The Strengths and Weaknesses of Ryanair - Case Study Example

Leadership and Management Module Ryanair Case Study Analysis By Laura ------------ Table of Contents Introduction 3 Background and History 3 Vision 4 Mission Statement 4 Business model 5 Porter's five forces analysis 6 Strengths of Ryanair 9 Weakness of Ryanair 10 External Factors that may influence Ryanair's performance 12 Airline Industry Analysis 14 Recommendations to Ryanair 15 Appendices 18 Appendix 1 18 Appendix 2 19 Sources 19 Introduction This report analyses the strengths and weaknesses of Ryanair based on case study data. Based on the analysis and external factors that include economical, social, cultural, technological and political and industry analysis, recommendations are made on how Ryanair can maintain its strengths and improve on its areas of weaknesses in the future. Background and History Ryanair was setup in 1985 by Dr.Tony Ryan, an Irish businessperson with a share capital of just 1, and a staff of 25. Their first route was launched in July1985 with daily flights on a 15-seater Bandeirante aircraft, operating daily from Waterford in the southeast of Ireland to London Gatwick. Ryanair's first cabin crew recruits had to be less than 5ft. 2ins. tall in order that they were able to operate in the tiny cabin of the aircraft! As proclaimed on its website, Ryanair was Europe's original low fares airline and is still Europe's largest low fares carrier. In the current year, Ryanair will carry over 35million passengers on 288 low fare routes across 21 European countries. With 12 European bases and a fleet of over 100 brand new Boeing 737-800 aircraft and with firm orders for a further 125 new aircraft, delivered over the next seven years, Ryanair is ready for an awesome takeoff. These additional aircraft will allow Ryanair to double in size to over 70 million passengers per annum by 2012 recording stupendous growth. Ryanair currently employs a team of 2,700 people, comprising over 25 different nationalities. Ryanair continuous to clock record passenger growth [Appendix 1] Vision Ryanair's CEO, Michael O'Leary, has a vision of a world where the fare could drop to nothing, as local communities would subsidize the airline to bring a steady traffic of business people and tourists to their region. Rather than blending its low fares with some emotional benefits, Ryanair packs its brand with functional benefits such as punctuality and efficiency. In Ryanair's words "At Ryanair, we guarantee you the lowest fares on the Internet. However, our success is due -- not just to our low fares -- but also a winning combination of our No.1 on-time record, our friendly and efficient people and our new Boeing 737-800 series aircraft". Mission Statement A successful example of a European no frills airline is Ryanair. It was established based on the assumption that the demands for short-haul air transport are price elastic. That means, if prices for flights are reduced, it is more appealing and therefore more people will fly. Ryanair strives to sell tickets at the lowest prices possible but at the same time promotes the fact that it is an on-time high frequency flyer. Ryanair does not offer any frills. It is not in the business to offer luxury flying experience or gourmet in-flight meals or a memorable flight. Its mission is to offer flights that cater to mass transportation and simply a 'point-to-point air service' to its customers. It promises just that and offers nothing more. Business model Traditionally airlines based their assumptions on the fact that airline traffic grows in line with the economy and are catered towards the more affluent and that cutting prices will only lead to a decrease in revenues. With the introduction of the 'no-nonsense' concept to the European market, after its deregulation in 1992, Ryanair has been proved right repeatedly in its revolutionary concept. While traditional airlines used the hub-and-spoke methodology to fly, Ryanair introduced the point-to-point method of flying reducing waste enormously. Ryanair has expanded phenomenally in its size and volume of passengers and eaten into the customer base of the major airlines. The whole business model had its basis in the successful Southwest airlines based out of the US. With the advent of the 9/11 tragedy, while all other airlines struggled, Southwest alone emerged unscathed and though did not qualify for federal aid continued to survive and grow. The upstart low-cost carrier has become Europe's most profitable- by offering fares under 75 cents. In 1990, imitating Southwest Airlines, Ryanair became a "no frills" airline. Besides flying to smaller out of the way second level airports, rapid turnaround times at the airports, the usual cost-saving measures of e-tickets instead of paper tickets, no passenger meals, no pre-allocated or reserved seating etc. were the norm. Ryanair also benefited from airline industry deregulation and the booming explosion of the Internet usage. In 1997, EU airlines deregulation allowed Ryanair to go continental. By 2000, the company had started online bookings that today contribute to 94 percent of sales. Porter's five forces analysis Michael Porter's analysis of the five forces that drive competition