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Marketing Analysis of Ryanair (2019)

Table of Contents

1. Introduction

Ryanair, one of the largest airlines in Europe (Bryan, 2018) is also one of the chief beneficiaries of industry deregulation commencing from the late 1980s (Morrison and Winston, 2010). Before the prominent emergence of low-cost airlines, the airline industry was profoundly controlled, and large incumbents enjoyed almost monopolistic rights. A consequence of decades of deliberate policies to thwart market forces before the progressive deregulation wave in Europe was highly unaffordable itineraries, and indeed, air travel was the privilege of elite classes (Morrison and Winston, 2010). Incumbent firms benefiting from government subsidies and exclusive rights to operate particular routes, however, found themselves in precarious positions once new entrants decided to challenge market structures with innovative business models with affordable ticket prices and internal processes to attain an unparalleled operational efficiency, something that was seldom a priority concern for legacy airlines before industry deregulation (Morrison and Winston, 2010).

The years of 1994 and 1995 marked the entry of two highly disruptive organisations to the newly liberalised European airline industry – the London-based Easyjet and the Dublin-based Ryanair, following an entirely different business concept borrowed from American Low-Cost Airlines (LCA) and later adapted to the European market environment (Barrett, 2011). The swift growth of these pioneering companies incentivised investors to establish other low-cost airlines, and with the diminishing legal barriers of operating flights between any two-points within Europe, the once static airline industry has become one of the most competitive ones (Barrett, 2011). With large aircraft orders and deliveries, the European LCA market rapidly expanded at the expense of full-service airlines’ market share (Sheth, 2007). This report provides a critical analysis of Ryanair’s strategy through the assessment of the external and the internal environment to convey recommendations for Ryanair to neutralise threats and to capture opportunities in an increasingly saturated market.

2. Low-Cost Airline Industry Broad Level Overview in 2019

Almost thirty years after the birth of the EU’s internal market for aviation (without any route restrictions between any city pairs within the EU), artificially high ticket prices were no longer the norm, and with the commercial potential of ‘democratising’ air travel, the LCA market experienced a steady growth curve (Sheth, 2007). Initially, key players’ capacity remained beyond the actual, at that time untapped demand for air travel (Finger and Jaag, 2015). With the addition of new member states to the EU from 2004 and onwards, CEE (Central and Eastern European) markets became accessible to European LCAs. One of the key developments in the EU’s enlargement resulted in the phenomenal growth of WizzAir linking eastern cities with western Europe catering for price-sensitive travellers (Hall, 2018).

The sustainability of the unmatched growth of the European LCA sector has been a pivotal issue in industry reports for years (Sarker, Hossan and Zaman, 2012). On one hand, efficiency gains and technological improvements enabled airlines to eliminate cost-centres to offer highly affordable tickets, comparable (if not lower than) ground transportation alternatives. However, on the other, as price-based competition is known to erode profitability (Chevalier-Roignant and Trigeorgis, 2011), many long-term airlines attempted to compensate by massive capacity increases to spread fixed costs over a higher number of passengers (Wensveen and Wells, 2007).

Major capacity developments and hundreds of new aircraft orders continue to complicate competitive strategies in the airline industry (Wolf Street, 2019). The excessive supply of airline seat capacity ensued in airline bankruptcies in 2018 including Monarch, Air Berlin (CAPA, 2018a) and with declining industry profitability and a flattening growth curve, further failures are entirely realistic in 2019. Norwegian, the pioneer low-cost-long-haul airline is reportedly struggling to secure financing sources, indicative of unfavourable operating conditions and squeezing profit margins in the airline industry (The Economist, 2019a). Industry experts foresee further consolidations of the European airline industry with additional airline liquidations until some degree of supply-demand equilibrium is attained (The Economist, 2019b). Considerable exit barriers in the airline business intensify internal rivalry, implying that with volatile demand conditions and the industry’s exposure to external developments (e.g. fluctuations in oil price) (Holloway, 2016), price-based competition is likely to develop with downward pressure on profitability.

