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Strategic Analysis of Ryan Air

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Analysis of Ryan Air in light of strategic management analysis.

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Strategic Analysis of Ryan Air

  1. 1. Table of Contents ABOUT THE COMPANY: 2 EXTERNAL ENVIRONMENT ANALYSIS: 4 MACRO ENVIRONMENTAL ANALYSIS: 4 INDUSTRY ANALYSIS: 4 PESTEL ANALYSIS OF RYAN AIR: 5 RYANAIR - PORTER’S FIVE FORCES ANALYSIS: 7 STRATEGIC EVALUATION OF MICHAEL O’LEARY’S LEADERSHIP: 10 CURRENT COMPETITIVE STRATEGIES OF RYANAIR: 11 INNOVATIVE COST CUTTING METHOD: 13 ALTERNATIVE REVENUE GENERATION METHOD: 13 CRITICAL ISSUES 14 RECOMMENDATION: 15 CONCLUSION: 16
  2. 2. PAGE 2 About the company: RyanAir is Europe’s favorite airline. Operating in more than 1,600 daily flights from 72 bases, connecting 192 destinations in 31 countries and operating a fleet of more than 300 new Boeing 737-800 aircraft. They are Europe’s only ultra-low cost carrier, and that means they bring you the lowest fares on flights to all of our destinations. RyanAir made air travel accessible to the masses, and they opened Europe up for tourism in a way it had never been opened before. 1985 RyanAir is set up by the Ryan family with a share capital of just £1, and a staff of 25. 1986 RyanAir obtains permission from the regulatory authorities to challenge the British Airways and Aer Lingus' high fare duopoly on the Dublin-London route. Services are launched with two (46-seater) turbo prop BAE748 aircraft. The first flights operate in May from Dublin to London Luton. The launch fare of £99 return is less than half the price of the BA/Aer Lingus lowest return fare of £209. Both British Airways and Aer Lingus slash their high prices in response to RyanAir's. RyanAir starts the first fare war in Europe. 1987 RyanAir acquires its first jet aircraft by leasing three BAC1-11 aircraft from the Romanian state airline, Tarom. The aircraft arrive on a full wet lease with Tarom providing all the pilots and engineers to enable RyanAir to operate the aircraft. 1990 After three years of rapid growth in aircraft, routes and intense price competition with Aer Lingus and British Airways, RyanAir accumulates £20m in losses and goes through a substantial restructuring. The Ryan family invest a further £20m. in the company, and copying the Southwest Airlines low fares model the airline is re-launched under new management as Europe's first low fares airline.
  3. 3. PAGE 3 1995 RyanAir overtakes Aer Lingus and British Airways to become the largest passenger airline on the Dublin-London route (the biggest international scheduled route in Europe). RyanAir also becomes the largest Irish airline on every route they operate to/from Dublin. 2000 In January, RyanAir launches Europe's largest booking website - www.RyanAir.com. Within three months the site is taking over 50,000 bookings a week, and becomes the only source of the lowest airfares in Europe. In addition, RyanAir.com allows passengers to avail of the lowest cost car hire, hotel accommodation, travel insurance and rail services. 2004 RyanAir is named the most popular airline on the web for 2003 by Google, as www.RyanAir.com continues to be the most searched travel website in Europe. Company Vision- “To firmly establish itself as Europe’s low fare, schedule passenger airline through continued improvements and expanded offerings of its low fare service”. Company Mission- “To become Europe’s most profitable low cost airline by rolling-out proven low fare, no- frills service in all markets in which we operate to the benefit of passengers, people and stake-holders”.
