Operations Management - Ryanair vs British Airways - Case Study Example

Operations Management Ryanair vs. British Airways Introduction Ryanair Holdings Plc and British Airways are two European-based companies operating in the airline industry. Both these companies have significant market share in the world air transportation segment as well as in the UK airline industry. However, in order to compete and survive in the airline marketplace Ryanair and British Airways adopt absolutely different strategies and business models. This report aims to assess the strategies of these two airline players and to analyse how these strategies influence the operations performance. Strategy Management Strategy of Ryanair Holdings Plc Ryanair Holding Plc (Ryanair or the Company) is the Irish company, providing the services of air transportation. The company operates mainly in limited geographic area including Western and Eastern Europe. The company operates more than 550,000 flights per year on 1,600 routes across 30 countries, mainly in Europe (Johnson 2015; Popova, 2014). As of 2013, the company’s value share in the world air transportation has reached 1.1%, while the number of passenger reached 81 million (Popova, 2014). The global strategy of the company is to be the largest budget operator in terms of passengers carried in Europe (Popova, 2014). In order to establish itself as the leader in low-fares scheduled passenger airline, the company focuses on cost differentiation strategy. This strategy allows Ryanair to offer low prices to the customers and thus, to generate passenger traffic, achieving economies of scales (Ryanair, 2004). In order to implement this strategy the company needs to achieve operating efficiencies and to reduce its operational costs. Strategy of British Airways British Airways is the UK-based company that operates globally and provides services of air passenger transportation and cargo transportation. The company operates worldwide, with a strong focus made on Europe and North America. The global strategy of the company is to the leading schedule airline in the UK with three main operating hubs – Heathrow Airport, Gatwick Airport and London City Airport (Euromonitor 2011). As of 2010 (the most recent information available), the company’s world air value share was 2.1%. However, in January 2011, the British Airways has signed a merger deal with Iberia and established the International Airlines Group. It is logical to assume that this deal has increased company’s value share on the global market. Nowadays, it is the sixth largest scheduled airline in the world and the third-largest in Europe by revenue share (Johnson, 2015). This merger was a strategic initiative of the company, which would help to achieve costs savings for both companies (Euromonitor International, 2011). In contrast to Ryanair, British Airways targets business and premium segment, and therefore, pursues differentiation strategy, focusing on value-added service offered to the customers. As the company pursues absolutely different strategy and implements different business model, its operations also vary significantly. Key differences between the Ryanair and British Airways business models are summarised below in the table. Ryanair Holdings Plc British Airways Global strategy The largest budget operator in terms of passengers carried in Europe (Popova, 2014) British Airways is the leading schedule airline in the UK with three main operating hubs – Heathrow Airport, Gatwick Airport and London City Airport (Euromonitor International, 2011) Strategic positioning The leading European budget airline The leading carrier in the UK Regional Performance Western Europe, Eastern Europe Highly concentrated in Europe and North America Target audience Fare conscious leisure and business travellers Business and luxury segment Price Platform Low-cost Upscale/Midscale Strategic Initiatives Customer base diversification with a focus made on business segment Merger with Iberia, Establishment of International Airlines Group (Euromonitor International, 2011) Partnership with the key GDS players Launch of an updated and more modern website (Popova, 2014) Improvement of customer service Strategy and operations management Product and Operations Features Ryanair Holdings Plc In order to achieve its low-cost strategy, Ryanair has built a business model aiming to reduce the company’s operational costs and increase overall efficiency. A more detailed overview of product features and key operational features are discussed below. The product the Ryanair Company offers to its customers is air transportation. Even though the company operates in low cost segment and offers “no-frills” service, it provides customers with the option to purchase front row seats (from €/£ 15.00 )and premium seats (from €/£ 10.99) that provide such benefits as extra leg room and priority boarding free of charge (Ryanair, 2015). Also, the premium seats are offered to business plus category. The company offers seat pre-allocation service where customers who do not purchase preferred allocated seat can choose the seat they want online during check-in, between 7 days and 2 hours before the flight (Ryanair, 2015). The seating in the aircraft has high density, which means that the passengers have less space and therefore, less comfort during the flight. From the operational perspective it means that the company has increased capacity to transport greater number of people and thus to achieve economies of scales. The company has high load factors, mainly