Concerning the bargaining power of customers, the two main factors are the relative absence of switching costs and the high implication of the customer in the purchase (high acuity), as it represents the uncompressible part of the travel, independently from the length of the stay abroad. In addition, there are often very few alternatives to the air transport for long journey, leading to a concentrated acuity on airlines. The high concentration of the offer is also an important pressure factor, as there is basically one flag carrier per country, 4 major European discounters and numerous national/regional players (especially in Spain, Italy, Germany). On the other side, the concentration of buyers is very low for leisure travellers and low for business travellers (who travel more regularly, have higher budgets and expectations and sometime benefit from corporate subscriptions). The threat of backward integration is very low too, as holidays clubs will better create their own fleet or sign strategic partnership. Travel agencies are most of the time little entities and were already loosing ground in the 90’s, as they generate more costs than direct sale, but they have a direct relationship with the customer and could simply boycott any uninteresting airline.
This leads to an average mark of 2.7/5, examining 5 analysis factors.
With the opposite, the supplier power is characterized by very high switching costs (specially on maintenance and training of the staff). Concerning aircraft makers, there is only two main players even if other competitors exist. The latter don’t offer long-distance carriers nor high-capacity aircrafts, and Boeing and Airbus are aware of the importance of having only one brand of plane in a fleet to achieve a cost optimisation on maintenance. In addition, there is a high power of airports who allocate landing slots and use to the maximum their competitive advantages in terms of capacity, general convenience, location, ….
To the advantage of airlines, we can underline that they have a little reciprocity in bargaining power as the concerned amount are very important but also that the threat of forward integration is nearly null (very different businesses, very expensive, no real strategic synergies).
Consequently, the average mark for this vector of pressure also reaches 2.7/5, examining 4 sub-factors.
The threat of substitutes appears to be more dangerous. Focusing on European travels only, the threat is strong, especially on continental journeys. It is mainly illustrated by the large choice of substitution products: the development of dense network of high-speed trains in the main European countries with connections between the main capitals give a strong advantage to this safe, punctual, cheap and comfortable mean of transport offering a downtown-to-downtown journey. It is more evident on short-haul journey, as there is nearly no check-in nor boarding time. E.g., the air traffic growth between London and Paris has been nearly null since the opening of the Channel. The road remains the cheapest but also the slowest alternative. It is also proven to be the most dangerous, tiring and uncomfortable mean of transport, specially for long distance, but gives a total freedom of moving. Ferryboats link mainly IR/UK/FR/ES/NL and are relatively cheap. It offers the possibility to carry a car but it is dependant from the weather, is perceived as unsafe and submit its passengers to a possible “sea-sickness”. Concerning the business travellers segment (what represents only 1/3 of the volume of passengers carried but ¾ of the revenues), the rise of jet-sharing solutions are convenient and flexible substitutes but they require a real need and a heavy initial investment that limits its extension to large firms. The fast growth and the democratisation of video-conferencing and electronic communications represents a real substitution of need as many deals can be achieved without physical meeting. The generic substitution possibility is not pertinent here, as we can consider that low-cost carriers are the generic substitutes to majors.
So, the average mark for this axe of analyse reaches 3.3/5, taking into account 3 sub-factors.
To sum up, the resulting Porter’s Diamond is as follow:
New entrants: 3/5
Buyers’ power: 2.7/5
Suppliers’ power: 2.7/5
Substitutes’: 3.3/5
Taking into account the high-cyclicality of this global market and the high level of fixed costs (what will be more detailed in the next section), we can conclude that Ryanair was moving in a highly competitive environment, submitted to multiple pressures, as we can notice that all marks are above the average.
After having attempted to make an analysis of the competitive environment of Ryanair in the 90’s decade, we will use the strategic group analysis to define the market attractiveness and the relative strength of Ryanair toward its main competitors.
First, it is important to identify and to understand the market before comparing the different competitors. This aims not only to provide an overall comprehension of the business, but also to evaluate if staying on this market is relevant for Ryanair.
