Ryanair Strategic Analysis - Essay Example

?Table of Contents INTRODUCTION 2 Environmental Analysis 3 Macro-environment Analysis 3 PESTLE Analysis 3 Micro-environment Analysis 6 Power of Suppliers 6 Power of Buyers 6 Threat of New Entrants 6 Threat of Substitutes 7 Rivalry among Existing Firms 7 Company Analysis 8 Competitive Market Position 8 Strategic Options Available 9 Available Strategic Options 12 Mergers and Acquisitions 12 Operational Effectiveness 12 Service Innovation 12 Diversification 12 CONCLUSION AND RECOMMENDATION 12 BIBLIOGRAPHY 13 16 16 RYANAIR STRATEGIC ANALYSIS INTRODUCTION Ryanair is operating more than 1,400 flights each day from 44 bases and above 1100 routes across 27 countries. The company connects 160 destinations by offering low cost flights to its customers. With a team of 8,000 people and carrying 73.5 million passengers, Ryanair has become one of the World’s favourite airlines (Ryanair.com). According to the information available on the official website of the company, in 2009 the airline carried total 66,503,999 passengers and its traffic grew by 14 percent as compared to previous year. The average fare of the airline in 2009 was €35. The success of Ryanair in the world’s airline industry is because of the low cost business model of the company. In this report, the strategic analysis for Ryanair has been done. This report has been divided into four sections. In the first section, the macro and micro environment analysis of airline industry of UK has been conducted. In the second section, the company’s analysis has been conducted by studying its current competitive marketplace both in the UK and abroad and the current strategy of Ryanair has been discussed. In third section, a critical evaluation of the strategic options available to the company has been performed in the light of SWOT analysis and Ansoff matrix analysis. Finally, recommendations have been provided based on the analysis of the previous three sections. Environmental Analysis Macro-environment Analysis PESTLE Analysis Political The UK government has recently unveiled the new ruling coalition for the air transport industry. The plan of the previous government to develop a new runway at Heathrow airport has been scrapped by the new government. Second, the government is planning to replace the previous system of tax on passengers flying by a new system of tax per plane. The new tax system appears to have good news for the low cost airlines and travel companies and these airlines have also supported this move of the UK government. These airlines are of the view that tax per passenger system is unfair for the airlines which are efficient and able to fill their planes (Niththyananthan, 2010). UK government influences the operations of airlines and it is expected new tax system will offer huge benefits to low cost airlines. The increasing threat of terrorism is increasing the role of UK government in the airline and transport industry. British authorities have warned the UK government that Al-Qaida is planning to target a UK airport and the government has increased the security. According to government, the threats of international terrorism remain severe and officials are monitoring all forms of transit in the UK however, according to British Transport Police public would not notice significant changes (Kirka, 2011). Government is also facing criticism on its current regulatory control on airline industry. Therefore, it is expected that because of increasing pressures on government, the regulatory control of the government on airline industry in the next few years will increase. Pring writes that global airline industry is facing many concerns and governments of the states urgently need to consider Airline Brand Control. The increasing concerns and discussions of analysts also contribute to increasing government interference in the airline industry (Insightgrp, 2010). Economic The global financial crisis has significantly affected the UK’s economy. The GDP of the UK has reduced by 0.4 percent in the 3rd quarter of 2009, thereby, continuing the longest recession in 50 years (Kolade, 2009). The businesses in UK are also facing lower profitability and growth as a result of this recession. UK government aims to improve the macroeconomic policies. Budget deficit is the major problem which UK government is currently facing. The budget deficit of UK is almost equal to one pound in every four that the UK government spends. Therefore, Government is considering having a Spending Review to analyse how taxpayers’ money is collected, so that public finances and confidence in the UK’s economy could be improved (British Embassy Washington). As a result of government initiative to improve budget deficit the tax system of UK will face significant changes. The recent incident of volcanic ashes coming from Iceland created disruptions and problems for the UK economy. According to a report of International Airport Association, as a result of these disruptions the airline industry was incurring a loss of ?130 million per day and the airlines reported a loss of ?28 million per day (Archer, 2010). Many of the airlines were also at the brink of bankruptcy because of such economic problems. Social Although the business culture in the UK varies from industry to industry however, individuals working in most of the industries are expected to be dressed smartly, remain formal and quite during meetings and exchange business cards more frequently. However, in the first meeting, a professional in the UK may appear to be a bit cold (Hillman). Therefore, business culture and environment in the UK is very favourable for the companies. The low-cost airlines have increased air travel in the UK. However, the current increase in the prices and taxes is expected to make millions of people prices out of long haul flights. Moreover, it is expected that