within an industry can be applied to Ryanair to facilitate understanding of the existing scenario. Porter identifies the following five forces that ultimately determine the long run profit attraction of a market or market segment comprising of industry competitors, potential entrants, substitutes, buyers and suppliers. The threats these pose are as follows: The intensity of rivalry among existing competitors Pressure from substitute products The bargaining power of buyers The bargaining power of suppliers The threat of entry by new competitors (Porter, 1985) The intensity of rivalry among existing competitors Its main competitor is easyJet in the UK, offering similar low cost conveniences. The Greek-owned airline, which operates 106 routes compared to Ryanair's 125, offers misleading statistics. According to "Ireland On-Line," a 75 percent increase in passengers carried in July (1.9 million) owes to the company's takeover of Go, a former BA subsidiary. Taking figures for both companies together, "the rise was a more modest 9 percent." Though easyJet had higher seat occupancy than Ryanair, its cost per seat kilometre was as high as the traditional airlines as was Ryanair's operating margin, which was significantly higher than easyJet's. BMIbaby, MyTravelLite and Buzz are the other major competitors while Virgin Express, Hapag Lloyd Express, Germanwings and Air Berlin already are or might become competitors in the light of future expansion plans. A growing number of tour operators (like Thomas Cook and TUI) have jumped into the fray by selling airline seats as part of the package deals at reduced prices adding to the competitor mix. While the major airlines like British Airways and the traditional Irish carrier Aer Lingus are definitely competitors, their sheer size puts them at a disadvantage due to their immense overheads. Pressure from substitute products The substitute mediums of travel are the other modes of transport like train and car on domestic routes do compete in the travel sector. When it comes to efficient use of time, the low-cost airlines have the upper hand. These also have cost advantages coupled with lesser time that makes the threat of substitutes minimal. While longer hauls undoubtedly point to the airline carriers, the Eurostar emerges an option in that segment. The bargaining power of suppliers With Boeing, providing the majority of commercial planes for the Ryanair fleet, an increased dependency on them for newer planes and spares, reduces their edge in negotiations. The price of aviation fuel is directly dependent on the surge and fall of the oil prices and Ryanair management has no control over this parameter that will increase the fares. The bargaining power of buyers Ryanair's buyers are the consumers who purchase the ticket. Buyer power is definitely a strong contender for the performance of the company. Since Ryanair caters to the low-cost market, Ryanair's buyers are very cost conscious within the airline industry and especially the low-cost market - is relatively strong, as customers will often shop around for the better price, particularly with the dependence that the low cost airline has on Internet sales. Price discrepancies can be easily found and exploited by the consumer, meaning that the operator must keep a regular check on prices. The threat of entry by new competitors The requirement of a high investment to enter the field is a major deterrent to the new entrant. Ryanair started small but has achieved tremendous growth and now dominates due to its volume. In addition, Europe as a market is almost near saturation for the low-cost carriers. All this create a barrier of entry that is hard to overcome. With secondary airports being the focus for these carriers, and the take off and landing slots all taken to full capacity, newer entrants will find that the deficiency of take-off and landing slots more difficult to scale and find suitable airports. It also means, the ability to sustain a loss initially before achieving a turnaround due to volumes will be a requisite and that makes entry even more complex. Strengths of Ryanair The greatest strength of Ryanair is its price. It is a key element of the branding process of Ryanair. Current air travellers, who mainly shop through the Internet for tickets, are lured by the low-price advantage and Ryanair offering just that is a great advantage. It is reputed to be one of the most punctual airlines in the industry thereby not compromising on that aspect of service due to the low-cost. It sells seats through direct marketing and paperless tickets reduce costs further. It promotes sale through the Internet and this reduces agency commissions. About 95% of its sales are through the Internet. Minimum information from the customer is obtained and stored. This reduces costs on investments in equipment to store and process data and the personnel to operate it. It outsources its IT services thereby reducing its directly employed workforce. Ryanair does not employ an advertising agency, instead producing all its advertising material in-house. Choosing secondary airports in close proximity to major cities facilitates low stopover times and quick turnaround times. This also translates into