Looking at the above quote, one would not be eager to go into the air travel business. Yet the author currently holds the position of chief executive officer (CEO) at the most profitable airline in Europe. The CEO? Michael O’Leary. The airline? Ryanair. Ryanair grew to become the most successful LCC on the European continent based on a business model focussed on operational excellence and rigorous discipline.Before we unravel the mystery of Ryanair’s success, let us briefly look at their financial performance and illustrate what we mean with “success”.
On the European continent Ryanair is leading the pack in terms of operating margin, slightly improving compared to FY2012.In terms of revenue Ryanair ranks fifth after legacy airlines (due to consolidation and LHL profiles). Revenue growth (the red dots) however is driven by LCCs.Number of passengers, one of the strategic focus points of Ryanair, consistently increases but the pace is slowing down.
Looking at cost we immediately see that Fuel is a major cost, equaling 45% of total operating costs. This not only illustrates that fuel is a major point of attention (as for any airline), but also illustrates how Ryanair managed to keep its other costs at an unseen level.Employeecosts for example or one of the lowest in Europe.Lookingat CASK and RASK (baseline 2009) weseethat CASK ex fuel isstilldecreasing but at a lower pace, but fuel costsmakethat total CASK increases. For the moment Ryanairwas able to pass on fuel costs to itscustomerswith a little more on top. So RASK stilloutpaces CASK.
Ryanairisthus in a healthyfinancialconsition, stillincreasingitsmarketshareyear on year (currentlyat 13,8%).But competitionis on the lookout in an ever-competitiveindustryComp stems fromLegacyairlinesgoingthrough a major consolidation exercice, combinedwith setting up subsidiarylow-costairlines.SomeLCCs on the other hand are shifting to more hybridforms, such as EasyJet.Ryanairdoesseem to remain the dominant player in the pure low-costmarket.
Ryanair thus managed to grow its business and remain financially sound in difficult economic times. To stay in this good shape and to survive, let alone grow, in the hyper-competitive market of the airline industry it is self-explanatory that having a sound business model and strategy is key.We base ourselves on 4 components, asking the questions;What value do we create for whom?How do we do it?How do we earn money with it?What values do we pursue and communicate?
= basic value proposition at the core of Ryanair’s strategic decisions and is reflected continuously in their slogans: “the ultra-low-cost airline” Ryanairtargets customers whom are willing to compromise on comfort in order to have the lowest fare;leisure and corporate travellers. Majority: leisure pax; but due to stricter travel policies higher share (22%) of corporate travellersWants to establish itself as “Europe’s leading low-fares scheduled passenger airline”. - How?maintain a continuous focus on cost-containment,thus minimising non-essential frills.maximising ancillary revenuesTheir revenue model will be discussed later on, I will now further elaborate on their cost-containment strategy.
One of the fundamental aspects of a LCC’s business model is its choice of airports and routes. Let’s first have a look at howRyanair tries to minimise costs on such level:Short-haul: eliminating the “frill” services otherwise expected by customers on long-haul flights. Point-to-point : avoid the costs that are related to long-haul flights: service for connecting passengers (baggage transfer and transit passenger assistance costs)Monopoly:demand on these routes (never flown to) is consequently generated by offering low fares.Advantages of this strategy:Fewer problems with congestion (reduce turnaround time and reach high punctuality)Landing and take-off charges are cheaper. Bargaining power over these smaller airports, allowing them to negotiate better conditions.
In order to control aircraft-related costs, Ryanairpurchasesaircraft of a single type. Ryanair has always ordered aircraft in bulk, which allows them to obtain very interesting negotiated prices. The streamlined, ‘young’ fleet results in a lower per seat cost compared to older aircraft. In line with the strategic focus on operational excellence, all aircraft were designed with a view on reducing costs (no window shades, no reclining seats). In terms of Aircraft usageRyanair concentrates its efforts on reducing turnaround time and fuel consumption. The company tries to optimise costs related to aircraft by:Having cabin cleaning performed by cabin crew;Ryanair envisions a model without checked-in bags; Michael O’Leary is less concerned with maintaining a good relationship between employees and management as compared to cost-containment efforts. Top management at Ryanair puts enormous efforts into keeping unions out of the company. Both cabin crew and pilots are also expected to pay for their formation and for the rental of uniforms. Ryanair’s business model thus managed to turn one of the major cost centers into a competitive advantage.
Ryanair is a strong believer of outsourcing. The company has entered into agreements with third party contractors at certain airports for passenger and aircraft handling, ticketing and other services that management believes can be more cost efficiently provided by third parties. The development of its own internet booking facility has allowed Ryanair to eliminate travel agent commissions. Today, nearly 100% of bookings are made via ryanair.com. The website follows the ‘no frills’ motto and was developed by two students.
Fromthis graph, itcanbeeasilyseenthatRyanair’s ex fuel costssuch as Staff, Airporthandling, route charges, and Sales & Marketing expenses, are indeedkept to a minimum as compared to otherairlines. The costs of otherEuropeanairlines are at least 86% higherthan the ones of Ryanair.
As a result,Ryanair manages to keep the averagefareslow. This graph depictsthat, as a matter of example, Ryanair’sfares are about 70% cheaper as compared to easyJet.
