Ryanair the Low-Fares Airlines - Case Study Example

Ryanair – the Low-Fares Airlines 1. Introduction Ryanair faces a multitude of opportunities and dilemmas. On the one hand, in August 2006, an Air Transport World magazine reported that Ryanair was the most profitable airline in the world, based on its operation and net profit margins, and on a per-airplane and per-passenger basis (Higgins 2007: 2). In November 2006, the company announced new record half-year bottom line of €329 million for the first half of fiscal 2007 (Higgins 2007: 2). Furthermore, traffic increased by 23 per cent to 22.1 million passengers, while yield jumped by 9 per cent as total revenues increased by 33 per cent to €1.256 billion (Higgins 2007: 2). In addition, even as fuel costs increased by 42 per cent to €337 million, Ryanair’s after-tax margin increased by 1 point to 26 per cent (Higgins 2007: 2). Ryanair expects high demand in the future, so it plans to expand routes and its fleet. On the other hand, Ryanair faces legal battles and acquisition challenges for its Irish rival, Aer Lingus (Higgins 2007: 1). Ryanair also faces stiff opposition for its union-busting policies and long working hours and low salary, although it claims the opposite (Higgins 2007: 6). There are, additionally, environmental challenges that threaten to impinge on Ryanair’s low-cost, no-frills business model. These environmental threats can increase operational costs. This paper analyses the case of Ryanair. It evaluates Ryanair’s strategy compared to competitors, by analysing its low-cost business model through the stakeholder approach analysis. It also determines the key internal and external issues of Ryanair. Furthermore, it evaluates O’Leary’s leadership using the transformational leadership framework. Finally, it examines the sustainability of Ryanair’s future strategies. 2. Evaluation of Ryanair’s strategy compared to competitors Ryanair’s business strategy compared to competitors will be analysed using the stakeholder approach. 2.1 Stakeholder approach The society, in general, is becoming more concerned of the role that business plays in managing stakeholder relations and responding to the environment. Many customers also prefer to deal with companies that actively reduce their ecological footprints (Rueda-Manzanares, Aragón-Correa, and Sharma 2008: 188). Similarly, shareholders, as well as financial and insurance companies, seek to lessen liabilities associated with environmental risks that come from corporate operations, such as pollution and harmful human health effects. The European Union has, in response, as well as the United Kingdom (UK) passed environmental regulations, sanctions, fines, penalties and legal costs for companies that are not operating in an environmentally responsible manner (Henriques and Sadorsky 1996 cited in Rueda-Manzanares et al. 2008: 188). These political institutions recognise that stakeholders clearly know their rights and responsibilities and are willing to generate partnerships and networks that can result to win-win situations. Companies that neglect crucial stakeholder relationships, however, may compromise competitiveness in the long-run, particularly now in a globalised world, where stakeholder interests matter (Rueda-Manzanares et al. 2008: 188). Stakeholder theory has rise amidst the public clamour for corporate governance and business ethics (Elms et al. 2010: 405). The theory can be rooted from the integration of business strategy and ethics and gained greater attention from management scholars for the past fifteen years (Damall, Henriques, and Sadorsky 2009 cited in Elms et al. 2010: 405). Harrison, Bosse, and Phillips (2010) argue that stakeholder management can be a core source of competitive advantage. Choi and Wang (2009) stress from their findings that good stakeholder relationships allow firms to turn around quickly from poor profitability conditions. Elms et al. (2010) assert the importance of finding value for stakeholders, so that they can work toward common goals and truly unify under definitive vision, mission, and goals. These articles underscore that stakeholder theory is an effective analytical framework in understanding competitiveness in the modern business context. 