Exploring Ryanairs Value Chain - Essay Example

Exploring Ryanair’s Value Chain Ryanair prides itself to be “Europe’s original low fares airline” and “Europe’s largest low fares carrier”. As a low fare scheduled passenger airline, Ryanair serves short haul, point to point routes between Ireland, the UK and Continental Europe. Although the company operates through one business segment, Ryanair operates from 19 European bases with a fleet of over 130 Boeing 737-800 aircrafts. The company carries approximately 42.5 million passengers a year, over 456 routes across 24 countries. Planning to increase their routes in the future, Ryanair have ordered 117 new aircrafts (net of planned disposals), which will be delivered over the next 5 years. Their expectation is that these additional aircraft will allow Ryanair to double in size to over 84 million passengers each year by 2012. Moreover, Ryanair currently employs a team of 4,200 people, comprising over 25 different nationalities (About Ryanair). Ryanair’s competitive strategy is quite simple. The company offers the lowest fares of any airline operating in Europe. The firm has succeeded by holding its average fare below €50, which is about a third lower than even EasyJet’s, its strongest low-price competitor. The company sells seats on a one-way basis. Fares are set on the basis of demand for particular flights and by reference to the period remaining to the date of departure of the flights; higher fares are charged on flights with higher levels of demand made nearer to the date of departure. The secret of Ryanair’s success in their business could be drawn out of how they were able to narrow the value network by eliminating non core activities and to shorten the value network by eliminating processes that are part of the value chain. The company’s aircraft handling, ticketing and other services at certain airports are handled by third party contractors, which is Servisair. The company has its own internet booking facility and reservation centre, and generates the majority of its sales through direct selling (through website and telephone reservations). Ryanair also provides various ancillary services and engages in other activities connected with its core air passenger service, including non-flight scheduled services; in-flight sale of beverages, food and merchandise; and internet-related services. As part of its non-flight scheduled and internet-related services, Ryanair offers accommodation services, car rentals, rail tickets, and travel insurance through both its website and its traditional telephone reservation offices. Exploring how the company started, we can draw Ryanair’s roots back in 1985, where it was established by the Ryan family with a share capital of GBP1, and a staff of 25. The company launched its first service that year with daily flights on a 15-seater Bandeirante aircraft, operating daily from Waterford in the southeast of Ireland to London Gatwick. It was said that Ryanairs first cabin crew employees have to be less than 5ft. 2ins. tall in order to be able to operate in the tiny cabin of the aircraft! Finally, in 1986, Ryanair obtained permission from the regulatory authorities to start operations on the Dublin-London route (About Ryanair). However, in 1990, three years after the rapid growth in airline industry, routes and intense price competition with airline giants, Aer Lingus and British Airways began to injure the smaller Ryanair. This is why Ryanair accumulated £20m in losses and goes through a substantial restructuring. So, the Ryanair management re-launched the low fare model under a new management in 1990. One of Ryanair’s formidable competitors during that time was British Airways. British Airways’ competitive advantage in the leisure market is slight, it makes sense to make provision for it. It has often seemed attractive to airlines to focus exclusively on business travellers, observing the substantially higher fares they pay, but such airlines have generally failed (as is also true of other focused airlines such as those specialising in backpackers or budget travellers). The reason appears to be that airline economics (and passengers) do not favour small planes but business travellers do favour service frequency. So, an airline which combines leisure and business travellers can offer better value for money to its business passengers than one which carries only business passengers. British Airways is right to pursue a leisure market on business routes, although it should not seek a dedicated leisure market. It makes sense for it to take holiday-makers to Paris and Rome but not to Dublin. There may also be scope economies in offering routes which, although not profitable in themselves, yield returns through the generation of traffic elsewhere in the network. The route between London and Dublin poses this issue very clearly. Because of close commercial and personal ties between Britain and Ireland, this is one of the busiest air routes in Europe; one of the few on which there is both substantial business and substantial leisure traffic. In 1986, Ryanair, a low-cost operator, offering point-to-point services without frills, entered this market. This became a huge disadvantage to British Airways that it abandoned the London-Dublin route in 1991 (Kay, 1995, p. 308) It often marvels European travellers of how Ryanair can make money offering €9.99 fares for trips such as London–Brussels. But in less than two decades of existence, the Irish