Strategic Management - Brief Financial Analysis of Ryanair - Case Study Example

Strategic Management Brief financial analysis of Ryanair at the end of the case. Ryanair is the airline based in Ireland. It is considered on of the largest low-cost carrier, operating on low-fare routes to most of European countries. It started its journey in 1985 on very small scale. In its initial years it faced quite lot of problems and challenges. It was quite difficult to make Ryanair profitable until its management was taken over by Michael O'Leary. Michael O'Leary proved to be a good leader and entrepreneur. He took some very unpopular and decisions, but most of them proved more than useful for the company. It was the time that it started evolving as the world's most profitable airline. Michael O'Leary 's key to success was to drastically cut costs down by taking extra-ordinary decisions. But it was not the only reason of his success. He was also very innovative and shrewd in his approach. His efforts were also supported by state policies of the European countries. The briefs of Financial & operational performance of the company from 1998 to 2002 retrieved from ATI database show a great change in the financial status of the company. The increase in Passengers Revenue was $259.68 millions from 1998 to 2002. Net margins increased from 19.63% to 24.09% during this period. Number of passengers increased by almost 300% during this period. These were not mean achievements in such a short period of time. But these statistics does not show that how daring was O'Leary in his decision making. He was never afraid of taking unpopular decision and he had complete trust in judgment. As it is famous saying that fortune favours the braves that was the case with him. Fortune also favoured him on many occasions. The difficulties came to his way never deterred him. He went on expansion spree. Ryanair was not only expanded in terms of routes and destinations but he also acquired new planes for his company. The data sheet is give herewith that shows his achievements. Numbers speak louder than words in this case. Profit for the year 2000 was 77 millions euros whereas it jumped to 150 millions euros in year 2002. RyanAir was successful in controlling total operating at a lower rate than revenues inspite of the fact that some new routes were opened. The performance was matchless; all other carriers during the period, operating margins were increased. Profit after also risen by 44%. Earnings per share also increased. (Financial performance table is attached as Appendix II retrieved from ATI Database) A tremendous increase in the profits of the company encourages O'Leary to go on and take more daring decision of acquisition of Buzz Air. It could prove a turning point towards best or worse. As O'Leary promises to make Buzz profitable within three months by "halving fares and doubling passengers". (Part I 475 words) Strategic Analysis of RyanAir at the end of 2002 Ryanair is considered one of Europe's debatable companies, it policies are appreciated and criticised simultaneously. Some analysts support its commitment to low fares, its revolutionary management. At the same time few analysts attack its labor policies and disapprove its advertising campaign. It would be quite interesting to use analysis models described by Richard Lynch analyse the Ryanair strategically at the end of year . These models can be applied for a thorough analysis of RyanAir. Model: Consideration of the nature of the environment (General considerations) The problems like market recession because of September 11 attacks required a thorough analysis. O'Leary did this very well in comparison to competitors and also with other industries. It helped in assessing the situation correctly into true perspective. His research and evaluation team gave him correct input. The market research was one of the tools used by O'Leary. A correct and true analysis was the key of success of O'Leary. He understood that although situation is quite turbulent but it can be brought under control. He was able to make correct decisions because of these comparative studies and analysis by his staff and himself. He slashed some expenditures in unproductive sections. Made investment in new sections and divisions. Model 2 Factors affecting the organization (PESTEL analysis and scenarios) For analysis under this model we need to ask few questions 1. What are the industry's dominant economic features' This question gives an overview of the industry's dominant economic features. The factors to consider in this question are market size, scope of competitive rivalry, market growth rate, number of rivals and their relative sizes, etc. Knowledge of the industry's economic features is important because of the implications they have for the strategy. 