Ryanair - business analysis. What is the strategic position of Ryanair and how to maintain and strengthen their position for the future?

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Summary Ryanair - the low fares airline

A new airline company was founded in 1985, namely Ryanair. This company was the first competitor for Aer Lingus. During the first years, they were actually "a full service conventional airline" . They had two different classes of seating and they leased three different types of aircraft. At the beginning of the nineties they turned there airline company from a full-service into a low-fares, no frills-carrier. The restyling had been based on the model of Southwest Airlines. Tony Ryan who was the founder of this company hired Michael O'Leary who was going to lead the new management team. As a result of the restyling in 1997, they were able to become floated on the Dublin Stock Exchange and the NASDAQ.

The family sold the company for IR₤56.7 million and purchased a stake of 61% for just only IR₤3.1 million. Michael O'Leary also purchased a stake, which was 17.9% for IR₤0.9 million. Another investment group (David Bonderman) invested IR₤1 million in equity and an IR₤24 million loan through Irish Air (vehicle company). In return they received a stake of 19.9%. David Bonderman, who was already chairman of Continental Airlines, became also chairman of Ryanair at the flotation. During the following years the shares of the Ryans, O'Leary and also Bonderman decreased. Since Ryanair is a European carrier, they will have to have a majority of shares held by EU nationals. This means there might be some limitations of trading shares outside the EU.

Maintaining their "position as Europe's leading low-fares airline, operating frequent point to point flights on short-haul flights, mainly out of regional and secondary airports" . No frills service with low fares, in order to stimulate demand from budget- conscious leisure and business travellers. Ryanair wants to achieve growth by initiating additional and new routes from Dublin and London to other cities in Europe, most of these routes are being served by high-cost and high-fare carriers. Being profitable, attracting new customers by having low fares and to have a satisfactory operating margin are challenges that can be achieved. If the right opportunities are available, then acquisitions might be considered. After entering the Ireland-UK market, more competitors entered this market, which was dominated by Aer Lingus. This led to lower fares and more traffic on the routes served by Ryanair. The "Ryanair generation" was responsible for the successful growth of this company. This generation consisted of "the younger Irish emigrant population in the UK" . From 2001 on, there emphasis lies on expanding to continental Europe instead of Ireland-UK. The low fares were possible by allocating a majority of seat inventory to their lowest-fare categories. As a result they were able to prioritise features, such as frequent departures, advance reservations and baggage handling. Dropping cargo services resulted in an annually revenue of IR₤400.000 (which were costs). The turn around time could be reduced from 30 minutes till 25 minutes. By offering ancillary services Ryanair could increase its revenue. According to Micheal O'Leary in 2001, those ancillary services could be used to subsidise the airfares. In 2000 the revenues from ancillary services increased up to 38%. By purchasing "new aircraft, refitting used aircraft and hush kitting and rudder installation of existing aircraft to comply with EU regulations"  it will be able to realise its growth ambitions.

Costs and operations.

The Ryanair's objective of being the leading no frills airline in Europe depends on the lowest airline. Focus is put on lowering costs it order to sustain low fares and gain profit. In order to lower costs, Ryanair focuses on five areas:

Fleet commonality

Contracting out of services

Airport charges

Staff costs and productivity

Marketing costs

Fleet commonality.

In order to lower cost, Ryanair initially used only one type of aircraft. This aimed at obtaining spares and maintenance services on favorable terms, limiting costs of staff training and offering flexibility in scheduling aircraft and crew assignments. Later on, Ryanair has ordered more new aircraft to its meet goal of increasing capacity. Older aircraft needs higher maintenance costs and consumed lots of fuel. However, under the EU directive on noise requirements, Ryanair had to install hushkits for its 14 airplanes which resulted in a high level of fuel consumption. To scope with this problem, Ryanair had contract for a large proportion of its need in advance in order to save cost.

Contracting out of services.

