How Ryan Air Prices Change - Book Report/Review Example

 How Ryan air Prices Change Introduction Ryanair Ltd. is a low-cost airline company with its headquarters in Dublin Airport, Fingal, Ireland. It operates primarily from London Stansted Airport and Dublin Airport. It has around 300 Boeing 737-800 aircraft which it operates. With deregulation of the aviation industry in Europe in the year 1997, Ryanair is undergoing rapid expansion. It has its networks across 30 countries in Europe and Morocco. In times of economic downturn, Ryanair being a low-cost carrier is doing an excellent business with increased profitability levels. Ryanair has reinvented the short haul air travel in Europe. They have replaced their old model of growth at any cost with scientific model of expansion and growth. They are now the Europe’s most profitable airline through their continued and sustained effort on being the lowest cost airline in market. SWOT analysis of Ryanair Ryan air’s Strengths Lowest cost Base Ryanair being a low cost carrier has achieved the distinction of being the lowest cost carrier in Europe. It competes in this segment with easyJet. The difference in margin between them in terms of cost base in marginal, approximately about one-third of a difference between them. But if the fuel cost is excluded, then the difference becomes huge, with Easyjet bearing cost per passenger 67% higher than that of Ryanair. Ryanair achieves this unit cost advantage over Easyjet mainly from their airport and handling charges. Ryanair uses low cost airports and smaller aircrafts as compared to its rival (Mayer 3). It has substantial bargaining power with the airports and they have low bag check-in fees and low handling charges at the airports. Figure 1: Costs per passenger (EUR, ex fuel) of Ryanair Ryanair also derives its low unit cost advantage from its labour force. The labour forces which they use are more flexible and productive at the same time. They have employed around 50% of their flight crew as contractual workers. Hence they are hired only when required. Seat density of Ryanair is high as compared to its rival easyJet. Ryanair has 189 seats per aircraft as compared to 156 of easyJet. The load factor of Ryanair is also pretty high with 82% for the year 2012 (Walder 2). Compared to it the load density of easyJet is 80%. Hence Ryanair uses a strategy which allows high aircraft utilisation, having lean overheads, having efficient and young fleet at their disposal and lack of legacy pension cost (Mennen, 10). Being a lowest costs aircraft company in the market they can take a lot of major decisions which are crucial to their success like introducing the check-in and baggage charges to be paid by the passengers , choosing their airports carefully for their network distribution. They even choose the aircrafts which they fly carefully, like in 2010 they made a good deal with Boeing. With this much advantage to them it is difficult for another carrier to match their cost base. Lowest Fares Having the lowest cost base gives them the advantage of keeping their fare prices low. Their average fare prices are around 37% lower than easyJet (Müller 13.3). But due to rise in fuel surcharges and slower growth forced them to increase their fares, though still retaining the same price discount. Network They have their presence in over 28 countries from Europe to North Africa with their carriers flying in more than 1500 routes and having 178 airports from where they operate. They have the largest short distance network in Europe. They flew the maximum number of passengers in 2012 like 80m with Lufthansa group flying 82m along with all the subsidiaries it have. It has captures a market share of around 12% in 2012. Figure 2: Top 10 Airlines ranked by Seats. Fleet Ryan air has a young fleet base than the other European flag carriers. The average age of its aircraft is about 4 years which is 9-11 years younger than other carriers. This gives them the advantage of achieving a greater fuel efficiency and lower maintenance cost. Airport Choices Ryan air gets its low cost advantage from its choice of airports. They focus on uncongested airports which gives them around 25 minute turnaround time. This gives them a competitive edge over its rivals. They have also crated demand of air travel in areas of little demand and through its low cost fares they have stimulated demand in those markets. Fast Turnaround Time Ryan air has achieved a 25 minute turnaround time which is lower than other aircraft carriers. It helps them in achieving maximum aircraft utilisation. Innovation In Europe they have reinvented the art of