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One of the European’s cheapest short haul airlines is Ryanair Holdings Plc. Grown from being family owned to a public listed company. With its dominant C.E.O, Michael O’Leary proved his unmatched leadership qualities by introducing no frill business to Ryanair. The Ryanair culture enabled it to remain profitable (except for year ended March 2009 when it made a loss of â‚¬169.17million) in the environment where big industry players like BA are merging (merged with Iberia in 2009) in search for survival and other airlines are forced out of business (Albatros Airways).
Ryanair has adequate resources and capabilities ranging from cash and cash equivalent to human resources and not forgetting its continuously growing fleet of Boeing 737-800. Ryanair is enjoying concessionary charges by use of secondary airports. The culture of cost consciousness helped the airline to bring cost down and hence profit maximisation.
Currently Ryanair faces competition from Easy Jet and other airlines that it shares similar routes with. However, Ryanair prides itself of being highly liquid with cash reserves amounting to â‚¬ 1,583 million (2009 financial statements). The current strategy of being cost leadership may not be sustained forever since it can be easily copied by competition and wane its profitability capability.
Several strategic choices are available to Ryanair are; merger and acquisition, market development, alliances, diversification, and consolidation. In this report and according to the company’s capabilities and other analysis considered, diversification strategy has been recommended. Although the strategy is risk, a proper business appraisal must be done to justify risk and returns. The strategy helps to spread risks and at the same time profit maximisation.
It is therefore the sole responsibility of Ryanair management who are tasked with fiduciary duties to convince the shareholders with landmark business case for diversification. As long the values addition is envisaged in this strategy, management should consider it on the behalf of all stakeholders concerned.
1.2 Terms of reference
In part fulfilment of the requirements leading to the award of MBA in Project Management by University of Wales, I will produce a strategic report based on Ryanair Holdings Plc.
1.3 Aims and objectives of the report
The report will consider the external environment affecting Ryanair, resources and capabilities available to the company, its strategic situation, the strategic choice open to the company and finally a strategic decisions and recommended strategy for Ryanair that it can follow to satisfy its stakeholders profitably.
1.4 Company overview
Ryanair is in short haul European Aviation Industry is the industry. Its competitors are Aer Lingus, easy Jet only to mention but a few. Ryanair is the main subsidiary of Ryanair Holdings Plc. Ryanair’s main business is to fly passengers to its 150 destinations, like any other business, Ryanair strive to satisfy customer with its market offering profitably hence the company opened ancillary services to the customers.
Ryanair tries by all means possible to avoid incurring losses, Michael O’Leary was quoted saying “I am warning them that if they don’t get off their backsides and reach a deal we will cancel orders and change course” (Evening Standard, Monday 2 November 2009). This warning message was sent ahead the anticipated loss in the second half. Ryanair has “eyes reserved for the future direction”.
2. EXTERNAL ANALYSIS
External analysis will concentrate on the variables whose and will be analysed at three levels which are macro-environment, the industry environment and value networks and business partners.
2.1 The macro-environment (See appendix 1)
Terrorism is a threat not only to Ryanair but even other air lines. On the 25TH of December 2009, there was a botched attack on Amsterdam- Detroit bound aeroplane. What a failed Christmas party for Al-Qaida! A Nigerian man linked to Al-Qaida wanted to explode Delta airline plane. The incidence of terrorism has since resulted in increased security checks and further investments in security equipment. This has affected Ryanair’s turnaround time and ultimately affected its sales revenue adversely. We are told in the past (2006), Ryanair cancelled 279 flights in light of terrorism attacks. The revenues and profits related to these flights were lost; this led to Ryanair incurring loss in revenue then.
Recession has affected Ryanair negatively. People have low disposable income thus less people using air as a means of travel. Furthermore, Ryanair has to slash its fares down to accommodate inflation and recession. People have found train as a direct substitute to air travel especially for short distances.
Unpredictable fuel price increase affected Ryanair since it had not hedged against such increases. Profit margins have been affected negatively as this increase could not be passed on to the already “mourning and groaning customers”.
