Strategy Analysis of Ryanair - Essay Example

Ryanair Strategy Analysis Report Contents Introduction 3 2. The brief overview of Ryanair 4 3. External analysis 5 3 Analysis of the European low-fares airline industry 5 3.2 Analysis of the competitive environment within industry 6 4. Internal analysis 7 4.1 Current organisational structure. 7 4.2 Ryanair’s Value Chain 7 5. SWOT-analysis 9 6. Stakeholders power 9 7. Strategy formulation 10 7.1 Vision and mission 10 References 12 Appendix A. Operational Performance of Ryanair 13 Appendix B. PESTEL analysis for Ryanair 14 Appendix C. Analysis of the Ryanair’s competitive environment. 16 Appendix D. SWOT-analysis for Ryanair. 18 1. Introduction During last two years the European airlines have been experiencing tough time. High oil prices, the continued economic recession in Europe, a number of environmental disasters, such as spacious floods, harsh storms and forest fires, and finally, Icelandic volcanic ash cloud, which paralyzed the Europe sky for more than a week - all these factors have influenced profoundly on the financial performance and profitability of the European airlines sector. While the International Air Transport Association (IATA) emphasises an unexpectedly strong economic growth of the global airlines and predicts $560 billion in its revenue with the net profits of about $8.9 billion, the European air sector is expected to have loss of $1.3 billion (IATA, 2010). In particular, the number of the UK airports’ passengers has fallen by 7.3% - the biggest fall in the overall history of records (Milmo, 2010). In spite of the all-European negative trend, the Ryanair’s business has been stable and strong – today the company reports about the growth in profits in € 318.8 million over 2010 (RAa, 2010). As it is claimed in the Ryanair Annual Report 2010: “All the key indicators including traffic growth, market share, unit costs, profits, new route and base development, confirm that Ryanair continues to successfully roll out our unique low fares formula across Europe for the benefit of our passengers, our people and our shareholders” (RAa, 2010, p.6). However, one cannot but admit that the competitive environment of the global airline industry is changing dramatically, entailing challenges for even successful businesses. In order to respond appropriately to these emerging challenges, companies should constantly analyse, evaluate and formulate anew their strategies. This report presents strategic analysis and formulation of the strategic options for the Ryanair Limited in a purpose to ensure further success of the company in the modern competitive environment. 2. The brief overview of Ryanair The history of Ryanair began in 1985, when the company launched the first short daily route from Waterford in the Ireland to London Gatwick, pioneering the low-fares flight’s operating model in Europe. Thanks to a number of reasonable strategic decisions and changes provided by the company’s executives, the Ryanair have managed to strengthen market position enormously. Today Ryanair Limited is the largest and top-ranked low cost (or no-frills) airline company at the European passenger airline market. It serves low-fares, point-to-point routes from the so called “Ryanair’s bases of operations” consisting of about 40 airports in Ireland, the UK, Continental Europe and Morocco (RAa, p. 53). Table in Appendix A exhibits statistics of the Ryanair operational performance within 5 years period. Data of 2010 is given in comparing with the Ryanair’s main rival – easyJet Company. The Ryanair’s strategic orientation on low costs of flights and low air fares for European consumers is commonly recognized as the key to such superiority in competition and to outstanding performance results (RAa, 2010). RAa (2010) states that: “Ryanair’s objective is to firmly establish itself as Europe’s leading scheduled passenger airline, through continued improvements and expanded offerings of its low-fares service. In the highly challenging current operating environment, Ryanair seeks to offer low fares that generate increased passenger traffic while maintaining a continuous focus on cost-containment and operating efficiencies” (p.54). The key elements of Ryanair’s current strategy are: low fares, customer service, frequent point-to-point flights on short-haul routes, low operating costs, taking advantage of the internet, commitment to safety and quality maintenance, enhancement of operating results through ancillary services, focused criteria for growth, and responding to current challenges (for example an increasing of fuel costs, current economic recession, etc.). The success of the company is measured by key indicators, such as traffic growth, market share, unit costs, profits, new route and base development (RAa, 2010). 