2. What is the competition like and how strong is each of the competitive forces' This question gives understanding to the industry's competitive process in order to discover the main source of competitive pressure and how strong each competitive force is. This analytical step is essential because managers cannot devise a successful strategy without understanding the industry's competitive character. It is first and most important phase of re-assessing business strategies of the company. The first and major step taken by O'Leary to identify the problem areas. O'Leary felt that RyanAir can only grow by slashing costs and expanding on routes. Another tool used by O'Leary was his little self designed advertising campaign. The emphasis on customer oriented policies was a very correct decision. It brought about a change in the image of the company (Interconnection between events). Model: Analysis of growth (Industrial Life Cycle) RyanAir had painstakingly restructured its operations in order to boost and increase consumer demand. The launching of different strategies to each market evidences this. Differentiation strategies were employed to focus on passenger who was interested in low cost paying. The Five - Forces Model of Competition from the Harvard professor Michael Porter is used and questions are asked on: i) The rivalry among competing sellers in the industry. ii) The market attempts of companies in other industries to win customers over to their own substitute products. iii) The potential entry of new competitors. iv) The bargaining power and leverage of input suppliers can exercise. v) The bargaining powers and leverage exercisable by buyers of the product. This model is a powerful tool for systematically diagnosing the chief competitive pressures in a market and assessing how strong and important each one is. Not only is this model the most widely used technique of competition analysis, but it is also relatively easy to understand and apply. From a qualitative evaluation the prospect of industry profits is assessed. This model was almost completely applied. There were many factors that were related to competitiveness of the company. Some of them were: It was decided to operate on Aer Lingus' few profitable routes and only on greatly reduced prices O'Leary went to Texas to understand the policies of a similar successfully operating Airline On the Southwest business model he made it his top priority to control the cost Old planes were replaced with more economical Boeing Jets Un-necessary free in-flight meals and beverages were stopped it helped in reducing the cost a lot. Commission of agents was reduced from 9% to 7.5%, later on direct channels of booking were introduced. The results of this move were tremendous in year 2002, direct channels accounted for 100% of Ryanair bookings. Aircraft turn around time was minimised in order to reduce the aircraft utilization period. Such actions taken by O'Leary require great deal of firmness of beliefs and trust in personal assessment. These two qualities were present in O'Leary. It was because of his leadership that RyanAir faced all these challenges successfully. RyanAir not only survived but grown to its full potential. Model: factors specific to co-operation in the industry ( Four links analysis) There were many small and large scale Airlines operating in the area. O'Leary thoroughly analyzed all possibilities of co-operation. Although his plan could not get great deal of success with the competitors but in coming years RyanAir was able to extend cooperation with many of its competitors Model: Factors specific to immediate competitors (Competitor analysis and product portfolio analysis). In this model we need to ask following questions. What strategic moves are rivals likely to make next' This question discusses what competitors are doing by monitoring their actions, and trying to understand their strategies and anticipating what moves they are likely to make next. Good clues about what moves a specific rival may make next come from studying its strategic intent, monitoring how well it is faring in the marketplace, and determining how much pressure it is under to improve its financial performance. Aggressive rivals with ambitious strategic intent are strong candidates for pursuing emerging market opportunities and exploiting weaker rivals. O'Leary was one of the best leaders of the Industry. He immediately pinpointed the points of weakness of his company and rivals. Then he introduced various reforms like introduction of new Low fare routes. Model: Customer analysis (Market and segmentation studies) A very simple booking process was used keeping in view the needs of customers Whereas other competitors 's online booking was quite complex and disliked by customers. The frequency of flights was increased on key routes to facilitate frequent travelers. (Part I I 1056 words) The implied and explicit reasons for the acquisition of Buzz Airline by RyanAir The success story of the RyanAir was closely monitored by the main industry players. It was considered quite lucrative to operate a low cost wing big Airline. The similar thinking compelled management of KLM to convert its British arm, KLM-UK, into Buzz in year 2000. It was introduced with the similar features as of Ryanair and on similar routes. It is one of the important traits of good leader to foresee future. O'Leary was gifted with this quality. He was able to foresee the Buzz air in future could have posed challenges. Its acquisition opportunity was also described as too good to miss by him. The reasons of acquisition of Buzz air could be classified as implicit and explicit. Both categories are described here briefly. Explicit Reasons The clear and evident reasons for acquisition of the Buzz Air could have would found out by analyzing company worth, market status and standing, similarities and dissimilarities with Ryanair and many such factors like that. This type analysis could be done with the help of SWOT technique. