UNIVERSITY OF HERTFORDSHIRE
THE BUSINESS SCHOOL
BUSINESS STRATEGY
3BUS0014
LESLIE FITZHUGH
COURSEWORK:
RYANAIR CASE STUDY
BY:
SARAH ANTONY
LIDYAH GUNARATNAM
VIGITHA KIRITHARAN
SAADIA PERVEZ
JOSEPHINE
HAND IN DATE:
04/12/2003
2:30
Brief Introduction
About Ryanair
(See appendix A for a complete breakdown of Ryanair's history and future plans)
Ryanair was launched in 1985 with a daily flight between Waterford and London Gatwick. A year later, Ryanair broke the cartel of Aer Lingus and BA on the Dublin to London route. Over the next 3 years, Ryanair expanded rapidly. Under a new management team, a major overhaul of the airline was undertaken in 1990/91 and was relaunched as the first of the new breed of 'low fares/no frills' airline. Ryanair is Europe's largest low fare airline with 76 low fare routes to 13 countries in Europe carrying over 12 million passengers. It is the second largest scheduled airline in the UK in terms of passenger carryings. (Key Note Ltd 2002)
* In January of this year, 2003, Ryanair announced that they had ordered another 100 new Boeing 737-800 series aircraft.
* Also announce their takeover of the low-fares airline, Buzz from KLM and they plan to turn around the loss of £0m euros that Buzz is facing.
* In February, they opened a new base in Italy.
* In April, another base was opened in Sweden with six new routes.
* Financial results that were released in June showed:
"passenger traffic for the year grew by 42% to 15.7m as average load factors increased from 81% to 84%, primarily due to a 6% reduction in average fares. Total revenue in the year rose by 35%, however operating costs rose at a slower rate by 26%. Net Profit increased by 59% to 239.4m euros."
* 3 new routes were announced in August and now, "Ryanair has 127 routes that cover 84 destinations across 16 countries."
(www.ryanair.com )
The nature and extent of competition in the market and how
competitive advantage is sought
Ryanair is expected to carry almost 24 million passengers this year. Being the first airline to introduce low fares, it has revolutionised European air travel. They offer choices, competition and very low fares on all routes where they compete with some of Europe's biggest and strongest airlines. (www.ryanair.com)
On the basis of the success of the company, one could assume that the service offering is a good one. Of those factors included within it, cost leadership is thought to be the most important. Cost leadership is often a very effective form of competitive strategy. It is certainly very effective in the European market, where the cost of flights is still on average twice as much as the US. (Competitive Advantage M.E. Porter 1985).For example EasyJet is aware that customers would like to fly the Geneva Barcelona route with someone other than SwissAir i.e. cheaper alternative. However since Switzerland is not a full member of the EU, this route is an international route meaning that Switzerland has the right not to allow anyone but national carriers to operate (i.e. SwissAir and Iberia).
Their low fares and friendly, efficient service paves their way forward. They do this through very good cost management:
* Landing in airports that aren't too expensive
* No frills on flights - but sells food, drink and gifts
* Punchy advertising
* Give away free seats at times
Strategy
As an employer, Ryanair reward staff well for effort. Where possible, they motivate work so the more that's done, the more pay. They aim to offer competitive salaries with excellent benefits. Also offer share option scheme, which allows staff to own a piece of the airline and share in its success.
Ryanair makes every effort to give customers the best service around and wish to maintain their position as the number 1 airline for customer service. Which means, being the most punctual airline in Europe, making sure passengers are united with their bags when they reach their destination and doing everything they can to make sure that customers don't have any grounds to complain. (www.ryanair.com)
Although at times things can go wrong, Ryanair commit to improving on the previous years performance. (See Appendix B, which illustrates the dramatic reduction in complaints and lost bags per 1000 passengers each month over the past 3 years).