3. Analysis of the Macro Environment

3.1. Political

Industry deregulation (as a positive political change) has been the primary catalyst behind low-cost airlines’ growth and with intensified intergovernmental collaborations to eradicate current barriers to the unrestrained growth of airline route networks (beyond the EU), excessive capacity may be appropriated to unserved markets (e.g. Russia, Africa and the Middle East) (Morrison and Winston, 2010). For Ryanair and other airlines operating to and within the UK, the Brexit-induced political impasse remains a significant threat, especially considering the lack of clarity to the UK government’s agenda on the UK’s withdrawal from the EU (Schraer, 2019). The probability of a mutually beneficial agreement between the EU and the UK after Brexit has been steadily diminishing, giving more credibility to no-deal scenarios and ensuing uncertainty to airline operations in the UK. Should the UK decide to leave the EU without a final resolution of EU-UK trade relationships, airlines with UK bases will automatically lose unlimited access to the EU, and vice-versa, EU airlines will no longer enjoy restriction-free traffic rights to the UK (The Irish Times, 2018).

3.2. Economic

The airline industry is not only seasonal but is also severely influenced by global economic performance (Wensveen and Wells, 2007). There have been several speculations of an approach of a worldwide economic recession with unfavourable outlooks for leisure and business travel, further exacerbating internal rivalry in the airline industry. According to Tay’s (2019) recent article referring to patterns in airline orders as indicators of global economic health, the airline industry may point towards a looming economic stagnation, expressed in terms of declining demand for air cargo and the number of aircraft orders. While economic problems in the UK may not have a substantial effect on the airline industry’s immediate profitability, weakening demand for internal air travel in the UK is another impending hazard to airline profitability (IATA, 2016). The IATA’s (2019) global airline industry outlook also shows weakening global trade, rising operating costs (particularly fuel) and gradually declining investor confidence in the industry’s short- and medium-term viability.

3.3. Socio-Cultural

The progressive increase in disposable income has been an additional stimulus for LCAs’ growth in the last thirty years (Halsted, 2017). The substantial reduction in average itinerary prices combined with Millennials’ insatiable desire for immersing in new travel experiences sustained industry growth and the proliferation of LCAs catering for an increased propensity for budget travel (SES, 2019). Rising awareness of the environmental and social consequences of binge-travel (e.g. taking multiple short trips each year to popular destinations) could constrain the industry’s future in the long-term once restrictive travel measures are implemented (Greenaironline.com, 2019).

3.4. Technology

Massive improvements in aircraft propulsion technologies substantively reduced airlines’ operating cost and fuel consumption (Agarwal, 2012). The prevalence of mobile devices and digital channels to engage with consumers (especially tech-savvy Millennials) clearly marks technology’s transformative impact on airline operations and the imperative to explore digital sales channels (Phocuswire.com, 2017). Enhanced capabilities of AI (Artificial Reality) and data mining are critical to streamlining product offers to actual consumer needs to eliminate non-value adding cost-centres and to optimise capacity in a saturated market (Phocuswire.com, 2017). From a corporate perspective, some early reports speculated that major improvements in communication technology (e.g. High-Definition video conferencing, Augmented and Virtual Reality (AR and VR)) would exert a downward pressure on the demand for business travel, though such predictions have proven to be mostly inaccurate (Travel Counsellors for Business, 2018).

3.5. Legal

Despite the commercial deregulation of the airline industry, the industry remains one of the most heavily controlled sectors, with directives mostly pertaining to operational safety (Wensveen and Wells, 2007). Beyond the EU and regions with close collaborations with each other (e.g. the US-EU Open Skies agreements and the EU-Morocco airspace deal) concerning route permissions, legal barriers continue to exist for expansion beyond EU airspace as route authorisations are subject to lengthy bilateral government negotiations (Finger and Button, 2017).