3. External analysis 3.1 Analysis of the European low-fares airline industry The European airline industry, and its low-fares sector, in particular, represents the macro-environment for the Ryanair. It is characterised by a number of factors, which influence directly the company’s strategic course. In order to identify these influences, Johnson et al. (2008) suggest using the PESTEL analysis framework (p.54). PESTEL is an acronym meaning that factors are in political, economic, social, technological, environmental and legal areas. Analysis of the industry (see table in Appendix B) shows that the Ryanair’s executives’ strategic decisions are highly depend on macro-environment dynamics, and in the most part they are influenced by economic, political, legal and social factors (see Figure 1). However, technological and environmental factors are also important, as they are closely connected and intertwined with the EU economics, politics and regulations. Figure 1. Influence of macroeconomics environment 3.2 Analysis of the competitive environment within industry The competitive environment within an industry depends on five forces: the manoeuvring of the company position among competitors, the threat of new entrants into the industry, the threat of substitute products or services, the bargaining power of customers and the bargaining power of suppliers (Lynch, 2009). This model was suggested by Porter and now it is called “the Porter’s five forces model”. Table in Appendix C presents the detailed result of the Ryanair’s competitive environment’s analysis. Figure 2 shows that the Ryanair Company operates in a highly competitive environment, where each of forces put a great pressure upon the company’s market position. It is considered that Customers put the moderate pressure in time of economic recession, when they are sensitive to low prices, but as soon as economic recession is getting easier, the power of customers will likely increase to high value. The power of Suppliers is high in regards to fuel, as oil prices constitute significant part of airline’s costs. 4. Internal analysis 4.1 Current organisational structure. The low-fares airline Ryanair Limited Company is a subsidiary of the holding Ryanair Holding Plc. The holding is governed by the Board of Directors that is responsible for the corporate strategic formulation and control. The Board of Directors is currently led by chairman D.Bonderman. The board consists of other directors and committees – audit, executive, nomination, air safety, etc. The Ryanair Limited is an airline operator; it provides airline service for customers. The company is led by the Chief Executive Officer, director M. O’Leary, who determines the company’s business strategy and manages a team of executives, which consists of Chief Financial Officer, Chief Operating Officer, Chief Pilot, Chief Engineer, Director of Flight Operations & Ground Operations, Director of Human Resources and In-flight, Director of Commercial Revenue, Director of Legal Affairs and Secretary, and Head of Customer Service. Thus, it is, clearly, functional organisational structure. 4.2 Ryanair’s Value Chain One of the tools of internal analysis is the value chain, it is aimed to examine “the character and limit of the synergies that do or do not exist between internal activities of a firm.” (Botten & McManus, 1999. p.132). Table 1 presents the Ryanair Value Chain; it illustrates how the company managed to achieve the lowest cost base to compete (McCormick, 2010). Thus, the key success factors of the Ryanair can be introduced as follows: 1. Cutting all costs not related to air airline service directly. 2. Outsourcing of maintenance, repair and other services. 3. Commonality of the airplane fleet. 4. A wide number of ancillary services. 5. Online booking. It is important to note that these key factors have undoubtedly provided the competitive advantages for Ryanair, but unfortunately they can be imitated, what we can see in the low-fares airline sector, especially during last years. Table 1. The Ryanair Value Chain Firm infrastructure: there is no large head office, Ryanair operates from modest, open-planned premises in Dublin airport; no staff perks, no consultants, only needed personnel Human resource management: restrictive practices are strongly discouraged, while multi-skilling encouraged; employees are accountable for outcomes, they can receive both incentives and sanctions; low cost staff training; many staff members are shareholders, they are interested in the company success; culture is youthful, casual and disrespectful Technology and Development: 99% internet booking; using of integrated systems on board for automatic control of flight paths; low cost internet marketing Procurement: the company expands