Business Management Strategy: Ryan Airlines - Assignment Example

? Business Management Strategy- Ryan Airlines I. Company Background In the domain of the European aviation Ryan air was the first budget airline established in the year 1985 by the Ryan family which chief hierarchy as Tony Ryan who put forwarded a dynamic platform for the provision of the scheduled passenger airline services between the routes of Ireland and the United Kingdom (UK). This provision was envisaged as an alternative to the then state monopoly carrier Aer Lingus. In the beginning, the airlines company was a full service conventional airline and gradually it encountered a massive growth in the volume of the passenger units but by the end of 1990s the company went through turbulent business surroundings incurring mammoth loss of around IR?20million with the retrenchment of five chief executives (Higgins, 695). In the year 1990-91, the company came under the purview of a new management system with the recruitment of a new CEO. The company resorted to the concepts of low fares-low frills with cutting back of the routes from 19 to a 5. The growth dynamics took a massive positive escalation with the enhancement in the fleet from 6 to 21 and also with the expansion of the routes from Ireland to the United Kingdom. The period saw a huge number of passenger bases with provision of low fares. One of the chief hurdles faced by the company was the emergence of rigid regulation regime imposed on the European airlines. The turning point year can be said to be 1997 applicable for both the European airline industry as well as for Ryanair owing to the policy of deregulation of the European Union air transportation. With the introduction of the deregulating environment it paved the way for different airlines in opening up several routes around the continental Europe which also led the company of Ryan air of taking the full advantage of expanding its routes from London Stansted to Stockholm and Oslo as well as routes from Dublin to Paris and Brussels. By the year 2001, the company established the Europe’s largest websites. With the launch of its website in the year 2000 the airlines received around 50000 bookings per week (Dhalla). The company is growing and its strong financial health can be shown in a comparative static tabular analysis of half yearly results of two years i.e, 2010-2011 as follows: Half Year Results (IFRS) in Euro Sep 30, 2010 Sep 30, 2011 Percentage Change Passengers 40.1 million 44.7 million +12 Revenue €2,182 million €2,712m +24 Adjusted Profit after Tax €451.9 million €543.5 million +20 Adjusted Basic Earnings Per Share (EPS) (euro cent) 30.47 36.62 +20 Table 1. (RYANAIR HALF YEAR PROFITS RISE 20% TO €544m) The above table represents that the profitability indicators and the business augmenting indicators shows positive growth from the performance of the past year in this small comparative static exercise. The CEO of the company also declared that, “We are pleased to report a 20% increase in the half year net profits to €544m. This is a testament to the strength of Ryanair’s lowest fare/lowest cost model which delivered robust traffic and profit growth despite, significantly higher oil prices, and an economic downturn in Europe” (RYANAIR HALF YEAR PROFITS RISE 20% TO €544m). The paper will focus on the application of stylized techniques like PESTEL analysis, Porter’s Five Forces analysis and will be focusing on the synthesis building of the strengths and weaknesses and will eventually highlight on the policy recommendations for the better performance and intensification in the business operations. II. PESTEL Analysis For the systematic analysis of the macro environment factors affecting any organization, generally PESTEL analysis is applied. The PESTEL analysis model involves various parameters like the political, economical, social, technological, environmental and legal factors. The analysis of this tool will be used with the backdrop of the European aviation industry and how it has and will be affecting the business environment of the Ryan Air Company. Political factors The intervention of the national governments in the European aviation industry has been a predominant phenomenon. Majority of the country focused on the development of a single national airline with direct involvement of the government as the crux and there were limited pricing independence as well as restricted growth of new entrants into the market. But soon the economists came up with the notion of the advantages of the freer competition where the lower price will allow the airline companies in the reduction of inefficiency and attract many customers (An analysis of the European low fare airline industry). With the relaxation in the regulations Ryan air got a competitive advantage of gaining its foothold. On February 2005, new EU compensation regulations came into the forefront which dedicated to the immediate assistance to the passengers who were delayed or cancelled traveling. A total sector-wide bill of €200 million per annum was expected for the compensation to the passengers which included compensation payments as well as free care charges. In case of Ryan air, the cost of compensation was expected to fall in the bracket of €250 million. Although the implementation of the regulation was not very successful, it has to be taken into account for the company for formulating strategies for cost reduction (Higgins 701). Economical factors Among various economic factors, one of the most important factors is that of the fuel prices. The fuel prices came as a sharp challenge to the company as it entered into the fiscal year of 2007 and the forecasts of the company were also not optimistic as compared to the cost cutting spree adapted by the rivals. The strategies