The Ryanair First Low Fares Carrier - Case Study Example

Ryan Air Business Report Table of Contents Introduction 2. Resource Analysis 2 Financial 2 2.2 Marketing3 2.3 HRM 5 2.4 Operations 5 3. Environmental Analysis 3.1 PESTEL Analysis 6 3.2 Porters 5 Forces 8 4. Critical success factors 9 5. SWOT Analysis 9 6. Strategic position of the airline 11 7. Unresolved issues 12 8. Possible strategies for the future 12 9. Selection of a winning strategy 13 10. Recommended strategy and risk assessment 14 Bibliography 16 Appendices 17 1. Introduction Ryanair, Europes first low fares, no frills carrier, is quoted on the Dublin and London Stock exchanges and on NASDAQ. The airline operates basically in the European market but also serves the Middle East. The airline provides the lowest fares on all routes and matches competitors’ special offers. It strives to deliver on-time and eliminates over booking in addition to eliminating lost or delayed luggage. Ryanair had taken over Buzz, the budget subsidiary of KLM, based at Stansted. This was a strategic decision which would allow the carrier to get ready-made take-off and landing slots. This was an organic growth model. The airline makes money by reducing its costs at every point. This is the reason that despite a drop in yields of 14 percent, it still achieved margins of over 20 percent as they carried 47% more passengers. The airline has strong sales promotions and heavy discounting. The airline owns rather than leases aircrafts but has been considering leasing at least one-third of its fleet due to changes in the market conditions. It also makes money by oil hedging but since the oil prices were expected to decline in the year under study, Ryanair decided not to hedge in 2004. To cope with the falling ticket prices, the airline hope to generate revenue by providing ancillary services such as satellite television and internet services, arcade games on rented laptops and screening favorite movies on television. They also earn through advertising on their website. However, despite the low fares, the airline’s load factor stared declining and its share price had declined substantially. This requires that Ryanair reconsider its strategy and take decisions based on facts and figures. 2. Resource Analysis 2. 1 Financial Analysis 2.1.1 Performance, profitability and Investment analysis Ryanair has registered revenue growth in 2004 over 2003 but the net profit has declined by 14% during the same period (Appendix A). The airline has been consistently registering profits for 26 quarters but the profits have declined in 2004 which has been primarily due to escalating fuel costs. The number of aircrafts operated commensurate with traffic growth as is evident from Appendix B. The net profits have declined as also the earnings per share (Appendix C) which has given the airline an adverse reputation with investors. The balance sheet shows that the equity base has declined while its total liabilities have increased. 2.1.2 Financial evaluation and conclusion Ryanair has registered consistent growth for the past five years and exhibited stability but there has been a decline in net profits in 2004 over 2003 despite increase in load factor. Thus: This can lead to future risks and instability due to external competition. Investor confidence has declined due to various litigations against the company. Market is concentrated in Europe where competition is intense. The company is financially strong even though its long-term debt has increased. Stability because the revenues, expenses, assets and liabilities are denominated in Euro. Decrease in earnings per share demonstrates future business risks. 2.2 Marketing Analysis 2.2.1 Marketing strategy Price * Lowest fares * Price wars in the industry * Relative price advantage without big price cuts. Product * Focuses on the European sector but UK and Germany are difficult markets due to intense competition * Extension in routes every year * No overbooking * Fewest number of cancellations. * Best punctuality record * No frills, no refreshments * No reclining seats, window blinds, headrests, seat pockets and other non-essentials. Place * Ninety-eight percent of bookings available online. They have a user-friendly website. * Eliminates discounts and commissions to travel agents, and computer reservation charges. Promotion * Focus on customer service as they realize that low price is not sufficient for sustenance. * One of every five tickets sold at no charge. * Marketing costs have been steadily declining People * Does not deal with trade unions as according to the airline, their staff earns the highest in the industry. * They consider themselves as high-pay, non-union multinational companies. * Share options offered to pilots who want a change in their remuneration terms. 2.2.2 Marketing evaluation and Conclusion * They follow the price-differentiation strategy. * They have distinct advantages over competition. * They are market pioneers in the budget airline industry (Appendix D – Value Chain analysis). However, they operate on short-haul routes and airports which offer competitive cost terms. * They incur minimum promotional expenses. * They remain close to the customers which helps them to understand the customer needs and the changing customer preferences. * They expand in markets where they see potential and due to low-price strategy they have a good market share. * They cater to the segment that looks for the cheapest fares. * Their marketing efforts are practically nil and they seem to be getting the market share purely on their price differentiation strategy. * The key success driver at Ryanair is focus on setting low fares, sustaining low cost position and finding extra revenues from other services. 2.3. HRM Analysis 2.3.1 HR strategy * Training and development – does not invest in training and development * Management and motivation – ability to energize people and motivate * Employee relations – when its pilots threatened forming an association or joining trade unions, the airline threatened them with redundancy, no share options or pay increases. * Employee pay – the staff at Ryanair are the highest earners in the industry and hence the airline does not like to deal with unions. * Team work – practically not found * Outsourcing - Outsourcing of repairs, maintenance and ancillary services. 