Strategic Analysis of Ryanair - Case Study Example

A case study of Ryanair While many industries in downturn period, the airline industry is blooming by evolving to flexible strategies for various business models (Wensveen and Leick, 2009). The legislation and de-regulation processes of geographical areas, competitive conditions and labour resources are factors influences the productivity and efficiency of airline. Based on those factors, data envelopment and total factor productivity were analysed in forty-nine worldwide airlines. This airline’s efficiency and productivity study shown that low cost carriers are more efficient than full service carriers (Barbot, Costa and Sochirca, 2008). As one of the most successful airlines around the world, Ryanair’s strategies are essential for its future development. The objective of this report is to assess whether Ryanair airline strategy in the short distance haul sector is sustainable by using the associated case study, and related research. Furthermore, suggestion about where future development point may come from will be discussed. 1. Basic Introduction Founded in 28, Nov, 1984 and headquartered in the suburb of Dublin, Swords, Ryanair Ltd is a Irish budget airlines with more than 11, 000 employees and over 370 Boeing 737-800 aircrafts. With a low-cost business model, Ryanair expands rapidly after 1997 when deregulation of the aviation industry was happened in Europe (EU). Their operation mode was characterized with online sales, short-haul flights, single-class configuration, no-frills services and so on. Have extensive business experience, one executive and eleven non-executive directors in Ryanair board now governing the whole Company. Complete business strategy and policy added the range of necessary management skills, knowledge and international experience bring from the directors lead the airline into a much more successful company. Figure 1. The number of passengers and staffs during the past 30 years (Ryanair.com., Retrieved 16 March 2017.) As its current CEO, Michael O’Leary who has lead Ryanair to dramatically successes for 27 years, said Ryanair was going to be the Walmart in air. Ryanair developed from a small airway which only offers short journey from Waterford to London and it is now the largest European low-cost carrier airline among one hundred top airlines, and having carried more than 100 million passengers across borders last year. The increasing trend for number of passengers and employees can be seen from Figure 1. The number of served countries and destinations of Ryanair now is 33 and 185, respectively, including Europe, Africa (Morocco), and the Middle East (Israel) (Ryanair.com., Retrieved 16 March 2017.). Nearly 1,300 million euro net profit makes Ryanair one of the world’s most profitable airline in 2016, which grows to 43% than 2015. Worthy to note that, all the year refers to financial data in this report is fiscal years for different companies. Considering about the share capital of Ryanair, the number of ordinary shares unceasing decreased from 1,383,237,668 (2014) to 1,377,661,859 (2015) and to 1,290,739,865 (2016). Table 1. The key trends for Ryanair from 2010 to 2016 (Ryanair, 2016) Different airlines with various scales for the reason they carried kinds of business model and other features. Table 2. shows the comparison of scale Ryanair and other four companies, containing total assets, net income, number of passengers, employees and fleets, airlines. The scale is bigger among the EU airlines but smaller than other two companies in terms of number of aircrafts. But the long haul routes help the British airway to earn more assets, which also learn from the low cost model after a tough time (Direction, 2004). While its staff to fleets ratio is the lowest among those airlines, as 37:1, which means their employees are most productive staff. Table 2. Scale of five airlines worldwide (Annual report of five airline) 2. Strategic analysis of Ryanair Obviously, now Ryanair is the largest low-cost carrier in EU. It reports an increase of 15.5% in the total operating revenue to 6,536 million euro and 43.3% in profit after tax to 1,242 million euro, even under the depressed EU economy environment such as the devaluation of the £ following the Brexit Referendum and increasing competition. The analysis part will be divided into low cost strategy, efficient positioning strategy, ancillary revenues strategy and responds to challenges strategy. 2.1 Ultra-low cost strategy Ryanair illustrated that a successes company should understand their customers and offer first class service at low cost (Thomas, 2015). Listing the company’s expenditures rather than people’s approval on the top of the agenda is the strategy adopted copied from Southwest Airlines by Michael O’Leary. The original low cost carrier model characterized with three features, including product features, flight distribution and operating features. Usually, the point-to-point flight fare is high frequencies but low, simple, unrestricted and no interlining was used. Free meals or alcoholic drinks are not offered and customers can buy it voluntarily. The tickets can be ordered from travel agents and call centres or online, noted that the internet sale is now the most popular way for these low cost airlines. Single fleet type was adhered to use while the high-density seating is set without seat assignment even through one can book some seats by extra charge (Alamdari