available to the companies are that of firstly the purchase of the fuel-efficient aircrafts which become very costly during the times of economic turmoil, secondly that of the Fuel ferrying strategies which are uses the multi stage mechanism of purchasing fuels different airports rather than single stage mechanism, thirdly hedging techniques which include the minimization of the risks through purchase of the future contracts of oil and stabilize their earnings and lastly the policy of escalating the fare rates but that may lead to the loss of customer base (An analysis of the European low fare airline Industry 43-44). Social factors There has been much change in the cost structure of the airway travel as there has been rise in the purchase of the real estate in France by the British residents which led to the cheap travel across the European countries. The changing pattern of the real estate market also leads to the rise have increased the number of flights at low cost. This is an advantageous position for the Ryan airlines as it can attract more passengers through its cost effective fare structures (An analysis of the European low fare airline Industry 43-44). Technological factors One of the major drivers in the business environment is that of the technological factors. As already discussed, the airlines has successfully adapted internet and ultra modern technologies for hassle free transactions through their websites. Environmental factors With the Kyoto protocol, the environmental concerns have cropped up as significant drivers among the aviation industry with high scale agenda on reduction of the greenhouse gases. Pressures have come from the British Airline Pilots’ Association to recruit Ryanair pilots based in the UK and environmental costs have been high. The company has to manage the environmental issues very carefully (Higgins 701-702). Legal factors Legal factors are also play a significant part in analyzing the effects on the organization’s financial health as well as limit the free flow of the operations. The restricted legal regime has hindered the company in our concern also. Ryan airline faced obstacles of not flying beyond the nation’s boundary. In several times the company has engaged itself in legal disputes like it was in litigation with several airports regarding landing charges. There were also allegations against the company that it was receiving biased treatment from the government with illegal state aids at different airports like Lubeck and Frankfurt Hahn in Germany, and Shannon in Ireland (Higgins 703). These legal constraints will be a hindering variable for the growth of the company and can be regarded as the weakness of the company as well. III. Porter’s five forces analysis The Porters five forces model is also a stylized tool for analyzing the particular industry and it will be analyzed with respect to the European airline industry. Threat of entry The availability of the airport slots is much easier in the recent times with the development of various regional as well secondary airports. The potential for the budget sector of the low cost carriers was slightly flourishing with the comparisons of the figures of 2006 with that of 2005. However the CEO of the company regarded the market as healthy for development which was a unique forecast as the many carriers withdrew from their routes which clashed with Ryan air like MyTravel Lite from the Dublin–Birmingham route. Although nearly 50 companies withdrew from the business, the attractiveness of the budget led to the development of new entrants into the market. The low pricing of the airlines can give it competitive advantages (Higgins 706). There has been also an environment for the mergers and acquisitions Air France-KLM which are also possessing massive threat of entry in the market. Buyer’s bargaining power The bargaining power of the buyers are rising in this market as it is known that there has been increase in around 75 million new consumers from 10 new EU member states each having a large number of choice as well as information through the internet along with the power distribution through the travel agents also leads to the increase in the buyer’s bargaining power as it has been tested that the many sites like Orbitz, Priceline consumer can set the price of the tickets (Higgins 373-374). Existing Rivalry There has been significant lessening of the airlines fares with the mechanisms of various business models by various companies. The estimates of forecaster’s states that the low air airlines will be increasing with a range of 5% to 25% within the time period 2010 and as Ryan air possess low cost advantage with expansion of routes to Poland, Czech Republic etc. providing tremendous opportunity to expand (Higgins 372). Threats of new substitutes There are manifold threats of substitutes like that of the swift rail and cross water tunnels enabling convenient travel on land, vacationers using cars, rail and road are major viable substitutes in case of short journeys with respect to budget airlines (Higgins 374). Suppliers bargaining power There has been heated rivalry between Airbus and the Boeing suppliers. More the strength of the airlines, larger will be the orders as well as the deals. There have also been route cutbacks since the year 2011 by the major players releasing almost-new second-hand aircraft on to the market, reducing aircraft suppliers’ power (Higgins 374). IV. Scenario Analysis One of the biggest endeavors of the company propelled through the hands of the CEO of the company Michael O’Leary has decided on taking over its one of the most threatening Irish rival, Aer Lingus after the flotation of the legacy national carrier. With prior announcements which revealed that that around 19.2 per cent was already procured through