The increased number of wheelchair passenger (disabled) carried at discounted charge will mean that Ryanair will be losing out money. But at the same time it’s a sign of social corporate responsibility of Ryanair which all corporate bodies are requested to display.
Introduction of internet enabled Ryanair customer to book online and at the same time to do on-line check-in. This resulted in fasts turnaround time because customers will come with their printed boarding passes on the day of flight.
Furthermore Ryanair use of fuel-efficient Boeing 737-800 with high carrying capacity.
The recent snowing (January 2010) in UK has resulted in cancellation of planes resulting in loss of revenue to Ryanair hence loss of revenue.
Investment in the latest air craft and engine has enabled Ryanair to reduce carbon emission since the Boeing 737-800 has less fuel burn. This move towards such planes contributed positively to the consciousness of Ryanair towards the environment and hence creating a good picture in the image of environmental campaigners.
The EU regulation aimed at customer compensation will increase costs for Ryanair since Ryanair it’s proud of itself to be cost efficacy air line. Industry wide, there will be a loss of â‚¬ 200m annually.
2.2 The industry environment.
Ryanair does not operate in vacuum. The industry is very competitive, with players like British Airways, Aer Lingus and many others. The main competitor for Ryanair is Aer Lingus, but Ryanair proved to have contained this competition by offering low fares to its customers. The competitive rivalry is medium.
Railways transport is a threat since Ryanair operates short haul routes, furthermore, Ryanair discourage carry- on luggage. Traveller with carry-on luggage will prefer travelling by train to flying by Ryanair. Again the threat is medium to low.
The increase in passenger by 19% in August 2009 against 5.78m in August of 2008 signifies the less power the customers have in relation to the services offered by Ryanair. Ryanair, through its low cost model, customers find themselves without option by to fly with low fare airline. The power of buyers here is low.
The industry in which Ryanair operates, demand substantial outlay, this makes it difficult for new entrants into the industry. Threat on new entrants can classified as low to medium. See appendix 1 as well.
2.3 Value networks and business partners
To sustain the low cost model, Ryanair benefited a lot in its value network. Internet booking together with internet check-in reduced cost tremendously. Travel agents were eliminated (direct booking) in a bid that saw Ryanair increasing its profits margin. Sales for the year ended 31/03/09 rose by 8.4% above that of 2008.
No services are provided free of charge by Ryanair to its customers. All services like meals are provided at an extra cost to the client, exception is given for the use of toilets only. Again, elimination of such services which do not increase profit explains why Ryanair is a cost leader.
Ryanair use its own fleet of aircraft than leased ones. This enabled Ryanair to increase its profit levels since own aircraft are cheap to run given its short life span of 2.4 years. Leased planes attract a high lease charges given their high maintenance costs.
A charge levied by Ryanair on more than one carry-on baggage coupled by on-line check-in makes their operations efficacy. Furthermore, turnaround time becomes faster hence increased routes served by each plane.
The adoption and use of Boeing 737-800, whose carrying capacity is high, resulted in benefits accruing to Ryanair like, increased load factor, low fuel consumption and less environmental costs.
Ryanair is known to be using secondary and regional airports which are cheap. This again indicate how strategically mindful is Ryanair in business partner selection with the view of bringing down costs.
The ability by Ryanair to secure and guaranteed supply of its fleet from Boeing without immediate payment of cash up front puts the airline at an advantage. Cash flow is the oxygen and profit is the blood.
Other value network factors why Ryanair is successful are: in-house marketing, advertising on airplanes and outsourcing of services at international airports.
3.0 RESOURCES AND CAPABILITIES
3.1 Valuable resources and strategic assets
Refer to appendix 4
Which company can compete without valuable resources? Ryanair pride itself of having modern aircrafts, Boeing 737-800 whose benefits are mentioned above. Growing fleet to 200 aircrafts by 2009, indicate the pivotal role played by aircrafts as resources of no direct substitute to this business.
