Market Strategy Analysis on the Recent Problems of Ryanair - Case Study Example

Market Strategy Analysis on the Recent Problems of Ryanair Introduction Ryanair is an Irish low cost airline with its head office in Dublin and its main operational base at London Stansted Airport. It is Europe's major low-cost carrier it operates 729 routes across Europe and North Africa from 28 bases. (Ryanair 2008a) The airline is the third largest airline in Europe in terms of passenger numbers and the world's largest in terms of international passenger numbers.   Over the years, Ryanair was able to establish a network of over 57 routes in 11 countries and served by a fleet of 31 Boeing 737-200 and -800 aircraft with over 1,400 staffs and personnel. (Ryanair 2008b) To position itself in the marketplace, the company focused on driving down its airfare costs to the lowest possible yet profitable. Even though Ryanair is able to easily convince more people to use the services offered by the company, the risks associated with cutting down the market prices of air fares remains inevitable (West, 2007). Since the air travel in Europe has been deregulated (Kangis & O'Reilly, 2003), Ryanair’s marketing approach in capturing a larger market share is to deliver the best quality service to its customers aside from offering travellers the opportunity to travel at a relatively low price.  To make the company’s goal possible, the airline company adopted a cost reduction strategy by offering Ryaniair’s employees with less attractive salary combined with a performance related pay arrangement which aims to maintain the quality performance of its employees. With regards to the main goal of Ryanair, the market- and organization-related problems that the company is currently experiencing particularly when it comes to the negative consequences of implementing a cost reduction marketing strategy will be identified and thoroughly discussed. In the process of going through the discussion, ways in which unfavourable business conditions could either temporarily or permanently harm the profitability of the business will be tackled. The problem will be analyzed by ranking the identified market and organizational problems associated with this type of marketing strategy in terms of urgency such that the most urgent problem will significantly influence the strategic decisions made in this study. Given that the market and organizational problems are often connected with one another, a problem map will be provided to illustrate the inter-relatedness of the identified problems. Prior to conclusion, alternative solutions that will effectively counteract its negative impact on Ryanair’s business performance will be provided. The Impact of Market- and Organization-related Problems on Ryanair’s Business Performance Considering that the main goal of Ryanair is to deliver the best quality service at a relatively low price makes the air line company face serious problems when it comes to the decline in the company’s profitability, the maintenance of a good quality customer service, and the prevention of legal issues. (See Figure I – Problem Map below) Figure I – Problem Map Rank 1 – Negative Consequences of Offering Relatively Low Air Fare Offering a relatively low air fare to the public can make it easy on the part of Ryanair to fill up the passengers’ seat in each air plane. However, there are also some negative consequences associated with selling plane tickets cheaper as compared with what other company gives to the public. In UK travel industry, the market price of air fare should be significantly dictated by the public demand such that the market price of air fare should be higher during holiday season and lower during non-holidays (Mounser, 1996). Within the airline industry, it is very important to keep the quality service offered to customer reliable to enable the company to keep its price-insensitive loyal customers from switching to other similar companies (Chen, Narasimhan, & Zhang, 2001). Offering a relatively low air fare is not always the best solution to increase the profitability of Ryanair since having developed strong brand equity enables the company to create a positive brand association among its loyal price insensitive consumers. In general, consumer-based brand equity arises from a more favourable differential response to the firm’s marketing efforts (Keller, 2003, 1993). Depending on the effectiveness of marketing strategy used in attracting its target consumers, establishing strong brand equity can also promote customers’ loyalty and brand awareness (Yoo, Donthy, & Lee, 2000). Hogg, Cox, & Keeling (2000) explains that the higher the consistency between the brand image and the consumer’s self-image, the better the consumers’ evaluation of a brand and the greater the customers’ intention to purchasing a product and/or services regardless of the market price. Because of customers’ loyalty which is associated with establishing strong brand equity, price insensitive customers may end up patronizing the services offered by Ryanair without considering the price (Datta , 2003). The fact that Ryanair offers a relatively low air fare makes the company less capable of sustaining possible financial difficulty caused by uncontrollable external challenges in the market. Recently, the global economic slowdown and the significant increase in the market prices of oil per barrel placed Ryanair at risk of experiencing a profit loss by the end of 2008 (Jolly, 2008). As a result of the negative impact of global economic condition in the profitability of Ryanair, the company’s profitability fell by as much as 85% to €21 million even though its revenue increased by 12% to €777 million (Jolly, 2008). Rank 2 –Strengthening Customer Service and the Negative Effects of Offering Less Attractive Salary and Performance-Related Pay Marketing is focused on identifying the needs and wants of the customers. (Doole & Lowe, 2007: p. 5) Since customers would always prefer a good quality service, human resources manager plays a key role in selecting, training, and motivating the right personnel who can deliver good working performance (Woodruffe 1995). Charrington (1995: p. 5) stated that “humans are an organization's greatest assets; without them, everyday business functions could not be completed.” Likewise, Legge (1989) acknowledged that ‘human resources’ are valued assets instead of a variable cost as he explained that the commitment of employees are a source of competitive advantage to the organization (Bratton & Gold, 2001, p. 17). Work motivation is linked with morale or employee's feeling toward the job, superiors, and the organization itself such that employees are