its fleet by purchasing only from Boeing with big discounts; it outsources all activities that dont give competitive advantages, such as maintenance, even cabin staffing; all costs are under constant scrutiny, employees drink their own coffee and should not use equipment and electricity in personal purposes; employees pay for the uniform and trainings Inbound Logistics: No commission to travel agencies, selling through telephone booking initially, later through internet. Operations: Each operation is streamlined – ticketing, baggage handling, check-in and docking are reduced to the basics; airports with quick turnaround and low landing charges are only selected; labour flexibility is demanded, while trade unions are opposed. Outbound Logistics: Costs do not exist since the contract with the passenger is fulfilled during the flight – service is delivered completely from the beginning to the end of a flight; quick turnaround; reliable service. Sales & Marketing: Varying ticket prices - early bookers pay less, high loading, significant ancillary services and extra payments for them; partnership commissions ( rail fares, car hire, hotels, insurance, etc.); advertising on the website and on boards. Services: High productivity; but good service is not a key feature – minimal assistance for children, the aged and disabled people, stranded customers. 5. SWOT-analysis The overall analysis of a company’s competitive position can be made by the SWOT framework, which integrate both external Opportunities and Threats and internal Strengths and Weaknesses of Ryanair (see Appendix D). In the new strategy Ryanair should use its strengths in order to turn opportunities into new competitive advantages, as well as to avoid possible threats. 6. Stakeholders power Ryanair deals with a large and diverse range of stakeholders both in Ireland and in the EU. Today there is not clear established, formalised company’s mission or vision, so one can suppose that satisfying stakeholders is the mission of Ryanair. The major stakeholders of Ryanair and their power are described in the Table 2. Table 2. Ryanair’s stakeholders Stakeholder Power Board of Directors Very high. It formulates strategy and makes decisions concerning how and what way the company will be developed. Employees Low. They have a lot of responsibilities and a little of rights. Customers Moderate. Although there are a lot of complaints, including public ones, low prices still attract a considerable customers’ flow. Suppliers High. It relates mainly to fuel suppliers. Other suppliers, such as ancillary services’ suppliers have relatively moderate power, as they are interested in the long-term collaboration. Providers of Capital (banks, investors) High. Technological development of Ryanair is based on combination of bank loans, operating and finance leases. EU Commission Moderate. Investigations over a long period of time influence negatively on the company image and create additional costs. Ireland and EU government High. New regulations and taxes increase costs significantly. Airports Moderate. When airports increase charges, the company has to cut flights, it causes revenue lowering and considerable additional costs in order to open new destinations. 7. Strategy formulation 7.1 Vision and mission Johnson et al. (2008) assert that well-crafted statements of mission and vision are very important to motivate a company’s stakeholders. In order to achieve this objective, mission should take proper account of all important stakeholders. The analysis of stakeholders revealed that currently Employees’ and Customers’ interests are not taken into consideration properly. In the company’s Code of Business & Ethics there is no any commitment of the company to employees (RAb, 2010). However, nowadays corporate social responsibility, which includes responsibilities toward employees, is very important for business success. So, it is suggested to formulate the following vision and mission for the nearest short-term future: Vision. To remain the leading European low-fare airline company with strong positive brand and high-quality customer services. Mission. Based on its low-cost business model, the Ryanair Limited strives to provide high-quality airline services aimed to meet diverse customers’ needs. The company strengthens its market position by having high-skilled and motivated personnel, encouraged to achieve superior organisational and personal goals. The company works for a sustainable future of our shareholders, employees, customers and partners. 