short haul air travel. They have pushes the concept of low cost carrier through series of innovations (Hägele 11). They have utilised the moment of aviation liberalisation in Europe. They have abandoned free catering, removed check-in desk system, they are now into internet sales, and they put up advertisement on the boarding passes. Ryanair’s Weaknesses Seasonality of earnings For the aviation industry in general their earnings are highly seasonal. Their profits are high in times of summer season particularly in Q2 while making losses during the winter. This has been their trend over long time period. Figure 3: Ryanair's quarterly operating profits: 1Q2000/01 to 3Q2012/13 Low Frequencies Ryan air offers low flight frequency as compared to its rivals and keeps its departure time at odd times for the passengers to board on to keep their operating cost low. Secondary airports Their airports are located many miles away from the city which has kept the passengers away from travelling in their carriers. Brand perception Public has the perception of it being an uncaring, mean and money-grabbing airliner. They have the lowest brand recognition among public masses. Ryanair Opportunities Market growth and market share gains Although the aviation industry faces sluggish growth, the aviation sector still remains a growth industry with lots of prospects in the medium to long term. Ryanair targets to meet 120m passengers in a year for the next 10 years. This is equivalent to achieving 4%-5% growth per annum. Figure 4: Ryanair passenger numbers (mill) FY 2001 to FY 2013 and 2022 target, and passenger growth rates Further aircraft order In 2010 Ryan air broke the deal they had with Boeing for the delivery of 200 aircraft. But his communication between the two remains open and they might place an order in late 2013 or early 2014 so that they can get the deliveries by 2017. With the addition of small number of aircrafts through leasing deals they could sustain a growth rate of 3%-5% till 2017. Economic Outlook At times of economic weakness, Ryanair has managed to stay strong on their profitability terms. They have achieved this feat by increasing their price of the tickets and capacity cutting. With austerity measures across Europe still continuing it could be beneficial for them to increase the market share. Ryanair’s Threats External events Geopolitical events and natural phenomena like volcanic ash disruptions, earthquakes can affect air travel from any country to another country. Though Ryanair has a focused geographic exposure still it is vulnerable to such events. Capacity Discipline Ryan air is now following their rational and disciplined approach to their capacity growth. If they deviate from this discipline it could threaten their position in the market. Increase in Airport and navigation charges The airport charges in AENA airport of Spain and ATC charges in Italy are increasing due to increase in fuel cost. This can have an effect on their cost structure. Air travel taxes Since the airline prices are elastic in nature, hence any increase in air travel taxes would reduce the demand for air travel. In UK the air taxes has been increased hence they have decided to reduce their exposure in that market. These air travel taxes represent a significant cost of the ticket fare (Thomas 145). Fuel price and currency movement Jet fuel price accounts for around 45% of total cost that Ryanair has to bear. This shows that the price of fare is highly volatile in nature. They bear the cost in US dollars and hence any fluctuation in exchange like strengthening of dollars against pound will make them loose money (Hoffmann 8). Figure 5: Ryanair's jet fuel prices paid and hedging details by quarter FY12 to FY14 Pricing Strategy of Ryanair Ryan air is a low cost carrier which has established itself well in Europe. Their objective is to establish itself as a leading low-cost airliner in Europe through continuous improvement in its service quality and through the low-cost air fares. Their aim is not only to increase the passenger traffic, but also to maintain their core competency which is cost-containment and operational efficiency (Ryanair, 2012, p. 3). The key elements to their pricing strategy are Low Fares Ryan air wants to stimulate demand from the travellers who are conscious of the fare. They also target business executives who might have used alternate mode of transportation than air travel. They sell their ticket in one-way basis thereby eliminating the minimum stay requirements on all their scheduled services. They basically charge high fares for tickets in high demand and when bookings are