2.2 Low-cost business model Michael O’Leary, Ryanair’s Chief Executive Officer (CEO) was a reluctant CEO when he stepped into Ryanair. Ryanair was incurring losses during this time. However, after spending time with Southwest Airline’s legendary CEO Herb Kellher, O’Leary was inspired to turn Ryanair to a low-cost, no-frills business model. O’Leary adopted Southwest’s business model and added a few more cost-cutting measures of his own. As one article aptly puts it: “Kelleher may have trained, groomed and nourished the young pup, but O’Leary has made the low cost bone his own. If not quite the Hound of Ulster, he is certainly the Hound of Stansted airport” (Boru 2006: 47). For the low-cost business model, O’Leary decreased costs through a wide array of changes that copied Southwest’s business policies and practices: 1) Ryanair uses only one model to limit maintenance and operational costs; 2) It sells tickets directly to customers; 3) It removed seat assignments and free meals, 4) It flies using secondary airports that have faster turnarounds compared to major airports, 5) It has high air craft utilisation, 6) It offers point-to-point and mostly short-haul services, and 7) It charges for additional products, such as meals and late check-ins (Lawton 2003: 178). Table 1 compares low-cost airlines to full-fare airlines. It can be seen that full-fare airlines have higher prices, because they have complicated products, where services and products are charged altogether (Lawton 2003: 178). Full-fare airline companies also have a wider array of services, with combined short-haul and long-haul trips. They focus on the primary product, while low-cost airlines concentrate on making additional revenues, such as charging extra for additional check-in bags and other luxuries that some people would pay for. Table 1: Low-cost airlines versus full-fare airlines Source: Lawton (2003: 178) 2.3 Key internal issues Ryanair’s strengths come from its management philosophy of aggressive cost-cutting measures and low-cost, no-frills business model. While some customers would complain about poor customer service, Ryanair emphasises that it is only giving what the customers basically need and that is low-cost fare tickets (Araujo, Finch, and Kjellberg 2010: 126). Ryanair makes no promises of luxury or comfort, only fast and low-cost airfares for its customers (Araujo et al. 2010: 126). The business model strains several internal factors, however. The key internal issues of the model, as compared to other airlines are: 1) Poor customer service, 2) Antagonism against unionisation and union activities, and 3) Allegations of poor employment relations. These are important issues that can be considered as by-products of cost-reduction thinking, but should be addressed, because not doing so would be affecting the interests of the stakeholders, who are important to the long-run competitiveness of Ryanair (Rueda-Manzanares et al. 2008: 188). 2.3.1 Poor customer service. In 2003, Ryanair created its Passenger Charter, which adopted numerous doctrines that promote low fares, redress, and punctuality (Higgins 2007: 8). Despite this dedication to customers, in a poll of 4,000 travellers around the globe through TripAdvisor in 2006, Ryanair was voted as “the world’s least favourite airline,” and next to it was easyJet (Higgins 2007: 8). Ryanair had low scores in almost all categories, such as comfortable seats, safe-secure, baggage loss, best amenities, and so on (Higgins 2007: 8). Its best score was “best fares.” Apparently, though Ryanair has many customers, it has “very few fans” (Higgins 2007: 8). Southwest Airlines, in comparison, is the world’s fifth most favourite airline, even when it offers the same no-frills approach to customer service (Higgins 2007: 8). Ryanair’s involvement of charging a man with cerebral palsy €25 to use a wheelchair also made the airline quite unpopular (Higgins 2007: 8). Ryanair resolved the matter by imposing a 50 cent wheelchair charge on every passenger ticket (Higgins 2007: 8). Campaigners against the charge argue that the levy should be no more than 3 cents (Higgins 2007: 8). Ryanair held its position and stated that it “costs €37 per person to transport disabled passengers at Stansted and the airline carried 1.5 million such passengers every year” (Higgins 2007: 8). It must be noted that Ryanair is the only major airline in the UK to charge for wheelchair levies (Higgins 2007: 8). These actions underscore that Ryanair has become too abrasive against its customers. People with disabilities, for instance, are important stakeholders. Many of them find airline travel more preferable compared to trains and buses, where they have to change transportation frequently. They are valuable stakeholders who also deserve low costs, but with extra privileges, such as wheelchair use. The management of Ryanair must exercise discretion in responding to its diverse market segments (Rueda-Manzanares et al. 2008: 188). They should not treat their customers the same at all times, because some have special needs too that garner international respect and acknowledgment. 