7.2 New strategic option The vision and mission, formulated above, require reformulation of the Ryanair’s strategy, because new dimensions now should be taken into account. Till recently Ryanair succeed in competition, mainly gaining competitive advantages through overall cost leadership and focusing on European passengers, who wants to get a destination quickly and without paying a lot. According to Porter’s Generic Strategies (Campbell et al., 2002) the company had a hybrid strategy of Cost Leadership and Focus (see Fig.1, RA1 position). Figure 1. Current and suggested strategy of Ryanair. Today the market is becoming more competitive, while customers are more powerful. So, Ryanair must seek other ways to sustain their top performance. One of the good ways is the Customer Service Improvement. This strategy allows to keep all advantages of previous business model and to gain new competitive advantages, such as: satisfied and loyal customers, improved corporate image, and strong positive brand. The improvement of customer service undoubtedly entails the increasing of costs, but it also allows differentiating services according to customers’ preferences (see Fig.1, RA2 position). More importantly, it will attract new segments of customers, e.g. businessmen, who prefer pay more for good service. This, in turn, will provide increasing the revenue. The strategy of Customer Service Improvement seems quite pertinent for Ryanair, as the company has already collected a great number of consumer data that can be used for implementation of a sophisticated Customer Relationship Management system. In addition, the company can expand its presence entering into the Eastern European, Russian and other suitable markets. One more promising option is to diversify the business, providing cargo transportation between Asia and Europe. References Botten, N. & McManus, J. (1999) Competitive strategies for service organisations. Basingstoke, Macmillan Press. Campbell, D., Stonehouse, G, & Houston, B. (2002) Business Strategy. Butterworth-Heinemann, 2002 European Low Fares Airline Association ELFAA. (2010) Statistics. [Online] Available from: http://www.elfaa.com/statistics.htm [Accessed 18 November 2010]. Heynold, Y., & Rosande, J. (2006) A New Organizational Model for Airlines. McKinsey Quarterly. [Online] Available from: https://www.mckinseyquarterly.com/A_new_organizational_model_for_airlines_1700 [Accessed 18 November 2010]. International Air Transport Association (IATA). (2010) Special Report - European Aviation. [Online] Available from: http://www.iata.org/pressroom/airlines-international/october-2010/Pages/08.aspx [Accessed 18 November 2010]. Johnson, G., Scholes, K., & Whittington, R. (2008) Exploring Corporate Strategy: Text & Cases. 8th edition. Harlow, Pearson Education. Lynch, R.L. (2009) Strategic Management. 5th edition. Harlow, Pearson Education. McCormick, T. (2010) Understanding Costs Using the Value Chain: A Ryanair Example. Accountancy Ireland, 42 (5), pp 28-30. Milmo, D. (2010) Airline industry in profit but UK carriers hit by disputes. Guardian.co.uk. [Online] Available from: http://www.guardian.co.uk/business/2010/sep/21/airline-industry-profit-uk-carriers-losses [Accessed 18 November 2010]. Ryanair Holdings (RAa). (2010) Annual Report & Financial Statement 2010. [Online] Available from: http://www.ryanair.com/doc/investor/2010/Annual_report_2010_web.pdf [Accessed 18 November 2010]. Ryanair Holdings (RAb). (2010) Code of Business & Ethics. [Online] Available from: http://www.ryanair.com/doc/investor/2010/code_of_ethics.pdf [Accessed 18 November 2010]. Appendix A. Operational Performance of Ryanair Table 1. Operational Performance of Ryanair, 2006-2010. 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 June easyJet 2010 June Passenger (in million) 40.53 48.36 57.67 65.3 69.2 47.6 Load Factor 83% 82% 81% 82% 82% 86.7% Country served 26 27 26 26 25 29 Numbers of destination 148 139 148 150 155 122 Permanent employee 3,500 5,000 5,986 7,118 8,000 7,000 Fleet (Aircrafts) 120 148 169 210 250 189 Daily Flights 750 900 1050 1,070 1,468 1,200 Source: ELFAA, 2010, http://www.elfaa.com/statistics.htm Appendix B. PESTEL analysis for Ryanair Area Key Influenced Factors Pressure Political Ryanair provides operations within the Europe, so, political or governmental instability within Europe may influence on passenger volumes or destinations of flights. Outside the Europe, Ryanair depends on politics in countries – oil suppliers, which form the global oil supply chain and influence upon oil prices. Also some recent agreements between governments cause the increased competition and higher costs. Strikes in European countries The EU-US Open Skies Agreement that allows US airlines to provide services in the EU market Government Taxes on Travel in several EU countries Terrorism threat and decisions of EU and countries’ governments concerning security EU expansion and agreements with non-EU countries allowing entrance in EU without visas can increase tourism and passenger volumes