The Growth of Ryanair Entrant Airline - Case Study Example

Running Head: RYANAIR CASE STUDY Ryanair Case Study of the of the Ryanair Case Study This paper examines the growth of Ryanair, Europe’s largest new entrant airline since deregulation. The sustainability of the Ryanair product is examined, including: acceptability to passengers, the use of secondary airports, labour productivity and use of outsourcing, corporate culture, policy environment and legal and policy obstacles. The growth of the airline is expected to continue because of the popularity of low fares, the willingness of passengers to forego traditional airline services in order to avail of low fares and the ability of Ryanair to control and reduce costs. Introduction Since the terrorist attacks of September 11th 2001 along with economic slowdown, the Iraq war and SARS, the aviation industry has suffered a deep slump, particularly in flag airlines. Yet it raises opportunities for the low-fare carrier segment, such as Ryanair that is a rising star in the skies of Europe, having been performing well post 9/11. The aim of this report is to analyse the overall performance of Ryanair in the fast-changing environment, and then few recommendations will be provided. Conclusions will be drawn at the end of this report. Description of Ryanair Irish-owned Ryanair, founded in 1985, began to introduce a low cost operating model in the early 1990s. The company primarily serves short-haul, point-to-point routes that target business commuters and leisure travellers by offering low, multi-tier fare pricing and sngle-classs air transportation. Having overtaken EasyJet, Ryanair is now the largest low-cost carrier in Europe In January 2000. (Doganis, 2001) The company offers approximately 475 scheduled flights per day serving 84 locations in 14 EU countries. Environmental analysis: Political factors: 9/11, SARS Iraq War The worldwide commercial aviation has suffered from terrorist attacks of 9/11. The tragedy dramatically decreases the number of passengers and pushed Airline industry facing deterioration in their financial positions. Similarly, impact of SARS and Iraq War reduce willingness of people to travel outside their countries. The EU policy on aviation industry Since 1997, the European market has been completely deregulated. For example, any airlines holding a valid Air Operators Certificate in the EU have right to operate on any route within the European Union, including flights wholly operating within another country. On May 1st 2004, ten new members joined the EU as part of EU enlargement. The era of single European sky related to Open-Sky Treaty, allowing point-to-point service between any EU countries is approaching and airline companies will benefit from consolidation; on the other hand, they will have to confront fiercer competitions against each other. (Loddenberg, 2004) The price-sensitivity for routes to and within accession countries is naturally suited to low cost airlines. The average Ryanair fare in 2003/4 was €40 and the expectation is a €38 average fare in 2004/5. The net margin fell from 28% in 2002/3 to 21% in 2003/4 and is predicted to fall to 18% in 2004/5. The net margin has thus fallen by 10 points in two years. While the margin exceeds the industry average, it may come under pressure from factors such as further falls in yields and the lack of scope for more reductions in an already low cost base. Economic factors Economic recession Overall, the worlds economy is slowdown, which affects European economy as well. People are reluctant to spend money in leisure activities. Currency fluctuation In related to companies operating costs, currency fluctuation affects those companies revenues that are not in US dollars. Weakness in US dollars enables fuel cost reduction. Social and cultural factors Population intensity High level of population density in the EU region (six times larger than the USA) is likely to stimulate the growth of short-haul point-to-point routes within Europe, which provides major opportunities for low-cost airlines. Airport expansion in UK UK airport expansion plan will raise passengers charge to help fund a new runway. This will particularly impact on ticket price of low-fare airlines and lose their low price advantage. External factors The winter of 2004/5 has been predicted as a period of intense competition in European aviation. It is expected that there will be market exit by undercapitalised new entrants and intensified pressure for rescue packages for national airlines such as Alitalia. The July 2004 decision by the EU Commission to permit the Italian government to provide Alitalia with a €400m loan following €1.4b in both 1997 and 2002 obviously creates competitive problems for unsubsidised airlines such as Ryanair. (Loddenberg, 2004) The decision of the High Court in London in July 2004 to refer to the European Court of Justice the EU regulation on denied boardings, delays and cancellations due to come into force in February 2005 is also important to low cost airlines. The fixed sum compensation would impose disproportionate costs on low fare airlines. The third important pending legal decision affecting low cost airlines is the Charleroi case verdict. The opportunity cost of airlines using previously underutilised or empty airports rather than congested hubs is the vital economic consideration in deciding whether or not an airline is being subsidised at an airport. Legal decision affecting legacy airline subsidies, passenger compensation, and secondary airport charges have big implications for Ryanair and other low cost airlines. (Paul, 2005) Ryanair decided not impose fuel surcharges during 2004. In the half year to September 2004 passenger numbers rose by 24%, revenue by 21%, and net margin increased to 28%. Unit costs fell by 4%. The yield decline was 5%. The reduced rate of decline in yield and buoyant passenger growth indicate that fuel surcharges by other airlines encounter consumer resistance and some transfer to low cost