Ryanair's success is not only due to their low fares, but also a winning combination of their no. 1 on time record, their friendly and efficient people and their new Boeing 737-800 series aircraft. (See Appendix C for a selection of recent comments from passenger
Stakeholders
All firms have responsibility towards their shareholders, but they may also have social responsibility towards others. Different stakeholder groups can be a powerful influence on the extent to which an organisation can change its strategy (Adrian Haberberg 2001). Ryanair's stakeholders are;
* Employees: An aircraft needs skilled staff to operate within. Experienced qualified pilots and other members are essential to the running of the business. If good customer service is received then customers will come back and good word of mouth may even bring in new customers. Staff can have an influence with the firm's decision making as without them, the service would not be able to operate. For example Ryanair needs to ensure that their air crew are happy at all times as a strike will delay flights, make unhappy customers and bring the business a bad name.
* Suppliers: are likely to be extremely worried if an important customer decides to move into a different business area (Adrian Haberberg 2001). Fuel is important to the day to day running of Ryanair. An airplane cannot fly without fuel. Supplies need to be purchased from reliable suppliers. even though they are a 'no frills' airline, the suppliers of their food that they sell to customers need to be on time and reliable too. They are stakeholders of the business as they play a major part. However there are so many suppliers available that if one is unsatisfactory then there are so many more to choose from.
* Consumers: Consumers are key stakeholders of this business. Because there is a market for a low cost airline Ryanair is successful. Without any customers the business will not need to run and will definitely not be making any profit.
* The Environment: The environment is the key to an organisations success. By gaining and analysing information of the environment, an organisation can understand the needs of customers and provide a service that meets their customer requirements more closely. The weather conditions are really important to air travel. Bad weather might mean cancellation of flights so its ...
This is a preview of the whole essay
* Consumers: Consumers are key stakeholders of this business. Because there is a market for a low cost airline Ryanair is successful. Without any customers the business will not need to run and will definitely not be making any profit.
* The Environment: The environment is the key to an organisations success. By gaining and analysing information of the environment, an organisation can understand the needs of customers and provide a service that meets their customer requirements more closely. The weather conditions are really important to air travel. Bad weather might mean cancellation of flights so its really important that weather conditions are known before flight dates are finalised.
* The Local Community: They are not key stakeholders and only play a small part with the firm's decision making. Its an advantage to Ryanair if they can keep the local community happy by not making too much noise when landing planes or if that's impossible, then land at times that will be accepted by locals.
The above at the minimum have a stake in the outcome of the airline's decision making. These stakeholders have a right to influence management (Steven Barnes 1997). It is quite common for different sets of stakeholders to hold different views about a firm's direction (Adrian Haberberg 2001).
Competitive failure and success
"The Dublin-based airline has become a leading force in European aviation. But with the European Commission about to rule on airport subsidies and expansion likely to raise costs, margins are under pressure." (Financial Times 2003) Some of Ryanair's statistics are certainly impressive. In the six months to September 30, passenger numbers rose 45% to 11.3m. However, a closer study of the carrier's performance may perhaps be less encouraging. Ryanair, in its attempt to lead Europe's skies even more, is frantically adding capacity to its network. Consequently, the load factor is coming under pressure. All this means that Ryanair's rate of profit growth might be slowing.
Leadership
Tax on economy class passengers is said to increase but Mr. O'Leary has his doubts, "I don't think he will increase the air passenger duty. Whatever else he may be, he's not stupid." (Financial Times 2003) He must be flexible and prepare for when things may go wrong. Must also, as a leader, expect the unexpected in order to be able to react fast.
Ryanair will shortly learn the outcome of a European Commission inquiry into alleged illegal subsidies at Charleroi airport in Belgium. (Financial Times 2003) Mr. O'Leary plays down the importance of airport support. This could mean bad publicity and repayment of the money could mean a terrible loss.
However, the constant search for economies is typical of Ryanair's approach. In addition to negotiating favourable airport deals, it is able to drive down costs with all its suppliers by promising large, and crucially growing, volume based on projected passenger numbers. "This is Tesco", says Mr. O'Leary. "How is Tesco cheaper compared with other stores? They buy more and sell it at low prices. That's what we do." (Financial Times 2003)
By owning, rather than leasing its aircrafts, Ryanair has been able to capitalise maintenance costs and depreciate them between significant overhauls. (See Appendix D for charts showing passenger traffic, Net Profit margin and Breakdown of revenue for 2003)
Competitor Analysis (Please see Appendix E for a complete competitor breakdown.)
