Business Strategy on Ryan Air - Case Study Example

Introduction - Company Overview Ryan air is Europe's leading budget airline started in year 1985 with only 57 staff members and with one 15 seater turboprop plane from the south of east of Ireland to London-Gatwick which carried 5000 passengers on one route (Harrison, 2002). In 1986, inspired from the story of David and Goliath the company go after the big guys for a slice of the action and end up smashing the Aer Lingus or British Airways high fare cartel on the Dublin-London route. The staff increased from mere 57 to 120 staff members and the plane carried for about 82,000 passengers on two routes. In 1989, the company employed 350 staff and their average maximum passengers increased to 600,000. In 1990-1991, the company has 700,000 passengers (ivythesis). Ryan air is one of Europe's largest low-cost carriers and one of the most successful, operating on 262 routes to 22 countries. Its focus is on providing low cost, efficient, frequent connections and consequently offering no other frills or supporting services on their flights. The changes in the nature of the barriers to entry in the mid - 1980s with the deregulation of the airline industry , as well as the adoption of a strategy which was noticeably different from that pursued by the market leader at the time (Aer Lingus) was a credible means for Ryan air to gain entry into the market. O'Leary, the company's Chief Executive Office, adopted the Southwest Airlines model, established by Herb Kelleher which adhered to the following principles: fly one type of plane to keep down engineering costs every year; turn around aircraft as quickly as possible; and concentrate on selling seats by avoiding loyalty schemes or air miles. The airline took several other steps to restructure its business model. It eliminated business class to concentrate on economy class and leisure customers. It stopped serving free meals and beverages on flights - a move which allowed the airline to reduce the number of attendants on each flight from five to two. It also eliminated seat assignments to speed up boarding and stopped carrying cargo, which reduced aircraft turnaround times from 45 minutes to 25 minutes. There has been a revolutionary increase in the number of low-cost airline which are otherwise called the budget airlines in the aviation industry over the last few years. The budget airlines are usually operators who provide low-cost travel options for the passengers. The budget airlines try and cut the indirect costs to the maximum possible extent. Passengers are not offered wet towels, meals etc. Sometimes it may even happen that they do not even offer water to the passengers flying the budget airlines [(Phillip), 2002]. Internal analysis Revenue Generation is one of the most important aspects that Budget airlines give more importance, to the extent that most of the budget airlines have a position that is unique to this particular industry - "Chief Revenue Officer" (AIR DECCAN) whose sole responsibility is to focus on revenue generation from all possible sources. Unlike the scheduled airlines, they sell the maximum possible space they can. They sell space on the aircrafts in order to give advertisements. They even sell the space on the rear side of the boarding passes (Palanikumar). However, despite of the increase of passengers, the company is not so good in managing cost that the company has lose its money. A new management team is brought in to sort it out and re-launch as a "low fares or no frills" airline, closely modelling the Southwest Airlines model in the U.S. And in 1994, Ryan air bought its first Boeing 737 aircraft which carried over 1.5 million passengers. In 1995, Ryan air is the biggest passenger carrier on Dublin-London route, the largest Irish airline on every route being operate and carried 2.25 million passengers in the year (ivythesis). The main areas which have been the focus of the airline's concentration on costs have been: - Fleet commonality (operates only one type of aircraft, Boeing 737- 200s) - Contracting out of services (e.g. ground and maintenance services) - Airport and handling charges (flights are scheduled into regional airports which offered lower landing and handling charges than international airports) - Marketing costs Although the business model has turned Ryan air into one of the most profitable airlines in the world, it has come under increasing pressure, particularly after the terror alert in August 2006 caused delays that threatened its tight turnaround time (AESICA). The CEO of the company has adopted a hands-on style of management with a flat management hierarchy. The airline claims to have adopted a management style that encourages employees to regard the company as acting in their best interests (Irish Times). As the European airline industry consolidates, Ryan air is looking for potential acquisitions. Earlier in 2006 when Aer Lingus was floated on the Stock Exchange, Ryan air, which acquired 25% of the firm, attempted to take over the airline. However, the proposed take over was fiercely opposed by the company's board and management, as well as the Irish government, which has a 28% stake in Aer Lingus (AESICA). In 2000, they announced the launch of 10 new European routes for the summer 2000 after much deliberation and watching others burning money. The company has also jump onto the internet with the launch of their new online booking site and in just 3 months the site is taking over 50,000 bookings a week. By 2001 there are more than 1500 employees working for Ryan air and more than 10 million