  4. 4. PAGE 4 External environment analysis: External Environment analysis in conducted to analyze the nature of the environment the firm operates in. It identifies the forces in the environment affecting the firm and its degree of impact. It also identifies the opportunities, threats and challenges faced by the company. The external environment analysis for RyanAir consists of a macro- environment analysis, industry analysis and external factor analysis. The macro environment scans and identifies the general environment factors that can have an impact on the organization whereas the industry analysis focuses on the competitive situation of the company. Macro Environmental Analysis: The macro-environment is composed of major external and uncontrollable factors that influence an organization's decision making, and affect its performance and strategies. These factors include the Political, Economical, Social, Technological, Environmental and Legal forces (PESTEL). These forces do not change frequently, but when it does, it has a major impact on the organization. The PESTEL analysis looks at the general environment in which the organization is operating in and helps to realize the risk associated with the market growth or decline. Industry Analysis: The second stage of the external environmental analysis is to assess the industry environment and the aim of this analysis is to identify those factors that could contribute to or affect the industry profitability. To aid in the industry analysis, Porter’s Five Forces Model will be used. Porter developed a technique analyzing five forces that affect industry profitability known as “Five Forces Model”. These forces shape the industry and increase the intensity of competitiveness, and therefore, the profitability and attractiveness of the industry. This
  5. 5. PAGE 5 model helps to identify the dynamic factors of the industry and the market to compete effectively. PESTEL Analysis of Ryan Air: RyanAir PESTEL analyses are those external factors that could hinder their operation which would be analyzed based on the case study. Political: As a big political factor European Union expansion affect the direction and strategy planning of RyanAir. The enlargement is positive as it increases the flow of migration, thus increasing the company passengers. Also, the tighten security may have increased their security system. This could increase costs because it has to be regularly monitored and maintained. Economical: For Economic factors, there is unstable fuel price that could affect the company operating costs. It can be said that, the biggest costs for any airline is fuel. The rise in fuel prices means that operation costs would increase therefore pushing prices to increase and relatively affecting the company growth and profitability. This situation was badly affected to the Ryan air while they are run for least price. Also the depreciation of US Dollar, availability of efficient substitute transport methods and also reduction in distribution costs from customers adapting to online check-ins where identified as the factors that has high influence regarding the economical influence. Social: Social factors link with political and economic in terms of stable development that would allow a more sociable lifestyle. The enlargement of EU for instance has increase the number of people moving from region-region to work, for graduation trips, backpackers, or leisure. The enlargement (EU expansion) has affected RyanAir by providing the bases to attract a wide demographic of prospect. The effect of this capacity on RyanAir is that, it could increase their operating market, segmentation and productivity. Also, the company low-fares strategy means they can fly frequently because there is demand.
  6. 6. PAGE 6 Technological: Technology expansion has enabled the company change their market focus from third-party agents to on-line bookings. This has increased the competition level between airlines, consequently driving RyanAir to further reduce costs in order to remain competitive in the aviation industry. RyanAir admitted that in order to keep costs down all aircraft are made by Beoing. Availability of satellite Television and Internet services on flights for a fee increased their revenue in order to enhancing the revenue through ancillary services. Environmental: Environmental factors for RyanAir include noise level controls, global warming, green house gas effects and corporate social responsibility policies and environmental protection laws. There is evidence of the company implementing certain policies to reduce pollution. Despite their environmentally friendly strategy, the company has been diminished by bad publicity. Thus RyanAir should adhere to good business practice for sustainability and high performance. Legal: Legal factors can affect the company's image and reputation. In August 2003, RyanAir ceased operations at Strasbourg after losing a court case brought by Air France. Also the EU had devised new rules to cover overbooking that result in boarding denials to passengers by airlines. Before to the EU decision at the Central London Country Court, a disable man won a landmark case against RyanAir after it charged him €18 for a wheelchair he needed at Standsted to get from the check-in desk to the aircraft. The passenger awarded €1,336 in compensation from RyanAir.
  7. 7. PAGE 7 RyanAir - Porter’s Five Forces Analysis: Porter’s Five Forces analytical tool assists in analyzing competitive environment for RyanAir. Figure 1: Porter's five forces model Bargaining power of suppliers: Boeing has been traditionally RyanAir’s main supplier, as well as increased level of efficiency associated with energy consumption. This fact signals about RyanAir’s increasing bargaining power towards its main supplier, Boeing. Barriers to Entry Supplier Existing Customer Bargaining Power Competitive Bargaining Power Rivalry Substitute
  8. 8. PAGE 8 However, the supplier switching costs for RyanAir is extremely high due significant amount of expenses involved associated with pilot retraining needs. Because there is no abundant supply of highly qualified and experienced pilots. Nevertheless, RyanAir enjoys rapidly increasing power towards a different category of its suppliers. Bargaining power of customers: RyanAir customers enjoy high bargaining power because switching to another airline is simple and not associated with additional expenses. Increased level of price sensitivity of RyanAir customers is another factor that contributes to their bargaining power. Competitive Rivalry: The competitive rivalry in RyanAir is increasing due to deregulation, more competitors on more routes creating overcapacity and growing power of buyers. Potential trend among some competitors to add some „frills’ and flexibility, e.g. Virgin Express adds comfort, Easy Jet adds flexibility. Threat of substitute products and services: A substitute is a product or service of another industry, which creates an equivalent value for the customer. The threat of substitute products or services is a major factor upon the level of profitability of an industry. Substitute services for airline industry in general and RyanAir in particular include railway networks, sea transports, coach transport, as well as, car rental firms. The threat of main substitute, trains are occasionally addressed by RyanAir in a proactive manner through providing price comparison prices of RyanAir services with train services on the company website and other sources. Nevertheless, it is fair to state that the threat of substitute products and services for RyanAir is insignificant compared to many other industries in the marketplace.
