Energy Industry and SWOT Analysis for Ryanair - Assignment Example

Name Class Unit Topic 4 Energy industry The global energy demand has been on increase over the years. It is estimated that the world energy demand will be 50% higher than the current level. This is based on an annual growth rate of 1.6% (Filis, 2010). It is estimated that more than two thirds of the energy demand will come from the developing countries where there are high economic and population growth. Fossil fuels are the major world energy supplies and will be meeting more than 80% of the demand in this scenario (Narayan & Narayan, 2007). The growth of natural gas demand has been driven by power generation overtaking coal. The transport sector is the single largest consumer of fuel (Yang, Hwang & Huang, 2002). The share for nuclear power has been on marginal decline while hydropower demand remains constant. The current world energy resources have the capability to meet the growing demand. Despite this, there is need for more oil reserves to ensure that the peak production does not occur before the projected period (Narayan & Narayan, 2007). Main real world demand and supply factors that influence the price of oil, including macroeconomic factors After four years of stability where the price per barrel was around $105, oil prices have faced a sharp decline since 2014. Macroeconomic conditions play a major role in determining the oil prices. For example, sharp increase in oil prices is preceded by economic expansion and low real interest rates. Decrease in oil prices in some cases coincides with global recession and high real interest rates. This implies that monetary expansions and contractions have an effect on oil price shocks. For example, monetary expansion leads to positive oil price shocks. Monetary conditions influence demand hence prices through economic growth (Zhang, Fan, Tsai & Wei, 2008). Interest rates influence oil prices based on channels which are related to opportunity cost of investing in real assets. The interest rates have a significant influence on the energy firms to hold their inventories (Blanchard & Gali, 2007). Also when there is a strong demand for energy and stagnant supply, the prices for oil rises. The oil prices are based on US dollar. A depreciation in dollar leads to an increase in demand for oil in the non-dollar regions. This makes oil less expensive using the foreign currency. In some cases, dollar depreciation may lead to expansionary monetary policies in other countries. This is especially in economies which have their currencies pegged to dollar. When there are low interest rates, an increased money supply leads to increasing demand for oil (Zhang, Fan, Tsai & Wei, 2008). Income rather than the price is a major determiner for the oil demand. This helps in understanding the short term changes in oil prices. Price booms are in most cases are associated with an economic growth (Blanchard & Gali, 2007). For example, the increase in demand for oil after 2002 was caused by the unexpected growth by the countries outside OECD. A research has shown that the main driver for the global oil demand has been the emerging economies which include China and India. This is due to their strong economic perfoamcne and high oil intensity in their GDP. Most of the growing economies use more oil in their output as compared to USA (Narayan & Narayan, 2007). Historically, oil prices changes and inflation has been directly correlated. This relationship varies widely based on the country. High increases in oil prices were followed by instances of high inflation rates in many countries. It has also been observed that decline in oil prices have had several macroeconomic implications (Filis, 2010). Real world examples, show how changes in the price of oil affect pricing and costs in road/rail/air transport The transport sector is highly affected by the volatility in the oil prices. In the airline industry, fuel cost is the highest contributor for their operation costs. When the fuel prices fall, the airline industry is able to enjoy reduced costs (Narayan & Sharma, 2011). An estimated third of the airline cost is fuel based. For example, air transport association has projected that the falling oil prices will lead to a collective profit of $25.0 billion in 2015 due to reduced oil prices. Delta airlines stand to gain $1.7 billion in 2015 due to low fuel costs. Southwest airlines estimate a savings of $0.80 for every $1.00 drop in the fuel prices. Also, the falling oil prices pushes up the cost of acquiring fuel efficient aircraft such as Boeing 787. The railway industry also benefits in a great way. For example, the North American energy boom has helped the Canadian railroad operators. Canadian national railway co. and the Canadian pacific railway ltd have benefited a lot. Despite this, oil is not a major contributor for the railway costs. Also, as the oil prices reduce, rail transport loses its cost advantage. The consumer prefers rail due to low costs and trade-off the speed, convenience, and reliability among others (Narayan & Sharma, 2011). The road transport sector benefits from the drop in the oil prices in both short and long run. Drivers are able to enjoy higher margins through low costs. The trucking business is able to profit from this and may pass some of the savings to customers. For example, National Delivery Services reduce their fuel surcharge to the customers (Narayan & Sharma, 2011). Shipping industry benefits a lot from reduced oil prices. This is due to fact that fuel accounts for a large percentage of shipping costs. For