PEST Analysis of Ryanair - Case Study Example

Running Head: A STRATEGIC ANALYSIS OF RYANAIR A Strategic Analysis of Ryanair in APA format by 16 March 2007 Table of Contents Introduction 3 External Analysis 4 PEST Analysis 4 Porter's Five Forces Model 7 Internal Analysis 10 Strengths 11 Weaknesses 12 Overall Assesment 13 Bibliography 15 1.0. INTRODUCTION The emergence of low cost carriers in the European airline industry is a living example of how the strategic directions of business organisations are strongly affected by the changes, trends, and developments and their external environment. Currently, it can be seen that traditional business class airlines are still in operation but budget airlines are in the limelight due to the strong patronage of customers. It can be seen that the European airline industry has evolved from being dominated by large, business class air carriers to one which is increasingly controlled by the proliferation of low cost airlines. The wide popularity and acceptance of budget air travel which has significantly increased air traffic and gave a boost to the tourism industry has began putting pressure on large airlines to create their own low profile brand in order to regain and retain their market shares. Starting out as a full service conventional airline in 1985, Ryanair changed its strategic direction in 1990s to become Europe's first low-fares, no-frills carrier. The company has taken advantage of the price sensitive customers and gained wide acceptance and recognition because of this strategy. Ryanair battled head-on with other traditional carriers and paved the way in the establishment of a new segment in the European industry. The early success of the budget airline, however, is threatened by the new challenges presented by its rapidly changing business environment. Thus, the main concern of Ryanair is how to sustain and maintain its position in the industry amidst these threats and challenges. In line with this, this paper will examine the current trends in the European airline industry and its implication for the budget airline sector specifically on Ryanair. This paper will primarily draw information from the case study prepared by Eleanor O' Higgins. In order to draw an adequate and accurate assessment of the situation of the industry, it will utilize various strategic management tools like PEST analysis and Porter's Five Forces Model. Another objective of this paper is an internal examination of Ryanair by identifying its strengths and weaknesses. Lastly, this paper will give an assessment of whether the business organization is meeting the expectation of the customers relative to its competitors. 2.0. External Environment Analysis: The European Airline Industry 2.1. PEST Analysis PEST analysis stands for Political, Economic, Social, Technological, Legal, and Environmental. This strategic management tool is noted for its ability to capture almost all the variables in the environment where the business operates (Thomson 2002). The following section applies the PESTLE analysis of the European airline industry. Political The operation of the European airline industry is strongly affected by specific policies instituted by the government. Perhaps the most significant political transformation in the market where Ryanair operates is the governments' effort in integrating their economies through the creation of free trade unions that led to the establishment of the European Union. Through the European Union, budget airlines are given access to the numerous markets which increases their patrons together with the revenue that they generate. However, this integration also has adverse effects in the operation of budget airlines. It should be noted that the abolition of duty-free sales and the subsequent increase in airport's landing charges squeezed the margins of the players. Another policy which impacts the operation of Ryanair is the EU regulation which requires the refitting of used aircraft, huskitting and rudder installation. All of these increase the company's capital expenditures and costs of operations since installations require higher fuel consumption. The policies instituted by the government makes the European airline market less competitive with the presence of high taxes, excise charges on fuel, and higher landing, ground landing, and air traffic control charges. Economic Economic and political factors are closely interrelated because policies often dictate and institute the changes in the economy. Generally, the global business arena has been rapidly becoming hypecompetitive characterised by more intense competition among industry players. This gives opportunity to budget airlines like Ryanair to generate income from ancillary services like television advertising services and advertising outside its aircraft which allows a company to paint its logo on its aircraft. Since the European airline industry players operate in specific routes outside their national countries' territories, a portion of their income is denominated in foreign currencies. This exposes them to foreign currency exchanges rate risks which can lead to losses if the currencies are converted into their local money. The instability of oil prices in the global market also posts threats for the European industry especially for low fare airlines like Ryanair. It should be noted that unexpected increases in fuel rises and inability of the budget air carriers to implement hedging strategies can erode profitability. Social Social factors in the market of European airlines strongly affects the operation of its players. It has been apparent that the European market currently has higher propensity to spend in travel; rise in the number of both debit and credit card transactions; increase in the usage of internet technology. These factors present huge opportunities in the operation of air carriers. It should be noted that the success of Ryanair is strongly linked to its ability to attract price sensitive customers who travels for leisure. This market segment has continued to become a profitable target for the business