Why Has Ryanair Been Successful So Far - Essay Example

?Why has Ryanair been successful so far? Ryanair continues to be successful because it has a ical airline business model focusing on service. They created a new segment for themselves when they first entered the market as they offered air route to the Irish immigrants working in England whose status was elevated from ferrying across to air travel (O’Higgins 2005). They did not divert passengers from other carriers but created new customers by diverting from other modes of travel. To sustain competition they maintain low prices, which imply that they offer no frills. To eliminate the agent’s commission, they use online booking and ticketing system which further pushes down costs. Porter suggests that a firm should follow either differentiation strategy or cost-leadership. They do not submit a mission or vision but they continue to be the largest low-cost leader in the European air industry (Box and Byus 2007). This requires an absolute dedication to low-cost performance in every element of the value chain. Thus, they have quick gate turnarounds, non-union operations, their compensation plans are in the form of performance-based incentives, and they fly to secondary airports which too results in cost savings. They have been successful so far because they could compete against the tradition carriers as consumers have become price-conscious. They are able to maintain price advantage and they get most of their bookings online. They replicated the South West Airline model of offering “no frills” services and focused on the most price-sensitive segment (Leavy 2003). Is Ryanair’s strategy sustainable? Ryanair’s strategy has become questionable due to the impact of cost savings in every function. This can be better understood through environmental analysis. Michael Porter has developed a set of tools and framework for environmental analysis. These tools have brought new levels of depth and sophistication and make a firm conscious of its positioning, industry attractiveness and competitive strength (Leavy 2003). PESTLE Analysis Political Ryanair operates within Europe and Europe enjoys political stability. However, if they want to expand in the OPEC countries they would face challenge as the fuels costs have been escalating. Political factor however, has low impact. Economical The economy of Europe as a whole is stable and the domination of Euro as the common currency adds to stability. The consumers in Europe too are stable so overall the economical factor has low impact on the industry. However, outside Europe the market is undeveloped and these economies are unstable. Moreover, the economic crisis has impacted all low-cost carriers since 2008 which ash prompted stringent actions from the low-cost carriers (Dunn 2009). Social The airline industry depends on the changing consumer demand. Ryanair could succeed so far because of the price-consciousness of the consumers. However, consumer demographics keep changing and the airline has to be cognizant of the changing consumer preference. Even a small price difference can change the mindset of the most loyal consumer. Thus the social factor has a high impact. Technological The technological factor has a low impact because Ryanair has invested in standardized but latest aircrafts. However, they do not use technology in employee relations or in customer relationship management. Legal This has a high impact as they have been charged by the EU for receiving illegal subsidies for its base airport (O’Higgins 2005). Its website also had several consumer complaints which prompted the airline to shut down the website (O’Higgins 2005). The airline was also in a dispute against the British Airports Authority (BAA) for alleged monopoly abuse over fuel levies. Environmental This has a high impact because ‘climate protection charge’ has been levied against the airline. Frequent landings and take-off on short-haul flights have high impact on the environment (O’Leary 2007). PESTLE Evaluation The external environmental analysis suggests low impact overall although the social factor has a high impact on its operations and strategy. Hey are also faced with changing consumer demands, the legal factors and the environmental demands. Porter’s Five Forces Analysis Supplier power The supplier power at Ryanair is low because they have outsourced several functions like repairs and maintenance. Outsourcing strategy helps to maintain productivity levels above the industry norms and avoid complexities while keeping costs low (Leavy 2004). Besides, the fleet at Ryanair is their own and they have control over operations. Thus, the bargaining power at Ryanair is high. Buyer power The buyer power is normally very high in the airline industry and Ryanair could capture the low-priced segment. However, within the low-price segment, the power of the consumers is low because they pay a low price and get facilities accordingly. They cannot bargain for higher facilities. Threat of new entrants The threat of new carriers in the low-cost segment is low because many low-cost carriers have been withdrawing due to losses. Only the early entrants could survive the economic downturn. Moreover, rising fuel prices makes entry of new carriers challenging in the industry. At the same time deregulation has lowered the barriers to entry and hence they face threat from competition. Substitutes The threat from substitutes is high as the traditional carriers are also trying to enter the low-cost segment and price war is rampant in the sector. Competitive rivalry Among the low-cost carriers EasyJet are the strongest competitors (Appendix A). Analysis of the Five Forces The industry is very attractive as most forces are weak. Because of its choice of airports Ryanair has been able to safeguard its position. Threats from substitutes are high but nevertheless it is the most preferred airline. There is no threat from new entrants and even existing players are phasing out. Competitive rivalry is high as several