made nearer to flight departure date. From Dublin to London route which carriers the largest number of passengers by volume has the fares ranging from euro 0.99 to euro 199.99. Ryanair in July 2004 gave a fare promotion on one million seats on certain routes for euro 0.99. Low Operating Costs Ryan air management tries to keep their operating cost the lowest among all the other European passenger airliners. They do this by controlling four primary expenses which are involved in running any scheduled airline Aircraft equipment cost Customer service costs Personnel productivity Airport access and handling costs. Aircraft Equipment Costs The initial strategy of Ryanair was to purchase used aircraft of a single type. Ryanair applied this strategy from 1994 to 1998 when it purchased used Boeing 737-200A aircraft that were between 11 years to 17 years old. But in 1990s when they saw that there was no such used aircraft available they announced that they would start purchasing new Boeing 737-800 aircraft. It represented the next generation of aircraft which helped them to significantly increase the fleet size from 1998 onwards. Personnel productivity Ryanair strives to improve the productivity of the workforce and this control their labour costs (Kahawatte 35). In 2004 Ryanair saw that the number of passengers booked per employee improved significantly to 10,049 passengers, which is a 21% improvement over the previous years for the year ended 2003. They started to compensate their employees on the basis of their productivity as incentives. It also included commissions for selling of products on-board to the flight attendants and the passengers. Ryanair paid the employee Euro 50,582 in 2004 as compared to Euro 41,384 of easyJet, 41,377 of Lufthansa. Customer service Costs Ryanair has entered into agreements with third part contractors to carry out functions like aircraft handling, ticketing and performing other services. They believe that it will be more cost efficient than doing it themselves. They enter into multi-year contracts with the third party to obtain competitive rates. They have managed to eliminate the commissions earned by the travel agents by developing their own internet booking facility and reservations centre. For the year ended March 31, 2004 Ryanair has achieved to generate all its sales through their online platform. Airport Access Fees Ryanair focuses on airports that offer competitive prices. By doing this they can control airport access and service charges which is charged to them. As they bring high passenger volume with them this has given them the power to negotiate the terms during the contract. They also try to reduce their airport charges by choosing for less expensive gate locations and using outdoor boarding stairs as compared to the more expensive jet ways. Conclusion Ryan air uses its low cost base as its core competency. This allows Ryanair to have the lowest average fares among its other competitors in the market. This strategy will attract huge number of passengers although at a slower rates than in the past. The management has set a target of reaching 120m passengers each year over the next decade. This will certainly help Ryanair to improve its brand perception among the masses which now worst in Europe, though low fare prices will overshadow this weakness. Having a strong balance sheet and huge cash base puts them in a good negotiating position with the aircraft manufacturers, and thus they will place the order only when it serves them right. Ryanair with its strong competitive advantage will continue to operate at low cost and will try to enter into areas in Europe where it has never entered before and capture greater market share as compared its competitors. Works cited Mayer, Sascha. Ryanair and Its Low Cost Flights in Europe. Norderstedt: GRIN Verlag. 2008. Print. Mennen, Miriam. An Analysis of Ryanair's Corporate Strategy. Norderstedt: GRIN Verlag. 2010. Print. Müller, Christoph. Case Study and Comparative Strategic Analysis of Toyota and Ryanair. Norderstedt: GRIN Verlag. 2011. Print. Thomas, Andrew R. Soft Landing: Airline Industry Strategy, Service, and Safety. New York: Apress. 2011. Print. Walder, Johannes. A strategic analysis of Ryanair. Norderstedt: GRIN Verlag. 2013. Print. Hägele, Kathrin C. Marketing Plan for Ryanair. Norderstedt: GRIN Verlag. 2006. Print. Hoffmann, Judith. Ryan Air - Environmental Analysis, Discussion of Core Competencies and Strategy proposal. Norderstedt: GRIN Verlag. 2005. Print. Kahawatte, Uddika. Ryanair's Strategy from a Perspective of Core Competencies. Norderstedt: GRIN Verlag. 2010. Print. Read More