European Airline Industry: of Ryanair's and British Airways' Strategies - Case Study Example

 1. Introduction Leading economist Joseph Schumpeter incorporated the term “creative destruction” as a central element of the contemporary capitalist business model; arguing that innovation was the key to business success (Schumpeter, 1942). . Schumpeter further argues that internal innovation within a business operational framework produces lower costs, which in turn permits companies to sell products at lower prices, which is referred to as dynamic efficiency (Utterback, J. 1996). This in turn highlights a key element of Schumpeter’s model that competition for innovation as opposed to competition for customers is the most important (Utterback, J. 1996). This is particularly evident in relation to the European airline industry particularly as a result of EU initiated deregulation, intended to remove competition barrier thereby opening the market for exploitation by others. Moreover, the proliferation of different business models, work patterns has meant that the success of the working organisation is inherently dependent on greater participation and employee empowerment, through the concept of the “learning organisation” (Porter, 1996). Hamal and Prahalad argue that a central element of this is the shift in how companies compete with each other, with the underlying basis of competition moving towards “soft” factors such as reputation, service and market placement and positioning. This in turn reflects the evolution of the “knowledge-based economy” (Hamal and Prahalad, 1996). From the airline industry perspective, the fall in profits in the current economic downturn and global pressures has clearly created a need to manage costs and flexibility, which in turn creates the need to change the dynamic of the work organisation. The focus of this paper is to critically evaluate the European airline industry with particular reference to Ryannair and British Airways. 2. Analysis of Issues Facing the European Airline Industry At the outset, the underlying issue facing the European airline industry is that the external pressures of falling profits and increased competition in the global marketplace has created an internal pressure regarding staffing needs and working arrangements. As such, the obvious course of action for management as been to address internal employee relations and personnel management as evidenced by British Airways (Pascale, 2000). Indeed, Schneider & Bowen argue that the profits accumulated by BA in the 1980s and 1990s correlates to the internal personnel culture change (Schneider & Bowen, 1995). Firstly, both Ryanair and British Airways’s market position appears to link in with the notion of the “high performance work organisation” due to the industry it operates in and market position. Pfeffer argues that fundamental changes in business environment such as those facing the airline industry are the central catalyst for changes in the work organisation (Pfeffer, 1995). In particular, Pfeffer refers to market maturity in the markets, accompanied by increasing competition and fragmentation of customer demand and the market liberalisation, which in turn has reduced product market barriers as evidenced by the intense global competition faced particularly by British Airways (BA) in the face of Ryanair’s business growth fuelled by lower operational costs. To this end, the globalisation of competition has highlighted the need of BA to find novel methods of maintaining brand position and internal management of costs. Furthermore, due to the aim of BA in particular to continue global dominance in the airlines industry supports the proposition in many studies, which indicate that “high performance work organisation is most likely to be used by large companies” (Reinert, H., & Reinert, E.S., 2006). Accordingly, as part of business strategy, both airlines arguably need to preserve competitive intensity exposure (Porter, 1995). This is further supported if we consider the positioning of the airlines in context of the tourism industry as a whole and their relationship with travel agencies in the digital arena. For example, the evolution of the traditional business model from deregulation of the travel business in 1978 to online business evolved an integrated group of players in the tourism industry; namely, airlines, online reservations, search engines, systems, travel agents companies. As such, the success of each player was interdependent (Lubbock, M. and Krosch, L., 2000). However, the growth of the web has enabled sellers such as airlines to have direct access to the consumer online, effectively shifting the balance of the role of the travel agent as intermediary having primary contact with the consumer as indicated in figure 1 (Swarbrook, J. and Horner, S. 2006). To this end, airlines are expanding services available, thereby negating the importance of the intermediary travel agent. The British Airways website has a “manage my booking” facility allowing passengers to make travel plans, email itineraries, thereby bypassing the role of the travel agent whether online or high street. As such, the travel agency monopoly has been quashed ((Swarbrook, J. and Horner, S. 2006). For example, it has been argued that “the expedia philosophy is about putting the customer in the control seat” (Taylor, I 2007). Moreover, it is submitted that directly correlated to the proliferation of the internet business model is the effects of customer relationship management systems (CRM), which is the focus of this paper. It has distinctly altered the way that companies view strategy, with a distinct shift from product focused strategy to customer relationship management, which is “underpinned by information systems convergence and the development of supporting software, which in turn promises to significantly improve the implementation of Relationship Marketing principles” (Ryals & Knox, 2001). CRM essentially stems from relationship marketing and early works of Berry (1983) and Reichheld (1996), which indicated that a 5% growth in customer retention rates culminated