carriers including traditional carriers are fighting against Ryanair. SWOT analysis Strengths Airline has own fleet Standardized process Reduced turnaround times No frills and hence low cost Outsources services at international airport thereby low supplier power Weakness Volatile employee relations Poor customer relations Several litigations against the airline Customer complaints No succession plan after O’Leary (O’Higgins 2005) Lack of technology application for customer and employee relationship management Opportunities Generate revenue through advertising on-board Raise fares without losing existing customers (O’Higgins 2005) Compete in the long-haul sectors by adding services like food Use of technology to enhance several services like the website experience. Threats Dependence on the current CEO. Emphasis on increased ‘climate protection change’ Traditional carriers entering the low-cost segment Legal suits filed by the customers Changing consumer demographics and demands The airline has several threats and weaknesses which can hamper its growth. An evaluation of the position of Ryanair through the use of several tools like PESTLE, SWOT, and Porter’s FIVE FORTCES suggest that the strategy being pursued by the airline is not sustainable. They focus only on cutting costs and as a result they compromise on basic services and legal requirements. They have been charged of illegal subsidies which they apparently try to manipulate simply to cut costs. Consumers demand some services and they are willing to pay a price for it. Moreover, Ryanair makes no effort to keep in touch with consumers or handle consumer complaints efficiently which has led to antagonism among the consumers. Employee relations too are not good at Ryanair. Maintaining relationships require a cost and if profits are low, they cannot allocate budget for customer and employee relationships. Changes in Ryanair’s approach – suggestion Ryanair has to redefine its strategy. Their customer-focused approach does not demonstrate growth potential. They must adopt the disruptive strategy which becomes necessary when competition is high and product innovation can lead to competitive advantage. To apply the disruptive strategy the airline must understand the laws of supply and demand. The airline management must understand the relationship between costs, pricing, adoption rates and market growth (Rudin 2010). The disruptive strategy has to be based on how customers buy and not on how sellers sell. Ryanair should use technology to enhance visitor relationship management. Many visitors to the website quit the page before making any booking. This suggests that the customer experience is not very positive. Consumer’s perception of any online brand is influenced by the online experience (Fink 2006). They have been focusing on the prices while ignoring the needs of the customers. However, e-relationship adds value to the customer relationship that is difficult to imitate (O’Toole 2003). This would enhance and lead to a sustainable relationship with the customers. E-business model creates closer relationships and adds unique features that cannot be easily replicated by competitors, thereby offering competitive advantage. E-business model requires management commitment and resources. Ryanair can hence use the electronic media not just to interact with the customers and potential customers but even with the employees. Blogs and forums have become common where employees express their experiences, wish and grievances more freely than they would do verbally. The management must know what is happening at the grass root level. Competitors are equal stakeholders and effective communication with each of the stakeholders serves to add value to the relationship. Close relationship with the competitor can also be a strategic asset (O’Toole 2003) but Ryanair has antagonistic relationship with its competitors. Ryanair has the competitive power and the bargaining resources but it has not been able to maximize the utility to its fullest potential. Ryanair has not been investing in the core business but this is essential (Campbell 2005). The importance of investment in marketing and promotional activities is heightened because many airlines are trying to enter the low-budget sector. Adverse publicity of the airline due to several litigation cases has tarnished its image. Hence, the company being financially stable, it should invest in publicity and advertising, and regain its strong market position. This strategy will give a strong fight to the competitors and the markets will grow. Based on the disruptive strategy, the airline must evaluate the changing consumer demands and needs, and devise/redefine their product and services. Introducing long-haul flights Long-haul flights for most carriers has shown cut in capacity which makes it difficult for the airlines to recover costs, let alone make profits. Moreover, Ryanair does not offer on-board services, including boarding passes. Long-haul flight passengers seek service and are willing to pay the price. Since Ryanair is known for its low-cost model, they would tend to cut costs and compromise on service which will further keep long-haul flights operating below minimum capacity required. Aer Lingus suffered group losses mainly because of their long-haul flights. They had to cut unprofitable routes and reduce capacity to better match the demand as their long-haul passenger number decreased by 15.7 percent (RTE 2011). Many airlines are also entering into code share on long-haul sectors as independently they are unable to compete. Thus, Ryanair should continue to focus on its core business – that of serving the budget carriers but they should add services with costs. Consumers look for comfort and convenience and price is not always the main consideration. Thus, instead of focusing on long-haul sectors they should try to focus on their strengths and the core business as most competitors are currently earning less than their capital invested. Did Aer Lingus bid make