The Irish Airline Ryanair Commerce Essay

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It looks at Ryanairs current strategy and the management of that strategy. It identifies how the business operations and functions impacts on the carrier's customer relations and leaderships with regard to their overall strategy. It also gives a brief evaluation of Ryanair's financial structure as well as an environmental analysis of the European airline industry and how this affects Ryanair. The report is mainly a case study analysis based on Eleanor O'Higgins' review of Ryanair conducted in 2004. However, other secondary research has been analysed and used to support the arguments put forward in this document.

II. Current strategic position

To evaluate any organisations strategic position certain factors have to be assessed. These include those below and also the environmental analysis which follows later in the report.

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II.1 Market Segmentation

Ryanair lay claim to their market segment by stating they were 'Europe's first no frills airline', www.ryanair.com. Ryanair have made strategic decisions based on increasing their competitive edge, the main one becoming involved in attracting customers at both ends of their routes. Haberberg and Rieple (2001), support this by showing that Ryanair's key source of revenue from as far back as a decade ago has been in enticing passengers from France, Italy and Scandinavia. This has had the advantage of increasing their market share as well as the added bonus of creating a well recognised brand name across Europe.

II.2 Prescriptive, Emergent or something unique?

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'A prescriptive corporate strategy is one where the objective has been defined in advance and the main elements have been developed before the strategy commences….an emergent corporate strategy is one whose final objective is unclear and whose elements are developed during the course of its life, as the strategy proceeds'. Lynch (2000) As is shown above by Lynch (2000) the two recognised strategy models are extremely different, however these are the two dominant strategy approaches as stated by Dennis Foster in his lecture on Managing Strategic Change (2006). It is safe to recognise straight away that Ryanair does not sit uniformly with either strategy. However certain aspects or functions could certainly adhere to one or the other as these are sections that make up the carrier as a whole and for an organisation of Ryanair's size different parts would have different aims and objectives underneath a main umbrella strategy for the organisation. For example any planning undertaken by Ryanair for new routes or planes would follow the prescriptive model as the objective would have been defined beforehand and elements such as finance will have had to have been agreed before any purchasing goes ahead. On the other hand emergent strategies may be in place for things like training and development where elements can be discovered along the way for example if an issue arose where staff needed more health and safety training then the training programme could be redirected. Ryanair, as already stated, follows neither strategic approach religiously and possesses a strategy unique to their organisation, which has identified their needs and objectives. However their approach to strategic management isn't unique in itself as the majority of organisations will tailor strategies to suit their business' own individuality.

II.3 Competitive Advantages

Their main competitors are carriers including easyJet, BMI baby, FlyBe and ThomsonFly all of who try to attract potential customers by emphasising their low cost tickets. This makes the competition in this market segment fierce as in order to offer the lowest fares, costs must also be kept to a minimum. The well discussed fact that Ryanair possesses a more than favourable relationship with airport operators has benefited the carrier in a time of industry growth and aggressive pricing. The carrier continues to pay little or no costs despite being the focus of the EU Commission in February 2004, 'which ruled that Ryanair had been receiving illegal state subsidies for its base airport at publicly-owned Charleroi Airport', O'Higgins (2004), see Appendix C for full details of the controversial dispute. Ryanair and the airport in question defended themselves by declaring they paid a fee for every customer and therefore complied with the EU state aid rules. O'Higgins (2004) claims that Michael O'Leary's main argument was that the 'state aid rules allow the Wallonian government to stimulate traffic at an unused airport facility in exactly the same way that every private airport reduces its charges it if wishes to grow its business'. However, although these decisions by the EU Commission went against Ryanair, it also made them even more of a household name across the EU. The free publicity was an added bonus, as well as the position Ryanair took, of being almost a saviour of the lesser known airports, bringing them trade and tourism and then being persecuted for it.

III. Functioning

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A business' functions and internal resources can be considered extremely important to an organisation. When running smoothly they ensure business operations are kept on an even keel. If any aspect is disrupted or an issue arises then the whole value chain can come apart. This section firstly provides a SWOT analysis of the company, giving a brief overview of the company then looks at some of Ryanair's most important functions or business areas and how they might influence or affect strategic decisions

III.1 SWOT Analysis

Factor Ways which factor applies to RyanAir

Strengths _ Marketing - strong branding and

reputation, aggressive price strategy.