Ryanair only maintained its own staff and services at Dublin Airport, aircraft handling, ticketing, baggage handling and other functions had been contracted out to third parties. It aimed at obtaining competitive rates and multi year contracts at fixed prices, limiting exposure to cost increases.

With regard to maintenance, Ryanair engineering staff carry out routine maintenance, all services such as repair services and checks on aircraft, engine and heavy maintenance are contracted out to third parties. Contracting out of services is done under the supervision and planning of Ryanair engineering staff so that the company can have overall control of quality and safety without incurring the cost of specialized labor force for a modestly sized fleet and facing the labor unrest that cause problems to the maintenance subsidiary of its rival.

Airport charges and route policy.

In order to reduce airport charges including landing fees, passenger loading fees, aircraft parking fees and noise surcharges, Ryanair has chosen not to operate in congested main airports. Instead Ryanair has chosen secondary and regional airport destination. Due to the fact that Ryanair can generate high volume for airports, therefore it has negotiated favorable access fees. This can help the company keep lowering costs. Besides that, operating in less busy airports can help provide on time departures, faster turnaround times and fewer terminal delays. In addition, Ryanair does not interline with other airlines. This aims at allowing the airline to offer direct non stop journeys, avoiding the costs of services including baggage transfer, passenger assistance for connecting passenger as well as delays. Notably, due to the number of issues, including an increase in airport charges and inadequate congested amenities at Dublin Airport, Ryanair submitted a plan to build its own terminal or cooperate with another companies to build a second terminal.

Staff cost and productivity.

Ryanair's employee compensation costs are controlled through a performance related pay structure. Ryanair's cabin attendants can earn commission on on-board sales and in flight services. Although EU legislation has eliminated intra EU duty free sales, cabin staff can still earn commission through duty paid sales and in flight refreshments. This creates opportunity for staff to earn commission for paid service and a reduction in the extent to which the aircraft need cleaning between flights; hence cabin crew can clean up the cabin and allow a quicker turnaround time.

Ryanair has refused to join trade unions which led to controversy with regard to employment practices. Ryanair claims that it will only recognize trade unions when a majority of workers choose to join. Ryanair is simply leading the way in facing the realities of international competitiveness and the growing irrelevance of trade unions to effective enterprise and workers' rights. Nevertheless, Ryanair's employees stated that they are happy to work for the company.

Marketing costs.

Ryanair advertises its low fares through its websites, national and regional Irish and UK newspapers, radio and television. Besides that the company had cut its rate of commission to travel agents who led to boycott towards Ryanair including stopping selling Ryanair tickets and handling reservations for Ryanair flights.

In order to improve contact with its customers, Ryanair established Ryanair Direct limited in Dublin through government grants. Ryanair Direct aims at management control over customer service quality and increases sales of ancillary services such as travel insurance, car rental and connecting rail services.

In January 2000, Ryanair launched its own website in order to save money on staff costs, agents' commission and computer reservation charges. The website helps Ryanair decrease 24% in marketing and distribution costs.

Notably, Ryanair found that the company can not dispense with some dependency on travel agents, especially when the company opens up new routes in unfamiliar markets and problems arise such as a system breakdown on the internet or other events influencing on the operation of a single centralized reservation centre.

In time performance and baggage handling are seen as key importance to customers.

Ryanair's competitive arena - the European airline industry.

Even after deregulation, the European Commission was concerned that liberalization had been ineffective, for several reasons.

The European market continues to be characterized by higher fares and operating costs than the US, resulting from relatively high tax and exercise charges on fuel, and higher landing, ground handling and air traffic control charges.

Another airline sub-sector in Europe is the vertically integrated groups of tour operators and travel agents which use in-house charter airlines. Since deregulation, some of these charter airlines have entered the scheduled service sector, but are still sticking to leisure-dominated routes.

In Europe, high speed rail travel and the construction of major tunnels and bridges provide viable and often quicker transport alternatives to air travel for journeys up to 500 km. Further complications arise because of the convergence criteria set by the EU for cross-border train links.

An issue for European airports has been the abolition of duty-free shopping within the European Union from July 1999.