passengers are carried to 56 cities in 13 European countries. The company has opened Frankfurt-Hahn in 2002 as their second continental European base and announce a long term partnership with Boeing which will see the company acquiring up to 150 new Boeing 737-800 series aircraft over an eight year period from 2002-2010. The booking in their web accounts have increased to 94% which has probably has something to do with opening another 26 routes. In year 2003, the company is characterised by rapid expansion and the start the year by announcing that the company has ordered an additional 100 new Boeing 737-800 series aircraft to facilitate the rapid European growth plans. They acquired Buss from KL M in April and re-launched 13 buss routes in May. In February they opened their first base in Italy at Milan-Bergamo and launched their Stockholm Skavsta base in Sweden with six new European routes. In all 60 new routes are added throughout 2003 to bring the company a total of 127 routes. By 2004, the company is named as the most popular airline on the web by Google and they launched their 10th and 11th bases in Rome Ciampino and Barcelona Gerona and continue to add more routes to their already extensive network. The company has also passed out British Airways to become the UK's favourite airline in United Kingdom and throughout Europe. Internal Analysis of the Critical Success Factors of Ryan Air Although the company had encountered different problems, specifically in line with its cost structures, the company had been able to survive and grow in the marketplace. Ryan air implement different marketing strategy to make the company survive in the competition and to be able to gain competitive position in the airline market. It is said that the company was regarded recently as the most punctual airline between Dublin and London. And because of the strategy of the industry, Ryan air is now recognised as the second largest airline in United Kingdom and Europe's largest low-fares airline having a network of over 57 routes in 11 countries and served by a fleet of 31 Boeing 737-200 and -800 aircraft with over 1,400 staffs and personnel (ivythesis). In order to position itself in the marketplace the company continuously concentrates on driving own its costs to offer the lowest fares possible and remain profitable. In addition, Ryan air offer minimum standards of service and very low prices for point-to-point, short haul flights. The goal of Ryan air is to meet the needs of travelling at the lowest price. The following are the Critical Success Factors (CSFs) in airline industry: the strategic focus of having the lowest prices; Being reliable within the marketplace, comfort and service and frequency. Generation of Strategic Options The main focus of any budget airways will be on reducing costs to the maximum extent they can. This is not the case with the scheduled airways. The budget airlines go to the ridiculous extent that they even cut costs on the kind of paper that they use. If scheduled airlines use a 120 gsm (grams per square meter) paper, the budget airlines would not mind using an 80 or even a 70 gsm paper for the same purpose which would mean direct reduction in stationery. Another aspect where cost reduction happens with respect to the budget airlines is that they try and keep their aircrafts in the air for as long as possible to increase flying revenues and cuts costs in areas like usage of aerobridges - aerobridges are expensive. Ryan Air also had its own cost reduction strategies some of which are discussed in this paper. To achieve its goal of having a competitive position in the airline market, Ryan air uses a cost reduction strategy. Such cost reduction strategy relies on five main aspects like fleet commonality, contracting out services, airport charges and route policies, managed staff costs and productivity and managed marketing costs. In terms of fleet commonality, the company used only one kind of plane which limits the cost for staff training, maintenance services and facility of obtaining spares, facility in scheduling aircraft and crew assignment. With their purchase of aircraft Boeing 737, Ryan air has been able to gain capacity and reduces the average age of fleet which means savings on maintenance costs and avoiding the fit of European Union-conform equipment on old feet. The next factor under the cost reduction strategy of Ryan air is contracting out services. In this manner, aircraft handling, ticketing, handling and other functions are contracted out by Ryan air to third parties. In addition, in order to limit their expenses engine and heavy maintenance are also contracted out whereas the staff of Ryan air carries out routine maintenance (ivythesis). Another factor for the cost reduction strategy of the company is in terms of airport charges and route policies. Herein, Ryan air has made judicious choice of dealing with secondary and regional airports, where the traffic is not jammed and fees incomparably lower. Since Ryan air, is a true windfall for such airports, the airline company has a bargaining power which enables it getting favourable access fees. In addition, Ryan air provides only a point-to-point service, thus, it has no cost concerning connecting passengers. Moreover, the company pays special focus to on-time departures because it means maximizing aircraft utilization. Managing staff costs and productivity is another factor used for reducing the cost for Ryan air. In this manner, the company pays its staff on modest salary but has set up a performance related pay structure which urges employees to