PESTEL Analysis of Ryanair.

by clancypants77 (student)

University Degree Business and Administrative studies

CASE STUDY

Business Applications in Engineering

The first section of this report deals with the “Macro Environment”. This consists of broad environmental factors that impact almost all organizations. Here the PESTEL framework can be used to identify how future trends in the political, economic, social, technological, environmental and legal environments might effect on organizations. The following PESTEL analysis provides broad data from which to identify key drivers of change. Many of these factors are linked together for example restrictions regarding mergers are political decisions written into law therefore covers both political and legal aspects. The four I have chosen are also in some way linked together and are as follows.

Macro

TECHNOLOGICAL/ECONOMIC

The increase in the use of technology should stay up to date on cost saving measures regarding the increasing use of online check-in. As Ryanair expands to the Balkan states and turkey the flights get longer therefore entertainment technology may be “taken on board” (Ancillary revenue). The video entertainment industry is heavily endorsed socially. Technological advances in the research and development of engines and airframe play an important role with respect to lowering an airlines’ major expense, fuel costs. Ryanairs’ decision to upgrade its fleet to an average age of 2.9 years tackles this very problem as newer aircraft have much more efficient engines (fuel burn) and with lighter airframe materials and various modifications such as the winglet modification program which reduced fuel burn by 2%. Also carbon emissions as much as 50% were reduced with these newer aircraft and therefore will save on the ETS imposed by the EU that coincidently are under fierce scrutiny from US and Chinese airlines. Staying up to date on Economic issues enables the price of oil to be forecasted and manipulated to give you stable costs using Hedging. Hedging will be discussed later with suggestions as how to move forward taking a Micro point of view.

ENVIRONMENTAL/LEGAL

Staying on the Macro and emissions, Climate change (whatever our beliefs to whether it is factually correct or not) is providing much debate in the airline industry especially with low cost high passenger capacity airlines. The EU has demanded that all flights taking off or landing at any airport within the EU will from January 2012 will be included in the EU Emissions Trading System (ETS). This will affect the European Budget airline industry as all of their flights will come under this scheme. It’s up for debate whether or not the Intergovernmental Panel on Climate Change (IPCC) has all the facts regarding human influence on climate change and has been a very controversial issue after the devastating revelations from what’s known as “climate gate”, evidence that the “top scientists” are manipulating information to support the claim made so one has to ask oneself, should “government propaganda” be inserted into the PESTEL framework as it’s going to hit airlines hard in the coming years as the demand for carbon credits will rise therefore we will see a rise in the price. I would recommend to Ryanair to open up debate regarding both climate change and indeed the Emissions scam, it has much broader consequences which will affect us all in the balance sheet, debate is a cheap but good insurance policy and true provider of real image. China have Banned their carriers from paying it. They would have to pay emissions from where the flight originated. One can understand why they are not happy. There is a rising public awareness around these areas and creates a market, the public changes and Ryanair must change somewhat with it and be on the political platform when it matters. How Ryanair and other European airlines play this one out who knows, but that’s politics.

POLITICAL/LEGAL

This is a preview of the whole essay

POLITICAL/LEGAL

Speaking of politics, the European Union now plays a major part in providing legislative reform of the Airline industry. Its pro competition nature has prevented Ryanair many ways when trying to expand into international markets, for example the failed merger bid for Irish carrier Aer Lingus, saying that to monopolize an industry is contrary what the EU want to achieve. It’s ironic that this is coming from the one institution that wants to monopolize power within the EU states by centralizing the institutions it governs. One such institution is Eurocontrol. This institution gained a lot of momentum during the Icelandic volcano incident which brings us onto another Legal issue which eroded a lot of profit for the airline as the Law provides that the airline must pay an astronomical amount in compensation and accommodation to thousands of passengers as a result of this incident. When the legislative figures use the passing of Laws for political gain it shows again why Ryanair and all budget airlines must stay on the political platform if even for damage control.