In 2009, Ryanair has more than 150 flight routes, with majority routes originating from London-Stansted base. Increased airports give a greater catchment area and hence increased passengers. Passengers carried by Ryanair in 2008 stood at 58.5million. This increase may have been directly or indirectly brought about the increase in the number of airports serviced by Ryanair.
Cash is the life blood of the business, Ryanair has â‚¬ 1,987 million as at 31/03/09 in cash and in short term investments. A company with such resources stand a higher chance when it comes to negotiations of loans from the banks. Such big amounts of cash available give a higher credit rating by lenders. Furthermore, Ryanair can easily meet its future unbudgeted obligations without recourse to debt funds.
Internet has enabled Ryanair to lower down its booking and check-in costs, so as a result of this, Ryanair’s database is of crucial importance to its cutting edge. Technology used in their database plays a key role as well. Without internet technology and dedicated database Ryanair will not have achieved faster turnaround time which later resulted in reduced costs. Ryanair’s website is said to be the largest travel website in Europe.
3.2 Capabilities, knowledge and intellectual assets
For any organisation to succeed financially or socially, it should have some elements of competences. Ryanair has set itself a good performance record among its peer budget airlines because of its outstanding attributes which are linked to cost cutting where necessary.
The contribution of the staff and particularly of Michael O’Leary is of great immense to the success of Ryanair. ”Michael’s genius is his ability to motivate and energise people…” said Tim Jeans, former Sales and Marketing Director of Ryanair. It’s clear from the statement how talented is Michael and his ability to diffuse skills to his staff. Not mentioning Michael’s ability to secure strategic assets like Boeing 737-800 and to anticipate future impact on the organisation’s profits it will be fool hard to do so.
Ryanair managed to increase airports served to 150 in 2009. Increase in airports goes in hand in hand with increased capability and skill to manage and maintain those airports to the mutual benefit of the company and stakeholders. In addition, Ryanair dominated secondary airports which cost less than primary airports. This strategy provides goal congruence to its objectives of being a cost leadership. Moreso, Ryanair dominated some routes, in one instance, MyTravelLite plying Dublin – Birmingham route was forced to withdraw.
The ability by Ryanair to reduce administrative costs from â‚¬17.7m in 2008 to â‚¬12.75m in 2009 without affecting the service delivery level shows how capable is the company in driving its costs down.
The measure of passengers to available seats (load factor) declined by 0.2% in 2006. This might have been caused by 2% increase in average passenger fare.
Brand awareness and recognition played a role. Customers’ associated low fares with Ryanair and truly speaking Ryanair offer these low fares. Ryanair managed to send clear message about its market offering (travel) to the target segment of the market. Promotion mix that covered television and print advertisement run by Ryanair promoted its brand awareness of low fares and no frills airline. See appendix 2.
The successful implementation of low-fare model by Ryanair in these trying times of recession which has seen companies like Albatros Airways ( low-cost airline once based in Albania, Tiran but closed down in 2006 due to unpaid airport and air traffic control fees) closing down, it’s a clear indicator how knowledgeable and team working is the Ryanair management and staff. To quote Michael, ”… The difficult bit is to sell the lowest airfares and make profits…” Ryanair is charging low airfares and still make profits except in 2009 where losses were recorded due to the recession. Ryanair outperformed its competitors see the table below:
Ryanair: FY (2009)
easy Jet: FY (2009)
Return on equity
Net Profit Margin
Source: Ryanair & easy Jet websites 17/11/09, websites in bibliography below.
In addition to its main business, Ryanair offer ancillary activities without jeopardising its core business. These ancillary activities include excess baggage charges, in-flight sales and car rental services. The revenue from ancillary activities is rising faster (35.74%) and sales from scheduled revenue rose by 27.1% in the same year (2006). The business acumen gives a strong business synergy which has earned Ryanair a name among world renowned air lines like British Airways. For further information see appendix 2.
3.3 Structure, Culture and Value added
Given the rate of action and implementation of strategies by Ryanair, one can conclude that there is flat structure in place. Decisions at Ryanair are made and implemented in a short time frame. Characteristic of a flat structure are dominant at Ryanair. Give the dynamic of the operating environment in the aviation industry; there is a need that management act on time and even coming up with contingency measures.