3.6. Environmental

Lastly, but not least importantly, the astronomical growth of the airline industry surpassed efficiency improvements in jet engine technology, thus the total environmental effect of the industry increased (Upham, 2012). Although the airline industry is only accountable for less than 2% of human-induced CO2 emissions (Transport & Environment, 2018), the indirectly induced destructive properties of mass tourism are habitually linked to the unrestrained growth of low-cost air travel (Vidal, 2019). There has been some political momentum of restricting binge travel by levying additional fees from passengers to reimburse for environmental damages. As of now, plans to restrict binge flying and to impose an environmental tax on airlines are in preliminary phases (Abeyratne, 2019).

4. internal Analysis

4.1 Resource-Based View of Strategy – Key Resources and Competencies

The Resource-Based View (RBV) of strategy is framework designated for the identification of firms’ essential resources and competencies and the suitability thereof to exploit opportunities in the external environment and to neutralise competitive threats and risks in the macro environment (these themes are summarised in the PESTLE analysis in the previous section) (Johnson, Scholes and Whittington, 2010). Based on publicly available sources and inferences made from Ryanair’s marketing/competitive strategy, table 1 summarises Ryanair’s key resources and competencies.

Resources

Competencies

The Ryanair brand

Excellent, high-visibility stunts on earned media

Visionary (at times controversial) CEO

Implementation of new strategies, lobbying power

Huge fleet and massive capacity in the LCA travel market

Advanced capacity planning and coordination

An extensive network of bases

Advanced capacity planning and coordination

Ryanair employees

Recruitment and selection of Ryanair employees as the backbone of organisational growth

Negotiation power (to reduce service fees)

Above industry average cost efficiency and

In-house reservation system

Elimination of intermediaries to translate cost savings directly to travellers as a competitive edge (CAPA, 2018b)

Table 1 – Ryanair’s Key Resources and Competencies

The above resources and competencies do not guarantee a sustainable competitive advantage unless these are configured in a manner that enables value creation by directly responding to external demands and variations (alongside the PESTEL dimensions) in the macro environment (Johnson, Scholes and Whittington, 2010). The VRIO analytical model (an acronym standing for Value, Rarity, Inimitability and Organisation) is designated to measure resource configurations’ potential of delivering sustainable competitive advantage (Johnson, Scholes and Whittington, 2010). Figure 1 below visually summarises the VRIO concept.

The VRIO Concep

Figure 1 – The VRIO Concept – Its Components and Implications for Competitive Advantage (B2U - Business-to-you.com, 2019 n.p.)

Ryanair’s sustained growth in the last two decades was propelled by economic, political and societal changes (see PESTLE analysis) jointly stimulating the demand for affordable travel, evincing that Ryanair’s current offers and business model are conducive to value creation. Rarity is another critical factor of sustainable competitive advantage (Johnson, Scholes and Whittington, 2010). A particular resource configuration only leads to unique capabilities if rival firms cannot access similar resources and although none of Ryanair’s resources is by default rare, the method in which resources are deployed and combined encapsulates the essence of Ryanair’s success and therefore limits the imitability of Ryanair’s strategy.

CASK (Cost PER Available Seat Kilometre) is a traditional efficiency metric in the airline industry (CAPA, 2018b). Ryanair has historically outperformed most of its rivals’ CASK (see figure 1) although it appears that its main competitors (Easyjet and Wizzair) have also succeeded in optimising internal operations, which slightly questions if Ryanair’s strategy and cost advantage is indeed inimitable (CAPA, 2018b).

CASK ex-fuel Low-Cost Airlines in Europe

Figure 2 – CASK ex-fuel Low-Cost Airlines in Europe (CAPA, 2018b n.p.)

Ryanair’s huge fleet consisting of over 400 aircraft allows the organisation to penetrate new markets quickly, and to increase capacity to thwart competition. Figure 3 summarises leading European airlines’ fleet size as of 2018.

Fleet Size of A Selection of Airlines

Figure 3 – Fleet Size of A Selection of Airlines – Ryanair is Leading the Way Ahead (CAPA, 2018b n.p.)