To do so, we will study the market segmentation: concerning the customer segmentation, we will remember that between a third and a half of passengers are flying for business, most of them being independent businessmen/women such as C.E.O of S.M.Es, architects, … who have different expectations than leisure travellers. The latter are more composed of “Visiting Friends & Family” customers, who are going abroad for a short time and try to reduce the cost of the stay to the maximum as they are usually lodged and not flying very far from home. Families are proportionally less frequent than on majors, because of the low level of comfort/service on board, the lack of convenience of secondary airports for the post-travel and the absence of assumption of responsibility for alone children. It is important to stress on the fact that Ryanair’s base of customer is Irish or British, benefiting from national economies with bright growth perspectives in the 90’s. We remember that low-costs carriers offer only one single travelling class.
Concerning the segmentation of the purchase, it appears that there is a very little brand-loyalty as well as a low perceived difference between brands (P.D.B.B) inside the same category of carrier (Majors / Low-costs). In addition, we already noticed that this is a high-implication purchase, leading to high sensitivity in function of the choice criteria. Scrutiny seems to be higher toward low-costs, as customers are afraid to get very poor value for such a low price. On the contrary, customers expect comparable level of service/comfort from majors.
The choice criteria are different according to the category of customer: business travellers are more sensitive to reliability and frequency, as leisure travellers pay more attention to the price. Generally speaking, the ranking is as follow: 1st = price; 2nd = reliability; 3rd = comfort/service; 4th = frequency. As the concept of low-cost carriers is to meet the need of travelling at the lowest price, it is not amazing that majors on all other criteria exceed them, as shown by the following diagram.
The market attractiveness is characterized by, on the one hand, very high amount of revenues and, on the other hand, by a very high cyclicality according to the global economical, political and medical backgrounds. Indeed, the global industry recorded a cumulated loss over USD 20,000 Bn between 1990 and 1995 which as to be compared to a cumulated profit over USD 35,000 between 1995 and 2000. This information must be linked with the high level of fixed costs occurring in this industry, preventing airlines from being really flexible (remember that plane renting is very expensive and can’t represent a large part of the fleet, otherwise the profitability would suffer). In addition, the competition is very concentrated on main airways generating large volume of passengers, pushing airlines to open new routes at their own risk. The problem of sky and airports congestion raises these difficulties, as airports and sky control authorities raise fees to develop infrastructures. As we have seen before, the competitive pressure on the environment is quit high too. To sum up, we can say that the market is competitive and risky but offers possibilities of high profit.
Finally, the analysis of Ryanair’s strength outline a strong position with some further growth possibility: the following matrix shows compared market shares, both on the low-cost niche and on the European total market.
The two main conclusions are that, first of all, excepting the narrow follower Easyjet, the rest of the direct competitor is far behind. Then, we notice that the low-cost carriers represent only a small part of the total market but benefit from growth rates superior with 40% a year.
In terms of distribution, Ryanair uses a mix of direct sale and sale through agents, positioning itself between the “direct sale only” model of Easyjet and majors, which use to sell more through agents. Consequently, Ryanair is able to reach all its customers at a balanced cost.
The main strength of Ryanair is its very strong financial position: its high profitability reached 19.4% in 1999 (NOPAT/TURNOVER) is largely reinvested in the business, as their was nearly no dividends paid in the 90’s, what allows the company to benefit from a very low gearing ratio (only 6% in 1999) while increasing its assets (+78.3% in 1999). However, the company is highly capitalized on the stock exchange, thanks to its strong competitive position. Indeed, Ryanair manage to reach an average load factor of 70% whereas its break-even factor is only of 58%. The main dark point is certainly its relatively poor competitive image: As Easyjet benefit from a 72% brand recognition in UK and from a positive “challenger” image, Ryanair is often perceived as a follower with rude methods (no guarantee for luggage, cancellation of flight without notice, …). Ryanair is very weak in communication compared to Easyjet that use its own planes as an advertising support.
To conclude, Ryanair moves into a highly competitive and risky environment but with high profit possibilities. It managed well to take the position of “cost leader” and used perfectly its competitive advantage, even if some points need to be improved: the market segmentation shows some weaknesses compared to the choice criteria of its different customer segment.