in a mean customer lifetime value figure ranging between 35% to 95%, with knock on effects on profit margins (Ryals & Knox, 2001). There are many definitions of CRM but in broad terms, CRM is defined as an all embracing approach which integrates sales, customer service, marketing, field support and other functions that touch customers (Christopher et al, 1991). Moreover, Galbreath posits that effective with effective CRM activities “an enterprise performs to identify, select, acquire, develop, and retain increasingly loyal and profitable customers”(Galbreath, 1998 at p.14). A prime example is the BA loyalty points and airmiles. Additionally, Ryannair was one of the first big companies to position itself as offering low cost flights to Europe with online booking facilities and advance booking discounts. CRM therefore embodies the simultaneous operation of distribution channel members, including online and offline customers and “is a combination of business process and technology that seeks to understand a company’s customers from the perspective of who they are, what they do, and what they’re like” (Couldwell, 1998). In terms of practical applicability of CRM to retail strategy, it is submitted that retail businesses (particularly in the multi-channel marketplace) are more successful if they focus on obtaining and retaining shares in the customer marketplace rather than a share of the actual product base, particularly in light of the numerous outlets. To this end, it is submitted that effective CRM is vital to retail strategy in gaining new customers through online and offline marketing communication activities, promotion and direct email incentives (Trapp, 2007). If we further consider this in terms of effective customer relationship management “at the core, CRM is an integration of technologies and business processes used to satisfy the needs of a customer during any given interaction. More specifically, CRM involves acquisition, analysis and use of knowledge about customers in order to sell more goods or services and to do it more efficiently (Bose, 2002). Moreover, the “customer” includes a wide definition including vendors, channel partners, or virtually any group requiring information. This is further evidenced by reference to Ryanair’s proliferation as an airline, which I shall now discuss. 3. Ryanair Mayer highlights how Ryanair Holdings plc “operates the first of all founded low cost scheduled passenger airlines in Europe. Starting in 1985 Ryanair followed the example of Southwest Airlines, introduced the low cost concept in Europe (Mayer, 2008). As such, Ryannair has become a market leader in the low cost airline market by continuing to maintain low operating costs. Additionally, in its 2007 Business Report, Ryanair asserted its objective to establish itself as “Europe’s leading low fares scheduled passenger airline through continued improvements and expanded offerings of its low fare service”. (Ryanair, 2007, Strategy pp.1-4). In terms of the analysis of the internal environment, Mayer highlights how “Ryanair, with its 35 Mio passengers in 2006, is the market leader in the intra-European airline market – close packed with Easyjet and followed by Air Berlin” (Mayer, 2008) . Mayer further argues that the central reason for this is the fact that Ryanair operates within a tight and compact organisational structure and with a clear strategy. To this end, an underlying of the airline is the big financial reserves it has retained, which is estimated on 2 billion Euros (International Herald Tribune, 2006). As such, it is commented that these savings and the airline’s profitability enable it to survive in a crisis or complete in price flights: “This economical advantage result from its learning curve in aggressively optimising production costs” (Mayer, 2008). Indeed, Ryanair has retained its low costs because of outsourcing services to specialised operators and enable aggressive competitive behaviour towards suppliers such as ground handling and airports. In terms of the customer environment, the main target customer base is private purpose travellers within Europe. As such, this market is inherently price sensitive with a lower income bracket along with other preferences (Mayer, 2008). In implementing a targeted CRM strategy, it is arguable that the Ryanair success story is testament to the proposition that “flying has developed to be a daily commodity like going by bus” (Mayer, 2008). On the other side of the spectrum, it is posited that individuals are happy to save business travel costs by using Ryanair for short haul flights, thereby highlighting the need to address the continuous changes in consumer behaviour, particularly in the current economic climate. Indeed, Mayer comments that “an increasing part of the customers purchase their flight tickets either on the airline’s website on their own rather than they authorise the travel agency to book for them” (Mayer, 2008). If we consider the external business environment factors, it is evident that “people become more price-conscious in their consumption, which increases competition in the market, whereof Ryanair as a cost effective operator profits from. Furthermore, Ryanair uses the internet as new technological advancement to reduce its distribution costs” (Mayer, 2008). This is particularly evidenced by the online booking system and cutting out of the travel agent intermediary. Moreover, the heavy online presence enables Ryanair to keep its operational costs low. Moreover, whilst Mayer makes the point that EU liberalisation of the airline industry has provided a fertile environment for commercial exploitation; the particular success of Ryanair is its low operating cost, understanding of CRM and ability to sustain low cost flights over competitors. As an example, Figure 1 provides a detailed SWOT analysis of Ryanair’s business strategy operations. Figure 1 Strengths Brand name Strong Revenue Growth Business Strategy High seat density Fast turn around Small headquarters Benefits from low airport charges Low distribution costs (90% bookings via Internet) Weaknesses Fuel costs