Ryanair Company - Essay Example

Ryanair Case Study Introduction The company was founded in 1985 with only 15 members of staff. During that time the company only had a 15 seater turboprop plane. The plane only operated the Ireland to London-Gatwick route that had only 5000 passengers. The company since then has been aggressively expanding and come 1991, the company had already some 700,000 passengers with over 350 staff. In 1995 the company emerged as the largest passenger air carrier in Ireland and on every route that it operated from, and it managed to carry around 2.25 million passengers. Come 1997, European Union air transport regulations allowed the airliner for the very first time to open up new routes to Continental Europe, and in return the airline managed to ferry approximately 3 million passengers. In the year 2000 the company launched 10 new European routes, it also established internet bookings and just within a span of three months the online portal was completing around 50,000 bookings. Ryanair has a goal of offering low cost travel, and this is achieved by eliminating services such as free drinks, advanced seat assignment, and in-flight meals among others. Even though the airliner has eliminated certain services, some have been retained and this includes baggage handling and consistent on time services, advance reservations, and frequent departures among others. The industry the organization operates in Ryanair operates in the air travel industry, or rather the aviation industry. The airline industry like other sectors has severely been affected by the high oil prices and global financial crisis. International Air Transport Association (IATA) has already downgraded 2012 industry profit forecast, this is attributed to Unrest in North Africa and Middle east coupled with surging oil prices. This is because for each dollar increase in oil price, the airline industry faces an additional $1.6 billion in cost, and fuel is now being estimated to comprise of 30% of an airlines operating cost. S Substitute Products or services for current products or services The threat of substitute products and specifically in the short haul market is being cited to be one of the key factors affecting the airline industry profitability. According to (Aharoni, 2004), the airline industry has reached its maturity, this is so because low costs carriers such as Ryanair have emerged and these carriers have took advantage by developing a market niche and at the same time expanding into secondary airports. This particular strategy has also enabled these low cost carriers to avoid alliances and at the same time to gain foothold by establishing their own international bases. Today secondary airports especially in Europe have reached their capacities and this in return has limited the international expansion of these low cost carriers. The threat of substitute products in the airline industry is quite low. These substitute products are personal automobiles, buses, and trains. Travelling by train in most cases is normally longer in comparison to air even though the price difference is not similarly disproportionate. Also going by the fact that trains have fixed routes, putting it as a substitute of r air travel is clearly at a disadvantage. Travelling by bus offers the travellers some relief in form of tradeoffs, but the travelling time is significantly increased for a comparable trip. Passenger automobiles are only viable over short distances thus they are not such an insignificance substitute to the airline industry. This particular lack of viable substitutes within the airline industry is advantageous for the industry, however, it comes with negative impact in the sense that it impedes entry of new competitors. Key Competencies required in the Industry Air travellers are going for carriers which offer excellent quality of service, on time arrivals, and low fares all at once. These airlines do not have choices but to defy the traditional business strategy theory. According to porter (1980) there are two types of competitive advantages which can be combined with either broad or limited competitive scope in order to bring on board four well known business strategies. These includes cost leadership, differentiation, focused low cost, and focused Differentiation. Cost leadership is where by the company conducts its activities in the most efficient manner in order to generate profit margins despite the low cost of the service offered. In order for this to be achieved, the airline industry has to each cost creating activity in detail, and it also involves taking fundamental re-engineering of how activities are performed and re-engineered. It can also mean cutting out steps in the manufacturing process by implementing next generation products or robotics in order to provide the service or producing the same service at a fraction cost of the competitor. For instance, Ryanair has gotten rid of window shades in its aircrafts in order to eliminate maintenance costs associated with broken or non-functional shades, and also to lessen the fuel cost by eliminating the additional weight (Flouris & Oswald, 2006, p.25). Airliners which pursue cost leadership strategy normally outperform their rivals by producing their services at a high labour and capital productivity. These airlines are also known as low cost or low frill airlines. This low costs is normally achieved by offering un-complex point to point transportation on high volume routes, these routes are also served with quick turnaround time, and airports served with these no frill airlines in most cases are dominated with one company and this results in a high bargaining carrier for the airliner (Wittmer, Bieger, & Muller, 2011, p.84). Figure 1: Four competitive strategies. There are other core competencies which includes the skills of the top management in planning and marketing. There is also the interpersonal skills of the flight attendants who make the flights as comfortable. The pilots have also to be well trained. Also the fleet number significantly contributes towards competitive advantage. Other factors are comfort, privacy, and fare. Key resources required in the airline industry The global airline industry is premised on two fundamental drivers which are the aircraft safety and consumers ever increasing expectations of broad service choices. Researchers have already proven that poor quality in regard to communication, employee motivation, team work, decision making, are likely to translate into loss of customers hence market share. Therefore HRM experts are