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Strengths First of all strengths of Buzz Air would have been looked for. The strong points of the company were considered and analyzed. The strengths of the company may have been considered as following Buzz was branch of prestigious KLM Buzz had a quite large fleet including Boeings although later on it proved its weakness. Buzz was based at Stansted, and considered complimentary to Ryanair's network. Weaknesses Although Buzz was associated with a major International Company but yet not strong enough to survive in market and face the challenges posed by Ryanair Fares of Buzz were quite high as compared to Ryanair and made it less attractive for customers. Buzz could not reach productivity Levels of Ryanair BAe 146-300s were not very economical and proved burden for company. Management of Buzz was not very hopeful for its survival Opportunities O'Leary 's foresightedness was conceiving great advantages by acquiring Buzz. The eminent opportunities were: Buzz carried 2 million passengers in 2002-2003 although it incurred losses but it had got vast customer base that could have been utilized by Ryanair O'Leary considered this deal "too good to miss". Buzz was based at Stansted, the merger with Ryanair has thus secured Ryanair's position at Stansted. Threats Buzz Air could have posed various threats to Ryanair if it had came out of its losses cycle. Some of the eminent threats could have been: Buzz Air was subsidiary of KLM that could have boosted its status to challenging position for Ryanair. Buzz Air was operating almost on same routes and area and was capable of taking away market share of the Ryanair if managed properly. Buzz Air was capable of attracting customers because of its features. Ryanair could not have offered those facilities because of its low cost policies. After doing the competitive analysis it is useful to answer few questions to draw conclusions about the relative attractiveness or unattractiveness of the industry. These questions help analyzing the internal resources and capabilities i) Is current strategy of the company is going well' ii) How much the prices and costs are competitive' iii) What is the position of company in comparison to its rivals' iv) What kind of strategic issue is the company facing' The current strategy of Buzz in 2002-2004 was not very good. It was continuously incurring losses and became a burden for its owners. Prices and costs of Buzz were not very competitive and they were the main cause of its downfall. Although company was able to attract the customers but its position in terms of profit was not very good at that time. The Buzz air was facing various issues from un-economical fleet to poor management and administration. Its costs were quite high as compared to its low cost competitors. All these factors were the cause of downfall of Buzz Air. But O'Leary was very hopeful to convert all these advantages to the advantage of Ryanair. These were explicit reason of acquisition before the management of Ryanair. Implicit Reasons of acquisition The management of Ryanair was quite ambitious at that time it was aiming to create a monopoly in the market of low cost Airlines in Europe and beyond. This ambitious thinking was the first implicit cause of acquisition. Ryan Air was able to dictate the terms of acquisition and reduced the price considerably to its favour. All the terms of deal were quite favourable for Ryan Air. O'Leary was planning to use all the routes of Buzz on very low cost. He was hopeful of converting the loss making into a profitable within few months. Contrary to predictions of analysts that Market is saturated. He thought that it is not saturated for the budget airlines in Western Europe. O'Leary was striving hard to really fulfill his dream of becoming Europe's leading airline. He now started his expansion in terms of routes to south to Greece and Turkey. He was expecting to tap great European tourist summer in these countries. The flights to these new destinations could have generated enormous revenues from mid-April through October. He was also hopeful to pierce and damage the package tourism industry, dominated major tour operators. It was also on his agenda to compete in Southeastern Europe. These were major implicit reasons of acquisition of the Buzz. (Part III 906 words) Options available to Ryanair at the end of the case Acquisition of Buzz was great step forward. But this step increased challenges facing O'Leary and his company. Buzz was continuously incurring heavy losses. He promised to convert these losses into profits within three months. It was not a mean task to achieve. For achieving these uphill objectives he would have employed some proven strategies to enhance the performance of the company and increase its profitability. Some these strategies are discussed here. Profit-maximizing, competition-based theories of strategy O'Leary being a sharp and intelligent business leader at once noticed that due to stagnation in the market and over capacity company may loose its market share against competitors. He understood that he should chalk out a new business strategy to deal with the situation. The first strategy that proven and