Some secondary airports too far away Decline in operating margin Weakening employee relations Poor service Poor press Opportunities Growing demand for low cost airlines Expected market adjustment Launch of new routes Fleet expansion Opportunities by EU enlargement Low cost flights on long haul as a new market Threats Fluctuating oil prices Dependence on economic cycle Fierce competition, market consolidation Threats to security EU regulations on denied boarding compensation Involvement of airlines in EU emission trading system Source Datamonitor 2007: pp21-25. It is submitted that essentially Ryanair have been able to maintain consistency in production cost efficiency, which in turn has sustained leading market position. Conversely, the central weakness appears to be the location of some of the secondary airports, which are arguably balanced out by the low landing fees and low cost of the flight, which inherently avoids competition with its rivals (Mayer, 2008). Moreover, Ryanair’s objectives further highlight the various profit opportunities from the market: “however, the airline is always threatened by the rise in fuel prices and the general dependence of the airline industry on the economic cycle, but keeping its good cost structure and pursuing an elaborate fuel risk management could limit the threats in competition” (Mayer, 2008, 5). The central marketing goals of Ryanair are to attack the big network carriers such as British airways and become the largest airline in Europe (Ryanair, 2007). As such customer profiling and effective CRM is essential (Swarbrook & Horner, 2006). To this end, Ryannair positions itself amongst the price conscious punter and Mayer comments how the “awareness of different passenger types requires marketing campaigns that cover all categories of potential customers” (Mayer, 2008:6). Additionally, price flexibility has proved vital and will continue to do so in the difficulties of the current markets. Moreover, in terms of the product, the “idea of Ryanair is to keep the product as simple as possible. Its passengers travel ticketless in one class without any seat reservation. It does not offer free in flight service with drinks or meals….. Ryanair represents the pure low cost airline concept with no frills at all and narrow seating onboard – simply passenger transportation from A to B as point to point air service on short-haul routes (Mayer, 2008). Indeed, arguably of most importance to Ryanair’s competitive position in the European airline industry is the fact that it appears to have mastered the underlying issue of price the key element of its branding and brand value. Indeed, the “price is more important to the customer than the product itself” (Mayer, 2008). Within this key aspect of the brand, Ryanair exploits the commercial value of the brand by offering differential pricing schemes off peak and advance booking savings. Additionally, in terms of market placing, in 2006 it is estimated that approximately 98% of tickets were sold online over the Internet booking system (Van Broekhoven, 2006)., Additionally, in terms of the marketing mix, Ryanair has “recognised that an innovative communication mix is a key factor for cause for generating demand it is essential to create an awareness of its service (Shaw, 2004). To this end, the bulk of Ryannair’s marketing budget is applied in a sales pull strategy to raise awareness of their price through advertising, public relations and direct marketing (Flouris et al, 2006). Moreover, in terms of its internal employment training programme, it offers a continuing professional development program, where employees see their learning as a lifelong process of training and development (Cummings et al, 2003). This in turn helps remove traditional boundaries between job categories through autonomous working (Karash, 1991). Interestingly, this shift in the working organisation model ties in with the “learning organisation”. The learning organisation is an evolving notion which has become increasingly incorporated into the modern company and multinational philosophy. In its simplest form, Richard Karash propounds the ideology underlying the learning organisation: “A learning organisation is one which people at all levels, individuals and collectively are continually increasing their capacity to produce results they really care about” (Karash, R. 1995). The ideological underlying principle behind the learning organisation is that it produces a flexible workforce with a shared vision, which in turn ensures internal stability within an organisation. Mike Wills defines the learning organisation as a “group of people who work together” (Wills, M. 1998). He further defines it as a “company, corporation, firm, enterprise or institution, or part thereof, whether incorporated or not, public or private, that has its own functions and administration. For organisations with more than one operating unit, a single operating unity may be defined as an organisation” (1998). Pedler, Burgoyne and Boydell define the learning organisation as “an organisation that facilitates the learning of all its members and continuously transforms itself to achieve superior competitive performance” (1991). The concept traces its origins to the early writings on management trends in the 1930s and Schumpeter’s creative destruction theory (Pedler, Burgoyne & Boydell, 1991). This was further developed by neo-human writers such as Chris Argyris with his proposition of the “double-loop learning”, which reacted to the studies of corporate excellence undertaken by Peters and Waterman, identifying organisational behavioural trends (Argyris, C 1999). Within the contemporary business framework, personnel management theory highlights the importance of efficient employee relations and collective employee morale in achieving specific goals (Argyris, C 1999). As such, Pedler argues that the learning organisation theory is central to this (Pedler, M & Aspinwall, K., 1998). It is arguably this internal cohesion combined with the marketing strategy, which has contributed to Ryanair’s consistent positioning in the airline industry. Indeed, that “Ryanair is aware of the importance and necessity of implementing and executing the developed marketing plan in a proper way. The most effective approach is to implement the new marketing strategy is to allow our target market, which indeed is a broad mass, to get to know about the competitive advantage.” ((Mayer, 2008:9). I shall now consider British Airways. 