Ryanair's main competition comes from Easy jet Airlines, as these are the only two who have launched the 'low cost, no frills' services.
Easy jet was launched in 1995. Since its first flight, the airline has grown from two routes to 44 routes. The main shareholder is the Haji-loannou family. (Key Note Ltd 2002)
Assessing the Environment and the nature of Competition
Industry Analysis with Porters five forces model
Michael Porter's seminal article, 'How competitive forces shape strategy' introduced the five forces model for analysing an industry. Due to the limitations on this report bullet points will be used to convey the most important aspects of the five forces. It is as follows:
Threat of entry
Firstly looking at the threat of entry from the European airline industry in general, the factors that have influenced the threat of entry over the past few years are:
* EU deregulation removes barriers to entry for airlines based in Europe.
* Some newly established airlines or airlines on new routes might have to be prepared to lose money for a period of time and require strong financial backing.
* New entrants into different EU national markets can be other existing EU based airlines taking advantage of the deregulation.
* Lack of take off and landing slots make it difficult for new carriers to find suitable airports.
* Loss leader is required in order to join the low cost market- BA came a bit late with GO and it cost them £20m, and they have yet to make profit.
There have been factors that have affected the threat of entry within the budget factor.
* Perceived customer demand attracts new entrants to budget sector.
* High capital investment, negotiates threat to some extent
* Overcrowded market and very strong competition deters potential new entrants.
* Established airlines can enter budget from different bases. For example Just as British Airways had done with Go, mainstream airlines go "downmarket" or set up separate budgets.
* Charter airlines can also enter the sector by moving into low fare scheduled services.
From Ryanair's point of view there is a moderate threat of entry.
Bargaining Power of Suppliers
Firms rely on their suppliers to ensure that their goods are available on time (Adrian Haberberg 2001). With a view of the budget sector and the European airline industry, the following issues have affected the power of suppliers.
* Aircraft suppliers: Many budget airlines have been opting for standardised Boeing 737 fleets. Consequently, this has led to Boeing having more power . Larger orders for aeroplanes will naturally get better deals. For example the Ryanair deal with Boeing.
* The price of aviation fuel is directly related to the cost of oil and as an individual company Ryanair does not have the power to alter this.
* The more Ryanair expands the more power it will possess over its suppliers.
* Airports: primary airports have more power, but the power of airports is increasing as air traffic in Europe is increasing. Smaller secondary airports want business from budget airlines .
* Airport services and suppliers: EU legislation ensures competition-reducing power of suppliers. Budget airlines are more likely to outsource.
Threat of substitutes
The threat of substitutes within the airline industry has increased within the past few years. Much of this has come as a result of falling consumer confidence in air travel, mostly due to September 11th, terrorist attacks. The most common threats are:
* Other modes of transport. In Europe, fast rail and cross water tunnels and bridges enable faster and more convenient travel.
* The price of a rail substitutes is normally important.
* It is more difficult for rail prices to compete for price conscious travellers with low budget airline fares.
* Road and rail is more likely to be viable substitutes for the shorter journeys typical of budget airlines.
Power of buyers
Buyer power is strongly influenced by the availability of substitutes (Adrian Haberberg 2001). The following points are related to the affect of the power of the buyer in the budget sector:
* Budget airline fares appeal to price conscious travellers. Although the customer does not affect ticket price, they are still fickle and vote with their feet in order to find value for money.
* Business travellers used budget airlines especially valued for flight frequencies on routes and punctuality.
* Capacity utilisation, which is critical in a low margin industry, can increase competition.
* Internet booking is convenient for point-to-point travel typical of Ryanair, and is cost effective for airlines.
* Customers have the Civil Aviation Authority (CAA) on their side.