Ryanair’s fleet size and organisational capability to rotate these aircraft at the right cost level (in an increasingly saturated market) testify the satisfaction of the last criterion in the VRIO framework (organisation) to establish solid bases of sustainable competitive advantage. Current aircraft orders (including options) to be delivered over the course of the next ten years are shown in figure 4.

Airline Orders

Figure 4 – Airline Orders (Capa, 2018b n.p.)

Even without the contextual understanding of the dynamics of the airline industry, the sustainability of LCAs’ growth is highly dubious. Industry commentaries from the last couple of years have articulated warnings of overcapacity, mainly jeopardising smaller airlines with limited options to benefit from scales and scopes (Calder, 2016). However, this shall not imply that larger airlines are entirely invulnerable to intensifying price competition, diminishing margins and tightening profit markings leading towards intensive consolidations and inevitably, the fall of industry players unable to cope with extreme cost pressures (Moores, 2019). The survival potential of incumbents, therefore, is dependent on the exploration of new revenue sources as revenues from ticket sales will no longer cover operating expenditures within the current state of massive overcapacity.

5. Strategic Opportunities for Ryanair –Ansoff Matrix

The imperative for Ryanair (and as a matter of fact any rival airlines) to address the problem of overcapacity and the resultant profit-eroding competition is apparent. Ryanair has also lowered its profit forecast, and even if the firm transported a record number of passengers in 2018, the price war with rivals was the primary cause of unsatisfactory profit figures (Humphries, 2019). The Ansoff Matrix harbours for matrices as strategic options, based on organisational preferences (and capabilities) to embrace new markets with growth opportunities (Johnson, Scholes and Whittington, 2010). These include market penetration, product development, market development and diversification. Figure 5 positions these options alongside the axes of markets and services. The feasibility of each option, as well as examples, are presented below.

Ansoff Matrix

Figure 5 – Ansoff Matrix (Mindtools.com, 2019 n.p.)

Market Penetration: viable, but expensive strategy to increase the frequency on existing route pairs. With new aircraft being delivered, perhaps this strategy has already been planned an is being implemented. However, margins in the excessively saturated market would be insufficiently low to sustain growth (see the industry analysis).

Product Development: the lack of options for differentiating the core products is a well-known phenomenon in the airline industry. Airlines responded to this through a series of ancillary services passengers offered in addition to the base ticket (Holloway, 2016). In 2018, Ryanair CEO expressed Ryanair’s intent to become the ’Amazon’ of travel, referring to intact opportunities of expanding travel offers beyond air ticket sales to involve additional revenue sources to compensate for low margins realisable on airfares (May, 2019).

Market Development: the saturated European market does not harbour substantial growth options for airlines (unless major rivals declare bankruptcy). Exploring emerging markets (such as Africa) with limited LCA presence appears a viable option for Ryanair with overcapacity. CAPA (2018c) warns that despite the vast potential of emerging markets, the lack of airspace liberalisation in Africa complicates operations.

Diversification: within current resources and competencies, unrelated diversification is the least feasible strategy.

6. Conclusion

The transformative changes in the airline industry in the last thirty years entirely redefined the competitive landscape. LCAs rising to prominent success in the 1990s and the 2000s aptly captured a valuable market opportunity of offering affordable airfares to a broader group of consumers, and with innovative, cost-efficient business models, LCAs acquired a unique cost advantage over traditional airlines. The report has shown that the European LCA market is experiencing flattening tendencies, resulting in intensified competition and inevitably distressed airline operators. With over 600 new aircraft orders with a delivery window of five to ten years, further airline failures are projected. Due to thin profit margins, further consolidations in the European airline industry are entirely realistic. Although the report has not fully explored the viability of new avenues for cost reduction for LCAs, a critical component for survival most likely includes LCAs’ ability to tap into new revenue sources to compensate for falling margins on ticket prices.


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