example, in 2008 during the oil spike MTS was able to reduce fuel costs through deploying new and efficient ships. The shipping companies starts slow steaming consolidates using large vessels and uses efficient ships when oil prices are high (Filis, 2010). Demand and supply diagrams to show examples of how this real world demand and supply factors affect the price of oil Price of oil p.1 Quantity Q.1, Q.2 KEY Supply Demand Shift in supply The current low oil prices are as a result of the faltering demand and increase in the shale oil deposits. OPEC has not been reducing production even as the prices fall while the shale gas produced has been on increase. The surging oil demand in developing countries has led to an increase in demand for oil. The market is competitive and the price is equal to the marginal cost of the highest cost that is required to make balance between demand and supply. Other factors leading to the above graph are; exchange rates, availability of substitutes, wars, preferences and financial crisis. Topic 5 Low Cost Airline Model Ryanair Ryanair is a low cost airline based in Europe. The airline was established in 1985 by Christopher Ryan. The airline started with 51 employees and had 5000 passengers in their first year of operations. Ryanair was formed with an aim of breaking the duopoly in the London Ireland flights between British airways and Aer Lingus (Box & Byus, 2005). Ryanair was the first low cost airline in the European market and has changed the market structure in a great way. Ryanair underwent rapid expansions in 1980s which helped in acquiring new routes, new planes and offering (Creaton, 2007). Despite an increase in passenger numbers, the airline continued making loss. This is due to fact that Ryanair operated as a low fare airline instead of low cost airline. The airline was offering the same services as the major airlines but at low costs. With the price war, Ryanair faced a lot of challenges (Box & Byus, 2005). The airline underwent restructuring and new management was put in place. The airline lowered the costs more and eliminated all costly routes. The airline increased the frequency of flights on the profitable routes and utilised a single type of airplane to reduce the maintenance costs. The airline utilised regional airports which has lower landing costs and better turnaround times. The airline attained high profits and was able to offer cheapest flights in Europe (Creaton, 2007). Ryanair has been very fast in taking opportunities and using them to expand. When EU deregulated the market, Ryanair took the opportunity and expanded in a rapid manner in the EU states (Box & Byus, 2005). The airline was able to compete with British Airways and Aer Lingus. The airline was among the first in the region to launch their website in 2000. Within a period of one year, three quarters of their bookings were made through online. The airline eliminated the traditional check in desks and adopted the baggage drops which saved a lot of costs and time (Creaton, 2007). Ryanair has posted an impressive growth in time when most of the airlines were suffering huge loss (Box & Byus, 2005). The airline passengers have increased from 5,000 in 1985 to 76 million in 2011. The airline has maintained its position as a low cost airline and is still expanding at a fast rate. The passengers have continued to grow (Creaton, 2007). Elements of the economic production function (Capital, Labour, Land, Entrepreneurship and technology) for a Ryanair Labour costs are the largest expense in the airline industry. This has made the labour suppliers to have great bargaining powers. When there were high profit margins, the employment conditions offered by the airlines were excellent. There were powerful labour unions and high wages. Through industry deregulation, low cost airlines have come up with cheaper wage contracts. Ryanair uses cheap wage contracts among the workers. This has enabled the airline to reduce their labour costs in the industry (O’Connell & Williams, 2005). Capital is highly required in the airline industry. For a low cost airline, minimising the capital is required for the airline to succeed in the low cost model. Ryanair has been operating through a model that minimises the costs (Barrett, 2004). The airline has been able to gain profits from their operations which are used in expansion and acquiring new assets. For example, the airline has been relying on Boeing -737-800 fleet. This is an exclusive flight that makes it possible to minimise the maintenance costs. Also the airline ensures that they avoid the high costs involved in switching aircrafts. This is due to costs of modifying the hangars, personnel and associated costs. Land refers to the natural resources used by the airline in this case. This includes land and air where airports and travel routes are based respectively. Ryanair has been able to utilise land as a factor of production in a great way. This is through ensuring that the airline expands to new markets through the established airports and travel routes. Ryanair has taken advantage of market liberalisation to expand their services to new airports. The airline has expanded to the EU market and beyond through seeking their right to use the resources (Barrett, 2004). Entrepreneurship is a scarce resource which is required for the business to run. The expansion of Ryanair from its humble beginnings in the 1980s is a major proof of entrepreneurship (Barros & Couto, 2013). The founder of the airline was able to use the other factors of production to come up with a successful low