more airtime for these planes thereby increasing load carrying capacities than the major airlines. The newer fleet of Ryanair also have better fuel efficiency and travel longer point-to-point distances economically. They also cost much less for landing and take off fees and this benefit is passed on to the customer translating into low fares. Ryanair operates its entire fleet with the similar planes. These are newer, require less maintenance and are much more fuel-efficient than the older ones. Seating is optimised because the newer planes, Boeing 737-800's replacing the 737-200's that were in operation, are more spacious and larger. These therefore have more seating and this in turn yields higher returns per flight. Uniformity of the fleet makes training of personnel easy and efficient. Their pilots put in more hours than in any other airlines. It enforces tight control over its staff and negates any unionized activity. The current economic downturn and recessional nature of the economy has seen people more cost-conscious and hence the time is right for the low-cost carriers. Today's travellers seem to opt for several short haul trips a year rather than one single long haul vacation, thereby increasing the potential of these low cost carriers in the future for great growth. Weakness of Ryanair The main weakness for Ryanair is its lack of customer loyalty. Switching to another low-cost carrier has no cost to the customer and Ryanair has a high risk of losing customers due to its poor customer-oriented management model. Although Ryanair is doing a great job of catering to the cost-conscious consumer, it does not have any customer retention and loyalty programs like frequent flyer miles that will urge the frequent traveller to fly Ryanair again. The management model that does not lean towards customer relationship building moves the high frequency business traveller away from the airlines that will add to the volumes. Ryanair is known for lack of flexibility where it has failed to take care of the customer mired by delayed or cancelled flight and stranded at obscure locations without local transport. It also has the reputation of "looking the other way" or brushing off complaints due to the policy, "that consumers have to put up with it since they pay less." Customers have the Civil Aviation Authority (CAA) on their side that provides protection against the consequence of travel organiser failure for people who buy package holidays, charter flights, and discounted scheduled air tickets. Ryanair's frequent run-ins with the authorities and customers do not help its image. Ryanair's advertising produced in-house is very direct to the extreme point of being offensive and has been embroiled in controversies on several occasions. With Boeing, providing the majority of commercial planes for the Ryanair fleet, an increased dependency on them for newer planes and spares, reduces their edge in negotiations. The two drivers of growth, the focus on price and the focus on convenience are reaching saturation points. Once their natural limits are reached, differentiation has to occur to keep the momentum going. Ryanair seems to have no plans yet in the pipeline. Ryanair flights are concentrated in Europe and have little or scope outside the region making them vulnerable to the economic downturns. London-Dublin is its most profitable route and finding viable profitable new routes is a great challenge. Although Ryanair seems to have many routes, some of its secondary airports are located far away from the major cities and these are often not well connected by other means of transports. This causes many inconveniences for the passengers especially when the flights are scheduled at odd hours. Ryanair receives subsidies from some of the airports for opening up the routes and because of its aggressive-style management negotiations has a very poor relationship and lost opportunities. Competition is likely to intensify, given the saturated market and the shortage of other options and this increased competition is likely to lead to greater difficulties in demanding incentives from communities. External Factors that may influence Ryanair's performance Economic factors Globalisation should continue to boost traffic in the long-term confirming predictions about the growth of the travel industry. Europe being integrated under the umbrella of a single currency will definitely bring more business due to the merging efficiencies. The main supplier will be the fuel suppliers that contribute a major percentage of the cost. The price of aviation fuel is directly dependent on the surge and fall of the oil prices and Ryanair management has no control over this parameter that will increase the fares. In addition, increasing air-traffic congestion and environmental concerns may result in restrictions that may pose a challenge to the airline industry. Recessive nature of the economies may cause travellers to tighten their purse strings and slow down travel. Political factors A widening European Union will open up newer markets and more viable and profitable routes. Unification under a single currency is also beneficial for its growth and as more countries enter the European Union, it stands to gain