2.3.2 Antagonism against unionisation and union activities. Ryanair is criticised for refusing to recognise unions and providing poor working conditions (Higgins 2007: 6). For instance, Ryanair appealed to the Irish Supreme Court over a former ruling enabling the collective bargaining of its pilots through the Irish Airline Pilot’s Association (IALPA), the biggest union of pilots in Ireland (Higgins 2007: 6). Ryanair received a favourable ruling in 2007 and claimed for legal expenses (Higgins 2007: 6). Ryanair is pressured by the British Airline Pilot’s Association to recruit pilots based in the UK, and yet Ryanair negotiates with all its employees through internally-chosen “Employee Representation Committees” (Higgins 2007: 6). These actions show that Ryanair is bypassing union role and authority and divides employees between union loyalty and participation in company-managed “Employee Representation Committees” (Higgins 2007: 6). It is unclear whether such committees truly uphold basic worker rights and freedoms. It is analysed that at this point, it is important to ensure that Ryanair respects unions and their efforts, especially when they can be partners to the company’s growth. Stakeholder management entails managing all stakeholders, and not excluding them, just because they share different ideologies or goals (Elms et al. 2010: 405). 2.3.3 Allegations of poor employment relations. Ryanair is also charged for its poor employment relations. In July 2006, the Irish High Court discovered that Ryanair bullied pilots to coerce them to agree to new contracts, where pilots will pay the costs of €15,000 for retraining on new aircraft, if they left the airline, or if the company was forced to negotiate with unions for the next five years (Higgins 2007: 6). Other complaints declare that Ryanair is not actually paying its employees above other airlines, when take-home pay is considered. Detractors of Ryanair also questioned its safety record, with reports of many “near-miss incidents” and accusations that the company has placed the crew under “intensive pressurised work schedules that alertness levels are compromised” (Higgins 2007: 7). In addition, in 2006, UK television Channel 4 created a documentary “Ryanair caught napping,” where two reporters worked as employees for Ryanair’s cabin crew stationed in London Stansted Airport. They recorded training and cabin crew procedures. They attacked Ryanair’s training policies, security procedures, aircraft hygiene, and stressed that there was low employee morale (Higgins 2007: 7). They caught Ryanair crew sleeping on the job, using aftershave to cover the smell of vomit instead of cleaning it up, ignoring warning alerts, promoting staff to falsify references for airport security passes, and making it acceptable that the staff no longer have to re-check passenger’s passports before boarding (Higgins 2007: 7). Ryanair denied all allegations and published responses to the Channel4’s website (Higgins 2007: 7). It said that according to the UK and Irish aviation authorities, these allegations have no substance at all (Higgins 2007: 7). The response, however, is more of public relations (PR) strategy than concrete responses to possibly systemic problems. Ryanair fails to survey employee morale and satisfaction and does not investigate fully the veracity, even to a small extent, of all twenty allegations produced by Channel 4. 2.4 Key external issues Ryanair also faces external issues, primarily acquisition problems, competition, fuel prices, terrorism and security issues, additional laws and legal problems, as well as environmental concerns. 2.4.1 Acquisition problems. Ryanair made a failed attempt to acquire its rival, Aer Lingus. However, by bidding for its Irish rival, Aer Lingus, Ryanair deviates from its organic growth strategy. Furthermore, it is incorporating long-haul flights that are not part of its original business model (Higgins 2007: 1). Such acquisition may increase the debts of Ryanair and dilute its profitability. 2.4.2 Competition. Competition comes from low-fare and full-fare airlines. Table 1 shows that full-fare airlines have advantages of greater number and kind of services and products offered and more destinations through major airports. Full-fare airlines can also offer better customer service. Low-fare airlines are direct competitors, such as easyJet. These airlines also offer no frills and low fare prices. Some airlines also have more competitively-hedged plane fuel prices. Ryanair has not hedger earlier than other competitors, so it was paying $70 per barrel of oil up to October 2006, and $73 to $74 up to March 207, while Lufthansa, Air France-KLM, and Iberia had majority of their fuel needs hedged at an average of $50 to $60 per barrel until the end of the year 2006 (Higgins 2007: 5). 