Impacts of Credit Crunch on Ryanair - Research Proposal Example

Impacts of Credit Crunch on Ryanair The world in 2008 suffers from a phenomenon called credit crunch. Credit crunch can be defined as sudden reduction in the general availability of loans, or increase in the cost of obtaining loans (Wei Ding n.d.) . If it evolves into a global financial crisis then the domino effect – due to the financial links between institutions and countries – could boost its spread world-wide. Credit crunch can have effect on: financial markets, such as stock exchanges, derivative markets equity funds as they go short on cash when investors try to get rid of assets insurance, pension funds as they cannot meet their profit expectations due to receding asset portfolio public finance, as bailout plans are financed from tax payers money foreign exchange markets (FOREX), as investors move their assets to strong currencies Ultimately borrowing and equity rising will be harder which could lead to an economy crises. Certain signs of coming changes in the world economy could be detected prior to the obvious appearance of credit crunch in 2008. These signs are for example: economic downturns in major economies, high-oil and high food prices which generated higher global inflation. In February 2008 Reuters reported that global inflation was at historic levels (Reuters 12 02 2008) Organization Background: Ryanair, the first Low Cost Carrier in Europe, it was founded in 1985 (Ryanair.com History 2008). Ryanair began operations with a staff of twenty-five and a single 15-seat airplane flying connecting Waterford and London. In 1986 Ryanair got authorization to begin flying four flights a day on the Dublin-London route. Utilizing the opportunity, they broke the monopoly of British Airways and Aer Lingus with fares that were much lower. Ryanair’s strategy (initially) was to offer simple, low-cost fairs and exemplary customer service. During the later part of the 80s Ryanair continued to compete vigorously with British Airways and Aer Lingus while adding additional routes and airplanes (Creaton 2004). In 1990 Ryanair suffered a £20 million loss and was forced to completely restructure. A new CEO – Michael O’Leary – was charged with making the airline profitable. O’Leary visited the USA to study the 'low fares/no frills' model being used by Southwest Airlines. O'Leary promptly determined that the key to low fares was to implement quick turn-around times for aircraft, "no frills", and no business class, as well as operating a particular model of aircraft (Ryanair About Us n.d.). Regardless of the decline in overall airline traffic, Ryanair made a profit of £293,000 for the year and carried 651,000 passengers. In 2000, they announced the launch of 10 new European routes for the summer and the company launched their new online booking site and in just 3 months the site was taking over 50,000 bookings a week (Ryanair About Us n.d.). After the tragedy of 9/11, the whole air transportation industry suffered a drawback and airline companies had to modify their strategies in order to adapt to the new situation that led to an increase in oil prices and a downturn in traffic (Gloomy Ryanair 2008). Ryanair, instead of cancelling thousands of flights, adapted the opposite strategy (DG TREN – ANALYSIS OF THE EUROPEAN AIR 2001). The company took advantage of empty slots in the airports, which were until the date the biggest constraint in European airports. In 2008 Ryanair is the 3rd largest airline in Europe; it has 31 bases and carries 50.9 million passengers annually (Ryanair Annual Results 2008). The firm’s whole story is built on ambitious growth targets. But keeping returns up while deploying ever-increasing quantities of capital is hard to achieve (LEX: RYANAIR 2003). Ryanair’s business model focuses on the price sensitivity of the customers. The model aims to offer the cheapest ticket prices. To reach its goal the costs must be kept at a low level, thus Ryanair uses secondary and smaller airports which offer cheaper services than others. Its fleet consists of single model aircrafts (Ryanair About Us n.d.), which reduces maintenance and training costs. Ryanair sells ticket through its website, doing so the firm lowers the cost of distribution as over the phone bookings are more costly, furthermore eliminates the need of travel agents (DG TREN – ANALYSIS OF THE EUROPEAN AIR 2001). The firm communicates with customers only through postal mail, fax, or premium rate phone number. This mode of customer care is not popular or friendly, but it minimizes the costs of operating a customer care service. The airline flies with short turnaround and maximum utilization of aircrafts, in addition it charges for every single service an extra fee. Ryanair has managed to keep its focus on its objective, and has transformed itself to one of Europe’s biggest airlines over two decades (LEX: RYANAIR 2003). Research questions: The Research questions for this study are as follow: a) How