How things are done here is the culture. The way things or activities are done maybe formal or informal. Ryanair’s culture appears to be characterised by mostly informal one. Staff is not allowed to charge mobile phones at work as these amounts to electricity theft.
The most prominent culture of Ryanair is cost containment. Ryanair is known to be a no frill airline as this is aimed at cutting down costs for unnecessary activities and if required by customer, it attracts a charge.
The way the strategies are discharged, reflect that Ryanair’s culture is embedded in its strategies. All decisions taken by Ryanair are earmarked at cost minimization.
Activities that are value subtraction to Ryanair are not taken aboard. Such activities will only be considered when the beneficial is willing to pay for them to achieve a compromising point. Ryanair charge customers for all refreshments provided on board. Other value addition actions taken by Ryanair include: use of secondary cheap airports, direct booking and check-in, direct flights and charging for more than one carry-on luggage.
4. THE STRATEGIC SITUATION
Ryanair’s position can be best understood in the following paragraphs:
Financial Ryanair is healthy with cash and cash equivalents of â‚¬ 1,986 million, which puts it in a competitive position to acquire opportunities as they come. Furthermore, such amounts of cash will help the organisation to meet future uncertain obligation. Holding such cash may also mean that the company it’s not resourceful.
Committed staff especially Michael O’Leary makes Ryanair to stays afloat given the current recession which has spelt doom in other organisations. Michael stood the criticism from many even from the press. His character gives confidence to the stakeholders.
Ryanair own its fleet of aircrafts. This improves profit since there will be few expenses to pay as compared to easy Jet which leases its fleet and pays lease rentals.
Direct sales of tickets contributed to the increase in revenue since agents’ costs have been eliminated.
Concentration on short haul flights makes Ryanair prone to entrants of a new player offering same services as Ryanair hence leading the sales of Ryanair into doldrums leading jeopardising of Ryanair’s profitability.
Poor customer care may result in the loss of customer which may in turn lead to decreased sales. In one incident, Ryanair charged £18 to carry a man with cerebral palsy to use a wheel chair. Customers who are not price sensitive but service sensitive may prefer to fly with other airlines with better customer service. Recently Ryanair has been branded as the worst airline for families (Metro, November 24, 2009)
Coverage of main cities hinders sales growth from customers who might want to fly to larger cities with Ryanair.
Ryanair can decide to merger for example with EasyJet so that it can lessen the competition and at the same concentrate the resources hence increasing sales. In addition to this, Ryanair can even acquire other small airline with its available cash and serve long haul flights. Its business portfolio will be enhanced and sales growth maybe realised for the benefit of the shareholders and even for the future growth.
Diversification is another opportunity available to Ryanair. This diversification can be a related diversification so that it will not stretch the resources of the organisation. The likely choice may be to venture into buses operation and /or theme parks. The ultimate effect will be increased sales and value addition to the organisation.
In any business, competition may not be ruled out. Ryanair faces stiff competition from EasyJet, British Airways and many more airlines. The effect of competition is that, expenses increases through advertising and also there is customer loss to the rival. All these may lead to reduced profit and low sales respectively.
Security plays an important role in restoring business confidence. There is threat of terrorism whose negative effect will be to slow turnaround time due to body increased searches and hence reduce sales.
Mergers of airlines like Lufthansa and Austrian airlines may pose a threat to Ryanair. These airlines may plan to run the same routes and offer the same airfares with better customer service to that of Ryanair. Ryanair may lose customers leading to reduced sales. In addition profit may go down as well due to increased costs in marketing promotion in bid to fight competition.
Increase in aviation fuel may reduce profit levels. In March 2007 fuel prices went up to $74 from $73 in October 2006 per barrel. Ryanair did not pass this increase to customer but however it affected its profit negatively since there was no price or currency rate hedge.
In 2006, Ryanair had pending litigation cases among them was; illegal receipt of â‚¬4m. The negative outcome of this case will mean that Ryanair will have to pay back the â‚¬ 4m. The repayment of this amount will reduce profit and even turning the carrier into reporting losses and hence negatively affecting stakeholder confidence.
