The explosive growth of RyanAir Company

The explosive growth of RyanAir Company The Ryanair Company is undoubtedly one of the most remarkable entrepreneurial stories of the past 10 years in Europe. Furthermore that Ryanair has developed a very outspoken communication style, using advertising and media to a great deal to publicize its revolution in air travel. Ryanair was Europes original low-fares airline and it is still Europes largest low-fares carrier. In the current year Ryanair will carry over 35m. passengers on 300 low fare routes across 21 European countries. Ryanair has 15 European bases and a fleet of over 100 brand new Boeing 737-800 aircraft, with firm orders for a further 125 new aircraft, which will be delivered over the next seven years. These additional aircraft will allow Ryanair to double in size to over 70m. passengers p.a. by 2012. Ryanair currently employs a team of 2,700 people, comprising over 25 different nationalities. Furthermore Ryanair continues a rapid growth in 2005. They started the year by launching two new bases at Liverpool John Lennon Airport and at Shannon in the West of Ireland. In February Ryanair announced orders for a further 70 firm aircraft from Boeing as well as 70 options. This takes Ryanairs total order with Boeing to 225 firm aircraft and 200 options. These new aircraft, which will be delivered between 2005 and 2012, will allow Ryanair to grow to over 70m. passengers per annum, proving that Ryanair is not just Europes original low fares airline, but remains Europes biggest low fares airline, as well as the only airline offering the lowest fares in every European market. http://www.grin.com Aims and objective: Aim of this report is to evaluate the given case study on the topic of Ryanair the low-fares airline by Eleanor OHiggins and critically analysing the current strategy of Ryanair to become successful in the European airline industry while airline business is struggling in Europe. The objectives of this report are as follows. Undertake an environmental analysis of the European airline industry with implications for the budget sector and Ryanair in particular. Analyse how Ryanair has been successful in the European budget airline industry. From the above analysis, critically assess the sustainability of Ryanairs strategy. Research methodology: In this report secondary research method also known as desk research, is being used. secondary research is the most common research method employed in the industry today. It involves processing data that has already been collected by another party. With this form, researchers will consult previous studies and findings such as reports, press articles and previous market research projects in order to come to a conclusion. The relatively low expense in comparison to primary research is the main advantage of this research, as no new research needs to be commissioned. However, its main disadvantage is that the data used in the analysis may be out-dated and therefore return inaccurate results. (www.marketresearchworld.net,) Environment Analysis: The environment is what gives organisations their means of survival. (Johnson et al 2008) We can distribute the environment into layers as follows. Source: (Johnson et al 2008) The Macro-Environment: The macro-environment is the highest level layer. This consists of broad environmental factors that impact to a greater or lesser extent on almost all organisations.(Johnson et al 2008) Macro environment is out of control of any organisation but it could influence the organisations overall activities and functions. The radical and ongoing changes occurring in society create an uncertain environment and have an impact on the function of the whole organization (Tsiakkiros, 2002). To analyse the macro-environment there is a framework which helps to analyse Political, Economical, Socio-Cultural, Technological, Ecological and Legal factors called PESTEL. This analysis of is therefore often known as Pest analysis (Johnson, Scholes, 1999). PESTEL analysis of Ryanair: Political On May 1, 2003, it will mark one of the most important days in recent European history, the continent will see the biggest expansion of EU to date when ten states become new members. For Ryanair new markets will open which suits its growth plans. Stansted airport, owned by BAA, is one of the most rapidly growing airports in Europe (www.baa.co.uk/). BAA plans to build a second runway and terminal there, accompanied by necessary rail and road infrastructure, aiming to double passenger capacity within ten years. Stansted is Ryanairs London base and an expansion would enable substantial traffic increases thereby facilitating consolidation (Johnson Scholes 2002). The Civil Aviation Authority (CAA) is responsible for setting à ¢Ã¢â€š ¬Ã‚ ¦price caps on airport chargesà ¢Ã¢â€š ¬Ã‚ ¦at airports designated by the Secretary of State (www.caa.co.uk). One of these is Stansted, which has hitherto à ¢Ã¢â€š ¬Ã‚ ¦benefited from discounted airport charges and cross-subsidy from the higher charges paid by the airlines at Heathrow and Gatwick airports (Done 18/12/03). CAAs new requirements command airport financing without cross-subsidisation on a stand-alone basis. Consequently discounts will be removed and charges possibly