airlines. Dealing with questions 9/11 Ryanair As the flag carriers struggle to cope with the crisis of 9/11, they have left more scope for low-cost competitors to enter the market segments abandoned by flag carriers. Policies adopted by Ryanair Promotion enhancement Ryanair lower airfares by offering one million seats for sale at just pound; 9.99 to stimulate air travel demand; they also lead the campaign within Europe to maintain consumer confidence in, stimulate demand for great value air travel. Additionally, they open new routes As a result, Ryanair are carrying more than 10 million passengers in 2001. Increasing capabilities Ryanair opened 7 new routes from their second Continental base in Frankfurt Hahn in 9 days time at the end of 2001. Moreover, in January 24, 2002 they drew up contract with Boeing to purchase 100 Boeing 737-800 aircrafts to facilitate the companys rapid European growth plans when other airlines companies reduced capital budget. Benefits gained by Ryanair Entry of niche market The 11th September gave significant opportunities for Ryanair. The 9/11 affected many of competitors, such as British Airways, Alitalia and Aer Lingus, to withdraw unprofitable routes where they previously competed with Ryanair. Consequently, Ryanair expanded market share significantly in specific market segments. Renegotiation of airport contracts Airport, maintenance and handling contracts are presently being renegotiated and it is expected to achieve efficiencies from these suppliers in return for delivering increased growth. Purchase of a low price aircraft There is a collapse demand for aircrafts post 9/11 and a need for capital-intensive manufactures to secure volume throughput. Therefore, Ryanair could acquire aircrafts at a very low price. As a result, Ryanairs 30% growth in traffic and 35% increase in profits in the last three months of 2001. (Loddenberg, 2004) Hyper competition To analyse how Ryanair dealed with the highly competitive environment, the group are using the concepts of hyper competition of DAveni. In the following part, the companys strategies are analysed in four arenas within the framework of new 7-Ss. Cost and quality Ryanair is the first no-frill airline in Europe. Their first target is price conscious leisure traveller. Now they are the largest lowest fare and lowest cost airline in Europe. They gradually expanded their target segment to price conscious business passengers. (Doganis, 2001) Ryanair has constantly reduced ticket fares by removing those services that it regarded as unnecessary. The company claims that they have provided customers with good services in respect of punctuality, low rate of lost baggage. However, the group argues the company should add more value in their services and have a better understanding of what the customers really want. Value Map Timing and know-how arena Ryanair is the first airline to adopt no-frill business model in Europe. This has given the company the first mover advantage to occupy short-haul non-premium segment. To maintain competitiveness, Ryanair has been constantly developing routes system within Europe. With speed, Ryanair creates new advantages before competitors are able to pre-empt these moves. Stronghold creation Ryanair always aims to be the lowest fare airline. They is now actively launching free tickets project. This action has disrupted market rule, throwing competitors off balance and sustaining their low fare image. (Barrett, 2003) Another strategic movement to create stronghold is the acquisition of Buzz in 2003. The purchase of Buzz allows Ryanair to occupy 50% of Stansteds slots in all, signalling their intent to prevent other competitors from entering their hub in UK. Deep pockets Ryanairs conservative balance sheet and strong cash flow has helped them to take advantage of the downturn in the market. (financial report ended 31th, 2001). According to the companys financial report ended 31th 2003, Ryanair has 1.12bn in cash. Due to their deep pockets, Ryanair has increased capacity and routes greatly. In 2001 Ryanair had 45 routes across 11 countries in Europe. By now the company has had 146 routes across 16 countries. Value Chain Human Resources From the human resources aspect, Ryanair benefit from the favourable Irish legislation. Ryanair take advantages of the overloaded demand of work in the airline industry and provides lower salaries than major national airlines, such as British Airway. By reducing services to the minimum, the staff of Ryanair can be reduced. Inbound logistics Ryanair negotiates contracts with airports in order to drop airport charges. According to an article of Business Week, "these out-of-the way terminals are so hungry for business that Ryanair can negotiate airport fees of as little as $1.50 per passenger, plus get marketing and training support for as long as 20 years. As to BA and Air France, they are charged by Europes major hubs at the average rate of $15 to $22 per passenger ". (Loddenberg, 2004) In January 2003, Ryanair acquired the company Buzz, the low-cost subsidiary of the airline company KLM. The operation would allow Ryanair to gain 2 million passengers a year. Through this acquisition, they doubled Buzz passengers volume to four million passengers by April 2004. Outbound logistics One of Ryanairs assets in the marketing area is its independence from travel agents. In fact 90% of the sales are taken directly from the Ryanair Internet web site and Ryanair reservation centre "Ryanair Direct" which are situated in London and Dublin. Travel agents provide only 8% of sales. It was one of the first European airline companies to cut its commission rate to travel agents. By contrast, BA adopts multiple distribution channel, such as selling directly, selling through agency or the companies website. Service While Ryanair has concentrated on providing the bare minimum, Aer Lingus has thought it worthwhile to provide an enhanced quality of service and to the market, even if this decision resulted in higher costs. Operation: Due to