High Economic Economics in Europe is still quite instable; energy crisis causes the growth of fuel prices, at that, fuel accounted for about 34% of total operating expenses in 2010. Instability on financial markets can be dangerous as Ryanair plan to increase a quantity of aircrafts to 272 by March 2011, mainly through a combination of bank loans, operating and finance leases. In addition, increased airport charges have already forced cutting flights to Frankfurt and Manchester. Changes in economic conditions in EU and worldwide Fuel prices fluctuations and fuel availability Currency fluctuations Instability in the credit and capital market Increase of taxes and interest rates Increase of price competition Increase of charges for access to existing and new airports Increase of short and low-fares routs High Social The “Ryanair generation”, which ensured the company’s success before 2000, consisted of young Irish emigrants, who didnt mind flying without traditional airline services for low prices. But today, when Ryanair operates across Europe, it confronts with customers dissatisfaction of service more and more. Customers mostly complain on a duty to pay for any service they want to use on a board (toilet, air conditioning), which traditionally are free of charges in airlines. The complaints are often discussed in media, and the campaign was even opened in internet (“I hate Ryanair” web-site, Facebook’s groups of offended consumers, etc.). Other social factors are also seemed important, e.g. fear of flight after 9/11 or fear of disease epidemics. Outbreaks of influenza viruses and other disease epidemics Changes in consumers behavior and fluctuations of consumer preferences Increase of business class travellers Public acceptance or rejection of low-fares airlines Increase of public complaints from dissatisfied customers (e.g. online), including disabled passengers Fear of flight after 9/11 Decrease of consumers’ intentions to fly in other country on holiday due to recession Corporate Social Responsibilities (CSR) Policy High Technological Today the majority of Ryanair’s flight reservations (99%) are made basically online, the company has a good reputation of online company, so the using of new internet technologies both for improvement of booking service and for strengthening of brand seems quite promising. The growing tendency to use online social networks in marketing can serve very well to advertise new routes, attract new customers and retain patrons. New internet technologies - they allows competitors to implement online booking easier, however, they can be used by Ryanair for new forms of marketing and branding Existing customer data base can be used for intelligent CRM solution High-speed trains routes development Moderate Environmental Environmental factors are mostly related to global warming concerns in the society, related to greenhouse emissions. It causes to pay attention to special policies in the company. Severe natural disasters Continued concern in society about CO2 emission and other environmental issues (noise level, water consumption) CSR Policy Moderate Legal In addition to numerous legislative regulations that Ryanair have to conform strictly, during some past year the company has been experiencing a number of legal investigations of the European Commission into agreements with EU airports. The company has also been fined for its poor services to the disabled passengers, as well as it was criticised for refuse to collaborate with trade union. Continued legal investigations of the European Commission into agreements with EU airports EU labour regulation EU regulation on passenger compensation EU regulation on emissions trading EU regulation on fair competition High Appendix C. Analysis of the Ryanair’s competitive environment. Force Pressure Competitors The market of low-fares airlines is highly competitive. Currently there are several budget carriers in Europe, which use similar approach to business, offering customers low prices, minimum of service and point-to-point routes to less loaded airports. Ryanair dominates the market in the most part due to its aggressive competitive tactics, lowering ticket prices even more or increasing the number of flights on routes where a competitor succeeds. Recently Ryanair managed to take control under its old rival Aer Lingus, acquired 29.8% of its business to 2009. The most important competitor for Ryanair is easyJet; however the table in the Appendix A indicates a clear superiority of Ryanair. But threat comes also from the mainstream carriers as they cut fares, especially on short routs, offer internet bookings, provide the only passenger class, and reduce services on board like the budget airlines. At that they have more attractive destinations to airports