_ Low costing due to airport operator

deals.

_ Reputation as biggest budget airline.

_ Lots of publicity due to O'Leary and

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controversial issues.

Weaknesses _ Cash tied up in purchase of new planes.

_ Entire company based on European low

cost airline market.

_ Shock profit warnings may have used

cash reserves and weakened fiscal

structure

_ Refusal to back down over issues such

as EU Commission

Opportunities _ Possible new routes,

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_ New planes = larger capacity.

_ Advertising space on website and

planes, more revenue

Threats _ Competitors - BMI baby, Easyjet,

ThomsonFly.

_ Economic recession would mean less

disposable income.

_ EU Commission could put restrictions

on company if do not adhere to state

aid rules

III.2 Human and Technical Operations

Human resources can be considered one of the most important functions of a business. The vast majority of organisations all employ staff and Ryanair is no exception especially due to their size. When the carrier was established over twenty years ago they only had fifty one members of staff on their payroll. Their staff total for last year was 2,288, www.ryanair.com. With this amount of staff they have to ensure that, in order to have operations like call centres and cabin crews running smoothly, they keep their staff happy and motivated. They do this by offering incentives and a share option scheme which allows employees to participate in the success of the company overall. Ryanair's technical operations should mainly revolve around their aircraft as this is the core of their business. In February of last year they announced an order placed with Boeng for 70 firm aircraft as well as 70 options, www.ryanair.com. This means that between now and 2012 Ryanair will have 225 firm aircraft and options for another 220, allowing them to grow to over 70 million passengers per year. Due to this excellent deal negotiated by the carrier their growing amount of aircraft will not add huge amounts to depreciation costs as they will be depreciated over 23 years. Ryanair has always owned instead of leasing its aircraft but they plan to have a third of their fleet leased in the long term. O'Higgins (2004) argues that 'owning rather than leasing allows maintenance costs to be capitalised on the balance sheet rather than be reflected in the variable costs'. Technical operations have to run smoothly for obvious reasons, if a plane scheduled to make a flight for technical problems, for example, then this will impact on all of Ryanair's operations and functions and also cause disharmony amongst their passengers, possibly costing them future ticket sales.

III.3 Customer Relationships

In 1999 Mintel published a report on passengers' attitude to no frills airlines. Haberberg and Rieple (2001) have summarised this in the table found in Appendix B. This shows that passengers are willing to dispense with the usual levels of airline service and considering it has been seven years since the mentioned Mintel report, the industry has shown it is viable, has staying power and it can be said, has enjoyed a boom period due to it's growth. Ryanair constantly offers its passengers the lowest fares in Europe, www.ryanair.com, but has developed its current no frills policy in order to keep costs to a minimum and therefore be in a position to provide cheap seats. However sometimes their no frills policy does backfire. Recently customers have claimed that the destinations offered by Ryanair are misleading as they fly to the regional airports near to the destination city advertised which can sometimes be miles away. O'Higgins (2004) reports that in 'December 2003, the Advertising Standards Authority rebuked Ryanair and upheld a misleading advertising complaint against Ryanair for attaching 'Lyon' to its advertisements for offers on flights to St Etienne'. Ryanair maintains that their advertising is not misleading as Lyon is printed underneath St Etienne, however this still caused one passenger to turn up at Lyon airport only to find that her Ryanair flight left from St Etienne some 75 kilometres away. Ryanair choose to fly to the regional airports rather than the larger national airports due to the favourable cost terms they receive although they argue it is this fact which helps to keep their fares low and also has the added bonus of being less congested therefore helping their flight punctuality. Ryanair were also targeted in 2004 for charging one passenger for the use of a wheelchair. Although they argued strenuously that it was the airport's responsibility to provide help for disabled passengers they still lost the court case brought against them and had to pay €2,400 in compensation. This situation worsened when Ryanair retaliated by levying 70c on all flights leaving from the four airports who do not provide free disability equipment. Things were brought to a head however later in the year when Ryanair made a group of blind and partially sighted passengers disembark their flight stating that they were not allowed to carry more than four passengers at a time. Although Ryanair insisted their disability policy exists for safety reasons, Watchdog reported at the time that no other British airline has a maximum amount of blind people they can carry, www.bbc.co.uk. All this bad publicity has not helped Ryanair's brand name but it does not seem to have affected sales figures as ultimately customers are looking for the cheapest way of travelling. Although Ryanair should remember that whilst their no frills, low budget policy has made them highly successful, they also need to keep the majority of their customers satisfied otherwise they could be setting themselves up for a large fall from grace.