  9. 9. PAGE 9 Threat of new entrants: The threat of new entrants is low for RyanAir due to the significant entry barriers associated with entering airline sector that include economies of scale, capital requirements, access to distribution channels etc. Moreover, significant capital requirements associated with entering airline industry include, but not limited to obtaining physical facilities, dealing with inventories, engaging in marketing activities and attracting qualified workforce represent another significant barrier. Difficulties associated with gaining access to distribution channels is another considerable barrier faced by new entrants in airline industry. Local and international airports may not be able to create additional slots in their platforms in order to serve new entrants into the market.
  10. 10. PAGE 10 Strategic Evaluation of Michael O’Leary’s leadership: The Michael O’Leary became the CEO of Ryan air in 1993. A new management team was appointed by the Tony Ryan. After this appointment the company entered the path of success. His language is the litany of the anti-hero, the self-styled champion of no frills service with low cost fares. His entrepreneurial model is, by his own proud admission, an unashamed copy (of Southwest Airlines) and delivered with a culture of iconoclasm to beat the traditional airline model. By any measure, he has succeeded and delivered wealth to his shareholders beyond their wildest dreams. His leadership model is a clever one. As a leader, Michael O’Leary is a risk taker, a hands-on day-to-day decision maker. He is both an asset and liability to RyanAir. He had pros and cons in his leadership of the company. The characteristics that have driven the company forward – his enthusiasm and energy, his strategic insight, his determination and mission orientation – can be carried too far. The capacity to irritate may bring about conflict and change. Michael O’Leary’s had delivered but now the question arises if the company now require more of a manager’ than a leader’ during a consolidation era. Leadership style in the Michael O’Leary o Autocratic style of leadership, o Determining strategic direction. o Effectively managing the firm’s resource portfolio. o Exploiting and maintaining core competences. o Developing human and social capital. o Sustaining effective organizational culture
  11. 11. PAGE 11 The leadership style O’Leary has instituted at RyanAir finds expression in a sort of transition: a movement from autocratic leadership to democratic one. Thus, O’Leary’s leadership structure as at when he joined RyanAir in 1988 as Tony Ryan’s personal enforcer to 1994 when he became the CEO of the airline and now has undergone variation to suit different situations. Debates could arise as whether O’Leary’s style would work in different circumstance(s), but there is no doubt that he is a perfect situation match for the RyanAir revolution. The remit of this study limits more investigation in this direction. Current Competitive Strategies of RyanAir: RyanAir is now the biggest airline company in Europe. They are expanding to new markets quickly and aggressively. They have a visionary and farsighted CEO Michael O’Leary. This Irish CEO has changed the company in a whole new dimension. He followed the Southwest Airline to restructure his company. He implemented new strategies to compete in the industry. It was a success. RyanAir has managed to remove the top airlines like British Airways, Aer Lingus etc. from their position. This was possible because RyanAir followed some strategies to gain the competitive edge these are: I. Low Fares: They offer plane fare half than that of their competitors. They incurred huge losses for the initial years but they were able to drive out the competitors. For fare they have huge demands in the market. Their seats get booked a month before the flight. II. Expansion: RyanAir is following an aggressive expansion strategy to move against the competitors. They are now the Europe’s fastest growing airline company. They are starting services in many air bases around the continent. III. Targeting discount market: RyanAir is not competing head on with the competitors. They are targeting the discount market which are neglected by the big airlines. They provide low fare. About 48% of their passengers are budget
  12. 12. PAGE 12 conscious travelers. They emphasizes the low fare more than anything. These budget conscious travelers move in and out of the country more frequently because of low fare. So, multiple revenue can be derived from each customers. IV. One Class Flight: There is no business class in RyanAir. They provide a single class and fare for the customers. This has a good effect on the customers. They don’t feel discriminated and that’s why the company’s sales and passengers are growing each year. V. Low CASM: CASM it is the cost per available seat mile. The CASM of RyanAir is very low, about 33%. The competitors on the other hand are about 63-73%. Low CASM has allowed to attain the break-even of each flight quite easily. Calculation shows that Ryan air can attain break-even of each flight with only half full flight. VI. Targeting Secondary Airport: RyanAir has reduced their cost tremendously by targeting the secondary air bases. This has allowed them to get the airports at any terms they offer. RyanAir has acquired the secondary airports for a low cost about $ 1.50 per passengers. Whereas the international hub costs about $ 15 to $ 22 per passengers. This is a major cut off of cost. They are currently using some of the ex NATO air bases and some old airports. VII. Removing cost layer: RyanAir is following a certain strategy to reduce their cost continuously. They want to remove a cost layer each year. The most notable is launching a website in 2000 to replace their travel agent service. They now follow the website. Passengers can book seats from websites very easily. Their website is so popular that it is considered the most crowded one by google.com. They have also started a no frill service. They will provide only the necessary services. For example no free drinks, no seat back pockets, no ice etc. The no ice strategy has allowed them to save $50,000 each year.