it will leave the holidaymakers out of cash and also hit the local communities (Thompson, 2010). The increasing inflationary pressures have further reduced the spending power of consumers therefore, the increase in prices of air travel can further reduce the demand of air travel in UK. Technological UK has an advanced engineering sector which is globally competitive and the economy is having the second largest aerospace market share after the United States. Manufacturing of advanced technology in the UK is contributing to 13.5 percent of gross domestic product and had a worth of ?131 billion in 2009 (British Embassy Washington). Therefore, airline industry in UK has access to highly innovative and developed technology. Legal According to the chief executive of British Airways, Willie Walsh, the new regulation of Aviation Passenger Duty, will damage both the UK airline industry and the economy. It has been estimated that airline passengers would have to pay up to ?170 more because of the new aviation taxes (Channel4, 2010). The new taxes imposed by the UK government are expected to reduce air travelling in the UK. The ability of UK to attract and retain inward investments is because of the fundamental strengths of the economy. However, current government legal policies and regulations are also committed to being “Open for Business” especially in the private sector (British Embassy Washington). Therefore, the current legal framework to attract more investors and to support the existing ones make legal environment of UK favourable for the companies. Environmental Aviation industry is considered as a major culprit in increasing environmental concerns. According to a government’s advisory board on climate change in the UK, the cost of air travel must be increased to discourage people from flying and to compensate the damages to environment. The committee argues that ticket process of the airlines should be increased and the taxes should be raised to reduce the carbon emission up to the 2005 levels (Batty & Davies, 2009). Such initiatives can negatively influence the demand of air travel in UK. The aviation global deal group comprised of four airlines is looking forward to a new global climate deal which will offer fair environmental benefits, sound operational and economic contributions of airlines and fair competition between airlines and reduce market distortions (Turner, 2009). The expected deal has the potential to influence the operations of airlines by making policies more strict and stringent. In a recent climate summit, airlines in the UK have been pressurised to reduce their carbon emissions. According to the environmental scheme launched by the UK and Ireland Institute of Travel and Meetings, one of the implications of any climate deal signed will be the increased pressure on airlines (Hodd, 2009). Therefore, the increasing environmental pressures on the airlines can influence their profitability and nature of operations. Micro-environment Analysis Power of Suppliers Power of suppliers is high because of a small number of aircrafts manufacturers in the world. In December 2009, company was negotiating with Boeing for an order of up to 200 new B737-800 aircraft series which were supposed to be delivered between 2013 and 2016, however, the negotiations terminated unsuccessfully because of price issues (Ryanair, 2009). Ryanair is now planning to negotiate with Russian and Chinese aircraft manufacturers because of their attractive prices and company is aiming to increase profit maximisation for its shareholders (Moores, 2011). Power of Buyers Bargaining power of buyers is low to moderate because of the significant number of airline companies in the industry, very high switching costs and few numbers of suppliers in the industry. Threat of New Entrants Threat of new entrants is very low because of the huge capital requirements to enter into the industry. Threat of Substitutes Threat of substitutes is significantly high in the short haul routes as compared to the long haul routes. For example, the recent increase in the airport taxes insisted the airlines to increase their fairs and it was expected that it would have potential impact on airline passenger traffic which would probably switch to other possible modes of transportation. Rivalry among Existing Firms The industry rivalry among the existing firms is increasing and significantly high. The deregulation of airline industry has stimulated competition among airlines (Stanford). Moreover, the rivalry among existing firms is based on price and routes. The Spectrum of Airline Industry Structure of UK Perfect competition Oligopoly Duopoly Monopoly Concentration Many firms A few firm Two firms One firm Entry and exit barriers No barriers Significant barriers High barriers Product differentiation Homogenous product Potential for product differentiation Information availability Easy information flow Imperfect availability of information Source: Grant, 2005 Company Analysis Competitive Market Position In the UK market, Ryanair has the second largest market shares of 13 percent in terms of number of flights (Routesonline, 2010). In 2010, Ryanair has become the largest airline in Europe in terms of passengers’ numbers and company expects to expand its market shares as a result of competitors’ failure or consolidation (Fottrell, 2010). Ryanair has low cost competitive advantage and through following competencies, company has achieved this advantage. Low marketing costs Low staff costs because of less compensation costs and pay structure Offering a number of routes and targeting only small airports and reducing airport taxes By offering no-frills company has been able to offer low cost fares and achieving low cost operational efficiency Company has outsourced some of its services from third party such as baggage handling The attractiveness of the airline