The increased number of disabled passengers with wheelchair carried by Ryanair at below normal fare has resulted in a loss of revenue amounting to (37-25) x 83,333 = â‚¬ 99,996 in 2006 alone. If such passengers in other airlines they are asked to pay the full fare, Ryanair in future is likely to lose more revenue due to increased passenger of similar disability.
5. STRATEGIC CHOICE
Ryanair has several strategic choices available to it that can be followed for the purpose of business growth. The following are available:
This strategic choice is available to Ryanair. Ryanair can decide to remain within the current market and supplying the same services. For this to work, Ryanair will have to defend its market from new entrants so that it will remain viable. Defending the market for Ryanair will involve the following;
Ryanair will be required to invest in marketing mix activities especially sales promotion. Giving discounts on repeat customers, buy one get one free (BOGOF) marketing technique and royalty cards. Such marketing activities will help to retain customers and at the same time keeping away competition for a while.
Other forms of marketing mix that Ryanair may take are: Promotion of corporate image of the company through carrying out advertisements about the good side organisation. Messages to include information like reliability of Ryanair fleet, staff dedication to customers and direct flights operated by the organisation.
Hosting events like tennis tournaments may also help Ryanair to remain in the same market with the same market offering.
Market offering ( Product/service)
Remaining profit viable in competition infested market requires also the modification to the market offering. Ryanair may improve its service by offering free light meals on it planes.
The consolidation strategy appears to be financial feasible, since Ryanair has â‚¬ 1.6 million in cash and cash equivalents, but however, what about the issue of no frills? I suggest a cost benefit analysis must be carried out first. Also the business acumen of Michael O’Leary and his staff can make consolidation strategy a success.
Ryanair management are likely to accept this strategy if it results increased number of customers with increased sales revenue and at the same time help to fight competition.
Consolidation as a strategy is likely not to be suitable to Ryanair since Ryanair operates with no frills.
5.2 New market offering (product/service) in a new market: Diversification
For Ryanair to spread its risk, diversification is the appropriate strategy to take. Ryanair will able to move into new market with a new product. However, risk and benifits analysis should precede the decision. See appendix 3 and section 6 below.
5.3 Market development
Ryanair may offer the existing product into the new market for example flying to Africa and Asia. Since Ryanair does not have knowledge about the new market, cost savings will be difficult to realise and hence the option becomes unsuitable.
The availability of cash and human resources makes the option feasible. Also there seems to be fewer barriers to entry into Africa and Asia. Entry into new market usually results in competitor retaliation and hence increases the costs to Ryanair. Culture change in terms low cost model in the new market poses as a risk and hence making the option unacceptable.
5.4 Product development
To sustain the business and build competitive barriers, product development and /or product modification may be pursued by Ryanair. Such new products will be offered to the existing market. Product development for Ryanair will entail offering business class services.
Operationally, a business class service does not provide synergy and fit with the current low cost business model, rendering the option to appear less suitable. Feasibility, resources are available, but do the company have competences to execute the new product profitably since?
As the culture of Ryanair is geared towards low cost business model, stakeholders are likely to envisage more risk than benefits in the new product and therefore, they are likely not to accept this option.
The above mentioned growth strategies for Ryanair may be achieved in one of the following ways: mergers and acquisition, joint ventures, organic growth, strategic alliances and franchise. For further explanation see appendix 5.
6.0 STRATEGIC DECISIONS AND RECOMMENDED STRATEGY
6.1 Description of the Recommended Strategy for the company
There is a common saying that goes like; ”never put all your eggs in one basket”. Ryanair resources may be likened to eggs and neither do management nor shareholders want to lose these assets. Therefore, I recommend unrelated diversification strategy for the company to be adopted to satisfy its stakeholders profitably.
Unrelated diversification will see Ryanair moving away from its existing market, products and value networks and value chains. Under this method, Ryanair will go into retailing business (clothes, FMCG) for example in Asia, Africa and Americas.