increased. Ryanair has protested as it will raise its costs (Done 20/10/03). Economical Opec aims to keep oil prices within the agreed band of US$22-US$28/bbl (www.opec.org). However, with crude oil now à ¢Ã¢â€š ¬Ã‚ ¦standing at close to $33 a barrelà ¢Ã¢â€š ¬Ã‚ ¦ (www.bbc.co.uk) near a 13-year high, Opec considers increasing its target. With a tight US gasoline market, low inventories and an upsurge in fighting in Iraq, oil prices look likely to remain high or rise Ryanair faces persistently high or rising fuel prices. Sociocultural Holiday home ownership in Europe is increasingly common for Britons. During Christmas sales boomed and analysts believe it will continue as customers are à ¢Ã¢â€š ¬Ã‚ ¦encouraged by the highest employment figures in 28 years, low interest ratesà ¢Ã¢â€š ¬Ã‚ ¦ (Insley 18/01/04) and other favourable borrowing conditions. Ryanair services regional airports, opening up the European countryside to buyers, and this trend means an increase in the possible customer base (Insley 08/02/04). The over-55s now represent approximately one third of most EU-countries populations, and the figure is increasing. Because of better healthcare and financial planning, a significant proportionà ¢Ã¢â€š ¬Ã‚ ¦of senior citizensà ¢Ã¢â€š ¬Ã‚ ¦ are able to indulge in high levels of leisure-orientated consumptionà ¢Ã¢â€š ¬Ã‚ ¦ (Brassington Pettitt 2003). Analysts recommend developing specific marketing strategies for this market highlighting its growing importance (Lohmann Danielsson 2001). Ryanair here has an opportunity to increase its market share. Technological New technology will allow mobile phone and broadband use on-board. Carriers, including Ryanair, can thus increase ancillary services by offering on-line shopping, TV screenings and mobile phone usage against a fee. Furthermore, the satellite link could boost operating efficiency by being used to monitor planes, giving early warnings of problems to ground crews, thereby enhancing safety and minimising grounding (Economist 01/03/03 Economist 01/04/04). Environmental A recent White Paper emphasised à ¢Ã¢â€š ¬Ã‚ ¦the environmental importance of including aviation within the global emissions-trading schemeà ¢Ã¢â€š ¬Ã‚ ¦ (Newman 03/12/03), aimed at providing financial incentives for companies to cut greenhouse-gas emissions and to tax aviation fuel across EU. Presently an increase in air passenger tax is planned, which doubles the  £5 and  £20 economy passengers currently pay for short- and long-haul flights. This will raise Ryanairs prices, possibly deterring the most price-sensitive customers. Legal Ryanair uses mainly secondary airports which enables negotiation of favourable deals with the owners. At Charleroi Ryanair was given 50% off landing fees plus contributions to local amenities, training and marketing costs against guarantee of à ¢Ã¢â€š ¬Ã‚ ¦a certain level of business for 15 years (FT 10/11/03). However, unfair competition was claimed and the European Commission (EC) decided that discounts on landing fees and ground-handling services are illegal, and ordered Ryanair to pay back  £3m. Ryanair fears that high-fare airlines and expensive hub-airports will lobby the EC into investigating other deals, using Charleroi as precedent (Done 29/01/04). Porters Five force analysis The PESTEL factors are important in a relative way as they usually affect all firms in the industry (Bowman Asch 1987). Hence, organisations should also examine their more immediate environment/industry, à ¢Ã¢â€š ¬Ã‚ ¦the group of firms producing products that are close substitutes for each other (Porter 1980). This analysis examines five competitive forces: potential entrants; buyers; substitutes; suppliers and industry competitors, which determine level of industry competition and profitability. Applying this to the budget airline industry enables identification of opportunities and threats to Ryanair in its business environment (Johnson Scholes 2002). Threat of new entrants High start-up costs needed for aircrafts, reservation systems and promotion, negates threat to some extent (Gilbert et.al 2001). The over-crowded market means à ¢Ã¢â€š ¬Ã‚ ¦there are too many budget aircraft playing Europes skies for too little money (Clark 07/02/04). As Europes skies are congested there is a lack of slots (Hanlon 1989) forcing new entrants into secondary airports and less profitable routes. Due to incumbents cost advantages, such as economies of scale and experience curve effects, price wars can be launched against newcomers. However, the market is expanding which pulls in new entrants and reduces the effect of entry barriers (Johnson Scholes 2002). Bargaining power of buyers Price dominated short-haul market with little or no product differentiation. Buyers thus face low switching costs (Porter 1980) As price is à ¢Ã¢â€š ¬Ã‚ ¦more important to passengers than productà ¢Ã¢â€š ¬Ã‚ ¦ (Gilbert et.al 2001) there is low customer loyalty. Procurement managers are now influential in the travel patterns of their business travellers. Threat of substitute products or services Videoconferencing for business companies has not had the impact expected and is no threat (Gilbert et.el 2001). Other modes of transport are no tenable threats generally. However, Eurostar has been winning