2.4.3 Increasing fuel prices. Increasing fuel charges is a large concern for Ryanair, especially when O’Leary claimed that it will not pass fuel surcharges to customers ever (Higgins 2007: 5). Its fuel costs already compose 35 per cent of operations costs in 2006 compared to 27 per cent only a year before that (Higgins 2007: 5). Competitors such as British Airways and Lufthansa have fuel surcharges making up a huge part of their fare prices (Higgins 2007: 3). Ryanair may compromise its low cost model as gas prices continue to rise. 2.4.4 Terrorism and security issues. Previous terrorist attacks on airliners and urban and holiday destinations severely affected the risks and costs of airlines all over the world (Higgins 2007: 5). In August 2006, UK authorities imposed severe security measures at all airports when it faced an alleged and urgent terrorist plot to attack up to 10 transatlantic routes (Higgins 2007: 5). These measures applied to all passengers, including short-haul ones, where they were subjected to body searches and were banned to carry liquids and gels in their carry-on luggage (Higgins 2007: 5). Airports that served London were greatly affected. Ryanair cancelled 279 flights in the days after the incident and refunded €2.7 million in fares to almost 40,000 passengers (Higgins 2007: 5). It is also estimated that Ryanair suffered from a loss of €1.9 million due to lower bookings (Higgins 2007: 5). Terrorism and other security concerns delay travel and increase costs. They can also directly impact the productivity of employees. Ryanair should find other measures to improve its response to terrorism and security concerns using the least costs by having a disaster management response. Such a response fits the stakeholder approach, because it considers all stakeholders possibly affected by terrorist and other untoward activities. 2.4.5 Laws and legal problems. In 2005, a new EU directive went into effect and aimed to diminish the inconvenience caused to passengers by delays, cancellations, and denied boarding (Higgins 2007: 5). The regulation demands standardised and immediate assistance for air passengers at EU airports when such events happen (Higgins 2007: 5). These forms of assistance were expected to reach €200 million per year (Higgins 2007: 5). This new directive is being widely ignored though. Following stakeholder analysis, Ryanair can and must remain as an ethical corporate citizen, while being a low-cost airliner. It can do so by preparing for such costs and finding ways to cut the costs of responding to these circumstances. Ryanair also suffers from several legal battles. In a number of disputes, Ryanair faced litigation with other airports over landing charges (Higgins 2007: 7). A ruling in 2004 mandated that Ryanair was in illegal receipt of state aid from publicly-owned Charleroi Airports, its Brussels base (Higgins 2007: 7). Ryanair was called to repay €4 million and put this into an escrow account, while waiting for an appeal in the European Court (Higgins 2007: 7). There were also charges of unfair discrimination favouring Ryanair over other airlines at different publicly-owned airports, such as Lubeck and Frankfurt in Germany (Higgins 2007: 7). These litigations add costs to Ryanair. Stakeholder analysis asserts that Ryanair also looks at its relationship with airports and other airliners. Airliners may be competitors, but they should not be treated as antagonistic enemies (Higgins 2007: 7). 2.4.6 Environmental concerns. Environmental concerns abound because of greenhouse gases from carbon emissions that have increasingly held higher and higher positions in national, regional, and global political agenda (Higgins 2007: 6). An Oxford University study forecasted that carbon emissions from aviation will increase, so that the negative climate impacts will surpass the commercial benefits of aviation (Higgins 2007: 6). Aviation fuel is currently exempt from taxation, but global warming concerns makes it imminent for it to be taxed soon (Higgins 2007: 6). Ryanair argued that less gas-efficient aircrafts should be taxed instead of low-cost airliners (Higgins 2007: 6). The response of the competition to environmental concerns is not documented by the study. Nevertheless, Ryanair should consider measures to proactively address carbon emissions. It should support studies for alternative fuel for aircrafts and other gas-efficient measures and technologies. Stakeholder theory asserts that Ryanair place greater emphasis on its environmental effects; even if it claims that it has small environmental impacts. 3. Evaluation of O’Leary’s leadership 3.1 Transformational leadership Burns (1978) originated the concept of transformational leadership, which Bass (1985) expanded on (cited in Corona 2010: 24). Transformational leadership integrates the behaviours and beliefs that support and induce followers to follow shared organizational goals (Angus-Leppan, Metcalf, & Benn 2010: 194; Corona 2010: 24). Transformational leadership has five dimensions: “(a) idealized influence – attributed, (b) idealized influence - behavioural, (c) inspirational motivation, (d) intellectual stimulation, and (e) individualized consideration” (Bass & Riggio 2006 cited in Corona 2010: 24). These components can recover individual and group self-efficacy, as well as leaders-member relationship and group effectiveness (Wu et al. 2010: 94). 