the overall economic system plays an important role on Ryanair’s business operations? b) What are the impacts of global credit crunch of 2007-08 on financial performance of Ryanair? c) What measure Ryanair has taken to curtail the problems resulting of credit crunch? d) What strategies, Ryanair has formulated and implemented to overcome business problems due to global credit crunch? Research objectives: a) The research objective for this research is to understand the overall impacts of the 2007-08 global financial crises on business operations, financial performance and financial stability of individual organisations. b) This paper will assess the performance of Ryanair a Low Cost Carrier company prior the credit crunch and then will try to identify the problems emerged during crises and how the company has developed strategies to overcome these problems. c) This research will try to investigate the relationship between the global financial crunch on the airline industry. d) This paper will also try to determine the impact of over all factors of airline industry effected by crisis with specific emphasis on Ryanair’s financial performance, revenue generation and cost management. Literature review: Nikolai Kondratieff drew attention to certain waves (called as Kondratieff or K-waves) which may be defined as pattern of regular characteristic of structural change in the modern world economy. K-waves are attributes of world economy visible in international production data. In other words, phased processes that imply S shaped growth curves: slow start-up, fast growth and leveling-off (Modelski n.d.). The K-waves rise from bunching of technical innovations that launch technological revolutions. According to Modelski and Thompson the 10th long cycle has been going on since 1973, from when they talk about the beginning of Information industries Age. When we study the actual events and close history of 2007-2008 Financial Crises we find that the theories of Hyman Minsky are relevant as well. Minsky talks about prosperous times when the cash-flow of companies rises beyond needed to pay off debts. At this time a speculative euphoria starts when lending gets beyond borrowers can pay and this leads to a financial crisis, or credit crunch. According to his studies there are swings in economy trends and swings are usually followed by booms and busts which are inevitable in free market economies, except if the government controls the economy for example by the means of regulation or central bank system. The accumulation of debts pushes economies to crises. Minksy identifies three types of borrowers the Speculative, Ponzi borrower and Hedge borrower. The hedge borrower intends to make debt payments from cash-flow from other investments. The speculative borrower believes he can service the interest on the loan but who must continuously roll over the principal to new investment. A Ponzi borrower relies on the appreciation of the value of their assets (e.g. real estate) to refinance or pay-off his debt (Minsky 1991). History of Credit Crunch 2007-2008 The financial crisis started in 2007 with the loss of confidence in securitized mortgages. The cost of credit was negligible and the financial system was full with over-leveraged financial contracts. The hypertrophy of financial sector first led to a liquidity crisis when Fedeal Reserve (FED) and European Central Bank (ECB) had to intervene with capital injection. In spite of these actions the liquidity crisis spread world-wide and had effect on the financial and economy areas as well. According to Henry M. Paulson Jr., the US Treasury secretary, the credit markets are more important measures of severity of the financial crisis than the stock markets, although harder to follow. To measure the recent disruptions we can monitor LIBOR– the London Interbank Offered Rate -, the short-term Treasury Bill yield and TED spread. The difference between three months LIBOR and Treasury Bill yield is a measure of stress in the credit markets. In addition, the rate of higher-yield bonds indicates the willingness to lend to more risky business. In September 2008 the yield of short-term Treasury Bill dropped and stayed volatile until mid-October when a steady decrease started. LIBOR rocketed in mid-September and started to decrease from October. TED spread followed the changes in LIBOR and 3-Months Treasury yields rocketing in mid-September. According to the charts banks did not trust in each other and doing so the wholesale‟ price of money increased. LIBOR is the basis of financial contracts and it has an effect on for example the cost of home mortgages. In order to understand the reasons of these sudden changes, the close history of credit crunch should be examined. The loosened underwriting standards resulted very large number of U.S. subprime mortgages (Will subprime mess ripple through economy? n.d.). The securitization of these high-risk loans amplified the spread of financial crisis like a domino