III.4 Financial Structure

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Since restyling the business into a budget airline, Ryanair have consistently increased in profitability. O'Higgins (2004) reports that in 2003 Chairman David Bonderman 'pointed out what an awful year it had been for the airline industry, what with war in Iraq, and an outbreak of SARS'. Despite this Ryanair announced increased profitability, making it their 13th year of consecutive rising profits. Other factors which played parts in Ryanair's fiscal success, as discussed by

O'Higgins (2004), were:

_ Net margin increase of 24 per cent

_ Staff efficiency ratio up by 15 per cent

_ Market capitalisation had grown from €397m in 1997 to €4.73bn by 1 July

2003

_ Profitability seen to be unique among airlines worldwide

However in 2004 they received a sharp shock when after announcing a shock

profits warning and they became the second worst performer in the FTSE Eurotop

300 index up to the end of April. On top of this O'Higgins' (2004) states that

'O'Leary predicted that the company's 2004 profits would decline by 10 per cent'

therefore ending their profitable run.

More recently Ryanair have enjoyed profitability once more, as shown in

Appendix C, the main point being a rise in net profit last year of 18 per cent.

III.5 Leadership

Ryanair's fight for survival in the early 1990's saw them bring in a new management team, headed up by Michael O'Leary. The success of the carrier's restyle into a no frills airline has made him a very wealthy man, having sold shares off every year since the company was floated has earned him in the region of €200m but still left him with a 5.4per cent stake, making him the largest shareholder, O'Higgins (2004). Despite the airlines huge success with Michael O'leary at the helm, he himself has come under scrutiny, resulting in both praise and criticism for both himself as a leader and his management style. O'Higgins (2004) argues that it is his publicity seeking antics which have earned him a high profile but also his outspokenness which has brought him into the public eye. This is true as O'Leary makes sure he is personally involved with the publicised events concerning Ryanair, such as the EU Commission investigations. So much so that the EU Commissioner for Belgium has described the airline chief in the Irish Times as 'irritating' and 'arrogant', Creaton (2004). O'Higgins (2004) supports this by declaring 'he is called everything from arrogant pig to messiah'. She also discusses that 'present and former staff have praised O'Leary's leadership style, and in an interview with the Financial Times Magazine Tim Jeans argues that 'Michael's genius is his ability to motivate and energise people' and goes on to state that the airline is 'without peer', Bowley (2003). This last statement is debatable however as it is O'Leary who is consistently hitting the headlines and not the rest of the management team or staff. O'Higgins also supports this point, stating 'Ryanair is inextricably identified with its dynamic chief executive. He is credited with single-handedly transforming European air transport'. Although it should be noted that O'Leary himself disagrees with this last part declaring 'I am not Herb Kelleher (the legendary founder of the original budget airline, Southwest Airlines in the US). He was a genius and I am not', Bowley (2003). Finlay (2000) discusses the three main characteristics of leaders, outlined below.

_ They must have a strongly held vision

_ They must be able to communicate that vision

_ They must be able to convert the vision into reality

When O'Leary took over at Ryanair his vision was very clear, to model the

carrier on Southwest airlines and create Europe's first no frills carrier. As far as

external communication is concerned it is well recognised that Ryanair was one of, if

not the first, budget airline in Europe. Internally, Tim Jeans revealed 'there is an

incredible energy in that place. People work very hard and get a lot out of it', Bowley

(2003).

Certainly the vision has turned into a reality as Ryanair has grown and the

'public's insatiable appetite for bargain getaways has continued to deliver record

profits at Europe's biggest no frills airline', Davey (2006).

While O'Leary possesses Finlay's (2000) characteristics for a leader, his

leadership style does not fit rigidly into a type. The below diagram, adapted from

Cook et al (1977) shows the types of leaders Finlay (2000) believes to be the more

dominant styles.