Competitive Rivalry
The nature of competition in an industry is strongly affected by the other four of
Porter's five forces (Alan Whitcomb 1990). Ryanair operates cost leadership and
differentiation strategies. The following pertain to competitive rivalry in the budget
airline sector:
* New competitors in the budget sector increase buyer power.
* Some of Ryanair's competitors in the budget sector may follow the trend of adding "frills" and flexibility. E.g. Easy Jet adds flexibility and Virgin express adds comfort.
* The competitive rivalry is fierce within this sector. There are an increasing number of rivals entering the sector. As more rivals develop route systems, budget airlines will find themselves competing head to head on the same routes between Glasgow, Edinburgh and Dublin.
* Mainstream airlines are trying to bring back customers from budget airlines. They are trying to do this by using special offers, E.g. AerLingus on Dublin - London routes.
* Cost is critical when competing with low fares.
PEST Analysis
Political
Politically, there are operating restrictions, (timing, rotations and slots), which airlines have to work within. The benefits in joining an alliance, is that it makes otherwise unreachable routes, a reality. This also ties with slots, as each national carrier in their home cities, has the monopoly. Another political benefit is the joint route agreements, which all members of an alliance can utilise.
Economic
Capacity in Europe exceeds demand, which leads to rate wars, equalling lower yields for companies. Economically, alliances lead to a greater control on capacity, therefore reducing competition and increasing yields. Alliances also reduce the near term possibilities of airport expansion. By code sharing airlines are able to not only split costs but to offer services and enter markets, they might not be able to do on their own. This leads to less aircraft at airports, therefore less space is required, and is another way in gaining access to prime airports, which can expand further.
Another factor is the cost of safety; alliances can share these additional costs on joint services.
Globalisation has played part by making it easier for airlines across the world to join forces.
Social
These are strong from an employer staffing perspective. Airlines in alliance/code-share can reduce costs by utilising only one airline's staff.
September 11th 2001, contributed to a major downturn in the airline industry, accelerated, and accentuated the current trend. It negatively affected consumer confidence and passenger numbers subsequently reduced. Passengers resorted to land substitutes or in business teleconferencing. These social and technological factors are still very much affecting airline travel.
Other recent factors affecting the industry is heightened security, leading to increased costs, slower turnaround times and therefore lower utilisation of aircraft, and Health and Safety issues surrounding Deep Vein Thrombosis (DVT), which may force airlines to increase their current seat pitch, thus reducing the number of passengers that can be carried.
Rising oil prices and airline rate wars have led to huge losses sustained by all airlines. Most airlines however do have hedging policies on fuel, which can limit these losses. In February 2001, most airlines introduced a fuel surcharge to both passengers and cargo tariffs. This surcharge lasted for ten months, until airlines were forced to withdraw, due to falling fuel prices, although this has now been reintroduced.
Technological
Technology in this industry is fast moving and very expensive. Alliances, give the opportunity for joint investment ventures, such as shared check-in systems.
SWOT Analysis
Strengths
The UK airline industry is one of the most competitive and strong airline industries in the world. The speed of air travel and the fall in real prices has meant that air travel has increased market share of passenger transport. In terms of fatalities per passenger mile, the long-term safety record of air travel is better than other modes of transport.
(Key Note Ltd 2002)
Ryanair carries out its routine checks and repairs on its aircraft using its own engineers which means that some maintenance costs are included in the staff cost. Also has cost advantage because of its ability to achieve 25minute turnarounds and therefore can run two more flights a day in its schedule than rivals such as B.A. Their use of secondary airports means that they are able to negotiate deals, e.g. airport paying for cost of call centre, and there's unlikely to be much competition because larger airlines are unwilling to split their operations between two or more airports. Ryanair does not pay dividends to shareholders. All profit is reinvested back into the business, which means a higher profit margin.
Weaknesses
As the demand for air travel increases, parts of the air transport infrastructure - such as air traffic control and ground transportation - are becoming congested. This increases delays and may pose a threat to safety.
The new air traffic control system for the UK was delayed and is over budget. Parts of the air traffic control system are not working as effectively as they should.
