European Airline Industry Analysis.
Managing in the Competitive Environment
Examined Coursework Assignment
On the whole the airline industry is a service industry, which has undergone dramatic change following the deregulation of the European airline activity. This has reduced the level of domination by some major airlines, increasing competition which has opened a sector for many different types of passenger.
European Airline Industry Analysis
A comprehensive PEST analysis detailing the changes within the European airline industry during the 1990's is shown in Appendix I. The most important factors highlighted in the PEST analysis are discussed below.
Once the European commission had deregulated the industry, they continued to enhance consumer power by further legislation and directives which stimulated new entrants to the market place. These ranged from aspects regarding the airports ie. no differential deals, no ground handling monopolies etc, to government grants and backing in dealing with or setting up links to the consumer.
During the 1990's predictions varied over the expected economic climate, with the business travel market highly sensitive to the trade cycle, companies tried to save money by lowering the cost of travel. Although less sensitive to economic performance the casual/leisure travel market still wished to obtain a good value for money service.
Parallel to these market needs was a greater demand to travel long distances due to an increase in geographical diversity of businesses and families. To meet these needs the 'low fares' air travel market evolved in a clear pattern within Europe similar to some years prior to that of the US market. Demonstrating the demand for air travel at affordable prices and strong prospects for further growth in demand, even through a possible recession.
With advances in technology with regard to the internet businesses offering an airline service could target their potential customers and achieve a positive response while incurring low costs. It is this aspect of low costs which is the main driving force behind the 'low fares' which are on offer in this sector of the European airline market.
To provide these very cheap flights they are billed as 'no frills' ie no advance seat assignments, no in-flight meals or complimentary drinks. All of the additions to the flight experience of the consumer are cut from the standard service to reduce costs, but important basic logistics are ensured to add value to both the customer and the business, ie frequent and consistent on time service, good baggage handling etc.
No-frills / low cost European Airline Sector Analysis
In reference to the competitive structure of this newly formed low fares airline market in Europe and how it has developed during the 1990's. The Porters five forces model shown in Appendix II, summaries these dynamics under the various influencing factors. The most influential of these are discussed.
As entrants developed in this market, rivalry increased although no major head-to-head battles with the mainline global airlines occurred due to the 'low fares' market developing their own routes. Competition only existed from various new airlines catering for this growing sector, along with tailor made sub-divisions of the major airlines eg GO parent group British Airways.
As the market became over crowded however the threat of entry was reduced, not only due to the large capital investment required. But the basic factors of congestion in the skies and the lack of take-off and landing slots at airports, deterred potential new entrants.
The suppliers of aircraft to the sector have relatively low power, second-hand aircraft entailed high maintenance & low fuel efficiency costs and some new entrants required new aircraft to promote their new image. Although new aircraft suppliers also have low power due to the fierce competition within their manufacturing industry ( Airbus, ...
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As the market became over crowded however the threat of entry was reduced, not only due to the large capital investment required. But the basic factors of congestion in the skies and the lack of take-off and landing slots at airports, deterred potential new entrants.
The suppliers of aircraft to the sector have relatively low power, second-hand aircraft entailed high maintenance & low fuel efficiency costs and some new entrants required new aircraft to promote their new image. Although new aircraft suppliers also have low power due to the fierce competition within their manufacturing industry ( Airbus, Boeing ). The main force of suppliers power, comes from the price of aviation fuel which is directly related to the cost of oil, as individual companies within the airline sector they do not have the power to alter this.
Customers have little power due to their large number and relatively small individual contribution to sales revenue, although this level of power will vary on the travel route in question depending on its level of competition.
The threat of substitutes is however a main area of power, smaller geographical space and shorter distances between major agglomerations allow a greater competition from alternative transportation, notably the high-speed train. The main business challenge during the 1990's for the 'low fares' airline sector was how to convince customers to take the plane instead.
Ryanairs Competitive Position within the budget airline industry
The initial plan for Ryanair was to be a full service airline, but they were unable to take on the role of an effective challenger in the marketplace. Hence a new market placement for the company was identified and Ryanair became the first 'low fares' budget airline in Europe, since then they have prospered in this environment, becoming the leader in the market and a model on which other entrants have based their operations.