TASK RELATED ORIENTATION

LOW HIGH

LOW Laissez-Faire Autocratic

PEOPLE

RELATED

ORIENTATION

HIGH Human Relations Enrolling

The majority of O'Leary's leadership style sits within the enrolling section.

Ryanair is highly task orientated, concentrating on tasks such as cost cutting, aircraft acquisition and route development. They are also highly people orientated, both with customers and their staff. However, because of Michael O'Leary's public status his leadership style varies slightly from this model. If Tim Jeans is to be believed in his interview, Bowley (2003), then he should be almost revered. On the other hand he manages to aggravate important people who could have the ability to affect Ryanair's profits negatively. To add to this it has been discussed whether Ryanair should replace O'Leary as their CEO, McManus (2003). As Ryanair were recently pulled back from the brink of a shock profits warning perhaps it would be fair to give O'Leary the benefit of the doubt and concede that, for now, his leadership style seems to be working. However Ryanair should be wary of the fact that he does not seem to enjoy smooth sailing. O'Higgins (2004) states that when the shock profit warning was announced O'Leary was 'irrepressible' and declared 'this is the most fun you can have without taking your clothes off. It is much more fun when the world is falling apart then when things are boring and going well', Creaton (2004). While this may just be a glib statement to rebuff negative press, it could be a characteristic of the man himself, in which case could well be interpreted into his management of the company.

III.6 Implications on strategic positioning

As already discussed, any part of Ryanair's internal operations and functioning will affect the company as a whole if not running smoothly. Dennis Foster (2006) stated in his lecture on Managing Strategic Change that change is a 'people based process'. This means that both staff and customers will have implications on Ryanair's strategic positioning and any changes they make to it. As supported in the leadership section of the report there is a good working atmosphere and relationship between O'Leary and his employees. This will not particularly impact on Ryanair's strategic positioning as at the moment it seems to be running smoothly, however the carrier should be aware of factors such as health and safety, equal opportunities and trade unions to ensure they are a fair employer and do not deter potential employees. Customer relationships are also generally good, with the company aiming to grow to 70 million passengers per year in a few years time, they should seek to nurture existing customers and their relationship with Ryanair flights in order not to let their position slip. Cavendish (2006) argues that 'Ryanair's revenues last year apparently included almost two million flights that were booked by passengers who never showed up'. While this is good for Ryanair from a financial point of view, it does not reflect will on them from a customer relations aspect and could affect their position and strategy. Ryanair's recent trouble profit wise certainly would have had implications on their strategic positioning as they would have had to re-evaluate their strategy and fiscal management. This was obviously done well as a year on from their shock profit warning and they had turned it around. However they should be wary of something similar happening again and make allowances in their strategy to intercept this and hopefully divert any more major trouble. Ryanair are well positioned strategy wise at the moment. They are currently Europe's biggest no frills, budget airline with big plans for expansion. They need to stay aware of any changes that may affect them and possibly give them cause to redirect their strategy and this can be achieved by keeping a close eye on their business environment. However, as long as the market demand stays high and they continue to keep their costs and therefore their ticket prices low, then with their current strategy, business outlook and leader there is no reason for them not to flourish.

IV. Environmental analysis

When the airlines were first deregulated it was believed they faced various strategic pressures as stated by Lynch (2000). These included airline closures, major profit falls and new competitive pressures. However, although these aspects may have affected long standing airlines such as British Airways, it also created a gap in the market which Ryanair took full advantage of. Wheelen and Hinger (1993) support this by discussing how many airlines abandoned the smaller communities to focus on the larger markets which in turn opened opportunities for new commuters, these mainly being budget customers. O'Higgins (2004) agrees and states that Ryanair's 'fight to survive in the early 1990's saw the airline restyle itself to become Europe's first low fares, no frills carrier, built on the model of Southwest Airlines, the highly successful Texas based operator'. Haberberg and Rieple (2001) also determine that part of Ryanair's success was being 'established at a time not only of a period of prolonged growth in its home market but also when discontent with high fares and limited or non-existent competition was increasing'. They also attribute some of Ryanair's growth and profits to the Irish economy. As Ryanair is an Irish airline they took advantage of being based in Europe's fastest growing economy at that time. Haberberg and Rieple (2001) argue that this benefited Ryanair as the 'airline industry has traditionally been sensitive to economic growth cycles'. To look specifically at Ryanair's business environment in more depth a PEST analysis was conducted in order to evaluate the following environmental factors affecting the carrier. These are:

_ Political

_ Economical

_ Social

_ Technological

This analysis was based on Haberberg and Rieple's (2001) view of this process

for evaluating business environments, see Appendix A.