There is no integrated air traffic control system for Europe. (Key Note Ltd 2002)
Restrictions on night flying can produce congestion and delays at other times.
Lack of runway and terminal capacity at some airports prevent the opportunities for new services.
Ryanair is unable to expand its home market industry because of airport taxes. Passengers having their luggage carried at their own risk could mean a loss of reputation if any major scandal is to occur in terms of loss of luggage. Increasing its fleet could mean that it might incur more losses as recently; there was a 5% drop in the load factor.
Opportunities
There is still potential for more regional departures to satisfy business travel demand and the growth in short breaks. The Internet can provide a simpler route to the market for consumers and businesses. It makes searching for availability and the lowest fares easier and reduce distribution costs for airlines. There is potential for more direct bookings to reduce distribution costs. Increasing collaboration with alliance partners and code sharing partners can increase sales and reduce costs. This could lead to higher levels of cross-shareholdings and consolidation in the industry. There is also considerable potential for further development of low-fare services in Europe.
Ryanair can use its reputation as a resource to expand into Internet café's or car rental services. They can also cut down on the use of intermediataries who sell their tickets for them by getting to publicise through the Internet or airports.
Threats
Oil prices have a knock on effect on aviation fuel prices and may lead to a squeeze on airline profitability. The development of video conferencing and other forms of communication may have a small impact on the business travel market. High-speed rail links may have an impact on some domestic and short-haul routes as they tend to be cheaper and passengers are dropped off closer to their destinations. Concern over the environment due to aircraft emissions may hinder some traffic development. The publicity given to Deep Vein Thrombosis (DVT) may stop some passengers from travelling. Civil aircrafts are often a target for hijackers and terrorists.
(Key Note Ltd 2002)
Increase in airport taxes.
Value chain
Differentiation
The Market
Many air services will transport both goods and services but they are two separate market sectors with their own characteristics. The other main sector categorisations for the air travel market are:
. Domestic and international services
2. Scheduled and non-scheduled services
Until the deregulation of air travel in the UK in the 1990's, non-UK airlines were not allowed to provide domestic air services in the UK. Since 1997, EU airlines have been allowed to operate any type of service within the EU. (Key Note Ltd 2002)
The key trend in air travel is to exceed the growth in economic activity. This means that even in times when economic activity is slow and growth rates are zero, the demand for air travel still increases. The demand for air travel has only declined twice since the Second World War. The first, in 1991, during the major world recession and the Gulf war. Ten years later, in 2001, air travel fell by 2% - 3% due to the terrorist attack. There are many reasons why air travel demand exceeds the growth in international travel. These include the removal of trade barriers, globalisation, increased leisure time, and the falling real cost of travel. (Key Note Ltd 2002)
Since the beginning of the 1990s, many international trade barriers have been removed. The Single market within the EU started from 1991 and the EU was expanded from 12 to 15 member states in 1985. More importantly, the World Trade Organisation (WTO) has been more active than in previous decades in making free trade for certain goods and services world wide. (Key Note Ltd 2002) The first outcome for removing trade barriers is to open up competition in goods and services, which puts pressure on prices and increases the flow of goods. The Second effect of removing trade barriers is that production of many goods and services is moved from high-cost to low-cost economies. As companies become more international in their production and marketing operations, they also lever brands globally. With international production and marketing operations, there is much greater need for the transport of goods and for business travel.
Since the late 1980s, the political environment for air travel has been in the market's favour as deregulation of the air transport industry in Europe has formed a more openly competitive environment. (Key Note Ltd 2002) The protection through mutual agreements that effectively barred competition on mutual routes has disappeared. Most European countries have open skies agreements with the US, with the notable exception of the UK. This environment has allowed competition, although there are constraints on terminal and runway capacity for many airports and this prevents some airlines developing certain routes.
Competence and capability
Ryanair's strategy is met by making the business more successful, by meeting the market needs. The company did not feel that they could fit through adapting the organisation to the environment, as there needed changes to be made in order to boost the increase. The organisation used its assets to innovate by introducing the launch of the new routes, and exceeded with the capabilities as being Europe' fastest growing economy. What the customer's value most, is that the organisation has the ability to do better than its competitors.