3.2 O’Leary and transformational leadership Is O’Leary a transformational leader? He is often argued as single-handedly transforming the course of Ryanair (Boru 2006). He is also described as brash and arrogant by his critics. Still, O’Leary possesses idealised influence, when he inspires employees to change how Ryanair works. Furthermore, he exemplifies the ability to affect behavioural changes. An article asserts: Yet, for all his foul-mouthed fulmination at namby-pamby marketers and their airy-fairy ilk, O’Leary is a model marketing man. This model, however, is not that of the deferential doormat, the unctuous, obsequious, oleaginous, customer-hugging, have-a nice-one, missing-you-already sycophant that we know and allegedly love. It is, rather, the marketing man-o-war, the marketing warmonger, the marketing gladiator, whose pugilistic tactics are predicated on the following six appropriately CELTIC actions. (Boru 2006: 47). O’Leary may not be a perfect gentleman in words, but he demonstrated marketing skills that acted as a precedent to the management. Furthermore, O’Leary engages intellectual stimulation. A former sales and marketing director of Ryanair, Tim jeans, praises O’Leary: “Michael’s genius is his ability to motivate and energise people...There is an incredible energy in that place. People work incredibly hard and get a lot out of it. They operate a very lean operation for a company of its size. It is without peer” (Higgins 2007: 9). O’Leary intellectually inspires his people to be dedicated to the business model. Nevertheless, O’Leary might have lacked individual consideration. Ryanair’s treatment of customers and allegations against employee policies and practices stress that O’Leary has also set a precedent of too much aggressiveness in cost-cutting measures. Sometimes, cost-efficiency could take out the “humanity” of services to both internal and external customers. Hence, O’Leary cannot be entirely considered as a transformative leader. His lack of engagement with other stakeholders and proactive attitude in dealing with unions, safety, terrorism, and environmental concerns could cost Ryanair its competitive edge. 4. Sustainability of Ryanair’s future strategy Growth and expansion plans of Ryanair included additional new aircraft to be delivered for the next six years. The additional airplanes should enable Ryanair to double its size to 80 million passengers per year in 2012 (Higgins 2007: 2). As for the industry, the attractiveness of the budget sector has invited large numbers of entrants and competitors (Higgins 2007: 9). Though as many as 50 have gone bankrupt, other companies continue to compete with Ryanair. Is the future strategy of Ryanair sustainable? In terms of its low-cost model, its business strategies serve to cut costs in many ways and preserve cost leadership. However, the analysis of internal and external issues reveals that Ryanair needs to work on its stakeholder management. First, Ryanair shows no active stakeholder management approach. It is defensive when it responds to unions, litigations, and environmental concerns. On the one hand, Ryanair has employee representatives and strives to be more fuel-efficient, because it will drive down costs. On the other hand, Ryanair does not legitimately acknowledge its responsibility to diverse stakeholders. It prefers to be answerable to shareholders and customers, and even fails sometimes at satisfying the latter. The absence of luxury, in particular, should not be a main concern for budget airlines. However, Ryanair must strive to acknowledge its stakeholders to serve them better. Second, Ryanair lacks stakeholder engagement. In many relations, it engages one-way, where the company dictates conditions and demands. Ryanair needs to move from a one-way communication manner to a participative approach, in order for it to prepare responding to diverse stakeholder concerns. 5. Conclusion The current strategy of Ryanair is best when it comes to decreasing fare prices by streamlining operations costs. However, it fares worse than competitors in customer service and responses to different stakeholders, such as employees, airliners, airports, and the environment. Furthermore, O’Leary cannot be completely considered as a transformative leader. His lack of engagement with other stakeholders and poor proactive attitude in dealing with unions, safety, terrorism, and environmental concerns could cost Ryanair its competitive edge in the long run. 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