The Budged Airline industry must fight politics with politics when disasters like this happen. Another example can be the incident with the Spanish Air traffic Control. This was simply that the government was not prepared to employ more controllers so therefore as a result increased the threshold for the maximum amount of hours that can be requested for the controllers to work, strike action pursued and flights were cancelled. This affected the industry as a whole but even more for the Low cost airlines as this can have detrimental effect on any businesses that run on strict cost cutting measures. I would advise Ryanair to be on the political platform as did Willie Walsh and work side by side during these times as both together can put on a lot of pressure and get back to business a lot quicker.

ECONOMIC/SOCIAL

As the economic crises looms over the airline industry, the low cost industry seem to be improving passenger numbers compared to flagship carriers as passengers endeavor to reduce the amount they pay for air travel. As people and businesses strive to economize, air travel may well drop but the important issue is to maintain market share. In this way airlines such as Ryanair may seek to gain the trust of passengers who would otherwise have chosen other airlines to fly with. As the price of oil rises, the exchange rate for the dollar is a very important issue as all oil has to be bought in dollars. Some countries in South America are trying to abolish this as are some African countries such as Libya. In recent months that has changed. These events must be sometimes closely followed when wanting to stabilize your costs for economic gain. Hedging will be discussed later with suggestions as how to move forward taking a Micro point of view. The micro point of view can be clearly seen using Porters Five Forces.

Micro

Porter’s five forces

Porter's five forces of competitive position analysis were developed in 1979 by Michael E. Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organization.

This theory is based on the concept that there are five forces which determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organization’s current competitive position, and the strength of a position that an organization may look to move into.

Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable. By understanding where power lies, the theory can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes.

The five forces are;

Threat of new entry.

Profitable markets attract new entrants, which erodes profitability. An aspect that reduces Ryanairs worry for new entrants to the market is that there exist a number of barriers that in these times proves unwise to enter the market. Examples of such are that to enter the market there’s a need for ;

High capital investment

Restricted slot availability which makes it more difficult to find suitable airports.

There would be an immediate price war if there was encroaching on existing routes therefore would be a need for a low cost base as customers are price sensitive.

Threat of Competitive rivalry.

The market of low-fares airlines is a highly competitive one with many rivals such as Easy Jet, German wings, virgin express and Aer Lingus on the domestic and European routes.

Ryanairs policy of insisting on the Low fares no frill strategy is proving to have a monopoly side effect. There is a low level of existing rivalry at present but as time goes on it will come up against other strategic viewpoints from the competition i.e. mergers on a number of operational functions. Cost savings are as beneficial to a company as is profit. The failed acquisition of Aer Lingus gave competitive advantage to Airline mergers of KLM-Air France and BA-Iberia with rumors at this stage of Air Nostrum (the franchised domestic provider for Iberia) being subsequently absorbed by this merger.

Although most cost advantages can be copied immediately and increasingly being so by flag carriers there are low levels of existing rivalry as the two major low-cost airlines have avoided direct head to head competition by choosing different routes to serve, however if any company does decide to compete on the same basis as Ryanair there will be heavy pressure on prices, margins, and hence on profitability. As there is not much differentiation between services, price is the main differentiating factor.

Threat of substitution.

Rivalries in the form of substitutes are emerging to be very damageable if studied correctly. There is no switching costs and no brand loyalty. There are other modes of transport, e.g. Eurostar, TGV, Euro lines, Ferries, etc.

An example of one I have experienced myself whilst living in Valencia is when Ryanair had a route in operation between Madrid and Valencia. It was extremely popular and caused stress within management at Air Nostrum where I was working at the time. The route was subsequently pulled due to the “AVE” high speed train line in operation for the first time and I for one would prefer the lower costing and faster route by train than fly. Taking into consideration check in time and going to and from the airports, the train was easier, cheaper, more comfortable and was center of city to center of city. This new high speed train technology is increasing globally and will no doubt, seeing its effect today be increasingly gaining competitive advantage against future domestic routes. The channel tunnel has had big influence on domestic routes between London and Paris and high speed train travel is expected to increase rapidly over the coming decade.