likely to experience high morale in case they are satisfied with the pay they receive including their job responsibility and the way they are treated at work. In the long run, highly motivated employees can lead to dedication and loyalty as well as to the desire to do a job well. With high morale, the airline company is expected to enjoy higher productivity, profitability, and a better customer service. On the contrary, employee with low morale can lead to careless work, absenteeism, and high rates of turnover (Agarwal, 1983: p. 319). The problem with implementing a strict cost reduction is that it could significantly affect employees’ morale and wok motivation. As reported by the International Transport Workers' Federation (ITF), many workers have left their jobs with Ryanair (O'Sullivan & Gunnigle, 2008). In line with the evidences revealing the unsatisfied workers at Ryanair, some negative comments were posted on the website www.ryanair-be-fair.com which publicly exposed the personal opinion of its employees when it comes to issues related to “low pay, misery and oppression” (Miller, 2005). Among the common employee complaints include requiring the pilots to pay for their own retraining to enable them to fly newer aircraft and the fact that employees are required to pay for their own uniform, food, and other office supplies like pens among others (Ryan-be-fair, 2008; Clark, 2005). Since Ryanair has been persistent in keeping its operational cost low, it becomes inevitable for the company to hire sub-contract workers in exchange with a lower salary aside from the less competitive individuals (Boyd, 2001: p. 442). As a result, the quality of Ryanair’s customer service suffers. Rank 3 –Legal Problems Associated with Advertisements Claims of Ryanair Advertisement or marketing communication is used to differentiate the product and services offered by Ryanair as compared to its competitors. (Ace, 2001: p. 1) In UK, the Advertising Standards Authority (ASA) strictly regulates the advertising practices against serious business offences especially when it comes to the violation of trademark directive (89/104/EEC) including the promotion of unfair market competition (Dee, 2007; Porter, 2007). Since the main function of ASA is to protect the businesses that are protected under the trademark law and the general public from misleading information presented in advertisements, there are certain ethical issues that should be considered when advertising that Ryanair offers a relatively low air fare. In 2005, Ryanair had to pay a fine of €250,000 (US$319,000) for publicly advertising that “the air fare of Ryanair is 391% cheaper than the air fare of Air France-KLM” (Breitbart News, 2005). Although the UK courts legally allow comparative advertising, the case of British Airways plc v Ryanair Ltd [2001] was brought up by the British Airways which legally sued Ryanair for publicly claiming that the market prices of other airline company’s air fares is at least five times higher than the air fare of Ryanair (Ellis, 2008). Alternative Solutions that Counteracts the Negative Impact of Ryanair’s Marketing Strategy on the Company’s Business Performance Rank 1 – Offering Relatively Low Air Fare Even though Ryanair is able to capture 2.64 million passengers or 7.2% of the European short-haul market share (West, 2007), it remains a fact that the company’s profitability has declining during the past 12 months (Jolly, 2008). (See Chart I – European Short-Haul Market below) Chart I – European Short-Haul Market Lufthansea Ryanair Air France EasyJet Iberia SAS British Airways Number of Passengers (in million) 5.53 5.12 4.64 3.53 3.3 3.23 2.91 Source: City focus: How low can no-frills airlines go?, 2007 Since Ryanair’s decision to offer a relatively low air fare has resulted to the decline in the company’s profitability, the top management should consider increasing the market price of its air fare to enable the company to compensate the high costs of oil and human resources among other operational expenses. By doing so, Ryanair will have a bigger chance of being able to increase not only the company’s market shares but also its profitability. To avoid the risk of bankruptcy, Ryanair is being challenged to make its daily operations more efficient by keeping its existing employees satisfied and motivated with work. Given the tight competition in the global airline markets, it becomes important on the part of the company to avoid unnecessary expenses associated with the high employee turnover rate and the lost of business opportunities by being unable to provide a good quality customer service at all times. Rank 2 –Strengthening Customer Service and the Negative Effects of Offering Less Attractive Salary and Performance-Related Pay HR manager of Ryanair should reconsider its cost reduction strategy. Requiring employees to shoulder the high training costs including other restrictions like not allowing employees to charge their mobile phones within the company premises could de-motivate and make employees feel unimportant. Also, the implementation of a low salary based and performance-related pay may not look attractive to some employees (Bonusand VariablePay: Lessons fromthe U.K., 2002). Ryanair should increase the price of its air fare for training fund. Training should include the importance of customer service and other important matters like the standard operating and safety procedures associated with flying a plane. By making employees feel important and satisfied with their job, there is a higher chance for its employees to remain loyal with the company and increase the quality of Ryanair’s customer service. Rank 3 – Legal Problems Associated with Advertisements Claims of Ryanair To avoid facing legal problems, marketers of Ryanair should familiarize themselves with the guidelines as set by ASA. Knowing the extent of using marketing communication will save the company a large sum of money caused by violating the free market competition and trademark directive. Conclusion The market strategy used by Ryanair is effective in terms of capturing a bigger market share but not in terms of generating good profit. To enable Ryanair to deliver good quality service to its customers, the company should slightly increase the price of air fare to enable the company to have sufficient contingency and training funds in case of negative global economic condition. Another way of saving unnecessary legal expenses, Ryanair should familiarize themselves with the ASA guidelines with regards to the scope and limitations of marketing communications through advertisements. *** End ** References: Ace, C. (2001). 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