tested by him in his previous ventures in Ryan Air. The major cost effective steps were: He decided to reduce the fleet so that the operation costs may be reducing thus increasing the profit. The replacement of un-economical aircraft with more cost efficient planes was his first step. He realised that these would be more cost effective and it would be helpful in increasing the frequency of flights on short and busy routes. He also planned to offer similar facilities to Buzz but with comparatively lower rates. For increasing profitability Ryanair adopted policy of not providing compensation or accommodation in cases of overnight delay. Significant fare differential was his key to success. Ryan air drastically reduced the fares on busy routes of Buzz The extra ordinary advertisement campaign stimulated demand O'Leary was not distracted by news items appeared in press against the policies of Ryan air He just adopted a focused strategy without any distractions Tight management control was also key to his success. He never succumbed to the pressure of employees of Buzz Resource-based theories of strategy O'Leary knew about the weak policies of Buzz. He immediately reversed those policies. He asked the managers to cut those expenses that were not productive but should not hesitate in raising those that may increase the productivity of the company. Administrative costs were reduced but also good investments were made into new services and facilities. Another important step taken by Group was to expand the circle of their services. The new routes and destinations were selected to make the company more productive. - Favorable Deals with Airports Ryanair was always successful in getting advantage from deals with under-utilised regional airports. Analysis proved that these deals earned great deal of advantage to company as compared to its competitors Renegotiations by airports because of performance AerRianta, the Irish airport started the process of renegotiations of terms to get more favourable deal, other airports operators followed the suit. But O'Leary was not easy to be pressurized. He immediately demanded better facilities and thus returned the pressure to airports and thus negotiated on equitable terms Pressure from big players & authorities Ryanair was now emerging as a big player and flag carrier Airlines also envied the successes of Ryanair. Pressure was on from airports, competitors and media. After all this hew and cry EU decided to investigate the possible advantages got by Ryanair. But this phase was also passed without creating much problems for the Airline Innovation and knowledge-based theories of strategy O'Leary was a very innovative person. He added some unique features to Ryanair. These features proved very profitable and productive. He was true believer of market research techniques. His expert researchers gave very useful inputs that were converted by him and his planning team into very profitable products. The researchers gave him input that summer tourists could be attracted and he took great advantage of this input. Exploring new avenues There were still new avenues to be explored within Europe for the low cost airlines. There were great opportunities for such carriers as the products were quite attractive to those people who wanted to save some money all over the Europe. Ryanair was quick to react and extended its operations to southern and eastern parts of Europe. Transoceanic Routes Low cost European carriers were mostly confined to Europe. The European regulations were not very encouraging. But gradually scenario was changed. Better and favourable agreements were negotiated by EC with US. Both sides agreed to open up. Thus Ryan Air and other European low cost airlines started their operations to US and thus opened new gets of opportunities and success. (Part IV 756 words) APPENDIX I The strategic tools, frameworks and models 1. PESTEL analysis and scenarios 2. Five Forces analysis 3. SWOT Model 4. Crisis Management and business development strategic theories APPENDIX II Financial & Operational Performance of Ryanair Finance(USD million) 2002 2001 2000 1999 1998 Period end 31 Mar 02 31 Mar 01 31 Mar 00 31 Mar 99 31 Mar 98 Passenger Revenue 494.07 393.05 340.62 278.02 234.39 Cargo Revenue Na Na Na Na Na Other Revenue 65.51 49.45 40.77 39.72 32.27 Total Revenue 559.59 442.49 381.39 317.73 266.66 Operating Result 146.10 103.51 86.61 76.73 64.73 Net Result 134.84 94.86 74.72 61.18 52.35 Net Margin 24.09% 21.43% 19.59% 19.25% 19.63% Operational Statistics Passenger millions 11.1 7.4 5. 5 4. 9 4. 0 Passenger Load factor 81.2% 71% 67% 71.5% 72% Revenue Passenger km (mill) 7,251.50 4,989.00 3,385.34 2,643.59 1,865.50 Available seat km (mill) 8,930.40 7,026.76 5,052.74 3,697.33 2,591.67 Source: ATI Database. Acknowledgement It is hereby acknowledged that following websites were used to gather information for writing this report. http://www.ryanair.com/site/EN/ http://www.britishairways.com/travel/globalgateway.jsp/global/public/en_ http://www.klm.com/travel/klm_splash/splashpage.html http://www.easyjet.com/ ATI Database and Material provided by the department References/Bibliography Harvey, M. (2001). The Hidden Force: A Critique of Normative Approaches to Business Leadership. SAM Advanced Management Journal, 66(4) Lynch Richard "Corporate Strategy" 2003 Read More