In this context, Ryanair will have to take care of the main forces of change in its environment:
The development of new routes and infrastructures may disturb its actual strategy of using secondary routes and airports to cut the costs, as it is already a competitive weakness for the customer. On the contrary, the increase in the number of companies using these secondary airports might result in an increase in fees. The achievement of a total liberalization thanks to EU actions can be considered as both a threat and a chance, as it will reinforce the competitive pressure but also allow Ryanair to expand without restraint. The change in economic cycles will be determinant to test its ability to adapt and that of its competitors, but Ryanair is financially strong enough not to fear a crisis. In addition, the low cost industry can hope going on gaining market shares Finally, the consumer behaviour may be the main dangerous factor, as it could both adopt or reject the particularities of the concept (secondary airports, no service, ..).
Anyway, Ryanair can both take advantage or suffer from any change in these factors, depending from its capacity to be proactive/reactive to these changes.
Q2. “Making use of internal resource analysis, evaluate Ryanair’s strategic capability in 1999. Does Ryanair have a clear generic strategy? How could Ryanair’s strategic position be strengthened?”
To assess of Ryanair strategic capability and understand how this regional player became the leader of the low cost air carrier and the most profitable airline in the world, we will first refer to the Value Chain Analysis and then draw the conclusions.
First and foremost, we must highlight the exhaustive cost reduction strategy: optimisation of the number of seats per plane, use of only one brand of second-hand planes to reduce both buying and maintenance costs, lowest level of service possible, low salaries …
The use of secondary airports as many advantages: it make Ryanair benefit from low landing fees and from financial incentives, allow a higher rotation rate due to the lowest congestion and give it a bargaining advantage by catching a large part of the local traffic.
Consequently, it achieves high load factors and low break-even factors.
On the other hand, it is sometime very inconvenient for the customer, as it is located far from the town centre. It sometime obliges the company to set its own connection service.
Flexibility is gained through the use of outsourced maintenance, and by adapting the number of daily flight and the transport capacity line by line through the use of the two size of planes.
Considering the marketing, Ryanair is less present than its main competitor Easyjet but catch attention by advertising on very low prices all year long. The company used to be a diversified consortium, involved in Hotels and tourism, but is now concentrated on its core business. It enlarges its offer by creating strategic partnership, so that the customer is proposed packages: discount on car rental, on connecting costs (rail or bus) to the airport, … it aims to compensate the relative absence of service on board (no assumption of responsibility for alone children, no frill, no movies, …). The concept is to answer to the basic need of travelling at the lowest price. As the first criteria choice is the price, Ryanair accept to sacrifice the level of satisfaction on other criteria to hold the position of “leader on low cost”.
The distribution is a mix of direct sale and sale trough agents, but tends to be cost reduction oriented: the agent’s commission was unilaterally reduced and the company promotes
On the human resources aspect, Ryanair benefit from the favourable Irish legislation. It takes advantages of the oversized demand of work in the airline industry and provides lower salaries than major airlines. By reducing services to the minimum, the staff can be reduced, as we remember that the maintenance is outsourced to the most competitive subcontractor.
Ryanair’s advantages have a counterpart: the customers have to accept to travel in poor conditions of comfort, not to rely either on the reliability nor on the luggage service and to add a 1 hour travel from the airport to the town centre. The planes are near from obsolescence what risk compensating cheap maintenance costs as they need more attention. This image of poor added value as to be made accepted by customers by promoting the idea than it is worth travelling fast from a point to another for a cheap fare: as it only concerned short haul journey, the lack of comfort is acceptable, and the difference of price compared to majors compensate the absence of frill on board. A communication effort must be made in this direction, to support the sociological trend among customers to call into question old schemes of consumption.
Indeed, customers accept more and more to subject itself to less convenient products such as no pre-assigned seats and no frills politics if they perceived a real money saving. The question “do I really need frills on board for a 2 hours journey” must be pushed into the consumer’s mind.
In addition, Ryanair will have to fight internal weaknesses such as high average delay, frequent flight cancellations and lost of luggage. If customers can accept to have less space in board, they won’t accept to be told neither that they carry their luggage at their own risk nor that the flight could simply be cancelled… Improving luggage logistic and tracking and offering a minimal guarantee will help alleviating the consumer’s mind and gain in productivity (it may result in shorter loading times for luggage). Concerning delays and flight cancellations, Ryanair should accept to re-examine with the fall of its plane rotation expectations, as the “just-in-time” politic is not really transferable to weather-addicted service. Deleting one flight out of 10 on its schedules would provide a higher load factor without really damaging the perceived frequency, and would provide a better security margin between flights to deaden the unforeseen events.