customers from airlines since its opening and many short-haul flights à ¢Ã¢â€š ¬Ã‚ ¦could be eliminated after 2007, when the fast line to the channel tunnel is completed (Wright 01/12/03). Bargaining power of suppliers The price of fuel is directly related to the cost of oil which is determined by Opec and out of control of the industry (www.opec.org). Budget airlines have work-hard cultures to keep costs down (Gilbert et.el 2001) meaning a scarce number of multi-skilled employees which à ¢Ã¢â€š ¬Ã‚ ¦can bargain away a significant fraction of potential profitsà ¢Ã¢â€š ¬Ã‚ ¦ (Porter 1980). However, carriers tend to experience economies of scale which gives purchasing power. Consequently, airlines are able to negotiate favourable deals with most of their suppliers (Johnson Scholes 2002). Rivalry among existing firms Already very competitive industry. Numerous new entrants intensify competition, although several newcomers have struggled to establish themselves and failed, Debonair and AB Airlines for example. The over-crowded market, and commodity nature of the product, means that airlines are battling to fill planes. Aggressive pricing, efficient distribution and innovative communication mixes are frequent competitive measures. However, carriers vary somewhat in segmentation by targeting different markets (narrow versus wide customer base) and offering divergent routes (regional towns versus main cities) which reduces rivalry somewhat (Gilbert et.al 2001). Nevertheless, competition is intensified as conventional carriers adopts à ¢Ã¢â€š ¬Ã‚ ¦many strategies of the no-frills carriers and continues to cut costs (Done 29/01/04). With low fares but a higher level of service (more frills and main airport servicing) they are a big threat. Mergers, acquisitions and alliances are increasingly used for consolidation and competition. EasyJet bought Go, bmibaby partnered with Germanwings (Economist 01/03/03 Hotten 13/03/04). Ryanair acquired Buzz but paid too much and was forced to close it to boost its productivity. SWOT Analysis: Key Strengths and Weaknesses Strengths Weaknesses Cost-consciousness at every level Isolation of airports Ability to drive down costs Poor judgement in route selection and acquisition Fast turnaround times Targets very narrow market Cross-utilisation of employees Poor brand image Website Negotiation skills Ability to achieve growth Use of secondary airports Key Opportunities and Threats Opportunities Threats The EU expansion The European Court of Justice ruling The Stansted expansion The Stansted expansion EUs ageing population The global emissions-trading scheme Mergers, acquisitions and alliances Low customer loyalty ANALYSIS OF STRATEGIC CAPABILITY A strategic analysis also includes investigation of the strategic capability, the à ¢Ã¢â€š ¬Ã‚ ¦ability to perform at the level required for success (Johnson Scholes 2002). Firms must understand what customers want and adopt product/service features accordingly. To succeed companies need: Critical Success Factors (CSF), features especially valued by customers and used to outperform competition; unique resources, hard to emulate and generates competitive advantage; core competences to meet the CSF, leading to competitive advantage. A number of tools exist to analyse strategic capability. Applying some of them to Ryanair facilitates identification of the organisations key strengths and weaknesses. Value Chain analysis This is a à ¢Ã¢â€š ¬Ã‚ ¦systematic way of studying theà ¢Ã¢â€š ¬Ã‚ ¦activities undertaken by a firm (Thompson 1997) and a means of identifying how competitive advantage is, or can be, created and sustained. The value chain consists of primary and support activities that together produce the profit margin. When the most critical of these are performed better or more cheaply, competitive advantage is created. The activities are à ¢Ã¢â€š ¬Ã‚ ¦related by linkages within the value chain (Porter 1985), meaning that how one is performed affects the performance or cost of another, and key linkages generate competitive advantage. Value activities should be benchmarked, compared against those of organisations both inside and outside the industry, to learn and improve on best practice (Laverick Brown 1992). Primary activities Inbound logistics Dependency on suppliers to deliver fuel as well as food, drinks and duty-paid products to be sold on-board (Gilbert et.al 2001). These need to be stored, handled and controlled upon delivery Low-cost deals are negotiated against promise of large and growing volumes of business (Felsted 04/11/03). Operations Use of standard model plane, Boeing 737, means that Ryanair is à ¢Ã¢â€š ¬Ã‚ ¦able to obtain spares and maintenance services on favourable terms, limits costs of staff training and offer flexibility in scheduling aircraft and crew assignments (Johnson Scholes 2002). A relatively young fleet reduces maintenance, spare and fuel costs. Fast turnarounds (core competence), 25 minutes, is the most important cost advantage as it enables high aircraft utilisation (Felsted 04/11/03). More frequent departures (two more a day than competitors) with few planes increases revenue (key linkage). However, Southwest excels with 15 minute turnarounds as its à ¢Ã¢â€š ¬Ã‚ ¦activities complement each other