Nevertheless, on the positive side, growth in air travel in the European market is one and a half times that of the more mature American market.

A trend among national carriers has been to form alliances amongst themselves and/or with smaller airlines.

Generally, large established airlines have tended to consolidate their positions in their hub airport and not to avail of EU cabotage rights, instead opting for code sharing links with smaller airlines.

Budget airlines in Europe

The 1990s saw the birth of several budget carriers in Europe, starting with Ryanair. Generally, these airlines use the tactics of offering low fares, no frills and point-to point-routes to smaller airports. Generally they have not confronted the large established airlines in head-to-head battles, by choosing airports that were not to be served by the large carriers, instead growing volumes on new routes. In instances of direct confrontation, the large carriers have reacted in a number of ways.

However, Ryanair is by far the dominant player in the budget industry in Europe.

Budget airlines in Europe - the customer's perspective.

The cheap flight deals offered to customers are frequently confusing. Often when passengers attempt to avail themselves of advertised bargains, they discover that the deals are hedged with conditions, and that just a small proportion of seats are offered at the bargain fares. In view of this fact, the Sunday Times carried out a study of four airlines. The results of the study are that early booking was more likely to get a bargain, but it was not always a guarantee of the lowest fares, as prices could go down if sales stagnated, and airlines monitored each flight by means of a yield management computer program. Early internet booking apparently resulted in the cheapest fares, and the best fares were usually available for flights that left at unsociable hours.

The future?

Ryanair was the first airline in Europe to see an opportunity for a budget airline and in 1998 was regarded as the leader of the pack. Others followed as deregulation opened the skies of Europe.

Ryanair has won a lot of prices in the years 1998. 1999 and 2000.

By 2001, Ryanair had increased its profits for 10 years in succession.

O'leary predicted that by 2008, Ryanair would carry 20m passengers, taking it beyond BA in European traffic terms and contesting Lufthansa for the number one spot. The challenge now was to maintain focus on its niche and to keep costs under control.

Problem statement.

What is the strategic position of Ryanair and how to maintain and strengthen their position for the future?

Learning goals.

How does the environment influences the strategic position of Ryanair?

How can Ryanair make use of it's strategic capability to perform in the market?

Who are the keyplayers of Ryanair and how do they influence the strategic position of Ryanair?

What methods/directions can be used to analyse and formulate the strategy development?

Organisational Structure Ryanair

Several types of structures can be identified. By using an organisational chart, the levels and roles of the organisation can be defined. The outcome of such map shows us how the processes and relationships work. Johnson and Scholes distinguish three basic structural types.

The first type is the simple structure. As a result no formal structure is present. The organisation is led/ run by the personal control of an individual.  Very small companies can only use this kind of structure, since the individual needs to have a good overview in order to run the company effectively, which is obviously difficult in larger companies.

The second structure mentioned is the functional structure. This structure has been "based on primary activities that have to be undertaken by an organisation such as production, finance and accounting, marketing, human resources and information management" . This structure is often being used by smaller companies, since they have narrower instead of diverse product ranges. Advantages of such an organisational structure may be the greater operational control at senior level. Another advantage is the clear definition of roles and tasks and the responsibilities. Disadvantages can be the bigger the company, the more the senior managers will have to deal with operational issues instead of putting a strategic view on the matters, which might result in neglecting strategic issues.  Another difficult issue is how to deal with diversity, since the different SBU's will have their own approach and strategic goals, how to adapt all these businesses into one outcome.

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The multidivisional structure is the third type being described. This structure consists of separate divisions that can be based on products, services or geographical areas. Advantages of this kind of structure are the concentration on the business area, facilitation of measurement of the unit performance, ease of addition and divestment of units, facilitation of senior's management attention to strategy and this structure encourages management development. According to Johnson and Scholes disadvantages are possible confusion over locus of responsibility (centralisation/ devolution confusion), conflict between divisions, basis of intertrading, costly, divisions grow too large and complexity of co-operation if too many divisions.

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