Therefore the majority of companies in the budget airline industry have the same strategic characteristics which they approach this new competitive market segment. A strategic group map with the variables of ' offering the lowest fares through cost leadership ' and ' the added value of a punctual and frequent airline service ' would highlight the various organisations overlapping in a complex format.
Ryanair has not only become market leader due to it being the first to climb the experience curve but its ability to contribute to the development of the low fares airline market, and to respond positively to the evolving competition, using a mix of offensive moves to exploit growth opportunity and defensive moves to protect its position in the market segment it has established. To achieve this strong competitive position the company has done so through careful strategy management, looking at both emergent strategy as well as carefully planned strategy. Characterised as low price/ low value added, route 1 on the strategy clock.
This style and consistency of Ryanairs competitive behaviour to obtain its market position is reinforced by their ability to achieve and forecast stronger P/E figures, than other budget airline companies.
Ryanairs Strategic Capabilities
When setting objectives, the primary objective is for the company to be successful. The ways in which objectives are set firstly need to consider the market conditions. As discussed Ryanair recognized what the market was demanding and filled this gap with the 'low cost, no frills' airline service they offered. The level of success in their approach was determined by their strategic capability resulting from the use and maximising both resources the organisation owned/gained access to, and the way it performed and linked activities to create competences that use these resources.
From assessing the 'Resource Audit' on Ryanair ( Appendix III ) one can note they do have the necessary resources and threshold competences to compete and provide an airline service. They own the physical aircrafts needed and have the financial / human capital to operate them. It is the intangible assets and resources which built on these basics and start to develop the unique resources and core competences that make Ryanair a success.
To describe these factors the initial analysis must view the overall value system Ryanair is placed. ( Appendix IV ). As discussed Ryanairs core business is the 'low fares, no frills' airline market, transporting people between locations within Europe. A downward integration established by themselves in the form of 'Ryanair Direct Ltd' the telephone reservation centre is an example of linkage between business units within the same organisation and one which extents to good linkage with potential customers. A further connection with the customers value chain is though linkage to Travel Agents value chains, although not as strong do provide benefits when marketing new airline routes.
It is however the linkage between Ryanairs own value chain (Appendix V ) in the form of their website, which serves as a possible core competence. Through significantly lowering marketing costs due to bypassing travel agents and the central reservation systems.
Another key source of competitive advantage is highlighted in the 'Procurement and Supplier Management' section of Ryanairs value chain. This evidence indicates excellent linkage between that of Ryanairs and the organisations who supply Ryanair with their requirements. ( Appendix IV )
The deliberate strategy of bulk purchasing 45 aircraft from Boeing inline with its single fleet policy, with a delivery plan of five aircraft per year. Represents good production scheduling on Boeings behalf and careful financial scheduling on Ryanairs, due to the large acquisition discount and a cost advantage in capital costs such as depreciation. The larger capacity of the purchased 737-800 aircraft, also results in a reduction in cost per seat. The economies of scale benefit can also be noted in the linkage with the organisations Ryanair purchase their fuel. Not only do Ryanair contract for a large portion of their needs in advance but payment is made using the financial tool of foreign exchange hedging, which has numerous benefits including risk reduction for both organisations.
Ryanairs passenger generation skills are a key strength when negotiating airport deals, especially with the less used secondary airports. Ryanair can negotiate favourable terms to obtain services available but do so on long-term contract agreements. Hence a good stable working relationship is formed between the organisations which improves both their value chains, one of which being the control of future cost budgets.
The achievement of Ryanairs objective of being the leading no-frills airline in Europe, with the goal of enhancing both revenue and profit, was done us under two aims ~ cost reduction and added value to the consumer through a frequent/punctual service. It is important for a company to have such aims and goals, otherwise it will not have anything to measure its success against.
The value chains and systems shown in Appendix IV & V with descriptions given above do highlight numerous resources and competences that Ryanair hold, although to gain a more visible and fuller understanding of Ryanairs strategic capabilities. The process described in 'Exploring Corporate Stategy', Gerry Johnson & Kevin Scholes, outlining a series of steps and questions that can identify core competences has been undertaken, with a focus on the areas of cost reduction. Diagram Appendix VI.