and Fagan, 2005). The sector length is short to only average 400 nautical miles. Ryanair has continuous experienced sustainable low cost competence during the past years. By cutting the unit costs and carried out “Always Getting Better (AGB)” program, they keep to lowering air fares and costs while improving customer experience. Ryanair even guarantees that passenger can enjoy "double the difference" i.e. double the difference between any competitor's lower return fare, if a cheaper flight ticket on a qualifying route with another company was found (Ryanair.com., Retrieved 16 March 2017.). This long adherence to the original model was shown by Alamdari and Fagan that may increase its profitability. Figure 2. Total operating expenses of Ryanair (2016, data from their Annual report) Ryanair endeavours to reduce their operating expenses: route charges, fuel and oil, depreciation, shown in Figure 2. The fundamental operating cost can also be reduced by using a single type fleet since it means lower staff training cost, repair and depreciation cost. Other equipment costs are minimum when only Boeing 737-800 was used, such as the maintenance and storage of aircraft components. Besides, the support and discount from partner Boeing company also enables the low cost strategy. The airport access and handling costs will be cut back by choosing secondary airport, meanwhile the airport would like to negotiate the rent with Ryanair since thousands of passengers were attracted to their place each month. For example, Ryanair suggests the customers to check-in online instead of check-in at the desks which were rented by the company. The passengers were offered with handling and ticketing services on the aircraft thus significantly speed waiting and boarding time. The total operating cost was reduced during the past three years, however, the staff wages and airport and handling charges were increased. Staffs affect the expense not only by the wages they get from the company, the most important is their productivity will directly take its toll on the company’s cost. The employees should be hard working and high productive but they all attracted by the competitive wages and profit shares adopted by Ryanair. In fact, the flight attendants and pilots are more productive when they realise that their personal commissions and payment are directly contact with the benefits of company. 2.2 Efficient positioning strategy In this section, analysis about the ancillary revenues, flight punctuality and frequent flights was used to shed a light on Ryanair’s efficient positioning strategy. Ancillary revenues play an important role in airline’s operation cost. Ryanair’s ancillary revenues increased 11.7% from 2014 to 2015, which comprise three sectors: non-flight scheduled operations, in-flight sales and internet-related services. The ancillary revenues from different part can be seen from Figure 3. While ancillary revenues decreased 13.9% from internet-related services, primarily commissions received from products sold on Ryanair’s or linked websites, due to an improved product mix and the implementation of fully reserved seating across the network. Revenues from non-flight scheduled operations increased to €1,164.4 million in 2015 from €1,012.4 million in the 2014, included revenues from excess baggage charges, sales of rail and bus tickets, car rental fare, priority boarding charge, reserved seating charge, accommodation and travel insurance. Ryanair prefer charges on-flight rather than provides frill services. Figure 3. Ancillary revenues of Ryanair (million euro, 2014 and 2015) Flight punctuality measured through industry standards, i.e. ‘on time’ means flight arrives on or within 15 minutes of its scheduled arrival time, which is important for travellers especially for business passengers. The main way to fulfil better punctuality for Ryanair is using secondary airport and increase online automatically services. The less congested way and more airports access made Ryanair operating over 600,000 flights in 2016 and 88% of those flights arrived on-time, the punctuality exceed 90% for 2013, 2014 and 2015 (Figure 4.). Based on their monthly punctuality statistics, it continues to beat other airline in EU. Figure 4. Ryanair monthly punctuality stats: colour chart from white to red, average value as the middle colour tone (2013~2016,and EasyJet 2013) The frequent flights strategy was carried out to transport more customers who are time-sensitive. With providing more flights, Ryanair tries to offer more point-to-point short hauls services, then a faster travel could be guaranteed. As return, more passengers would be attracted and a higher aircraft utilization would be achieved. Besides, the fewer lost baggage and few cancellations attribute to Ryanair’s benefit. 3. Environments 3.1 Political Environment The ‘Brexit’ for Ryanair according to Chief Executive’s report was both surprise and a disappointment since they stand on the ‘remain’ side (Michael O’Leary, 2016). Off from EU for U.K. lead to political and economic uncertainty for bilateral. The consumer confidence will respond as active or passive load factor for the long haul. The oil, insurance, fleet and other obligations are denominated in U.S. dollars of U.K. pounds, therefore the company’s operations and financial performance can be affected by fluctuations of those currencies. As a multinational company, Ryanair is vulnerable to exchange rate risks between euro and other currency. Approximately 28% Ryanair’s revenue in 2016 came from U.K., so leaving EU have changed the relationship with the U.K, thus renegotiation about employment, tax and other roles is necessary. No specific clear prediction can be tell for the effects of Ryanair, therefore, any eventualities should be considered to boost the growth. 