Such development strategy will bring the following benefits to Ryanair;
Risk spread: the failure in other business portfolio will not spell a doom to the organisation as other portfolio can compensate for that.
Steady income flows: Airline business has off and peak times which makes the cash flows fluctuates and hence diversification in retail business (FMCG) will give stable cash inflows to the organisation.
Relatively cost effective: The fact that Ryanair is not the first mover in that market, most of the business models will have been tested and tried already. Ryanair will just modify so as to enhance the business models to gain a competitive edge.
It is of paramount importance that the shortfalls of diversification are brought to the attention of Ryanair and these are: No benefits will flow between the two businesses since they do not share the same value networks and value chain. Each business will have its own value network and value chain because of differences in business activities.
Business expansion comes with cost in research and development, marketing and management. The envisaged diversification here is no exception to this. Such cost will reduce the organisation’s profitability in the short run.
I further recommend acquisition as a development route for accomplishment of this growth strategy. Ryanair may acquire an already existing and established business in Africa, Americas or Asia.
Acquisition will give Ryanair speed realisation of the diversification strategy as industrial and business models will be in existence (developed by market pioneers). The cash reserves available to Ryanair can be used to meet the capital outlay to keep the strategy in motion.
6.2 Key strategic decisions and actions needed
For diversification to succeed, the following should be taken into account;
Ryanair should consider the sources of finance to fund this unrelated diversification. Currently Ryanair have large sums of cash available, these cash may be used get started. Given the effect that companies are still nursing from financial crisis, financial lenders are reluctant to extend loans to the organisation.
Development route is important as it enables the realisation of management’s actions. Available routes must be analysed and the best possible taken aboard. In this scenario, acquisition has been considered to offer the desired benefits.
Strategically, external environment should be scanned to analyse the benefits and risks associated with diversification so as to manoeuvre with appropriate action plan in place. It also helps to come up with appropriate structure in place to counter the adversaries got from the environment. For example global warming may be discouraged by producing and marketing products which are environmental friendly.
The impact of new business in this case, the effect of diversification on the existing business should be evaluated. This can be done using ‘if and what’ technique or scenario building. This will help management to understand the overall effect of the business direction under varying environment affecting the business.
Strategic decision in quantities and calibre of personnel required should also be appraised. A good mix of highly skilled middle level and staff of lower level skills should be chosen to ensure smooth running of the business.
6.3 Resources and timing implications
For this strategic decision to be implemented successful, the following resources will be required;
There should be enough money to cover all start-up expenditure which will include, research and development, marketing (direct and indirect), human resources training, capital expenditure, and revenue expenditure. Currently, Ryanair has about â‚¬ 2 billion and this amount may need to be increased through rights issue or borrowing from the bank. Given its cash position and operating financial results which are financial sound, some banks / financial lenders may consider Ryanair to be less risk.
Human resources play pivotal role. A good mix of personnel calibre in terms of skills should also be considered before the decision of diversification is carried out.
A sound relationship with other economic players like regulators, industry boards, suppliers, environmental pressure groups, and who will be the customers must be appreciated.
The diversification strategy should be done in phases so that the current operations will not be deprived of working capital. The timing of this strategy should be when the current market reaches maturity.
Given the dynamic of the operating environment and the current financial quagmires which have left some companies without option but to shut the doors to the customers, it means Ryanair has to be alert and remain innovative.
Its current capabilities and culture type gives it a cutting edge in remaining profitably. But for how long these profit streams will continue? Not fully utilised resources must be made to ”sweat ” for the company so that in the event of poor performance in this industry, Ryanair will be compensated from other operations.
Strategic options available to the company are many, but unrelated diversification appears to be the best in this scenario. Its consideration has been found to be working in the best interest of all the stakeholders concerned. Also the strategic option should be not taken as an end to itself; it remains the fiduciary duty of management to ensure shareholder’s investments are safeguarded now and in the future. How this should be done has been outlined in this report and its sole responsibility again to consider timing and implications of such actions on the company.
Ryanair was in receipt of government assistance in which it was now being asked to repay back. This could affect Ryanair adversely since the payout will not have bee
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