more than ever required to spearhead the airliners marketing strategy in order to increase their customer loyalty, and a key area of focus is the way in which the human resource department will align its activities, policies, and procedures within the strategic imperatives of the organization. Expansion strategy is also another item that enables airlines to position themselves in the market place. For instance, Ryanair has been launching new routes ever since it commenced operations, and in 2003 the company launched 73 million new routes and ferried over 2 million passengers in a single month, July. The company’s website has also enabled the airline company to position itself on the global market. Also the destination is a critical factor. For instance Ryanair has established partnerships at some of the key airports in Europe. The company operates the Alicante base with approximately 40 departures in a day, the Brussels-Chaleroi with 45-50, Milan Bergamo with 70, Dublin more than 70, and the busiest London-Stanfed with more than 120 daily departures. With such high frequency destination, the airline demands for very low landing and handling fees, as well as financial assistance in marketing and promotional campaigns. Fleet is also critical for an airline to maintain a competitive advantage. As an example, Ryanair is claiming to be operating the newest, greenest, and quietest fleet of aircraft in Europe, and as of April 2012, the company boasted an average of 3.8 years of the age of its fleet. The company has over 200 aircrafts, and the fleet has been refitted with performance enhancing winglets and even the recent deliveries have been fitted with these winglets as standard. In January 2009 it was reported that Ryanair is holding some negotiations with Comac and United Aircraft Corporation of Russia arguing that these would form alternative option, and Ryanair also agreed to share on its own experience and expertise in assisting Comac come up with new C919 commercial aircraft that has a capacity of 200 seats, and in return would also enable the company Ryanair to lower its costs even further. Ryanair Growth Rates & Forecasts Fig 1.0 Ryanair Growth Rates & Forecasts Ryanair growth rates are somewhat sluggish even though the company has been increasing its fleet size by 16% annually. In December 2009, the company added 218 Boeing 737-800, and in November 2010 the company added some 254 Boeing 737-800. In simple terms this means that Ryanair paid for another thirty something new aircrafts which did not carry any passenger. The company is also looking at the possibility of opening up routes on all major airports due to the impeding slowing growth, and the company is now also planning to fly to larger airports, while raising costs hence in return boosting the average ticket prices and luring business class passengers. The company’s chief has indicated that its rock bottom price approach of €40 (£33) is completely unsustainable, and the airliner is being faced with increased pressure as they move towards major airports which are close to large cities. In a bid to stem the rising flying cost, Ryanair has also made bold attempts to lessen the usage of facilities such as check in desks and baggage handling machines in a response to travellers registering for flights electronically and carrying hand luggage. This in return has cut on entry expenses and made ticket prices to be lower (Rodwell, 2010). The global industry outlook has also been downgraded by IATA primarily due to the rising oil prices. IATA projects that the entire industry is going to make a combined profit of $3.0 billion in 2012 with a 0.5% margin. This profit outlook is even downgraded due to the initially forecasted $99, and now it is $115. However, there are several factors which even prevented further downgrades, and this includes avoiding the worsening of the Euro zone crisis, improvements with the US economy, cargo market stabilization, slow than expected capacity expansion. This particular performance can also be attributed to sluggish world GDP growth rate. In most cases airlines performance is usually tied to the GDP growth rate, and historically when the GDP drops to below 2%, the global airline industry usually return total loss, and with global GDP projections beign set at 2%, and a margin of 0.5%, then the industry is likey to be pushed to the red in 2012. Porter 5 Forces Before the idea of no frill airlines came about, the European industry was highly regulated, and after post 1992 deregulation there have been substantial benefits. By identifying porters five factors, it is possible to identify what this meant for Ryanair within the European air transport market. These porter five factors involve; threat of entry, competitive rivalry, bargaining power of suppliers, bargaining power of buyers, and the threat of substitutes. Threat of entry This one analyses the possibilities that a new entrant can enter the industry and diminish returns of the established companies. In the case it has been revealed how Ryanair has built up itself over the period and this means any new entrant would have to substantially invest in terms of sunk cost in advertisements in order to compete on a level playing field. Also going by the fact that Ryanair has established a very sound booking system, this means there are direct savings in the region of 42.6 in marketing and distribution expenses alone. Competitive Rivalry The cost of competing on the basis of price could be high because customers are benefitting from price war between rival airlines. This is why Ryanair has an advantage over other airlines due to its no frills policies which means that they are competing for the price sensitive customers. The demand for short haul flight service has also been steadily expanding in Europe. Also going by the fact that Ryanair was the first mover, it has significantly gained a competitive advanate and its strategies are becoming very difficult to replicate by rival airlines. Bargaining Power of Suppliers Ryanair has a very healthy relationship with its aeroplane supplier, and even during the economic downturns when airline companies were cancelling their orders, Ryanair continued buying as usual. In return, Ryanair receives various additional services such as; training of the flight crews, spare parts support, technical support and training, and software and field services engineering among others. Bargaining Power of Buyers There are quite a lot of determinants possessed by buyer in the airline industry, and this includes quality of service, brand