the use of secondary and regional airports, Ryanair provides higher rates for on time departures, faster turnaround and fewer terminal delays. In return, Aer Lingus has to comply with the limitations that are inevitable in the internationals hubs being serviced and thus finds itself in competition against major international airlines. Marketing and sales Ryanair use mainly newspapers, the others being too expensive, but could include billboard advertising. In according to the Ryanair and BAs financial report ended at 31th, March 2003, the marketing and sales cost accounted for 2.53% and 9.55% out of total operation expenditure respectively. The group implicated national airlines make heavy public promotions of their operations compared with low-cost airlines. (David, 2004) Core competence The Value chain highlights the value of a company, allows the group to believe what the core competencies are of Ryanair. Ryanair is a post-deregulation airline with a young labour force and a strong message on costs and productivity, Ryanair has not experienced the industrial relations problems encountered by, for example, Aer Lingus. Due to the latter’s inherited workplace culture and monopolistic past, it is proving difficult to raise the Aer Lingus passengers per staff member from 1000 to 2000 without industrial unrest. In contrast Ryanair has raised its number of passengers per staff member from 4800 in 1998 to 10,000 currently. (Barrett, 2003) Whilst it is recognised that this measure is not appropriate to comparisons between full service and low cost airlines or between long and short haul operators, over time the series shows that the productivity of Ryanair staff has increased rapidly. (Paul, 2005) Combined with the data on the Ryanair margin, it indicates that the balance between outsourcing and in-house provision of services has been correct. Ryanair staff currently holds over €130m of shares in the company and the 2004 share option scheme offers staff share options up to 20% of pay. The workplace culture described above remains strong compared to legacy airlines and airports seeking to adjust traditional organisations to a deregulated market. Management culture change is also important in projecting an organisation’s future. (Barrett, 2003) Ryanair’s own check-list against a loss of focus on cutting costs includes moving to a new corporate headquarters, designing a new corporate logo, acquiring a company helicopter, joining representative bodies and quangos, serving on government commissions and appearing in the social columns of glossy magazines. The danger signals appeared to be well understood by management during the period of research for this paper. Strategic sustainability Quadrant 1 - most sustainable Quadrants 2 4 - sustainable Quadrant 3 - unsustainable Ryanair is likely to be in quadrant 2 of in terms of sustainability by offering customers reliable, short-haul air services at low fares. The company is creative and accessible in constantly innovating to cut its costs. They recently have announced their plan to strip out window blinds, reclining seats, headrests and seat pockets. But, some of their cost-cutting efforts might put off passengers. The case of wheelchairs can be served as a good example. (David, 2004) At the present time when there are more and more no-frill airlines emerging within Europe, Ryanair should shy away from competing solely on price and try to add some more value to its customer offerings. (Paul, 2005) They need to understand their clientele, especially the new clientele, as they roll out routes and open up hubs in mainland Europe so that they could move strategically towards quadrant 1 for larger profit. One way of adding more value is the restructuring of its human resource management. Ryanair should invest more in its staff training. Once more, Southwest could be served as a model. Target other travellers Ryanair claim to satisfy all customers but in fact the majority of their customers are tourists. Thus, we think that Ryanair should work more efforts on this market segment. Moreover, students with short-haul flights are a potential target group as they are likely to fully take advantage of no-frills airlines. The company can offer a bonus of student discounts and other special offers for a return back for Christmas, fitting in with end of year semesters. Conclusion Passengers have responded to the low fares and accept the tradeoffs between these fares and the loss of many of the bundled services provided by legacy airlines. New secondary airports have been, somewhat surprisingly, successful. Their increasing use reflects and interest in low fares, point-to-point travel and a dislike of the congestion, confusion, and long walking times and waiting times at hub airports. The low cost base of Ryanair is a function of a simple product, high productivity of the airline staff and a policy of strict cost control over airports, aircraft suppliers, and distribution costs. The product, the productivity and low cost base including the use of secondary airports and Ryanair’s cost reducing corporate culture also appear to have a positive future even in the predicted short term difficulties facing European aviation References Doganis R., (2001) The Airline Business in the 21st Century, Routledge, Berlin. Loddenberg, A., (2004). Report on Ryanair, London, ABN-AMRO, April. Barrett, S.D., (2003). Airports as multimodal interchange nodes. Round Table 126, Paris, European Conference of Ministers of Transport. Fewings R., (1999) Provision of European airport infrastructure, Avmark Aviation Economist 7, pp. 18–20. David Gillen and Ashish Lall (2004) Competitive advantage of low-cost carriers: some implications for airports Journal of Air Transport Management, Volume 10, Issue 1, Pages 41-50 Paul Vlaar, Paul De Vries and Mattijs Willenborg (2005) Why Incumbents Struggle to Extract Value from New Strategic Options: Case of the European Airline Industry European Management Journal, Volume 23, Issue 2, Pages 154-169 Read More