industry because of high profits gives an advantage to Ryanair however; profitability of Ryanair also depends on the market position of Ryanair in the airline industry. Therefore, Ryanair has adopted Porter’s Generic Strategy, to keep the company competitive in the airline industry. In the UK airline industry, Ryanair is pursuing a Cost Leadership Strategy by focusing on low cost rather than product uniqueness and by adopting a broad industry wide strategy rather than narrow market segment strategy. Target Scope Advantage Low Cost Product Uniqueness Board (Industry wide) Cost leadership strategy Differentiation strategy Narrow (Market segment) Focus strategy (low cost) Focus strategy (differentiation) Strategic Options Available Ryanair is the market leader in the UK airline industry as evident from the market shares of the company. The following graph shows how rapidly the passengers of Ryanair have increased from 1985 to 2009. The growth rate of Ryanair has been positive except in 1991, when the number of passengers of Ryanair declined. The low cost strategy of the company helped the company to keep its rates low and the increasing routes of the company in the UK and Europe helped Ryanair to increase its customer base. Therefore, low fares and expanding customer base helped the company to boost its growth and increase its market shares. Growth of Ryanair from 1985-2009 Year Passengers Growth Rate 1985 5000   1986 82000 15.4 1987 322000 2.926829268 1988 592000 0.838509317 1989 644000 0.087837838 1990 754000 0.170807453 1991 651000 -0.136604775 1992 945000 0.451612903 1993 1120000 0.185185185 1994 1666000 0.4875 1995 2260000 0.356542617 1996 2950000 0.305309735 1997 3730000 0.26440678 1998 4629000 0.241018767 1999 5358000 0.157485418 2000 7002000 0.306830907 2001 9355000 0.336046844 2002 15736936 0.68219519 2003 23132936 0.469977129 2004 27593923 0.192841367 2005 34768813 0.260017033 2006 42509112 0.222621894 2007 50931723 0.198136602 2008 58565663 0.14988576 2009 66503999 0.135545909 Source: Ryanair Website As a strategic planning method, Ryanair uses Ansoff Matrix. This strategic planning option gives alterative corporate growth strategies to the company and based on this matrix, company is able to identify the current services and the potential services and the markets. Existing Products New Products Existing Markets Market Penetration Product Development New Markets Market Development Diversification Available Strategic Options Mergers and Acquisitions In order to improve the financial capabilities and economies of scale, Ryanair has the option to consider a merger or acquisition with some other airline in the UK. As company is not in a position to pursue market development because of limited financial capability therefore, market development is not recommended. Operational Effectiveness The company is lacking operational efficiency as compared to most of the airlines. To improve the operational effectiveness, company can consider outsourcing some of its non-core functions such as ground services and catering etc. This strategy can help the company to enhance its focus on its core functions. Service Innovation In the increasing competition, Ryanair has already achieved the low cost leadership; therefore, company is now in a position to focus on service innovation because it currently lacks differentiation. The service innovation will not only increase the marketing capabilities of the company but it will also allow the company to improve its revenue generation. By achieving service innovation, Ryanair can adopt Product Development strategy. Diversification Ryanair can also go for diversification to expand its sources of revenues. Company can introduce its holiday package company in which it can open its hotels throughout Europe like Thomas Cook. CONCLUSION AND RECOMMENDATION The airline industry of the UK is facing significant competition and huge challenges. Ryanair is one of the market leaders in the low-cost airline industry. Based on the above analysis and the recent challenges faced by Ryanair, it is recommended to the company that it should go for the strategic option of Merger. Since the company is not in a financial position to expand to the other markets therefore, using its resources in the existing market and expanding its market shares is the best strategy for the company. As many of the airlines are facing financial problems therefore, Ryanair can expand its financial and other resources by merging with another UK airline. If Ryanair plans to merge with another airline, it can pursue market penetration strategy. By merging with another airline, Ryanair will expand its physical, financial and human resources. The market shares of the company both in the Europe and UK will further expand which will further increase the profitability of the company. The low cost leadership model of Ryanair can make it attractive for any other airline operating in the UK market and the operational efficiency of the other airline needs to be the major priority for Ryanair. BIBLIOGRAPHY Archer, 2010. Impact on UK Economy from Volcanic Ash Flight Ban should be Limited. [Online] Available at: http://www.ihsglobalinsight.com/Perspective/PerspectiveDetail18565.htm [Accessed on 30 January 2011] Batty, D., & Davies, C., 2009. Cost of Air Travel Must Rise to Deter People from Flying. [Online] Available at: http://www.guardian.co.uk/uk/2009/sep/09/climate-change-air-transport [Accessed on 1 February 2011] British Embassy Washington, n.d. Advanced Engineering. [Online] Available at: http://ukinusa.fco.gov.uk/en/business/fundamental-strengths/Advanced-engineering [Accessed on 1 February 2011] British Embassy Washington, n.d. Business. [Online] Available at: http://ukinusa.fco.gov.uk/en/business/ [Accessed on 30 January 2011] British Embassy Washington, n.d. 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