organization. Also, the mounting computer literacy and the wide popularity and acceptance of internet technology have opened a venue for budget airlines to reduce their cost through establishing online presence. Ryanair is able to launch its own website which has been warmly embraced by customers. This online business model is also supported by the prevalence of using debit and credit card for online payments. Technological It is irrefutable that the rapid technological advancement in the business world has a huge role in instituting changes in the European airline industry. In the future, it is expected that technological advancement will further improve the efficiency of business organisations as well as lower their operating costs and enhancing the quality of their products. Technological advancements which have already impacted the business operation of the European airline industry are the internet technology, automated ticketing system, and creation of more efficient aircraft. It is expected that there will be a more prevalent use of automated check-in machines in airports. The automated check-in machines help in airline companies save cost by replacing the airline staff that the passengers must go through. Instead, they simply swipe their credit cards in the machines while their identifications are detected. The machine then automatically prints the customer's ticket. Currently, each automated check-in machine is maintained and employed by individual airlines. This is expected to provide customers with higher convenience and satisfaction while also reducing costs and errors from the manual operation of the checking in. The creation of more efficient aircrafts in the industry allows Ryanair and other players to save money as these new models require less maintenance and are more efficient in fuel consumption. 2.2. Porter's Five Forces Model The competitive forces analysis is concerned with the external environment and the various stakeholders of the firm. According to Porter, there are five competitive forces in the environment of a business entity namely the suppliers, buyers, customers, potential entrants, and product substitutes. Thus, environmental analysis helps managers come up with strategic moves in response to the trends and changes in the current environment (Thomson 2002). Barriers to Entry and Exit: Traditionally, prospective entrants in the airline industry are strongly barred by government regulations, high level of investment in capital, high marketing costs in order to battle head on with other established competitors and gain the patronage of the customers. With the improvement in the external environment, however, the past decade has witnessed how the barriers to entry in the European air travel industry have significantly declined. In the case of budget airlines, entry barriers are relatively lower because operation requires much lower initial capital outlay. It should be noted that the aircrafts used by low cost air travel companies are relatively less costly as it eliminates some of the special features and amenities available in business class airlines. Budget airlines also require less investment in marketing to attract customers. In general, barriers to exit are high. A player cannot easily exit in the industry noting that operation is highly capital-intensive. It should also be noted that aircrafts and other equipments used by operators cannot be easily disposed because of their highly-specific functions. Intensity of Rivalry: Intensity of rivalry in the European airline industry is high as competitors aggressively battle for market share. Competition is heightened by the emergence and proliferation of budget airlines which drastically stole the shares of business class airlines. On the other hand, business class airlines are also making aggressive moves with some going through the introduction of their own line of no-frills air lines like Ryanair. The trend is on the utilization of price war which pushes less competitive players to back off. The intensity of rivalry is also intensified by the increasing knowledge of customers of the different players' products and services. The internet has given customers an easy access on the delivery of service and prices among competing airlines. This pressures airline companies to barge into more aggressive strategies in competition such as offering of added features to boost passenger's experience or lowering of air travel prices. Competition is also enhanced by the threat of integration among players. Threats of Substitutes: Low cost air travel is generally perceived as a more "homogenous" good. It can be seen that price sensitive customers generally don't care about which company supplies the service. Switching costs in low cost air travel is also non-existent strengthening the threats for substitutes. However, it should also be emphasized that customers prefer carriers which are on-time and offers excellent customer service. It is also important to note that air travel competes with other mode of transportations like railway, land, and water travel. Air travel strongly competes with rail travel which is a viable and often quicker alternative. Supplier Power: There is a generally low supplier power in the European airline industry because air travel companies are generally considered as large clients for business organizations which provide service to them. Airlines usually have a high bargaining power over manufacturers of aircrafts, airline operators, and even catering service providers. Buyer Power: Kotler (2004) states that the business arena is currently evolving into a hypercompetitive environment characterised by higher bargaining power from the customers. It should be noted that globalisation also involves the technological advancement particularly the internet technology which enables business organisations to connect to all consumers in all geographic regions. This technology has strongly boosted the bargaining power of customers as it enables them to gain sufficient information about the price, design, and quality of the different products in the fashion industry. This also allows customers to easily compare the services provided by players in the industry. The global business arena is evolving into a more-customer driven and market oriented environment where customers' preferences are often prioritized. This is also the case in the airline industry. Air travel providers are more and more tailoring their products and services to suit the needs and preferences of travelers or else, they lose their market share. 