cost airline. The entrepreneurship spirit enabled the airline to challenge the duopoly of the European airline industry. This is through taking risks against the established airlines and competing with them. Entrepreneurship is scarce since not everyone is ready to take up risk. The success of Ryanair is based on the ability to make a successful decision in business. The airline was the first low cost carrier in the European market (O’Connell & Williams, 2005). Ryanair has been able to adopt technology at a very fast rate. The airline has one of the most advanced technologies in the industry which has benefited both the airline and the passengers. The airline has been partnering with other technology industries to come up with new technology. Through partnership with Maxroam, the airline has been able to reduce their mobile roaming costs by more than 70%. The users are allowed to use sim cards which reduce the roaming charges. Use of IT has enabled the industry to reduce costs and gain a competitive advantage. IT has made it easier for the customers to get near the customers (Malighetti, Paleari & Redondi, 2009). SWOT analysis for Ryanair Strengths Low costs-Ryanair has the lowest airline costs in Europe and one of the lowest cost airlines. The airline production costs has been low than that of their competitors (D’Alfonso, Malighetti & Redondi, 2011). Low fares-the airline model of operation allows low fare on profitable basis. The average fare for the airline is low than that of the competitors in the region. Most of the airline competitors operate on the long haul routes. This has made Ryanair to have low average fares across Europe. The airline average revenue based on every customer is lower than the competitors (Barros & Couto, 2013). Size- Ryanair has the largest short haul carriers in Europe. This is through their 16,000 routes across 30 countries. The airline operates in 186 airports and is the best in passenger numbers (D’Alfonso, Malighetti & Redondi, 2011). Fleet- Ryanair has been operating using a single aircraft type Boeing 737. The airline has been able to create a strong financial position which has made it possible to make large orders for Boeing. The airline has strong negotiating power which may lead to significant discounts (Malighetti, Paleari & Redondi, 2009). Weakness Brand perception has been one of the weaknesses for the airlines. For many years, the airline has been receiving poor performance in brand perception. This is through range of polls, awards and surveys. The airline earnings are highly seasonal. The profits are affected by the northern hemisphere summer. This seasonality has been a major determinant of the airline earnings (O’Connell & Williams, 2005). Opportunities The airline can enhance their customer service. This is through enhancing the quality of the passengers’ interactions with the airline. The airline can redesign their website to make it easier to use. There is need to increase their investment in new technologies. This is through use of mobile apps among other facilities that can make their services highly efficient. The airline should continue focusing on the business travellers segment (O’Connell & Williams, 2005). New aircrafts can help the airline to reduce their costs. The airline has been investing in new airplanes as evidenced in their 2014 order. The airline ordered 100 Boeing 737 max200 aircrafts. This is a delivery that is expected between 2019 and 2024. The new order has more seats than the current fleet (Malighetti, Paleari & Redondi, 2009). Threats The airline has to ensure that they do not damage their track record as most safe and punctual airlines. The efforts to buy Aer Lingus would have been a major threat (Koch, 2010). This is due to fact that this would have led to acquisition of an airline which is of a different business model (Brophy & George, 2003). This would have affected the airline operations and management. The airline must ensure that they don’t lose their focus on their low cost model. The competition in the industry is also a major threat to Ryanair. The airline must ensure that they are well positioned for competition (Barrett, 2004). Topic 6 Price and non-price competition in oligopoly markets generally, including those related to macroeconomic conditions In an oligopoly, if one of the firms wants to change price, there are two ways in which other firms can react. Other firms can match the new prices or ignore them. The action of other firms will be determined by the direction of the price change. For example, if one of the firms increases their price, other may not follow the suit since they may take advantage and take the market share from the price changer (Huck, Normann & Oechssler, 2000). This is due to fact that the demand curve is more elastic and when one firm raises the price, the customers switch to other firms. This lowers the revenue for the firm which has increased the price (Häckner, 2000). If one of the firms lowers their price, others will follow the suit. This is aimed at preventing the loss of their market share. At this point the demand curve is inelastic and all firms acts in concert. This makes the demand curve to have a kink. The demand changes from being very elastic at higher prices to inelastic when the prices are low. The marginal revenue curve for oligopoly is also kinked. Marginal cost curves intersect at same quantity that is produced by the oligopoly (Bauer, 2013). The kinked demand curve is an explanation why oligopoly resists any changes to price. Firms in oligopolistic engages in price war where firms