achieved due to affordable pricing for the flights. Below is provided a table of the Ryanair’s monthly load breakdown during the period 2013 and 2014 (Popova, 2014). As it can be noted the peak load is achieved during spring-autumn periods, which illustrates relative seasonality of the business. The number of passenger increases twice in August (compared to January). (Source: Popova, 2014) The company does not offer paid meals, as it the low-cost company and catering service will increase the overall cost of passenger’s flight. However, the company offers some snacks and drinks to its passengers for additional fee. Ryanair as a low-cost carrier strives to reduce or minimise its operational costs. That is why the company uses a point-to-point network, as it allows to save on complexity costs. This type of network implies that the company performs direct flights between destinations. On the one hand it is less expensive way of air transportation, however, it has its limitations, such as limited number of destinations and reduced potential for performing intercontinental flights (Vasigh, 2008). Frequency of flights in Ryanair is high, as the company strives thus to increase its productivity and aircraft utilisation. By maximising frequency of flights, Ryanair achieves economies of scales of its operations, which is essential for low-cost business model. While the company does not offer in-flight entertainment, as this is referred as value-added service more common to more expensive airlines, recently the company announced about its plans to introduce this service to the passengers. E-ticketing is a common service among all air-lines despite the segment in which they operate. This function allows the company to reduce check-in time and thus make its operations more effective and less time-consuming. The company does not operate frequent flyer schemes or programs as it relies on its ultra-cheap fares, that increase passenger’s loyalty and ensure customer’s retention (Gorodnichenko and Bilotkach, 2014). Ryanair uses single aircraft model, Boeing 737-800, with a passenger capacity for 189 people. This initiative is an integral part of the company’s strategy as it allows to ensure low fares for the passengers as well as safety during a flight (Ryanair, 2015). The company currently operates 303 aircrafts but is planning to expand the fleet to 400 by 2014, and to 500 by 2019 (Ryanair, 2015). The aircraft is highly utilised, which means that the company is actively using its fleet in order to provide services to passengers. Another important operational element is the choice of the airport. Ryanair uses secondary or regional airports in order to provide short-haul routes. Thus, the company reduces airport fee costs, and avoid the costs for transit passenger assistance costs, baggage transfer, and other costs incurred in case of long-distance (transit) flights (Ryanair, n.d.). Also, secondary airports are usually less congested, which means that the share of on-time departures will be higher and turnaround times will be faster (Ryanair, n.d.). The company’s turnaround is quite fast, approximately 25 minutes. Thus, the company operates short distances but more frequently with minimal turnaround time. Short-haul routes allow the company to avoid the necessity to offer “frill” services that are normally provided during long flights (Ryanair, n.d.). British Airways In contrast to Ryanair, British Airways (BA) has developed absolutely different approach to its operations management. Even though both companies provide air transportation services, British Airways’ product is absolutely different. British Airways have different classes of seats, which vary from economy to business class. The company cares about comfort of it passengers and charges for lower density seating premium price. Also, the company offers a great menu choice for its passengers, which can be pre-order beforehand. For this service, the company also charges a fee, depending on the type of meal and ingredients. In-flight entertainment is an integral element of the BA’s strategy, as it is one of the services that add value to the overall passenger’s experience. Moreover, in order to increase customer’s loyalty the company offers frequent flyer schemes, encouraging thus its passengers to use this specific airline (or its partners) and to accrue miles. Members of frequent flier schemes can enjoy thus different privileges, such as free tickets, higher status, opportunity to use business hall of BA in the airports, etc. Thus, in order to maintain its premium service, BA needs also to operate business halls in major airports for making it available to Loyalty Program members. British Airways also demonstrates high load factor at average of 84.4 % (Centreforaviation.com, 2013). British Airways is a well-established brand in the world which partners with other brands and airline alliances, creating thus additional passengers’ flow. The company performs frequent flights due to effective marketing and broad range of routes. The company uses several aircraft types and its fleet is recognized to be one of the largest in the world. The aircraft types vary in size and purpose for utilisation. Thus, for example, the Boeing 777 is used specifically for routes to North America and Asia. Thus, larger aircrafts are operated for intercontinental flights, while smaller aircrafts are more frequently used for domestic and European routes (Britishairways.com, 2015). Also, availability of wide range of aircraft provides the company with