2.3.2 HRM evaluation and conclusion * They maintain poor employee relations and the employee also becomes volatile. * Their focus is on cost saving which is why they outsource many functions. * There is a lack of succession plan and they do not invest in recurrent training. 2.4. Operations Analysis 2.4.1 Operations management * Sell the lowest fares and still make profits. * Maintain cost-reduction strategy – fleet commonality (usually 737-300), contracting out services, staff costs and productivity, airport charges and marketing costs are controlled. * Operates on non-stop point-to-point locations * High seating density and load factors * Direct booking through the internet so no TA commissions * Yield management for low pricing * Uses secondary airports and regional airport destinations to keep airport charges minimum and faster turnaround times. * No allocation of seats and no refund policy. * Customer relations are not focused on 2.4.2 Evaluation and conclusion * The operating statistics reveal cost reduction has been achieved but these can be imitated. * Operating costs have reduced and the revenue has increased but the airline has not made use of technology to enhance business communications and transactions. * The cost saving techniques do not add value to customer service. * They trade customer service against low pricing which is not always desirable. * Customer relations are bad as they have several litigations pending against them. * Focus is on process and not on people and service. * They have been surviving because they follow a high degree of standardization and they do not have direct competition in most routes. 3. Environmental Analysis 3.1. PESTLE analysis The external factors that could affect the airline: Political – low impact because it operates within Europe and Europe has political stability. However, they face challenges in the OPEC countries due to escalating fuel costs. Economical – low impact because again being within Europe, which has a stable economy and stable consumers. Denomination is Euro is another positive factor contributing to economic stability. Outside of Europe is an undeveloped market with unstable economy. Social – This has a high impact on operations because the consumer demographics keep changing as do the customer preferences. Consumer loyalty is waning and even a small price difference can sway the consumer. Technological – low impact because they have invested in latest aircrafts but they do not use technology in consumer relations or employee relations even though they have the financial stability to invest in these. Legal – high impact as they have been charged by the EU commission as well as several courts. EU ruled that Ryanair had been receiving illegal subsidies for its base airport. Environmental – high impact - because of frequent take-off and landings and shirt-haul flights, the ‘climate protection charge’ by the EU may have an impact on its profits. 3.1.2 PESTLE evaluation and conclusion The external environment determines the strategy and the decisions of any organization. At Ryanair, the external environment appears to be fairly stable. While they enjoy economic and political stability, they need to be cognizant of the changing consumer demands, the legal challenges and the environmental protection. 3.2. Porter’s Five Forces Analysis 3.2.1 Five forces Suppliers Ryanair has outsourced several functions such as repairs and maintenance which increases their bargaining power. However, since the aircrafts are owned by the company and not leased in, the overall bargaining power of the suppliers is low. Supplier power has decreased as airports increase the fees when they renew their contracts because of the airline’s exponential growth and profitability. Buyers Their bargaining power is low because Ryanair offers seats at the lowest price in the industry. Buyers cannot bargain for services at the existing price. Threat of New entrants The threat of new entrants in the industry is low because budget carriers have been withdrawing after losing money. Only the early entrants have survived. Rising oil process is also a deterrent for new entrants. Substitutes The threat from substitutes is of medium impact because several traditional carriers trying to enter short-haul sectors and even attempting to reduce fares. Price war exists. Competitive Rivalry High industry rivalry exists even though easyJet had logistical problems and they use centrally located airports. Virgin Express also uses main airports and has been struggling to make profits. FlyBE provides tough competition as they offer services like traditional airlines despite being a low cost carrier. Competitive rivalry is fierce as even MyTravelLite and Aer Lingus give it a tough fight on fares and routes. However when it comes to recommending the airline to a friend, easyJet stands as its main competitor (Appendix F). 3.2.2 Conclusion, attractiveness of industry and strongest force The industry is very attractive as most forces are weak. Ryanair has been able to protect its position because of its choice of airports. It is the most used airline in the low budget segment although threat from substitutes is high. However, new entrants are not a threat. The strongest force is the competitive rivalry as there are several existing budget airlines fighting against Ryanair, all have added capacity and indulge in heavy discounting. 4. Critical success factors To overcome the challenges Ryanair would have to make: Strong marketing and promotional efforts Investment in technology Enhance customer service. Build customer relationship to enhance customer loyalty 5. SWOT ANALYSIS Strengths - prioritized and distinctive competences/unique resources * Standardization of process * Reduced turnaround times. * NO cargo service * Own fleet * New aircrafts * Hedges fuel * Excellent ancillary services that generate revenue * Outsourcing of services at international airports. Weakness * Poor and volatile employee relations. * Does not entertain trade unions * Poor customer relations * Litigation pending against them in court * Poor marketing initiatives. * Lack of succession plan – solely dependent on Michael O’Leary * No use of technology to enhance services. * Poor relationship with competitors Opportunities * Generate revenue by advertising on board * Raise fares without losing existing customers (Bhagavan, Ertekin, Geijerman & Kuznetsov, 2003). * Provide food on board and compete in the long-haul sectors * Use technology to enhance visitor relationship with those who visit the website and leave without making a booking. Threats * Policy and regulation by the EU * Threat of increased ‘climate protection charge’ * Traditional airlines entering the low cost segment * Total dependence on Michael O’Leary who tends to be arrogant at times * The customers filing legal suits and getting claims * Economic downturn and reduced sales volumes * Deregulation has lowered the barriers to entry and hence they face the threat from competition. * Duplication of services by the traditional airlines. Evaluation and conclusion * The airline has a strong position because of its competitive advantages and resources. * Financially sound * No coordination and alignment with HR and poor marketing efforts. * Cost efficiency has been achieved due to process management. 