Ryanair managed to install a focussed and disciplined value architecture to dliver on its value proposition. Albeit important to create this value, it is equally important to generate the necessary revenues to sustain the business model and overall strategy.Here Ryanair also challenged the existing paradigms, by putting ancillary revenues at the core of its business.
As discussedbeforeRyanairoffers point-to-point One-Way routes with no frills, enablingit to keepits basic ticket structure as simple as possible. Booking in advance = lowestfare; closer to departure = more expensive.This system ensureslowfare for customers but comesat a price for Ryanair. To make up for the loss in revenue the company has to generate the maximum expenses from its customers. It manages to do this using compulsory fees and charges (eg wheelchair levy of EUR0,5), ticket-related fees and additional charges (eg priority boarding option) and generating additional ancillary revenues:Car hireIn-flight products (eg toilets)Internet income (eg partnership with Adara to generate more income from the gathered data on the website)Everything is not only optional, but also punishable (eg boarding ticket not printed)
Subsidies isanother major source of revenues, AND another point whereRyanairradicallychanged the way the airline business works:For most airlines airports are a cost in terms of landing fees, handling costs, etc. We described above how Ryanair managed to reduce these costs by flying on secondary airports. Besides the realised cost reduction, this strategy allowed Ryanair to use its bargaining power with these secondary airports as an extra source of revenues in the form of subsidies. Subsidies are key to understanding Ryanair‟s business model. The LLC “managed to turn the traditional model where airports provide services and charge airlines for them into a model where airports build a business plan to attract LCCs and offer conditions to retain them”
Culture of operation excellence, or in otherwordscheapnessCommunication is in line with value propositionIt’s not about customer service, itis about cheapness/provocation/buzzCEOAdvertising and provocative communicationNo suchthing for badpress… if you are Ryanair
Offering the lowest possible fares is clearly the ultimate goal ofRyanair. This is sth they achieve thanks to their excellent cost-containment strategy and their capability of generating revenue through various sources. Some elements can be both considered a strength and weakness; if we look at ‘brand perception’ for instance. On the one hand, it can be seen as a weakness, on the other hand as a strength because this is how Ryanair WANTS to be perceived.Ryanair aims to be perceived cheap and low-cost in all possible aspects, meaning their message of being the cheapest is being reflected into its corporate culture,values and communication; fighting all costs from fare to website. Based on the financial results, we can conclude that Ryanair is successful at what it does. Unlike other low-cost carriers that tend to evolve towards a rather hybrid business model, we can conclude that Ryanair can still be considered a LCC pur sang. Are thereany questions?
Ryanair Low-Cost Strategy Business Model
Strategy module | Kevin Constant | Lesley WiemeRyanair – Business Model
Hyper-competitive environmentTrends:• Consolidation among Legacy Carriers• Low-Cost subsidiaries of FSCs (e.g. Germanwings, Iberia Express)• LCCs evolving to more hybrid formsCompetitive environment
Ryanair‟s business modelValue Proposition What value do we create for whom?Value Architecture How do we do it?Revenue Model How do we earn money?Culture & Values What values do we pursue and communicate?
Value propositionLowest fares = CORE of business modelTarget customers?• Those who compromise on comfort• all fare-conscious customersHow?• Maintain focus on cost-containment• Maximise ancillary revenue
Value architectureAirport-related• Short-haul• Point-to-point• Monopoly on most of its routes• Secondary airports: Less congestion Lower charges Bargaining power
Value architectureAircraft-related costsAircraft acquisition costs• Aircraft of a single type (Boeing 737-800)• Buy in bulk• Young fleet: lower per seat costAircraft usagePersonnel-related costsCost savings are more important than relationship between management andemployees.
Value architectureCustomer service costs• Agreements with third party contractors• Internet booking facility
Value architectureFigure: Lowest ex fuel costs at Ryanair (figures from Ryanair, FY2013)
Value architectureFigure: Ryanair’s average fare vs other airlines (Figures from Ryanair, FY2013)
Revenue modelCompulsory fees and chargesVariable amount fare based on barebone ticket structureTicket-related fees and additional chargesAncillary revenues“We think [passengers who forget their boarding pass] should pay 60 euros for being so stupid.”
Airport AirlineDeliver servicePay charges and feesAirport RyanairProvide subsidies and supportGrants its presenceRevenue model
SWOT analysis• Brand name (20 years in LCC business)• Lowest fares• Small headquarters: low on overheads• Benefits from low airport charges• Low distribution cost• O‟Leary charisma providing strong leadershipand cheap marketing• Financial situation• Dependency on subsidies• Poor service, prone to bad press• Low frequencies and mid-day departure times(problem for business travellers)• Market growth• Continuing European economic crisis• Growing demand for LCCs• Growing market with EU enlargement• Untapped potential in Europe• Absence of LCC on long-haul flights• Market consolidation (LHG, AF-KLM, IAG)• Increase of airport and navigation charges• Fuel price volatility• EU regulations (e.g. on denied boardingcompensation and „hidden fees‟)• EC investigations into airport subsidiesThreats
Strategy module | Kevin Constant | Lesley Wieme?