flexibility to adapt the size to the number of passengers and thus to utilise aircraft more efficiently. As the company is positioning itself as premium service provider targeting business and premium segment, it operates main airports, namely Heathrow Airport, Gatwick Airport and London City Airport. BA adopted a hub-and-spoke network structure as it adds value on both cost and demand side. On the one hand, the customer are offered routes with greater geographical reach, and on the other hand, the company has capacity to perform frequent flight to a large number of destinations (Gillen, 2006). While Ryanair achieves high utilisation of aircraft due to frequent flights for short distance, British Airways achieves high utilisation of the fleet due operating intercontinental flights for long distance. The hub-and-spoke network increases variable and fixed costs and lowers productivity, therefore it impacts pricing, service and fleet strategies (Gillen, 2006). Moreover, in addition to providing passenger air transportation service, British Airways offers cargo services through separate unit – British Airways World Cargo. This is competitive advantage of the company, and additional revenue source. Below are summarised key points of product and operational features of each brand. Ryanair British Airways Product features Single class of seat (yes or no?) No No Seating (high or low seat density?, Seat pre-allocation possible? High density seating Seat pre-allocation is possible Lower density seating for premium class Seat pre-allocation Load factors (high or low occupancy?) High High Catering (no, little or always?) Little Always Network (point to point or hub and spoke?) Point to point Hub and spoke Frequency of flights (high or low?) High High In-flight entertainment (yes or none?) None (but planned) Yes E-ticketing (essential or not necessary?) Essential Essential Frequent flyer schemes (yes or none?) No Yes Operational features Single aircraft type in fleet Single, only large Several aircraft types (both large and small aircraft) Airport choice (main or secondary?) Secondary and regional Main Aircraft utilisation Highly utilised Highly utilised Fast turn around (yes or no?) Yes No Flight distance operated (long and short hauls or only short?) Only Short Long and short Cargo (do they carry cargo besides passengers?) No Yes The impact of operations on performance imperatives A trade-off analysis among the operations performance objectives quality, speed, dependability, flexibility and cost. Low cost – Ryanair Traditional – British Airways Qualifiers Winners Qualifiers Winners Quality Safety (of aircraft) Safety Customer service Customer service Comfort Speed … Dependability On-time departures, Weather conditions On-time schedule On-time departures, Weather conditions Flexibility Frequency, Timings Frequency, Timings, Destinations Flexibility to change flight Long-haul destinations Cost Fare cost; Aircraft equipment cost; Personnel costs; Airport handling cost Fare cost Fare cost Premium pricing Table1: Order qualifiers and order winners of Ryanair and British Airways The operating costs of Ryanair can be divided into four major categories: aircraft equipment costs; customer service costs; personnel productivity; and airport access and handling costs (Ryanair, n.d.). References: Britishairways.com, (2015). Entertainment: In Flight Entertainment, British Airways. [online] Available at: http://www.britishairways.com/en-gb/information/entertainment [Accessed 26 Jun. 2015]. Britishairways.com, (2015). Airbus 318-100 | About BA | British Airways. [online] Available at: http://www.britishairways.com/en-gb/information/about-ba/fleet-facts/airbus-318-100 [Accessed 26 Jun. 2015]. Centreforaviation.com, (2013). IAG pax numbers up 31% and load factor stable at 84% in Sep-2013, group premium traffic stable | CAPA - Centre for Aviation. [online] Available at: http://centreforaviation.com/news/iag-pax-numbers-up-31-and-load-factor-stable-at-84-in-sep-2013-group-premium-traffic-stable-270514 [Accessed 26 Jun. 2015]. Gillen, D. (2006). Airline Business Models and Networks: Regulation, Competition and Evolution in Aviation Markets, Review of Network Economics, 15 (4), pp.366-287. Gorodnichenko, J. and Bilotkach, V. (2014). Frequent flying is getting a lot more rewarding – for those at the very top. The Conversation, [online] Available at: http://theconversation.com/frequent-flying-is-getting-a-lot-more-rewarding-for-those-at-the-very-top-34458 Johnson, A. (2015), ‘Scheduled Passenger Air Transport in the UK’, IBIS World Industry Report H51.101, Euromonitor International, (2011), ‘British Airways Plc in Travel and Tourism (World), Passport, Available at: www.warc.com Popova, N. (2015), ‘Ryanair Holdings Plc in Travel and Tourism (World), Passport, Available at: www.warc.com Ryanair (2015). The Small Print | T&Cs. [online] Available at: http://www.ryanair.com/en/terms-and-conditions/article8-animalscargoandhuman/ [Accessed 26 Jun. 2015]. Ryanair (2015). Which seats can I select? | Frequently Asked Questions. [online] Available at: https://www.ryanair.com/en/questions/which-seats-can-i-select/ [Accessed 26 Jun. 2015]. Ryanair, (2015). Ryanair Fleet | Our Aircraft. [online] Available at: https://www.ryanair.com/us/about/fleet/ [Accessed 26 Jun. 2015]. Ryanair, (n.d.), ‘Strategy’, [online] Available at: https://www.ryanair.com/doc/investor/Strategy.pdf Vasigh, B., Fleming, K. & Tacker, T. (2008), Introduction to air transport economics: from theory to applications, Ashgate, Aldershot. Read More