airline has not only made money, it has grown into Europe’s biggest airline as measured by market capitalisation. And the share of intra-European passengers flown by the low-cost airlines—primarily Ryanair and EasyJet—continues to grow. Their market share reached 7 percent in 2002 and is predicted to top 14 percent by 2007. Clearly, a low-price competitive strategy can be profitable only when the firm’s costs are also low. Therefore, all of Ryanair’s functional activities and operating policies are designed with efficiency in mind. For instance, the firm owns rather than leases its airplanes, and most of those planes are older Boeing 737-200s, thereby reducing depreciation charges and allowing some standardisation of maintenance activities and parts inventories. Ryanair also concentrates nearly all its flights to and from underutilised regional airports, such as Stansted outside of London and Charleroi south of Brussels. Such airports offer the company more favourable terms with respect to taxes, facilities fees, and ground handling charges than more popular and congested airports closer to major cities. The lack of congestion also helps reduce turnaround times and thereby lowers costs by increasing utilisation rates for planes and flight crews. Unfortunately, many of Ryanair’s cost savings come at the expense of customer comfort and convenience. Not only do passengers have to find their way to and from small airports far from the big cities, they have to carry and stow their own bags and do without meals, drinks, and other in-flight services. And there is not much room for them to stretch out and relax during their flight since Ryanair carries 15 percent more seats per aircraft than traditional airlines. It is even harder for customers to buy their tickets because Ryanair pays no fees to computer reservation systems and no commissions to travel agents. Advertising and promotion, however, are among the few areas where Ryanair has not tried to cut costs below its competitors. With the exception of the sales commissions mentioned above, the companys marketing costs are about the same per passenger kilometer as those of more traditional airlines. Even the most frugal flyers will not seek out Ryanairs cheap fares without being aware—and being frequently reminded—that they exist. And the firm must also maintain an extensive website and call centre to facilitate the direct sale of tickets. In this case, Ryanair has optimised its value chain to work to its benefit. An organisation must understand, accept, and successfully execute its business strategy. Every aspect of the organisation contributes to the success (or failure) of the chosen strategy. The business processes of the organisation and the value chain they create play an integral role in strategy execution. A business process is a standardized set of activities that accomplish a specific task, such as processing a customer’s order. To evaluate the effectiveness of its business processes externally and internally, an organization can use PESTLE (Political, Economic, Social, Technological Legal and Environmental) and SWOT (Strength, Weakness, Opportunities and Threats) analysis. The value chain approach views an organization as a chain, or series, of processes, each of which adds value to the product or service for each customer. To create a competitive advantage, the value chain must enable the organisation to provide unique value to its customers. While Ryanairs low-cost/low-price strategy has been very successful so far, yet there may be some problems on that Ryanair might face in the future. Recently, the European Union’s transport commissioner is investigating whether some of the favourable terms that regional airports like Charleroi have granted the firm might actually be illegal subsidies. More critically, some analysts question whether the firms growth projections might be overly optimistic. Ryanair expanded its fleet by another 100 planes in 2002 in order to pursue an objective of 25 percent annual growth. But some experts question whether the segment of travellers willing to sacrifice comfort and convenience for low fares is sufficiently large to make such an aggressive growth objective attainable. To analyze Ryanair as company, below are the PESTLE and SWOT analysis: PESTLE Political – UK airline industry has been rocked by numerous terrorist bomb threats. Chaos reigned as UK airports are crammed with delayed travellers, following heightened security after a bomb threat. Tough security checks have caused airlines to be delayed in their flights. EasyJet has voiced out its frustration in the efforts to speed up security checks at the UK’s airports, particularly those in London such as British Airports Authority’s (BAA) Heathrow, Stansted and Gatwick airports (Europe Intelligence Wire, 14 November 2006). Economic - Passenger numbers at BAA’s seven UK airports climbed by 5% to 39.005 million in the April-June 2006 period. Stansted saw the largest gain, 13%, while passenger throughput at Heathrow and Gatwick grew by 2.6% and 6.1% respectively. Low-cost carrier EasyJet continued to capitalize on its market and financial strength. EasyJet’s point-to-point short-haul network connecting major European airports has continued to attract business and leisure travellers (Mergent Online, October 2006). Social – New baggage limits could be bad news for low-cost carriers, at a time when they were starting to charge passengers for checked baggage, to encourage them