Inside out/outside in
The inside out methods, evaluates how Ryanair set about their launch, instead of trying to adapt to their resources, they extended the services that were not making tremendous increases. Instead there was a duplication of similar services as its main competitors.
Ryanair protected its unique resources, by its regulation so that it would prevent other competitors into its market. The main purpose was to protect themselves and not for another company to be able to copy.
Contingency
The different stages of Ryanair's life cycle include many links between structure, strategy and management systems. The organisation structure affects future growth. The age of the organisation is essential and is the life span of an organisation, as management problems and principles are rooted in time.
The size of the organisation is important. Ryanair has had an increase in the number of employees due to the sales volume increase. As with age and size, Ryanair needs to be prepared for the prolonged growth. As Ryanair is more successful and have had an increase in their sales and services, they need to remain focused on their continuous years of growth without allowing any major economic setbacks. This is also related to the market environment as well as competitors. As Ryanair increased its services, it rapidly expanded its market and employed further staff as necessary.
Summary
On the whole the airline industry is a service industry. Airlines are primarily concerned with customer service and look to add value to the customer experience at different stages in the value chain. Aer Lingus, for example is a full service airline that charges premium prices for the high levels of service they provide; by comparison Ryanair positions itself at the other end of the scale. They are concerned with customer service and value added throughout the process. Some may argue that this should not be the case of Ryanair, since it is a 'no frills- low cost' airline. However O'Leary says that they are known for a friendly efficient service.
Most customers do not expect much as they are not paying much, therefore if you exceed those expectations then you will have happy customers. Ryanair manages customer expectations downward and then surpasses them, thus surprising the customers. They provide cheap flights that are billed as 'no frills' but ensuring that its basic logistics work very well.
The Seven S Framework was developed by McKinsey's (Waterman et al, 1980), which points up the linkages between super ordinate goals, strategy (competitive stance), staff (human resources), skills (competence and capabilities), structure, systems and management style (all elements of culture and architecture). His research points to the importance of coherence between the different elements of strategy if an organisation are to have a sustainable position (Adrian Haberberg 2001).
Super ordinate goals
To become Europe's first and most successful low cost carrier. They wanted to be unique. There is no one in Europe doing what Ryanair is doing says Martin Borghetto, European transport analyst at Morgan Stanley in London. Ryanair aimed to make air travel more affordable within Europe.
Skills
One of the greatest strengths of Ryanair is that they have never had a long-term plan. They are constantly exploiting opportunities as they arise. They are too busy growing to make long-term plans. They are a successful low cost, no frill airline.
Strategy
O'Leary transformed Ryanair from a money losing carrier serving Ireland and Britain into the leader among Europe's six low fare airlines. Their strategy is to maintain its cost discipline and corporate personality. Low fares and friendly efficient service through good cost management. They bring people along internally by having very clear goals, which are clearly stated so the organisation is marching - all the time in a certain direction.
Structure
They moved from being a private company to a public company. They are becoming a slightly different, more organised, less informal company internally. They are building management and communications structures to accommodate that. They are constantly trying to reinvent themselves.
Style
O'Leary figures that his biggest advantage is that Ryanair does not really compete head on with Europe's biggest carriers. It targets the discount market the majors have long shunned in favour of the business class traveller. 'These low cost companies are opening up new segments of the market without really taking clients from the regular carriers' says Air France CEO Jean Cyril Spinetta.
Staff
Since O'Leary took charge, he has either been engaged in crisis management or cracking the whip to ensure that the airline meets its stated growth objective. O'Leary and staff are trying to change the public perception of Ryanair brand to extend beyond cheap fares. They have a very good senior management team. They have a very solid and very stable management group and their second level of management is equally stable. They have a strong board of directors to draw on, with the experience of the Ryan family, the Bonderman group haven't yet brought in outside consultants to tell them how to cope.
System
It's a learning process. It's going to keep changing over the following years.