substantially. The effect of the unprecedented occurrence of the 911 tragedy on the airline industry is well-documented information. The threat of terrorism looms high and has opened concerns and new agendas related to security. This may translate in to higher insurance costs and added security measures that may increase prices. The threat of a war in the in the Middle East may also slow down air travel. Social and cultural factors Ryanair's popularity is based on its published low fares. However, in reality, these fares are for specific flights or days. Generally when people find that the flights they want are not available at those rates they are disillusioned and feel annoyed at being misled. Not people of all nationalities and cultures are Internet savvy. There is a lot of apprehension among the community about putting their credit card numbers on the Internet due to security concerns and fraudulent activity issues. For these people, Internet booking is not a great option. Ryanair's policy will fall short of encompassing these people into the customer base. Technological factors The fleet is a major expenditure and Ryanair will definitely lose its cost advantage when manufacturing costs are on the rise. To keep its competitive advantage, it has to monitor closely the rising costs of manufacture. As technology progresses rapidly, the cost of Internet transactions and associated volumes will be a key issue for Ryanair. In addition, consolidation being the name of the game, a lot of pressure is put on upward prices and costs due to these synergies. Airline Industry Analysis The 9/11 tragedy, did cause a slump in the airline industry, but also gave valuable lessons. All the airlines slowly woke up to the inefficiencies in their models and started drastic cost cutting measures translating into better operational efficiencies and improved margins. The major overhaul in the restructuring has gone a long way in changing the face of the aviation industry. Consolidation is the name of the game and slowly the industry will consolidate into three or four major players and their improved synergies will end up contributing to a stronger airline. This focus on regional traffic will allow low-cost carriers to focus on their niche markets and improve their market share. The low-cost market is less mature in the Europe than the U.S.A, therefore there is more scope for newer routes to be opened up, and newer destinations charted out for a few years before the restructuring and consolidations occur. Taking a page out of the history of the low-cost carriers in the USA, deregulation was followed by restructuring and consolidation into seven major carriers that cart bulk of the airline traffic today. Europe is more fragmented and it is only a matter of time before it follows through. [Appendix 2] Recommendations to Ryanair Its CEO Michael O'Leary, who stepped in when Ryanair was making a loss during 1991, studied the Southwest Airlines model and made great inroads into Europe. He has kept it simple and no frill right down from his management of his company and has embraced it totally. His dream of making Ryanair a mass transportation commodity is definitely proceeding to evolve. Ryanair has come out as a strong organisation and e-commerce entity and has been applauded as much as it has been criticised. On the positive side, Ryanair is based on a sound business model that has definitely worked for it in terms of building up size and volumes. It dared to defer the traditional hub-and-spoke model of flying long adopted in the airline industry and revolutionized the industry on the point-to-point service model that has served it well. Its greatest strength has been its price point and Ryanair will definitely need to maintain its price advantage. It needs to keep a close eye and monitor the external factors that may lead to an upward pressure on the price factor like manufacturing costs, fuel costs, air traffic taxes and Internet distribution costs. It also needs to monitor its competition pricing intimately, and its synergies, in terms of routes, loads, yield per seat and efficiencies. Keeping close tabs on its major competitor, easyJet's expansion plans also will insulate Ryanair from surprises and aid in formulating its strategic planning. Knowing where the competitor's price point is will help to decide the price at which it can remain competitive. Although Ryanair has added 50 new routes, they are yet to be profitable. However, Ryanair has to keep expanding because size matters. Doing volumes will create economies of scale and amortize the loss incurred on one route with a profit on another one. It can also try to capitalize on the available still-to-be-developed smaller airports along its routes in Europe and expand into more destinations without major costs. Europe is rapidly being saturated and Ryanair must expand south- to Greece and Turkey where the tourist population is high in the summer months. Istanbul and Athens would be profitable year-round and holiday flights, from mid-April through October. However, Ryanair is bound to face a lot of resistance from package tourism players like Thomas Cook and Neckerman. While EasyJet, a Greece operator, zealously guards its home