to check-in online and travel with only carry-on baggage. In March 2005, Ryanair imposed a £5 charge for each bag checked in at the airport, and a lower charge of £2.50 for online check-in. Now that airport authorities are imposing stricter controls on carry-on baggage, Ryanair is temporarily waiving the charges for passengers checking in bags at the gate (Kirby, 11 October 2005). Technological –Social groups have voiced out their concerns about the new technological procedures. Civil liberties campaigners in the UK cited that the new X-ray machines being used at London’s Heathrow Airport which are said to allow security personnel to see through passengers’ clothes. Liberty, the UK-based civil liberties group, said that the new machine was intrusive and its use is unjustified (Airline Industry Information, 9 November 2004). Legal - The European Commission (EC) is intending to crack down on what many see as misleading airfare prices. In July 2006, it proposed legislation that would force airlines to advertise fares inclusive of all taxes, charges and fees. The draft legislation also requires airlines to charge customers the same fare regardless of where they reside in the EU. It has also proposed to tighten licensing rules and wants the power to be able to revoke EU operating licenses for airlines (Airline Business Report, 20 June 2005). Environmental - As low-cost airlines, like Ryanair, make air travel available to more people, there is increasing concern over the effects of air travel on the environment. There have been differing views and approaches to greening the skies. The group Green Party believes that this can be done through taxes. International Air Transport Association (IATA) said that improving the regions air traffic control would be a better way to cut aircraft emissions (Concil, 17 February 2007). SWOT for Ryanair Strengths Ryanair Holdings (Ryanair) is one of Europe’s leading low-fare scheduled passenger airlines. The company operates short-haul, point-to-point routes between Ireland, the UK and Continental Europe. Ryanair has been reporting strong revenue growth since 1999, after low cost airlines have gained more passengers. The company reported revenues of 1,692.5 million Euros during the fiscal year ended March 2006, an increase of 28.3% over 2005. Ryanair has an extremely strong business strategy, which is focused on its objective to firmly establish itself as Europes leading low-fares scheduled passenger airline. Weaknesses Ryanair has been involved in a number of labour union disputes. In February 2005, Ryanair began court proceedings against The Irish Airline Pilots Associations in an effort to stop a campaign organized by the International Transport Workers Federation (ITF) to highlight the company’s anti-union practices. Ryanair’s operating profit decreased 19.3% on a per available seat-miles (ASM) basis in March 2006. If the trend continues in the future, it could affect the companys profitability. Opportunities The continuing rise of the low cost airline market is seen to be an opportunity for Ryanair. Ticket price is the number one criterion for most passengers when selecting a flight, well ahead of the availability of a non-stop service. Ryanair entered into an agreement with Boeing to purchase 70 new Boeing 737-800 series aircrafts over a five year period from 2006 to 2011 and acquired additional option to purchase up to an additional 70 such aircrafts. Threats Fluctuating oil prices could affect low cost airlines, like Ryan air. Fuel prices continue to be susceptible to many factors and they should find ways to allay the operating costs. Security issues often pose a challenge to Ryanair. On August 10, 2006, UK security authorities arrested and subsequently charged eight individuals in connection with an alleged terrorist plot. As a result of these arrests, UK authorities introduced increased security measures on all UK outbound flights, which resulted in all passengers being body searched and of banning the certain liquids and gels. Environmental regulations could also pose as a threat to low cost airlines, like Ryanair. Unless it could think of an alternative that will reduce its fuel usage, they will eventually be clobbered by environmental regulations. Conclusion The PESTLE analysis can be used to evaluate the external forces that can influence or affect Ryanair value chain. One of the most immediate concerns that Ryanair has to resolve is the European Union’s investigation on the low cost airlines. The European Commission (EC) is intending to crack down on what many see as misleading airfare prices. In July 2006, it proposed legislation that would force airlines to advertise fares inclusive of all taxes, charges and fees. It has also proposed to tighten licensing rules and wants the power to be able to revoke EU operating licenses for airlines (Airline Business Report, 20 June 2005). Ryanair should be transparent enough to show that their operations are all legal. With regards to Ryanair’s commitment to nature, the company is currently taking measures in its environmental responsibilities. They reasoned that the environmentalists and uninformed politicians who mistakenly suggest that aviation is responsible for, or is one of the major contributors to global warming are false. In the statement of Michael OLeary, Chief Executive and Director of Ryanair Holdings, he claimed that “aviation accounts for about 2% of global greenhouse gas emissions, yet it is responsible for 