identity, elasticity of demand, and standardization of the product. It is in this respect that buyer power within the European airline industry has become very strong because the switching costs are very small. Threat of Substitutes This comes in three forms which are road, rail and boat. Of all these rail offers the most threat due to the fact that it can be localised and more accessible. For instance, return plane ticket from Frankfurt-Amsterdam-Frankfurt costs 121 Euros compared to Ryan Air less that 50 Euros. Ryanair is in a very constructive industry and in 2004 alone the airline carried approximate 23 million passengers, and it even overtook British airways to emerge as Britain’s favourite airline. SWOT Analysis Strength Established brand name Low airport charges due to economy of scale Has an advantage on regional airports Internet bookings comprise of over 94% of the bookings which in retrun eliminates travel agents, and also lowers the cost of distribution because over the phone bookings tend to be expensive High seat density Boeing aircraft: Uniform fleet saves on maintenance and training costs Fast turnaround Small headquarters Weakness Prone to bad press: Any slight incident is being perceived as arrogance Niche market Poor service Sensitive to changes in charges Opportunity EU Enlargement: The company is rapidly expanding and opening up new destinations Low cost carrier is not yet saturated Only operates in Europe hence less Geo-political risk Economic slowdown helps the company because they steal passengers from rival carriers Threats Dependence on economic cycle Dependence on oil market Increase in low fare competition among rivals Minimal growth on South European Market Clients are price sensitive Looming increase in air traffic control charges Principle Players The principle players in Low cost carrier are Easy-Jet, and Air Berlin. Low cost airlines is a sustainable business model and even LCC carriers have even started landing at Primary airports in order to compete directly with the more established airline companies. These LCC are also pursuing business travellers by adding more business destinations and modifying their products in order to target a more discerning customer. Originally LCC flew second hand aircrafts, however, this has recently changed while on the hand network/legacy airlines have been unable to replace their ageing planes. As a result, LCC such as Ryanair boasts of average fleet age of 3.8 years, while the average for network/alliance airlines is between 10-15 years. Newer planes also enable LCC to offer onboard technology entertainment television and satellite radio. These companies being targeted with huge young business travellers, the LCC planes come fitted with mood lighting, computerized entertainment system comprising of I-Pod hook Ups, touch screen food and beverage ordering system, hundreds of hours of music and video entertainments. Low cost carriers are beginning to serve international markets. For instance, Frontier is now stepping up its service in Mexico, while Jet-Blue is extensively expanding in the Caribbean and Latin America. These LCC carriers face increasingly challenges such as volatile fuel prices, and rising labor costs, but still the main competition is among them. Legacy carriers such as Delta, Continental, KLM, and British Airways among others have already tried this model by operating their own low cost subsisidiary, but they ended up just selling their business or ceding operations. There are also other companies such as Mexicana, Singapore airlines, Qantas, Iberia, SAS, and British midlands who run their own low cost in parallel but independently from their legacy operations. In a battle to achieve the competitive advantage offered by these LCC, legacy carriers are now steadily moving towards the near end of the LCC business model by cutting cost and differentiating on services offered to customers. Even though these legacy carriers are trying to replicate this low cost model, the LCC are also busy moving from their core with more innovative ideas, leaving carriers stuck right in the middle of the game (Murphy, 2010). Legacy carriers are therefore forced to match what the low cost carriers are doing, which means they have to cut cost and at the same time improve on their efficiency. These carriers can also focus on their long haul operations in order to offset losses from short haul trips. Logistics Issues This can be described as the process of moving, storing, and retrieving material, people and information efficiently and in an economic manner. Because English is the most popular language across the globe, staff members from United Kingdom are more advantaged. However, according to feedback comments from customers, it has severally been cited that the staff language skills are very poor, and this is likely to act as a hindrance because the airline by now wanting to hire enough qualified staff or avoiding globalization is likely to make the airline lose customer or diminish the quality of customer service provided. Also going by the fact that the new route networks lead into more logistics issues because an expanded route network implies more flights and consequently more planes. Crude oil prices tend to significantly affect airline ticket prices, and Ryanair remains the only airline which guarantees no fuel surcharges. This prompts the passengers to constantly flock to their low fares, and this strategy has enabled the organization to maintain the same price range whatever the variation of petrol price. With such a strategy, the company’s customers are not going to be disappointed with the fluctuating crude oil prices. References Aharoni, Y., 2004, The race for Foreign Direct Investment in Services- The case of the airline industry, European Union and the Race for Foreign Direct Investment in Europe. Elsevier, Amsterdam. Triant G. Flouris, Sharon L. Oswald, 2006, Designing and Executing Strategy in Aviation Management. Illustrated Edition, Ashgate Publishing Limited. Andreas Wittmer, Thomas Bieger, & Rolland Muller, 2011, Aviation Systems: Management of the integrated Aviation Value Chain. Illustrated Edition. Springer Publishers. Steven Rodwelll, 2010, Ryanair’s O’Leary Plans to shift to \major Airport as Growth Slows. Retrieved 17th April 2012 from http://www.bloomberg.com/news/2010-09-22/ryanair-s-o-leary-plans-shift-to-europe-s-major-airports-as-growth-slows.html Patrick Murphy, 2010, Competing against Low Cost Airlines, retrieved 17th April 2012 from http://aviation-performance.com/pdf/PM_Competing%20against.pdf Read More