4. British Airways In British Airways’ 2007/2008 Annual report and accounts (available at www.britishairways.com/cms/global/microsites/ba_reports/pdfs accessed on 17 May 2009) it was asserted that “our strategy set out our priorities for the three years to March 2010, the plan would see us established in Terminal 5, and subject to our financial performance, allow us to order new aircraft for our fleet” as part of its global expansion plan. Moreover, Hamel & Prahalad argue that the global presence of British Airways is an excellent example of single brand positioning strategy and the need for product repositioning (1996). Indeed, the global nature of British Airways’ focus is evidenced by a number of key partnerships. For example, a key part of British Airways’ globalisation strategy was its partnership with US Air, to gain access to the internal US market, which was opposed by competitors (Douganis, 2001). British Airways Management has hit the headlines over years and Pascale comments that whilst its strategy has sometimes proved controversial, a consistent thread of sustained growth has been its brand position strategy (Pascale, 2000). Arguably, it is precisely this focus of the airline that has enabled it to retain its market position in long haul international flights. Indeed, Hamel and Prahalad argue that only four of the world’s top companies have reinvented and regenerated their strategy to such effect and as such, British Airways is a prime example (1996). Moreover, Hamel and Prahalad specifically refer to the role of chief executive of BA, Sir Colin Marshall as instrumental in reinventing the airline brand and maintaining “unfailingly high standards” (1996). Arguably the previous Concorde service highlights the reinvention ethos of the British Airways brand. Through the niche marketing approach, British Airways previously provided the Concorde Service to a small segment, namely the “mega wealthy or extremely urgent traveller who wants personalised ultra-luxury service” (Flouris et al, 2006). However, Flouris et al argues that the strategy did not work for British Airways due to the high operational cost “a newer niche strategy that some airlines offer focuses on heavily subscribed city-to-city business service, even in long haul markets, offered by smaller aircraft that only have business class seats. Speed is not an issue here; instead convenience and service are the focus” which further presses the need to address consumer behaviour and implement bespoke CRM according to market trends (Flouris et al, 2006). Moreover, Pascale further develops this argument and posits that the British Airways brand constantly searches for areas “that can add new levels of customer service that yield more in terms of loyalty and price realisation than they cost to create” (Pascale, 2000). For example, as stated above, the airline offers prime free mileage programmes “but more as a bonus than a bribe… to create the world’s first truly global airline” (Pascale, 2000). It is submitted that culture change was a significant part of this is the employee management culture and Heller comments that “the story of British Airways is one of the most widely used inspirational accounts of changing culture” (Heller, 1992) further argue that BA focused on changing culture by the “people come first” mantra, which in turn targeted employee attitudes directly to secure loyalty and commitment as opposed to “resigned behavioural compliance” (Ogbonna, 1992/1993). This in turn led to “all employees sharing a common vision and working together for the good of the organisation” (Heller, 1992). This was further achieved by the conversion of employees to the corporate faith in place of simple execution of work (Hopfl, 1993). However, whilst implementing a corporate management change, Schneider and Bowen posit that it was “not an expression of mutual trust and reciprocal emotional obligations between company employees and its management. Rather, it was an alternative control mechanism and should be understood as such” (Schneider & Bowen, 1995). Indeed, after privatisation in 1987, Marshall expressed the desire to become the “world’s favourite airline” and Hamel and Prahalad refer to this as “a strategic intent”, which facilitated the rapid increase in British Airways’ customer rating (1996). To this end, Pascale comments that BA’s service ranks among the best and that it is “one of the most profitable airlines in the world” and that “Marshall began leading British Airways down that road by going to those who dealt closely with customers and asking them what needed to happen” (Pascale, 2000). However, the exploitation of the market by industry players such as Ryanair has made inroads into the market, particularly heightened by Ryanair’s intention to enter the long haul flight market. Accordingly, Pascale presses the need for British Airways to protect margins and avoid deep discounting and therefore leverage the resources in a manner geared towards customer demand, which further highlights the central importance of effective CRM in contemporary business strategy. To this end addressing customer needs is fundamental to modern business growth and arguably has changed British airways in undertaking action to “cover everything from making sure the concourse flights were easier to deliver and unwrap” (Pascale, 2000). Therefore, it is submitted that not only is effective CRM vital to retail strategy within the contemporary multi-channel marketplace, it is further imperative for the retail sector to ensure successful implementation of CRM through “effective management of functional interdependencies through process teams” (Ryals & Knox, 2001). 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