and low-cost strategy.

Value added

Ryanair passes its cost cutting to the customers in the form of low fares but also makes them pay for in flight services such as food, water etc. Despite the often sited poor customer service customers continue to patronise the airline because of their perceived obtained by way of the

4.0 STRATEGIC SITUATION AND POSITIONING

Ryanair is undoubtedly Europe's first and largest no-frills, low-cost airline (www.ryanair.com)

The company's strategic intent is based on maintaining or increasing its competitive edge over competitors by offering low airfare to attract customers. It, therefore, aggressively employs cost-cutting strategy in order to charge the lowest fare to the customers to create volume.

According Porter a company can employ any of four models for its strategy.

Low cost strategy

Differentiation

Focused strategy

Hybrid strategy

The low cost strategy is adopted where an organisation seeks to achieve the lowest cost within its industry and targets its products or services at a broad market.

Ryanair's objective is to be Europe's leading low-cost scheduled short-haul point-to-point carrier through continuous improvements and expanded offering of its low-fare services. The airline tries to achieve this objective by adopting five main strategies.

Fleet commonality: The Company uses only one kind of plane (Boeing) which reduces the cost of staff training, aircraft maintenance and the facility of obtaining spare parts.

Management of airport charges and route policies: Ryanair chooses only secondary and regional airports where traffic is less congested and airport charges are very low. The company chooses routes that are compatible with its low cost operations and withdraws from any that becomes less profitable.

Point-to-point service: The firm operates only point-to-point service to eliminate the cost of connecting passengers.

Management of staff costs and productivity: the airline charges crew for uniforms and staff are banned from charging their mobile phones on the company premises. Routine servicing of aircrafts are done by staff. As regards staff productivity, Ryanair pays its staff modest salary but has a performance related pay structure which urges employees to maximise the number of sectors flown daily. In this way the firm controls productivity and keeps staff cost down.

Management of marketing costs: Marketing costs are reduced by customers booking directly on the firm's website thereby eliminating travel agents, advertising mainly on the website.

Outsourcing services: Services such as aircraft handling, ticketing and aircraft maintenance are contracted out to third parties to ensure efficiency. The company negotiates favourable terms with these contractors. Ryanair staffs carry out routine maintenance.

4.1 Positioning

Ryanair positions itself as the largest low-cost, no-frills, point-to-point short haul airline in the industry. The company boasts as number 1 in many areas:

Passenger traffic

Passenger growth

European routes

Customer service delivery - punctuality, fewest baggage loss, flight completion

5.0 STRATEGIC OPTIONS

The strategic choices available for Ryanair to grow may be as follows:

Increase the existing business and use volumes to drive down cost further

Introduce new complimentary products to air travel to augment revenue

Enter long-haul business in addition to the short-haul

Enter markets outside Europe

The strengths, weakness, opportunities and threat to each strategy are presented in the table below.

SWOT ANALYSIS OF STRATEGIC OPTIONS

Expand the existing business and use volumes to drive down cost further

Strengths

Market leader

First mover advantage

Financial strength and low cost base to support further cut in fares to generate volume

Weaknesses

Poor image in relation to customer service

Retaliation from other market players

EU regulation on unfair competition

Opportunities

Economic down turn makes customers more price sensitive. Travellers will shift from other competitors and substitutes if they find Ryanair's prices far lower

Threats

Competition from other low-cost and long-haul operators. Price war may erupt.

EU may apply unfair trading regulations

Regional governments may take action to protect their national airlines

Introduce complementary products to generate revenue

Strengths

Large volume of customers who can be targeted with new products such as holiday packages, rent a car, tourist destinations

Increased profitability to subsidise the core product

The company's popular website to be used to advertise the new products effectively

Low cost experience to be leveraged

Weaknesses

New products are associated with risks of failure

Opportunities

Increased use website

Threats

None that I can see

Long haul business

Strengths

Leverage on short-haul experience

Strong financial position

Leverage on low-cost experience

Weaknesses

Lack of experience in the long-haul business

Lower customer satisfaction if no-frills strategy is employed.

Other countries may not have open air policies

Opportunities

Exploit markets in Africa and other countries

Strong competition from other continental airlines

Threats

Fuel price increase may jeopardise the business

Competition is very fierce in this market

Replicate low-cost model outside the EU and in other countries

Strengths

Leverage European experience

Existing brand image and reputation in the EU

Has financial strength to support expansion

Weaknesses

Conditions in other countries may not be favourable

Different economic and political systems

Ryanair may not be able use the same 'arrogant' and aggressive behaviour for favourable terms

Non-availability of secondary airports

Opportunities

There are growth opportunities in other European, Asian and in African countries to be exploited

Threats

Governments may pass laws to protect their home carriers.

It is obvious that the low-cost strategy will one day hit the walls and the advantage will be lost in the present market segment. I will, therefore, suggest the following options.

Replicate the low cost strategy in Africa (West Africa to be precise)

Operate long-haul to Africa

Options evaluation

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