6. Strategic position of the airline Strategic positioning involves pursuing a strategy different from the competitors or performing similar activities in different ways (Hales & Barker, 2003). * Operates on the Low Cost Airline Business Model that has restructured the European Airline Industry. * It pioneers innovative cost reductions methods but these can easily be duplicated. * It employs alternative revenue generation techniques to make up for the low cost of tickets but there are opportunities to enhance revenue generation. * The airline has won international awards such as the Best Managed Airline. * The investors are happy and so are the customers that have benefited from low cost travel. * The company has been accused of monopoly in the sector. * Prolonged battles with the EU * The company lacks long-term vision and ignores change. 7. Unresolved issues relating to the future of the company Ryanair’s stand has been under dispute – the EU has levied charges against the airline of monopoly and illegal state subsidies for airport charges. British Airport Authority has filed a writ petition against the airline for monopoly abuse at Stansted. Pilots’ agitation has been disturbing the management who want to be a part of the trade union. They want to reduce the share options to the employees. Third quarter profits in 2005 dropped which was disturbing for the company for the future. 8. Possible strategies for the future So far Ryanair has been applying the breakthrough strategy but now they need to redefine their strategy. They should now adopt the disruptive strategy to enhance the value chain through one or more of these changes. 8.1 Use of technology to enhance customer relations The customer-focused approach does not demonstrate a positive growth attitude. Customer’s online experience influences consumer perception of a product’s brand (Fink, 2006). This would enable them to focus on the needs of the customers rather than just providing low cost airline facility. E-relationship adds value in a relationship that is difficult to imitate (O’Toole, 2003). This relationship can meet the sustainable relationship advantage. 8.2 Additional revenue generation Seatback pockets should be re-introduced and used for generating revenue through advertising. It would also serve to add value to customer service. They can also introduce rented in-flight entertainment and internet service on board. 8.3 Increase marketing budgets Many airlines have entered the low-budget sector which enhances the importance of investment in marketing and promotional activities. It is essential to continue to invest in the core business (Campbell, 2005). Instead of trying to diversify into long-haul sectors, Ryanair should focus on its strengths as most competitors are earning less than their capital invested. 9. Selection of a winning strategy (suitability, acceptability and feasibility) A selection of winning strategy will be assessed through screening against three factors. Strategy Suitability Acceptability Feasibility Accept/Reject 1. Help to focus on customer needs Meet sustainable relationship advantage Staff training in understanding and applying technology to online queries seems doubtful Reject 2. Suits the airline as they seek new sources of revenue generation Short haul flights would not generate customer interest in on-board entertainment and internet Financial resources not required Reject 3. An adverse publicity of the airline has tarnished the image so investment in marketing would help to change the customer perception. Markets will grow and this would also give a strong fight to the competitors Since the company is financially stable and has reserves, investment is feasible. Accept 10. Description of recommended strategy and risk assessment. The recommended strategy is to invest in marketing and promotion of the existing business. The risks in investment in marketing could come from political and industry sources: Government and EU policy could change specially about the environmental concerns which could enhance the overall ticket price and ultimately profitability. The channels of advertising and marketing could be wrongly assessed, thereby not getting the benefit of investment. The advertisements could also provide indirect benefit to the competitors. However, these risks can be minimized with the right decisions and the airline could overcome the threats from different sources. Bibliography Bhagavan, M., Ertekin, O., Geijerman, P., & Kuznetsov, V. (2003). Budget Airlines – Ryanair, Retrieved online 8 August 2009, from http://faculty.insead.fr/adner/PREVIOUS/Projects-May03/BudhetAirlines.pdf Campbell, A. (2005). Discovering significant and viable new businesses: have faith in strategic planning basics. Strategy & Leadership, 33 (1), 25-31 Fink, G. (2006). Value decomposition of e-commerce performance. Benchmarking: An International Journal, 13 (1/2), 81-92 Hales, K., & Barker, J. (2003). Value Creation and the Virtual Enterprise. Retrieved online 8 August 2009, from http://epublications.bond.edu.au/theses/hales/ OToole, T. (2003). E-relationships - emergence and the small firm. Marketing Intelligence & Planning, 21 (2), 115-122 Ryanair Annual Report & Financial Statement (2004).Retrieved online 8 August 2009, from http://www.ryanair.com/site/about/invest/docs/2004/0304annualreport.pdf Appendix A Financial Highlights for 2004 Source: Ryanair Annual Report & Financial Statement (2004). Appendix B Appendix C Appendix D Source: Bhagavan, Ertekin, Geijerman & Kuznetsov (2003). Appendix E Appendix F Read More