Threat of Buyer power.

This is essentially an assessment of how easy it is for buyers to drive prices down and is driven by:

The number of buyers in the market

The importance of each individual buyers to the organization

The cost to the buyer of switching from one supplier to another

The buyers in this industry are of course the passengers and let’s not forget the shareholders. With respect to passengers, there is limited power they pose. Within the budget airline, all its products are standardized and buyers can’t find anything cheaper. When there is a downturn customers opt for a cheaper flight.

Threat of Supplier power.

Boeing are Ryanairs main supplier , therefore the cost of switching from one supplier (Boeing) to another (Airbus) is high as all mechanics and pilots would have to be retrained therefore high bargaining power lies with the supplier. From Boeing and airbus’ point of view, COMAC (the Chinese aircraft manufacturer) are in talks with Ryanair regarding investment into their C919, with Ryanair taking and interest in research and development.

Also the price of aviation fuel is directly related to the cost of oil (Ryanair controls these through hedging), that is, Ryanair sees a drop in market price and buys at that price at a determined amount of time or oil. This can be a disadvantage as was seen by BA’s move when they hedged at a high price and were then consequently “burned” as prices then began to fall.

Ryanairs idea to use regional airports have taken away any bargaining power of the “supplier” of airports (and routes) as regional Airports have little bargaining power as they are heavily dependent on one airline, a typical example being Shannon , my local airport, when Ryanair decided to “Pull” the majority of routes the airport lost almost half of their business and the loss of jobs was not appreciated, something I believe Ryanair has to be careful of as a lot of capital investment has to be sought to bring airports up to operating standards and if Ryanair is looked upon as unpredictable ( as they were in Valencia) then they may lose their bargaining power as they may be seen as temporary investment. Bigger airports, where Ryanair's competitors operate, have greater bargaining power. Ryanair’s policy is to try and avoid these airports.

Macro vs. Micro

The financial statement made every year to shareholders and indeed to potential shareholders with the quarterly results, gives a more public, transparent look at the company’s actions and more importantly gains. Decisions made last year will reflect on the numbers contained in these reports. Future decisions will be influenced by both micro and macro factors taken into mind and will help develop future strategies to take shape.

As we know, the airline industry has many challenges and there are times when an airlines management team has to cancel a flight, therefore has to deal with such problems as angry passengers leading to the costly effect of refunding passengers and can lead to long term wounds such as a decline in passenger numbers. These challenges vary from small problems to serious flight security issues and if left ignored can produce enormous problems. This is the reason why airlines have in place a performance management system otherwise known as Key Performance indicators or KPIs.

Progress can be judged along a number of dimensions and are specific, actionable, measureable and more importantly, reliable. Without such indicators, it would be impossible for managers to review and evaluate how effective the company’s strategies are.

Financial KPIs

Financial KPIs comprise of Revenues, Expenses, Profits and Fuel costs. As there is a lot of concentration over the past 5 years on the effects. Fuel costs have for all airlines increased in price but one that has to be mentioned is the act of hedging. Airlines bet on future prices of oil and lock themselves into a contract settling on a fixed price, BA over these years have hedged badly and haven’t taken benefits from these programs. Ryanairs winglet program have saved approximately 2% savings from these fuel savings measures.

BA’s revenue from 2007 to 2009 remained steady but reporting profit of 883 million but an amazing loss of 401 million the year after whilst producing a difference of earnings per share from 59 pence profit to 32.6 pence loss the year after. Hedging also steadies total costs and therefore affects share price.

Ryanair on the other hand during those years produced reports detailing straight profits from 451 million in 2007 to 438 million in 2008 showing an increase in market share and a rise in ancillary revenue from 362,000 in 2007 to 488,000 in 2008-2009. Ryanair and Easyjets policy of adapting passengers to pack lightly would have had some affect but would offset on fuel costs by reducing its payload.

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