  13. 13. PAGE 13 Ryan air Core competencies are:  Innovative cost cutting  Alternative revenue generation Innovative cost cutting method: The main point of RyanAir's strategy involves reduce cost at wherever possible and pass the savings to the customer with low ticket prices. All the activities in its process are designed to increase efficiency and reduce costs. RyanAir is continuously come up with very Innovative Cost reduction method as a example Ryan Air doesn't have to have personnel in by offering a very few services at the airport, like limited airport check-in facilities or removal of baggage transfer, these areas. Lower customer service cost and riddance of ticket agent fees by high fixation of internet to sell tickets. By having a uniform fleet, it has helped to lower its maintenance costs and time. They also don’t provide meals to passengers facing delay. They do not provide wheelchair services to disable passengers. This reduces cost in maintaining only fewer inventories of aircraft maintenance parts and training of maintenance engineers. RyanAir flies offers only point- to-point route and flies to less expensive secondary airports which charges lower airport fees. Since these airports are not very populous, RyanAir can attain fewer delays and higher turnaround times. Alternative revenue generation method: RyanAir's ultimate goal is to offer free flights by generating revenue through other means. It always creative in finding new sources of revenue onboard their flights. Some examples of this are inflight advertisements, on-board shopping and gambling, pay- preview television. All the flight attendants get commission on the items they sell onboard. Food and beverages, airport check in, baggage checking and any other additional passenger service is charged higher than normal charge. RyanAir will not provide refreshments or meals to passengers facing delays. Anyone who wish to avail themselves of such services will be asked to pay for them directly to service provider.
  14. 14. PAGE 14 Critical Issues i) Customer service satisfaction: o RyanAir has eliminated traditional in-flight services such as seat allocation, complementary meals and drink and newspapers. o RyanAir earn profit from such secondary services by charging customers for in-flight services and other travel expenses such as travel insurance, car hire, Internet. o RyanAir is extremely sensitive in changing the fair value. o RyanAir is raising its checked luggage fee from 15 to 20 per bag. Although the RyanAir has remarkable track record for punctuality, flight completion the perception of the softer side of its customer service has not always been good. ii) Risks & Challenges: o Extra capacity building would create uncertainty about the success of new routes and locations iii) Fuel Prices: o Vulnerable to rising fuel prices iv) Industrial Relations: o Unions were not recognized v) Unwillingness and failure to recognize unions:
  15. 15. PAGE 15 Recommendation: According to the study the RyanAir’s only strategy is to reduce the cost. Excellent leadership under Michael O’Riley had led them to success so far but as the companies is growing they need to rethink and redesign their strategy. Below list mention our suggestion regarding the company development: o Increase the customer service o Increase the customer loyalty o Recognize workers union and form strategic relationship o Should invest on the Information Technology o Need to update competative strategy, because competitors adapt and will copy their core competencies, so they can’t be content with their success. o Should do careful analysis before entering new market because every market is different a single strategy will not work everywhere. o Rethink their advertising strategies. o Consolidate their business in their home country Ireland.
  16. 16. PAGE 16 Conclusion: Under the Leadership of Michael O’Leary RyanAir have succeeded and have managed to do that far beyond expectations. Aggressive pricing and expansion had been RyanAir’s main strategy since inception and few company have gone to such lengths to achieve their goals. But the thing is they are not a small growing company any more, they are Europe’s leading brand in low cost airline service. Now they have more to lose and their every steps is under careful observation by both competitors and shareholders. They need to be more careful how the public perceives them as a brand. Cheesy, hurtful advertising campaign to get easy publicity, bad relationships with workers union will only do harm in the long haul. And further new strategy needs to be evaluated and the current strategy should be given an overhaul because market changes and competitors adapt. Ryan’s core competencies will be copied, so they can’t be content with their success.

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