maximize the number of sectors flown daily. This way, Ryan air both controls productivity and keeps staff costs down. Lastly, managing marketing costs is another factor that makes the company reduces it costs. Ryan air advertises mainly on it website with its logo "Ryanair.com, the Low-Fare Airline". In addition, it is also advertised in national and regional Irish and UK newspaper, on radio and on television. External analysis The effective formulation of a strategy needs a clear understanding of competition. Competition in an industry is determined not only by existing competitors but also by other market forces such as customers, suppliers, potential entrants, and the existence of substitute products. Understanding the level of competition is important because the level of profits depends to a large extent upon the level of competition. Understanding the sources of competition can help the firm to gauge its own strengths and weaknesses, and to perceive the trends in the industry so that it can position itself optimally for the best returns. Michael E. Porter of the Harvard Business School has developed a framework known as the 'Five forces Model' to help analyze the business environment. There are five different generic strategies that a business can choose. These include cost leadership, differentiation, focused cost leadership and integrated cost leadership/differentiation. Each generic strategy helps the company to establish and exploit a competitive advantage within a particular competitive scope. By applying these strengths, three generic strategies are resulted: cost leadership, differentiation and focus (Gerry Jhonson). The strategies used by the company include cost leadership, differentiation strategy and focused differentiation. Evaluation of Strategic Options Differentiation strategy is based upon persuading customers that a product is superior to that offered by competitors. The value added by the uniqueness of the product or services may allow the company to charge a premium price for it. However, the danger associated with differentiation may include imitation by competitors and changes in customer tastes. Focus-differentiation strategy is aimed at a segment of the market for a product rather than at the whole market or many markets. The successful way using focus strategy is to tailor a broad of product or service development strengths to a relatively narrow market segment that they know very well. The risk may include imitation and changes in the target segments. In the case of Ryan air, these three generic strategies had been utilised. First, the company offers the lowest cost of fare than its competitors in the airline. On the other hand, Ryan air has also become a focuser because it concentrated on a narrow customer segment which include Irish and UK business people or travellers who could not afro to fly major airlines. Ryan air has restyled itself and shifted from a full service conventional airline to the first European low fares, no frills carrier. In 1985, it provided scheduled passenger airline services between Ireland and the UK. By the end of 1990 and despite a growth in passenger volume, the company had experienced some trouble and had to dispose of five chief executives, recording losses of IR20 million. Ryan air had to fight to survive and the new management team, headed by Michael O'Leary, decides to restyle the company on the model of successful American Southwest Airlines. Expansion strategy is another factor that enables Ryan air to position itself in the marketplace. The company has been known to be an airline which launches new routes since its operation begins. In addition, under the expansion strategy, company acquires Buzz in February 26, 2003. Such acquisition enables Ryan air to gain immediate access to11 new French regional airports and makes the company the largest airline operating at London Stansted Airport. In addition, the company continues to expand by opening two new Continental European bases with low-fare flights from Milan Bergamo and Stockholm. In the year, 2003, the company has been able to launch 73 new routes and carry over 2 million passengers in one month (July). In addition, the company website has been able to make the company position itself in the global market (ivythesis). Action Plan for Implementation The case study has provided the problems and issues encountered by the Ryan air, in spite of its strategies. One of the problems is in terms of handling customers or target market. In addition, another problem is assuring quality service. In this manner, the strategic option that can be used by the company for satisfying both internal and external customers and marketing environment is the use of total quality management. The industrial competitions in airline industry worldwide are at brisk, making companies in this field across the globe search for extensive strategic management procedures that would keep them in on the business world. The tasks of crafting, implementing, and executing company strategies are the heart and soul of managing business enterprise. A company's strategy serves as the game plan management and is use to stake out a market position, conduct its operations, attract and please customers, compete successfully, and achieve organizational objectives. Thus, TQM as a strategy is certainly appropriate for such situation. Bibliography 1. (ICMR), ICFAI Center For Management Research. Business Strategy. Hyderabad: ICMR, 2003. 2. 12MANAGE. 12MANAGE MAnagement Communities. 5 December 2007 . 3. AESICA. 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