successfully lowers their prices to gain a market share. In some cases, firms in oligopoly engage in cartel model where they collude to divide the market among themselves (Liski & Montero, 2006). This is aimed to restrict the competition. The fixing of prices allows them to earn monopoly profits. The firms maximise profits through producing output where marginal cost is equal to marginal revenue. If one of the firms in collusion cheats, price war may occur. Collusion is against the law in most countries. An example of cartel is OPEC which is formed by the major oil producing countries (Huck, Normann & Oechssler, 2000). In an oligopoly, there is a dominant firm which others firms follow in price changes. The dominant firm in this case acts as the price leader. Firms in an oligopoly change their prices when the cost changes are substantial. The price leader may limit price increase with an aim of discouraging new competitors (Bauer, 2013). This is known as limit pricing. When the price leadership breaks, a price war results which takes a short time. Oligopolies lack productive and allocative efficiency that is in pure competition. Oligopolies are capable of thwarting competition which allows them to restrict output and maximise their profits (Dickson & Hartley, 2013). The non-price based competition is carried out through use of delivery services, online sales, customer service and after sale service (Häckner, 2000). Roles and importance of price and non-price competition strategies in UK supermarkets UK supermarkets An oligopoly is a market condition where there are few independent suppliers of goods and services making it hard for competitive pricing. The main factor in an oligopoly is the existence of a few competitors. This is a condition that is seen in the UK supermarkets where there are few supermarkets (Tesco, Sainsbury and Asda) dominating over 75% of the national market (Lan, Lloyd & Morgan, 2012). The rest of the competitors are small companies. All supermarkets in UK have similar products from the same suppliers. The minor difference on the products occurs in cases where the supermarkets produce their own generic products (Schiraldi, Smith & Takahashi, 2012). Despite this, the products are the same in all supermarkets and the differentiation is minimal which is a feature of an oligopoly is (Naylor, 2002). In an oligopoly, firms compete on price with an aim of becoming the market leader and gain a large market share (Goettler & Gordon, 2014). This is seen by the price wars in UK supermarkets where price cuts are announced in given products by one supermarket and others follow suit. A research shows that supermarkets in UK have homogenous prices on similar products. Due to the oligopolistic manner of the market, all supermarkets compete on price to appeal the customers. The kinked demand curve shows that the competitors will reduce their prices if a price wars starts. Use of discount coupons is common in the UK supermarkets to attract the customers (Schiraldi, Smith & Takahashi, 2012). The competition aiming the UK supermarkets is stiff which has made them to look for non-price based competition. Most of the supermarkets give their consumers attractive services and facilities to attract and retain them. This is seen through online shopping where consumers can make shopping at comfort of their homes. Others offer delivery services to the customers. The supermarkets have been coming up with creative measures which ensure that the consumers are comfortable and are convenient during their shopping. This is aimed at retaining the customers despite the competition in the UK supermarkets. Some of the supermarkets such as ASDA offers help in carrying the customer shopping to the car. Home delivery is in some instances done free of charge. Each of the supermarkets has its own way to advertise and attract customers. There is also use of loyalty cards and increased their opening hours (Lan, Lloyd & Morgan, 2012). Apple and Microsoft in oligopoly Two companies that operate in oligopoly are Apple Inc. and Microsoft. Apple Inc. has been using the oligopolistic price and non-price strategies in their competition. This is also seen in Microsoft in the computer software market. Both companies have been able to retain long run abnormal profits. This is through use of high barriers of entry with an aim of capturing excess profits. For example, there are few competitors in the computer software market giving Microsoft and Apple an advantage. Apple and Microsoft compete for the market share through both price and non-price based strategies. Apple Inc. has been able to emphasise on their unique product features. This has created customer loyalty to Apple. Both companies have patents which makes it hard for the competitors to emulate their differentiated products. The firms are both price setters in the industries rather than price takers (Wonglimpiyarat, 2012). In the oligopoly, Apple and Microsoft can collude to cooperate with each other. This would allow them to come up with better products. Despite this, it would lead to a cartel which is not allowed in most of the markets. The firms compete on prices as well as non-price strategies. Non price strategies used includes advertising, after sale services, quality and online sales. Each of the firms spends a lot of revenue in advertising their products (Wonglimpiyarat, 2012) References Barrett, S. D. 2004. “The sustainability of the Ryanair model.” International journal of transport management, Vol.2, no.2, p.89-98. Barros, C. 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