effect. First companies engaged in securitization fell pray, like Bear Sterns. On July 11 2008 the largest mortgage lender in the U.S., IndyMac Bank, collapsed, and its assets were seized by federal regulators after the mortgage lender fell to the pressures of tighter credit, tumbling home prices and rising foreclosures. Foreclosures dumped more homes on market which accelerated the development of a financial crisis. Mortgage lenders Fannie Mae and Freddie Mac were placed into federal conservatorship on September 7 2008 after the crisis further accelerated in late summer. In the late summer of 2008 the crisis began to threaten financial institutions not directly connected to mortgage lending. These firms had investments had been derived from bundled home mortgages. Exposure to these mortgage-backed securities or to the credit derivatives threatened more and more firms such as Merrill Lynch, AIG, Washington Mutual, Goldman Sachs, Morgan Stanley and Lehman Brothers. Following the failures of prominent American and European banks, the American and European governments made efforts to rescue distressed financial institutions. In the United States by the help of the Emergency Economic Stabilization Act of 2008 and in European countries by infusion of capital into major banks. Not only institutions, but countries like Iceland were threatened with going bankrupt (Pfanner 2008). Stock markets fell world-wide and global financial regulators attempted to cooperate as the financial crisis developed. The US government planned to spend $700 billion and attempted to purchase the underperforming collaterals and assets (Raum 2008). The plan was vetoed by the US congress, certain members did not agree with spending taxpayers‟ money to bail out Wall Street companies. As a result the stock market fell. Eventually the US congress amended the $700 billion bail-out plan and passed the legislation. The British and other governments in Europe launched bail-out plans aimed to injecting capital into the financial system; in addition banks with financial problems were taken in public hands. As the financial crisis developed during September and October 2008 investors sought safety in U.S. treasury bonds, gold, and strong currencies such as the dollar and the yen. This currency crisis produced strong pressure on all world currencies and threatened with the collapse of international trade. The International Monetary Fund had limited resources relative to the needs of the nations with currencies under pressure. In the Eastern European countries of Hungary, Poland, Romania, and Ukraine the economic crisis caused difficulties with loans made in hard currencies such as the Swiss franc. As local currencies – Hungarian Forint, Polish Zloty, Romanian Lei, Ukrainian Hryvnia - in those countries lost value making payment on such loans became progressively difficult. A number of commentators have suggested that if the liquidity crisis continues, there could be an extended recession or worse. In case of recession the Gross Domestic Product (GDP) of a certain country decreases for at least two quarters (Bloomberg Financial Dictionary n.d.). In other words, it is a period of reduced economic activity. The U.S. based National Bureau of Economic Research describes recession as follows: “The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” (National Bureau of Economic Research n.d.). If the situation gets worse and lasts longer than a few months then depression may start. According to Bloomberg depression is: “Period when excess aggregate supply overwhelms aggregate demand, resulting in falling prices, unemployment problems, and economic contraction.” (Bloomberg Financial Dictionary n.d.). The largest and most important depression in modern history was the Great Depression. It is a good example of how far economy can fall. The Great Depression was a worldwide economic downfall started in 1929 and it originated from the United States. The 2008 October report of International Monetary Fund (IMF) says that world growth would slow – also in emerging markets – amid this most dangerous financial shock since 1930s. The report says that there would be no growth at all in the advanced economies until at least mid-2009 and global economy expected to stage modest recovery later in 2009 (IMF 2008 October). According to IMF the inflation rate in the developed countries should be contained by the stabilizing commodity prices and rising economic slack. On an annual basis, global growth is expected to moderate from 5.0 percent in 2007 to 3.9 percent in 2008 and 3.0 percent in 2009 (see table). According to WEO report the eventual recovery will be supported by the unwinding of adverse terms-of-trade effects as commodity prices stabilize; a turnaround in the U.S. housing market; and rising confidence that the liquidity and solvency problems in core financial institutions are being resolved. Research methodology: Keeping in mind the nature of study, the positivistic method would be used because positivism is based on the assumption that there are universal laws that governs social events and uncovering these laws enable researchers to describe, control and predict social phenomena.