in ways that create real economic value (Porter 1996). Point-to-point flights mean no interlinking with other carriers. Ryanair can à ¢Ã¢â€š ¬Ã‚ ¦offer direct non-stop journeys, avoiding the cost of providing through serviceà ¢Ã¢â€š ¬Ã‚ ¦for connecting passengersà ¢Ã¢â€š ¬Ã‚ ¦and delaysà ¢Ã¢â€š ¬Ã‚ ¦caused by late arrival of connecting flights (Johnson Sholes 2002). Outbound logistics Use of isolated secondary airports often requires further transport arrangements for customers. Also, some destinations are à ¢Ã¢â€š ¬Ã‚ ¦so geographically obscure that they cant support regular services (Pratley 05/02/04), as evident on some intra-Scandinavian routes for example (Done 04/11/03). This limits the level of market share Ryanair can achieve. EasyJet does the opposite and flies to big cities, but then has to pay higher landing charges which is reflected in their higher prices (Bowley 21/07/03). However, using regional airports saves costs as charges are lower, facilities cheaper and Ryanair can negotiate favourable deals. It also enables fast turnaround times, and more on-time departures as the airports are less congested (Johnson Scholes 2002). 95% of Ryanairs flights are punctual compared to 88% for EasyJet (www.ryanair.com). Marketing and Sales Heavy spending on advertising and promotions to expand its market is reduced as most advertising takes place on the website. There promotion is also used to sell excess capacity, such as two-for-one offers, which creates market awareness. Direct marketing is à ¢Ã¢â€š ¬Ã‚ ¦used occasionally with the customer database (Gilbert et.al 2001), and enables relationship marketing which produce customer retention equalling increased productivity (Ali-Knight Wild 2001). Ryanair considers branding virtually irrelevant as it believes that price is most important to customers. This is reflected in its not always so good image in the press. Southwest, contributes a large part of its success to its well established brand values (Gilbert et.al 2001), and EasyJet has won awards for its brand (Brand Strategy 2001). Over 90% of bookings are made directly, either on the website or through reservations centres. The website saves on à ¢Ã¢â€š ¬Ã‚ ¦staff costs, agents commission, and computer reservation charges, while significantly contributing to growth (Johnson Scholes 2002). Furthermore, direct booking gives greater control over sales of ancillary services, important revenue contributors, and eliminates need for tickets which reduces check-in times. Travel agencies are used on a small scale as necessary when opening new routes in unknown markets. Service Virtually no frills lower costs considerably, enable fast turnarounds and very low ticket prices (Gilbert et.al 2001). A very basic product is offered and Ryanair now plans to remove the last frills (Gow 16/02/04). The question is how much customers are willing to forgo before switching to competitors. Will it be possible to sustain the necessary load factor with an even narrower target market? Southwest is more successful than Ryanair but has not stripped away all frills (Porter 1996). The low service damages the brand which leads to reduced business. For example, Ryanair was taken to court for charging disabled passengers  £18 for wheelchair usage (Tait 03/12/03), and is known for transferring passengers to later or alternative flights without notice if original flight is not full enough (Johnson Scholes 2002). Support activities Procurement Purchasing power enables negotiation of favourable deals (core competence) with suppliers. However, these demand à ¢Ã¢â€š ¬Ã‚ ¦large andà ¢Ã¢â€š ¬Ã‚ ¦ growing volumes based on passenger numbers (Felsted 04/11/03) which is becoming difficult to sustain as Ryanair expanded too quickly. Although growth is slowed down new planes has been ordered aiming to double the fleet by 2009. Buys mostly during recession when prices are down Good buyer-supplier relationships ensure reliability and low-cost procurement of services (many functions are contracted out). Safety is guaranteed as contracted work is supervised and planned by Ryanair staff (Johnson Scholes 2002). Technology development Ryanair uses its website to monitor bookings to see how full planes are minute by minute. If numbers fall prices can be slashed immediately to attract buyers thus increasing the load factor. However, they dont hesitate to raise prices if demand is buoyant (Bowley 21/07/03) which leads to effective yield management. CONCLUSION The aim of this report was to carry out a strategy analysis of Ryanair, Europes largest low-cost no-frills airline. From this it became evident that the organisation operates in a complex environment with fast changing influences that affect its business both beneficially and unfavourably. It also enabled identification of some of the sources of Ryanairs competitive advantage: core competencies, unique resources, key linkages and the superior cost performance compared to its closest competitor. However, it also became clear that the organisation still has a lot to learn from best practice. In general Ryanairs strategies match its task environment although it fails to address certain crucial issues. If these are not dealt with they could lead to future problems and reductions in profits.