8% of the world economic activity. Within the European Union air transport accounts for just 3% of CO2 emissions, whereas road travel accounts for over 22%, and power generation almost 40%. Yet again, air transport is being wrongly blamed as either the cause of, or a significant contributor to, CO2 emissions when it is not. The suggestion from many of these uninformed commentators - that air transport should pay even greater taxes in order to reduce its impact on the environment - is misguided” (Ryanair Annual Report 2006). However, despite the less detrimental effect of aviation, Ryanair is poised to become a responsible corporation because it “accepts that even within that context it must minimise its contribution to global warming”. This is why, over the last five years, Ryanair has replaced a fleet of old aircraft with a fleet of new and much more environmentally friendly aircraft. Their new Boeing 737 aircraft produce 50% less emissions, 45% less fuel burn and 45% lower noise emissions on a per seat basis. With this new fleet we expect to double their traffic over the coming five years whilst halving their emissions on a per seat basis. On the other hand, the SWOT analysis can be used by Ryanair to maximise its value chain more by emphasising their strengths, working out its weaknesses, grabbing the opportunities that come on its way and preventing the threats from weakening their attainment of their visions and goals. SWOT analysis can be used in many ways to aid strategic analysis. The most common way is to use it as a logical framework guiding systematic discussion of a firms resources and the basic alternatives that emerge from this resource-based view. What one manager sees as an opportunity, another may see as a potential threat. Likewise, a strength to one manager may be a weakness to another. Different assessments may reflect underlying power considerations within the firm or differing factual perspectives. Indeed, the maturing of many basic industries, slower growth, improved productivity, the growing power of retailers and their private labels, the increased aggressiveness of low-cost global competitors such as Ryanair, and the growing ability of customers to compare suppliers prices on the Internet have made many markets more price competitive. The danger is that prices set solely on the basis of cost or competitive considerations may not reflect customer value: the customers perception of what the product or service is really worth. The price may be higher than the customer is willing to pay, resulting in a loss of potential sales and market share. This may be a problem that Ryanair will face—even with its relatively low fares—as it pursues its aggressive growth objectives. Alternatively, the price may be much lower than customers think the product is worth, resulting in low margins and the sacrifice of potential profits. While pricing a product below its perceived value may delight customers and stimulate short-term demand, it may also depress the earnings the firm needs to compensate its employees, fund capital investments, and pay for the product development and other marketing activities necessary for long-term growth. The continued success of Ryanair’s low price strategy obviously depends on the firms ability to hold its total costs and prices well below those of other airlines—especially other no-frills carriers like EasyJet—while offering a reasonably comparable choice of destinations, flight times, and customer services. Fortunately, Ryanair that has not stopped there; although they are not offering food and drinks to passengers, they make up for being on time. In fact, Ryanair has been voted as the airline with the best punctuality and highest frequency. The company’s leading market position provides the company with the ability to leverage its market position to further expand its operating network. In essence, the successful innovation of Ryanair, which it introduced into Europe, was the provision of easily accessible scheduled short-haul services at very low unrestricted fares close to those of charter airlines but with “no frills”. In the future, Ryanair just needs to think of more innovation to add up to their competitively low prices for it to maintain its profitability. References Airline Industry Information. (2004, November 9). Civil Liberties Group Opposes New Airport Scanner that Undresses Passengers. Airline Industry Information. (2005, June 20). European Deregulation May Shake Up Airline Booking Industry. 23(13): 1. Concil, A. (2007, February 17). UN Guidelines on Emissions Trading Welcomed. Retrieved 08 April 2007 at IATA Pressroom http://www.iata.org/pressroom/pr/2007-02-17-01. Europe Intelligence Wire. (2006, November 14). EasyJet Frustrated by UK Airport Delays, Profits up 56%. Kay, J. A. (1995). Foundations of Corporate Success: How Business Strategies Add Value. Oxford: Oxford University Press. Kirby, D. (2005, October 11). Airline Firm Gets Heavy with the Baggage-Limit Busters. Europe Intelligence Wire. Mergent Online. (2007). Industry Report – Europe. Retrieved 08 April 2007 at http://www.mergentonline.com/compdetail.asp?company=-1&company_mer=91183&Page=40&type=IndReports&ReportNumber=438. Ryanair Website. (2007). About Us. Retrieved 08 April 2007 at http://www.ryanair.com/site/EN/about.php?page=About Ryanair Website. (2006). Ryanair Annual Report 2006. Retrieved 08 April 2007 at http://www.ryanair.com/site/about/invest/docs/2006/060901annualreport.pdf. Read More