In regard to the cost reduction areas highlighted within the value chain, no further information is uncovered from the diagram for the marketing and fleet costs. Although in reference to airport charges a more detailed account of the reasons behind this cost reduction area are given. Ryanair reduce the various charges incurred at airports not only by using cheaper secondary airports, but use the less expensive gate locations and passenger loading facilities at these airports. Also due to Europe being small in relation to airspace, non-stop journeys are possible hence there is no need to have connecting flights, increasing the cost of landing fees.
While not a direct operating cost advantage, Ryanair's low tax rate allows it to generate higher returns on their equity. This partly due to the company being registered in Ireland where corporation tax rates are declining, and advantages from good tax planning. This being a good core competence which cannot be copied by Ryanairs competitors.
The value chain and system diagrams present that much of the cost of running an airline is the expense of the airplanes and the staff. The longer the airplanes are in the air and the fuller the seats the greater the revenue they are producing. The way in which the aeroplanes were utilised meant they were kept in the air longer, and the schedules that were operated by the staff meant that they were maximised, and wages were kept relatively low as an overall cost, but the staff were paid relatively well compared to industry standards. This was achieved by careful planning and timetabling of staff such as pilots. The stock option plan is also a useful inducement for locking key staff into long term employment, which in turn means that staff training on their single fleet policy is cost effective.
By taking some of the tertiary reasons supporting the cost reduction areas of Ryanair, and placing them in an Activity Map. A relationship is developed on how these competences and resources also provide the structure behind Ryanair's second aim of offering a frequent & punctual service. ( Appendix VII )
The use of less busy secondary airports and the services they provide, plus Ryanair not having to load/unload meals and cargo, result in short turnaround times at airports. This in addition to a flexible aircraft fleet and members of staff, help to achieve the aim of offering a frequent and punctual service.
The activity map also shows how Ryanair achieves and enhances it revenue making ability, through not only air travel itself but other various methods, such as advertising on their aircraft aswell as the offering of car hire and other related, but diversified services. All of which have been vital since the EU abolished duty-free sales on intra-EU travel.
Does Ryanair have a Sustainable Competitive Advantage in 2001 & in the future !
In summary Ryanairs strategy in 2001 of being a 'Low Cost Leader' is based largely on a set of unique skills in managing both the cost and revenue sides of the business. While none of these skills in itself may be enough to ensure success over competition, their cumulative effect amount to a good base of Sustainable Competitive Advantage in 2001. Allowing it to withstand price competition better than its competitors and a stronger balance sheet with which to absorb the effects of any price war. This allowing Ryanair to meet future competitive challenges without undue risk to its long-term EPS growth. Although the level of how sustainable it is, is open to wide range of views.
The transparency of most of the competitive advantages discussed are visible to all competitors, any airline can buy the same planes, lease the gates, and match the ticketing and handling services offered by other airlines. Although it is harder for rivals to match an array of interlocked activities, than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Ryanair's activities interlock and complement each other, so they do at present achieve a good level of sustainable competitive advantage. They should minimise the erosion of this advantage level, through having more critical success factors and continue to develop these to enhance durability. Therefore making attack on all fronts more difficult, for others to compete on the service they deliver.
Ryanair have shown their ability to adapt to EU regulations that are constantly changing, although these disturbances from the Government and the EU regulatory authority are increasing the transferability of some competitive advantages. Especially with reference to those Ryanair have gained through differential airport deals. Governments may encourage competition though some may have closer ties to "national flag carriers" who are potential competitors.
In reference to the future, will demographic changes weaken the model, for example encourage luxury spending. At present Ryanair is in the European market only, if they expand worldwide, is the concept expandable. Long haul may require food handling, which could start to alter the model significantly.
The advise at present would be to continue along the same routes and the same strategies, however, an increased awareness of the benefits of diversification may increase revenue even further. In regard to the internet, customer can be lured in by effective websites and can then buy online, providing easy ways of enticing customers to purchase these services Ryanair offer.