Factor Ways which factor might affect RyanAir

Political _ Change of government/policy

_ Ryanair have been involved in various legal disputes with

governments both in this country and the EU regarding their

business deals with airports and airline regulatory bodies

_ Political changes in countries where they have routes to (could

also be affected by above point)

_ Governments in countries they fly to may support their own

flagship carrier

_ Local councils objecting to noise and new runways being built

as in past

_ Governments looking to increase tourism might welcome

Ryanair and therefore act in their favour.

Economic _ Potential economic recession, Ireland's economy has already

been stated as growing however this may suddenly change.

_ Because of above main customers wouldn't fly for business as

would be cost cutting

_ Energy and fuel costs are cause of uncertainty

_ Economic change within countries they fly to or would hope to

open new routes to, for example war with Iraq has shut off any

hope of tourism there for the foreseeable future and other

factors such as SARS (O'Higgins, 2004) and more recently,

Bird Flu.

Social _ Because of economic growth at the moment it has become

normal to fly away for holidays therefore market has expanded

and new opportunities for tourism have opened in previously

unconsidered countries.

_ Business trips, although Ryanair do not offer luxury they are

possibly more attractive because less cost to a company means

they can travel more frequently.

_ Lower costs means attract a wider demographic of consumer

Technological _ Main threat to business market is video conferencing

_ To a lesser extent VOIP

_ Online check-in, self service check in at airport

_ O'Higgins, (2004) discusses that Ryanair currently have a fleet

of mainly Boeng 737s which are one of the best known and

used commercial aircraft. 'Thus, the company is able to obtain

spares and maintenance services on favourable terms thanks to

economies of scale, limit costs of staff training and offer

flexibility in scheduling aircraft and crew assignments'.

V. Recommendations

V.1 Changes to ensure sustainability

Davey (2006) declared at the start of this year that 'figures released yesterday show that (Ryanair's) formula is continuing to work'. This is directed at Ryanair's aim to keep fares low, mainly by not introducing fuel surcharges. Actions like this, which were of course highly publicised, ensure Ryanair is constantly attracting customers. Part of Ryanair's success is made possible by the fact they are such a lean company, both in the way they operate and the services they offer. O'Higgins (2004) claims that when the carrier dropped their cargo services, although they were going to be losing €500,000 of revenue a year, they decreased the turnaround time of their aircraft from 30 minutes to 25 minutes to attract more business travellers who required the punctuality. Innovativeness like this has ensured Ryanair's sustainability and will carry them forward into the future. To recommend any major changes would be to predict how the airline industry will change which ultimately cannot be foreseen. However it has been concluded that the budget airline will continue enjoying its boom, with many passengers now enjoying the short breaks away at a low price. Also the advent of new routes will bring more custom, from both departure points. If there was to be a drop in demand Ryanair would certainly suffer and subtle shifts in their strategy could be appropriate. For example offering drinks vouchers onboard for the customer's next Ryanair flight might entice more people back, or making alliances with hotel groups in order to offer a complete package, rather than just selling advertising space on their website. Ryanair should also pay attention to the technological changes happening in their industry, such as online check in; this could save them out sourcing check in staff at their airports which would enable them to cut their costs down.

VI. Conclusion

On the whole Ryanair seem to be following a strategy which works for them. They are obviously aware of their business environment and understand the importance of monitoring it as they took advantage of the opening in the market when they restyled themselves over a decade ago. However they need to be aware that this environment is constantly shifting and evolving and therefore maintaining a close eye on it and being ready to adapt to any changes should be a fundamental part of their strategy. Davey (2006) sums up Ryanair's current position and future opportunities succinctly by stating 'at 16 times forward earnings, the share price does not look too demanding given that this is a genuine growth story. It will take some time before the wings of this "Tesco of the skies" are clipped'.

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