strategic sense? Should Ryanair make another bid for Aer Lingus or any other carrier? Aer Lingus, the state-owned airline of Ireland, became the strongest competitor to Ryanair over time and Ryanair thought this was the best move – to bid for takeover. Aer Lingus, over time, had transformed itself into low-cost airline and it matched Ryanair fares on most routes (O’Higgins 2005). The bid would have been complimentary to Ryanair’s business as Aer Lingus flew to primary airports while Ryanair chose the secondary airports. This implies that would be no clash of common customers. Thus, while maintaining low fares, Aer Lingus differentiated itself from the no frill carriers as they offered practical and appropriate services. As far as Ryanair is concerned, this made strategic sense because the services were complimentary. Even though the Irish government rejected Ryanair’s bid for takeover as the big greatly undervalued the flagship carrier, Ryanair continued to build stake in Aer Lingus. Since Ryanair was allowed to keep minority shareholding, it amassed 29.8 percent stake (Chee and Gergely 2010). The court has not directed Ryanair to divest its stake in Aer Lingus which means Ryanair will make another bid for the airline. The current status is that unless the Irish government divests its shareholding in Aer Lingus, Ryanair stands no chance to win the bid. Ryanair has been accused of using anti0comoetitve measures and the Irish government would not encourage monopoly. At the same time, the Irish government or the court cannot enforce upon Ryanair to sell the shares of Aer Lingus. Thus, it makes no sense for Ryanair to make another bid for Aer Lingus because the status would remain the same unless the Irish government disinvests. The Irish government is not expedcted to divest because it encourages competition and not monopoly. Competition keeps the prices low and markets healthy. The consumers benefit from competition. It does not make sense for Ryanair to bid for another carrier because. Aer Lingus was a strategic move because of the sectors and the airports. Instead, Ryanair should divest its stake in Aer Lingus and focus on its core business. Strategic leadership of Michael O’Leary O’Leary has always been identified as a dynamic CEO. He is credited with transforming the European air transport system. The Financial Times has named the CEO as one of the best 25 European business stars. He is also known as the shrewd marketing brain and a ruthless competitive streak (O’Higgins 2005). While O’Leary is among the island’s riches man, he misuses his financial strength for personal gains. The character of a personal reflects in his personal life as well. He paid ?4000 just to get a taxi licence for his private car so that he would not be held up in traffic snarls (Clark 2005). When challenged for abusing the licence loophole, O’Leary claims that he has the liberty to do what he wants with his money. Similarly, when the airline ash been charged for environmental degradation and asked to operate keeping in mind the climate change, O’Leary claims that people would not sell their car and walk. Climate concern was not his concern and Ryanair was isolated from the industry for not offering support in climate concerns. This shows arrogance on the part of the CEO perhaps caused by the successes he has received so far. His re-cocupation lies only with maintaining low fares. He appears to be stuck with his initial strategy of replicating the South West Airlines but he deos not have the dynamism to change with the change in the business environment. That is the hallmark of a successful CEO. Besides, he has not even named a successor thereby showing that the airline’s future too is at stake. His attitude has been explained as his middle class background as he inherited nothing from the family and has built everything based on his education and personal merit. Such people can be successful for sometime but they become rigid in their stand which becomes a stumbling block for growth and progress. References Box, Thomas M, and Byus Kent. 2007. "RYANAIR (2005): SUCCESSFUL LOW COST LEADERSHIP". Journal of the International Academy for Case Studies, 2007, http://findarticles.com/p/articles/mi_qa5452/is_200705/ai_n21289700/ Brian Leavy. 2003. Assessing your strategic alternatives from both a market position and core competence perspective. Strategy & Leadership. 31 (6): 29-35 Brian Leavy. 2004. Outsourcing Strategies: Oppurtunities and risks. Strategy & Leadership. 32 (6): 20-25 Campbell Andy. 2005. Discovering significant and viable new businesses: have faith in strategic planning basics. Strategy & Leadership, 33 (1), 25-31 Chee Foo Yun and Gergely Andras 2010. Ryanair could still bid for Aer Lingus despite ruling". Reuters. http://uk.reuters.com/article/2010/07/06/uk-aerlingus-ryanair-court-idUKTRE6652FZ20100706 Clark Andrew 2005. "The Guardian profile: Michael O'Leary". The Guardian. http://www.guardian.co.uk/environment/2005/jun/24/theairlineindustry.travelnews Dunn, G. 2009. "Low-cost carriers: Ready for battle". http://www.flightglobal.com/articles/2009/04/21/325429/low-cost-carriers-ready-for-battle.html Fink, G. 2006. Value decomposition of e-commerce performance, Benchmarking: An International Journal. 13 (1/2): 81-92 O'Higgin Eleanor RE. 2005. "Ryanair: the low fare airline". ECCH Collection. O'Leary Michael. 2007. "Skyway robbery". http://www.guardian.co.uk/commentisfree/2007/mar/07/skywayrobbery O'Toole, T. 2003. E-relationships - emergence and the small firm. Marketing Intelligence & Planning, 21 (2): 115-122 RTE. 2011. "Aer Lingus flies back into profit. http://www.rte.ie/news/2011/0228/aerlingus-business.html Vella Matthew. 2011. "Giants of low-cost | Michael Cawley". http://www.maltatoday.com.mt/news/interview/giants-of-low-cost-michael-cawley Rudin Andrew 2010. "Elements of a Successful Disruptive Strategy". Salesvantage. http://www.salesvantage.com/article/1374/Elements-of-a-Successful-Disruptive-Strategy Appendix A Source: (O’Higgins 2005). Read More