(wardlow.1989).and later on as the particular study seeks to understand values, beliefs and meaning of employees so interpretive research may also be handy if necessary. Both qualitative and quantitative approaches will be used because the aim is to collect the facts in terms of financial reports, quarterly snapshots and press releases and there is always a link between qualitative and quantitative because the data gathered through qualitative approach will need quantitative measurement to analyse the data. The deductive approach will be used for this study by investigating impacts of financial crisis in general and then making conclusions specific to Ryanair. Research Approach Both primary and secondary data shall be collected for this research the secondary data is useful in time saving and will be collected and analysed through the source of literatures, and primary data will be collected at source from the financial statements, employees and managers of the organization for this research. a. Semi structure interview: An interview is a purposeful discussion between two or more people (Kahn and Cannell , 1957). Therefore a semi structure interview of two managers of the organization will be conducted for the purpose of this research. b. Questionnaires: Questionnaire is also useful and reliable source of gathering information which will be used for the collection and analysis of data and reward strategy of the organisation for this research and further to suggest recommendations where necessary . Data analysis For this particular research Grounded theory to analyse the qualitative data will be used. Analysing data is the process of turning data into information that can serve to develop concepts theories, explanation or understandings (Lancaster, 2005). At this stage of the research the data collected will be given the meaning full format through analysis and by interpreting the entire research finding through qualitative research with the help of computer programmes such as MS Excel. References: Belfast Telegraph. “Finance crisis good for business: Ryanair boss.” 8. Bloomberg Financial Dictionary. http://www.bloomberg.com/invest//glossary/bfglosr.htm Bloomberg USORTOT:IND. http://www.bloomberg.com/apps/quote?ticker=USURTOT:IND (accessed 12 25, 2008). Cochrane, Willard W. Farm Prices, Myth and Reality. 1958. Commodity Data. US Bureau of Labor Statistics. Creaton, Siobhan. “The rise and rise of Ryanair.” The Post.IE, 06 06 2004. “Crisis: Which Crisis.” Flight International, 30 October, 1990: 22,24. “DG TREN – ANALYSIS OF THE EUROPEAN AIR.” European Commission, 2001. Emergency Economic Stabilization Act of 2008. House Financial Services Committee, 28 September 2008. “Finance crisis good for business: Ryanair boss.” Belfast Telegraph, October 2008. Financial Times. “Gloomy Ryanair.” 04 02 2008. Financial Times. “LEX: RYANAIR.” 29 06 2003. IMF. World Economic Outlook (WEO). 2008 October. “Independent.IE.” Ryanair expects passenger shift to low-cost carriers. http://www.independent.ie/national-news/financial-crisis/ryanair-expects-passenger-shift-to-lowcost-carriers-1497280.html L. Engerman, Stanley, and Robert E. Gallman. The Cambridge Economic History of the United States. London Stock Exchange. http://www.londonstockexchange.com/en-gb/pricesnews/prices/System/DetailedPrices.htm?ti=RYA#PriceChart Millward, David. “Ryanair discounts seats as credit crisis bites.” Telegraph, 19 September 2008. Milmo, Dan. “Ryanair - the world's least favourite airline.” The Guardian, 26 10 2006. Minsky, Hyman. Financial Crises: Systemic or Idiosyncratic? 1991. Modelski, George. http://faculty.washington.edu/modelski/IPEKWAVE.html National Bureau of Economic Research. http://www.nber.org/cycles.html. New York Times. http://www.nytimes.com/interactive/2008/10/08/business/economy/20081008-credit-chart-graphic.html. Pfanner, Eric. “Iceland is all but officially bankrupt.” International Herald Tribune, 9 10 2008. Raum, Tom. “Bush asking for $700 million bailout.” The Huffington Post, 19 09 2008. Reuters, Kevin Plumberg and Steven C. Johnson. “Global inflation climbes to historic levels.” International Herelad Tribune, 12 02 2008. “Ryanair About Us.” http://www.ryanair.com/site/EN/about.php?page=About&sec=fleet. Ryanair Annual Results. Ryanair, 2008. “Ryanair.com History.” 2008. http://www.ryanair.com/site/EN/about.php?page=About&sec=story “Rynair.Com Strategy.” 2008. http://www.ryanair.com/site/about/invest/docs/Strategy.pdf. Schaffler, Eric Martin and Rhonda. “Roubini Sees Worst Recession in 40 Years, Stock Drop.” Bloomberg, 14 10 2008. US Treasury. http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/daily_treas_bill_rates_historical.shtml. Wei Ding, Ilker Domac & Giovanni Ferri (World Bank). 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