3.2 Economic Environment Furthermore, as part of its change in marketing and airport strategy, the company will expect increased marketing and advertising costs along with higher airport charges due to the increasing number of primary airports to which it operates. 3.3 Technical Environment The new website and mobile app in was launched in Oct, 2016 to support the passengers a better online booking and searching experience. When considering about the environmental sustainability, more argument emerges with the rapid growth of low cost airline (Graham and Shaw, 2008). In addition, through low cost airlines state that their fleet is more fuel-efficient, lower emission and quieter, nevertheless, rapid growth in air travel still bring more environmental problems, like the atmospheric pollution. Again, the progress technology is helpful for reducing aircraft atmospheric emissions, well the technological returns are not enough for diminishing offset by aviation’s growth. It is undeniable that new technology should be used in the aircraft, both for power supply and emission reduction. 4. Responds to challenges Ryanair continues to enjoy rapid growth with the low cost advantage and still a fair number of new airlines join in this group. However, some signs indicated that the low cost carriers is limited, with the decreasing of average flight frequencies and increasing average route distances especially in Europe and North America. This may be results from the increasing route density problems and exceedingly saturated markets (de Wit and Zuidberg, 2012). A strategy adaption by shifting to primary airports, promoting transfers, engaging in code sharing, entering airlines alliances or merging other airlines is vital for airlines like Ryanair. Falling in the maturity phase, Ryanair responds to the sluggish economy quickly by grounding aircraft during winter season (from November to March). But the decreasing of flights may lead to negative labour effects. 5. Conclusion Processing the “Always Getting Better” program, Ryanair now implements kinds of strategic initiatives to help the company to get more profit, such as scheduling more flights to primary airports, cooperating with travel agents and call centres to sale more tickets and adjusting the management plan. Additionally, other strategies including the reduced penalty fees, customer-friendly bags allowances, longer grace periods (24 hour) and allocated seating system are expected to improve the situation of Ryanair. It is seen that, Ryanair already adjusts their strategies basis on the original short distance haul sector. This indicated that the company realizes that some modification for the single flight mode is needed for a sustainable development. Some suggestions about how to keep the airline growth are given as fellows. The soaring oil cost and unpredictable policy challenge the growth of Ryanair. Ryanair was provided with 18 months protection against fuel price fluctuations which could release their fuel cost problem for certain period. However, the declines in the price of oil may cause hedging losses that could bring some negative effects on Ryanair’s financial condition. Passengers are still looking for bargaining at each flight at any time, low budget airlines have to focus on bargaining with innovative offers even in saturated markets (Huettinger, 2006). The most important problem for Ryanair now is to keep the cost constantly and meanwhile offer much cheaper ticket to customers. Since the mobile client is much more popular among the people, a surprise bonus in mobile app is an efficient way to encourage customers use the app to book ticket or online check-in. More functions like products sale can be integrated in their latest mobile app. However, increase routes between EU to oil-rich Africa countries may alter option to reduce the fuel cost. Expand its subsidies to Asia market in the view of Ryanair management system could be another way for avoid the fluctuated policy environment. Reference Alamdari, F. and S. Fagan (2005). 'Impact of the adherence to the original low‐cost model on the profitability of low‐cost airlines', Transport Reviews, 25, pp. 377-392. Barbot, C., Á. Costa and E. Sochirca (2008). 'Airlines performance in the new market context: A comparative productivity and efficiency analysis', Journal of Air Transport Management, 14, pp. 270-274. Direction, S. (2004). 'Industrious times at British Airways and Ryanair: Winning the battle for the skies.', STRATEGIC DIRECTION, 20, pp. 4-6. Graham, B. and J. Shaw (2008). 'Low-cost airlines in Europe: Reconciling liberalization and sustainability', Geoforum, 39, pp. 1439-1451. Huettinger, M. (2006). 'Air Baltic and SAS–a case study in the European airline industry', Baltic Journal of Management, 1, pp. 227-244. Ryanair (2016). 'Annual Report 2016'. Ryanair.com. (Retrieved 16 March 2017.). 'About us'. Thomas, M. (2015). 'Ryanair: success before love', STRATEGIC DIRECTION, 31, pp. 1-3. Wensveen, J. G. and R. Leick (2009). 'The long-haul low-cost carrier: A unique business model', Journal of Air Transport Management, 15, pp. 127-133. Read More