3.0. Internal Analysis: STRENGTHS AND WEAKNESS OF RYANAIR 3.1. Strengths The success of Ryanair in the European airline industry can be attributed to the following core competencies: Cost Leadership Strategy In its quest of becoming a low fare airline, the main tenet of Ryanair's operation is in the establishment and execution of a cost leadership strategy. It should be noted that the costs it incurs are all passed down to customers in the form of higher fares. However, the company has been very keen in implementing cost reductions in order to price more competitively. The cost leadership strategy is attained through five measures: fleet commonality; contracting out of services; airport charges; staff and costs productivity; and marketing costs. It should be noted that the company has pioneered development in the market such as the reduction in travel agent commissions which has significantly brought down ticket costs. Efficient Marketing Ryanair's marketing strategy is by far one of the most important contributors of its success in the European airline industry. It should be noted that Ryanair has evolved from being a traditional air carrier to a low fare no frills airline. For a business organization to do this, it needs to be backed by an efficient marketing strategy which allows it undergo a smooth transition. Ryanair is very successful in doing this because of its strong marketing insight. The recognition of customers' needs of lower cost air travel is a strong proof of this. The company also complements its product with appropriate services, pricing, advertising, and distribution channel. Market Leadership Ryanair is recognized as the market leader in the budget airline industry in Europe. This market leadership allows the company to distribute costs more efficiently with the higher number of passengers. As the airline industry is highly capital-intensive, airlines reap economies of scale when the number of customers and flights increases. The ancillary services of the company such as aircraft advertising is also made possible because of Ryanair's appeal in attracting passengers. Maximization of Shareholder Value One of the utmost aims of a business organization is the maximization of shareholder value. This is mirrored in the company's computed return on capital employed. It can be recalled that Ryanair has been awarded as the highest in ROCE during 1998. 3.2. Weaknesses Exposure to Foreign Exchange Rate Risk As stated above, Ryanair is strongly affected by foreign currency exchange rate risks. This exposure threatens the profitability of the business organization especially because fuel and aircraft prices are denominated in foreign currency, US dollar. Capital Intensity The profitability of Ryanair is also hampered by the capital intensive nature of its business. The airline is required to spend a lot in capital expenditures in order to improve its aircrafts. Because of this, its business operation becomes highly dependent in generating enough revenue to finance these acquisitions and attract customers in order to maintain economies of scale. Bad Publicity The company also suffers from negative perception because of its controversial employment practices especially regarding the issues of trade unions. The company's refusal to recognize any labor union has been met by criticisms from different sectors in the economy. 4.0. Overall Assessment: RYANAIR'S VALUE CREATION The venture of Ryanair in the budget airline sector implies the recognition of the customers' needs of low cost air travel. The company operates on a very simple business models which rests on its ability to offer no-frills air travel at lower costs. The company does this by offering the lowest possible fares in the industry through the reduction of operational costs. As opposed to traditional air carriers, Ryanair eliminate extra services such as advance seat assignments, in-flight meals, multi-class seating, access to frequent flyer programme, complimentary drinks, and other activities. Instead, the company focused on frequent flyer departures, baggage handling, and consistent on time services. In order to access Ryanair's delivery of value, the expectation of the customer should be taken into account. It should be noted that most of the passengers who opt for budget air carriers expects to have the best deal in terms of price and services. Some of the expectations are punctuality, excellent customer service, safety, and convenience. This paper believes that Ryanair has been very efficient in delivering its strategies relative to its competitors. The budget airline is regarded as the lowest air carrier in the industry. Even though the business organization eliminates some amenities, it complements this with services deemed more important by the target market as well as optional ones such as access to television and internet. The best indicator of the company's efficiency in delivering value relative to its competitors as evidenced by its large market share. 5.0. Bibliography Adams, J. 2005, Analyze Your Company Using SWOTs, Supply House Times, Vol. 48 Issue 7, pp. 26-28. De Witt, B. and Meyer, R. 1998, Strategy: Process, Content, Context, 2nd ed., Oxford: International Thompson Business Press. Hill, T. and Westbrook, R. 1997, SWOT Analysis: It's Time for a Product Recall, Long Range Planning, Vol. 30 Issue 1, pp.13-16. Porter's Five Forces Model 2007, Retrieved 16 March 2007, from http://en.wikipedia.org/wiki/Porter_5_forces_analysis Strategic Management, Strategic Management Journal, Vol. 11 pp.171-195 Thompson, J. 2002, Strategic Management, 4th Edition, London: Thomson Read More