its stockbroker Davy. An analysis of the profitability index of the company will be exercised with data from the balance sheet of the company (refer to Appendix) of two years 2005 as well as 2006 for analyzing the prospects of acquiring by the company. The focus will be on the graphical analysis which is as follows: (Higgins 696-697) The above figure represents the operating revenue of the company which shows a declining trend which can be regarded as a setback strategy for investment. (Higgins 696-697) The above graph reflects the operating expense of the company which also shows declining trend and it acts as a good signal if the proportionate fall in expenses is greater than the fall in operating revenue. (Higgins 696-697) The current ratio also is a measure of the financial strength. It is regarded as Total Assets/Total liabilities. A higher ratio indicates more financial strength. But the graph is showing falling current ratio over time which gives a grave uncertain situation for investment. (Higgins 696-697) The quick ratio is also an indicator of the financial strength. Quick ratio is defined as : More the value of the ratio above 1, more is the financial strength of the company. The diagram also shows that the ratio is rising in the time period taken in this respect. It can be regarded as the positive indicator for investment. With good market reputation and goodwill along with enhancement of the public equities the company can lead to the investment decision with the takeover of the company Aer Lingus. V. Internal strengths and weaknesses The strengths are manifold but the most significant of them are (a) It is the first budget airlines in the European aviation market possessing the first mover advantage, (b) several routes with the frequent departures in several routes along with the offer of low prices, (c) value for money proposition for the customers, (d) The ancillary revenues are also high enough with the figures rising up by 36% in the year 2006 with the generation of around 7.70 per passenger which strengthens its financial base (Higgins 698). Terrorist attacks can be said to be one of the significant threats of the airline industry. But in the aftermath of 9/11, the airlines recovered very quickly which can be regarded as the strength. Among the weaknesses it can be mentioned that the customer feedback of the airlines is feeble associated with low fares, decorum and punctuality and in a poll of 4000 travelers around the world by Trip Advisor in October 2006 was voted as the worst favorite airlines (Higgins 704). The violations of the EU regulations as discussed in the PESTEL analysis also question the efficacy as well as the staff commitment and loyalty. VI. Evaluation of the leadership of the CEO Appointed in 1991 with a new management team, led by Michael O’Leary recruited by Tony Ryan was regarded as a reluctant recruit. But his flare consists of charismatic personality which reflected in his works with the airlines. Among the many contributions highlight will be given on few attributes as the scope of discussion is less. In the rising fuel market, he considered people to offer the lowest fares in the market. Under his supervision the ancillary services also experienced tremendous boom. The launching of a ?1.02 billion bid for the Irish rival, Aer Lingus by the CEO is also a major stance from his side. But his over enthusiastic attitude and execution of many things at one single point of time may be looked upon as a set back as it will ignore the detailing perspective of the customer satisfaction which is its prime agenda (Higgins 695- 697). VII. Sustainability The company has been reviewed by poor customer satisfaction scenario and its performance ratings also have been also below levels but the carrier is one of the domains of customer confidence in the case of this airlines. As directed by the CEO, Ryanair will also land up in a web of adverse price shocks. The strategy of free seat giveaways by the company is interesting which is a strategy of filling up the seats and it can be thought of a sacrifice in the short run for achieving optimality in the long run. VIII. Recommendations First and foremost policy which Ryanair must be considering is that of the strengthening the customer satisfaction through more micro analysis into areas like food facilities, privilege giving to the handicapped people, proper sitting environment and arrangements should be also given particular stress. The company also has to develop aggressive strategies for curbing or destabilizing the growth of the competitors like that of Easy Jet. References 1. An analysis of the European low fare airline industry- with focus on Ryanair, 2005, July 5, 2012 from: http://pure.au.dk/portal-asb-student/files/2049/000139957-139957.pdf 2. Dhalla, Manpreet, Ryanair MarketBuster, n.d., July 5, 2012, from: http://www.marketbusting.com/casestudies/Ryanair%20Report.pdf 3. Higgins, Eleanor O’, Ryanair – the low-fares airline, 2007 4. RYANAIR HALF YEAR PROFITS RISE 20% TO €544m, 2012, July 5, 2012, from: http://www.ryanair.com/doc/investor/2012/q2_2012_doc.pdf Appendix 2005 Mar 2006 Mar 2006 Sept Current ratio 2.546459121 2.46065 2.427822 Current Asset 1653421 2170224 2053627 Current Liability 649302 881972 845872 2005 Mar 2006 Mar 2006 Sept Quick ratio 1.375172108 1.234619 1.736567 Cash & cash equivalents 872258 1064692 1439004 Trade Receivables 20644 24207 29909 Current Liability 649302 881972 845872 2005 Mar 2006 Mar 2006 Sept Profit for the following years 280043 329,127 306712 2005 Mar 2006 Mar 2006 Sept operating revenue 1319037 1692530 1256423 2005 Mar 2006 Mar 2006 Sept Operating Expanses 978299 1317484 870616 2005 Mar 2006 Mar 2006 Sept Total liability and share holders equity 3818153 4634219 4956478 (Higgins 696-697) Read More