turf, and therefore will offer stiff resistance to Ryanair. Similarly, Ryanair guards its Irish base and in September 2004, EasyJet announced its first Irish route, albeit a location where Ryanair flies too. Taking the battle down south Europe is definitely a tight encounter for supremacy between Ryanair and EasyJet and this has to be played right by Ryanair to gain the upper ground. New entrants will definitely have to contend with these two well-established carriers. However, Ryanair can look at acquisitions of smaller players where it does not have a presence, if it is a viable alternative, similar to the acquisition of "Go Fly" by EasyJet. This will help in faster scaling of destinations and growth without lead-time to establish itself. Ryanair's greatest weakness is the lack of customer focus. It undisputedly needs to address this if it is going to achieve its target of being Europe's leading airline. A customer retention program is a sure-fire way to add to its volumes without additional cost. Introducing a frequent flyer program will enable the business traveller to come back for a repeated purchase thereby buying brand loyalty that is invaluable. Similarly, to appeal to a wider customer base, it can charge a premium and provide more in-flight services to those willing to pay for it. In this way, it will be able to create a wider consumer base that includes those looking for a level of service as level beyond the low-cost flight but keen to compensate for it. While Michael O'Leary enthusiastically embraced the savings concept of the Southwest Airlines, he chose to ignore their high regard for their customers. Southwest Airlines has survived due to their understanding that eventually a satisfied customer is an organisation's greatest asset. Ryanair, on the other hand, has had the reputation of showing little or no empathy to its consumers. Although, it claims that it has received "less than one complaint per thousand". It needs a lot of work on its image, and investing in a little emotional brand building may go a long way. Trying to sell it as a "good experience" or a "compassionate" airline with the attitude will take away from its aggressiveness and create a more positive reaction among the public. Internally, within the organisation too, the management is known for its aggressive and extreme style of management. It takes "cutting costs" to the extreme and even bars its employees from charging their cell phones at their company to save electricity. Unhappy staff often contributes to the erosion of customer service that does not bode well for Ryanair. In conclusion, Ryanair has to stick relentlessly to its commitment of low cost and quality service that has contributed to its current success. It has to unerringly assess the current situation, analyse niche markets and expand judiciously without hiking up operating costs. Its vision and ability to put into action extreme measures unflinchingly should be applauded and sustained. It does need to put in a lot of effort to bring in customer-focussed service and enhance its image in order that its direction along the flight-path of growth, success and expansion takes off. Appendices Appendix 1 We continue our rapid growth in 2005. We started the year by launching two new bases at Liverpool John Lennon Airport and at Shannon in the West of Ireland. In February we announce orders for a further 70 firm aircraft from Boeing as well as 70 options. This takes Ryanair's total order with Boeing to 225 firm aircraft and 200 options. These new aircraft, which will be delivered between 2005 and 2012, will allow Ryanair to grow to over 70m. passengers per annum, proving that Ryanair is not just Europe's original low fares airline, but we remain Europe's biggest low fares airline, as well as the only airline offering the lowest fares in every European market. Ryanair Passenger Growth retrieved from http://www.ryanair.com/site/EN/about.php Appendix 2 Low-cost airlines are gearing up to take large chunks out of their rivals. In a decade, low-cost airlines may be the dominant form of air travel in Europe. . In Europe, no-frills travel accounts for only 5% of European air travel, but it is likely to grow to claim a 12-15% share in the next decade. (BBC News (2002), Retrieved from http://news.bbc.co.uk/1/hi/business/2038192.stm; Friday, 28th November 2003) Sources Low Fares Airlines and the Environment June 2005 Retrieved from Website ELFAA [Online] http://www.ryanair.com/site/news/releases/2005/elfaa.pdf 5th Jan 2006 European Low Cost (No Frills) Airline Industry Retrieved from Website Research and Markets [Online] http://www.researchandmarkets.com/reports/222300/222300.htm 5th Jan 2006 About us Retrieved from Website Ryanair.com [Online] http://www.ryanair.com/site/EN/about.php 5th Jan 2006 Ryanair focuses on the future 19th Aug 2005 Retrieved from Website Balkananlysis.com [Online] http://www.balkanalysis.com/modules.phpname=News&file=article&sid=123 5th Jan 2006 Ryanair slow on Emotion 20th Oct 2003 Retrieved from Website BrandChannel.com [Online] http://www.brandchannel.com/brand_speak.aspbs_id=72 5th Jan 2006 Ryanair Retrieved from website Wikipedia.Org [Online] http://en.wikipedia.org/wiki/Ryanair 5th Jan 2006 Read More