in large cities. Competition is strengthening even more with opening the EU sky for air carriers from US and other countries outside the Europe. High New entrants New entrants at the budget airline market can appear more likely in a form of diversified divisions of mainstream airlines, which currently strive to win more market segments. Another threat can be from the US, Australia and Middle East airlines, whose sector increasingly grows. New European low-fare airlines are unlikely possible, due to significant barriers to entry, high level of competition, high capital investment, restricted slot of available airports and flight authorisation. Moderate Substitute products and services All low-fares airline offer customers substitute products and services, competing only in prices. Yet cost advantages are copied quickly. Customer can easily choose between several airlines, so there is no brand loyalty among customers, and there are no customer relationships within carriers. As some analysts say, customers for low-fares airline are like any other kind of luggage that should be carried from one point to another. In addition, customers can choose other transports, e.g. high-speed trains or coaches. High Power of Customers In his annual report the Ryanair’s CEO claims that “in addition to the lowest fares in every market, we also offer the best punctuality, the fewest lost bags, the fewest complaints, the newest fleet, the cleanest airline and quick response to passengers.” (RAa, 2010, p.6). However, independent surveys (e.g. of the Sunday Times) rank the company as the worst in terms of customer service. Complaints grow each year as customers become more fastidious and susceptible to value for money. Today’s customers are ready to pay more for better service. Customers in the most part are not loyal and can easily switch between airlines. As economic recession is getting easier, the power of customers will likely increase. Moderate to High Power of Suppliers In June 2010 Ryanair had 280 of Boeing 737-800 airplanes (RAa, 2010). So, the main aircraft and maintenance supplier is Boeing company, and Ryanair doesn’t intend to switch to other suppliers, - this supplier is stable and reliable. But great threat comes from fuel suppliers - prices and availability of fuel influence operation costs profoundly, and the company’s hedging programme will likely not be able to help in a case of sharp rise in prices. In addition power of suppliers is felt from airports, as the significant part of service operations are provided in airports. Internet supplier is also important, taking into account that the practically entire booking system is online-based. Moderate to High Appendix D. SWOT-analysis for Ryanair. Strengths Continuous growth Low cost leadership Punctuality High service performance Few overbookings and cancellations Considerable market share Well recognised brand name Point to point flights Quick turnaround Frequent departures in multiple destinations Strategic alliances Good bargaining position with Boeing Commonality and good quality of fleet Ownership of airplanes rather than leasing (cutting depreciation costs) Hedging of fuel and other risks Outsourcing services Dealing with airports with low charges High loading level Big share of revenue from selling of ancillary services (up to 22% in 2010) Online services Weaknesses EU investigations on illegal airport subsidies Fines by regulatory authorities Specific casual organisational culture Intuitive decision making made mainly by CEO Negative position of CEO to competitors and authorities, which leads to public battles Bad customer service compared to other carriers High customer complaints including public complaining in internet Destinations in remote airports Ownership of airplanes (high maintaining costs) Poor employment and human resource management practice Niche market (no expansion is possible) Opportunities Contracts with new regional airports Improved customer and in-flight service Compliance to regulations Sophisticated branding and improved corporate image New services for businessmen Improved employment policy Technology innovations using Business diversification Strategic alliances with international airlines Other countries’ markets entry (e.g. East Europe, Russia, Middle East, etc.) EU enlargement New EU regulations conc. entry without visa Acquisition of airlines - competitors Threats New EU legislative regulations New EU compensations New EU and regional taxes Increasing fuel prices Increasing airports landing and services charges Pilots can form or join trade unions New players at the market Strengthening of competitors (easyJet) Strategic decisions of mainstream airlines Increase of low-fare competition Accidents with air planes Environmental cataclysm and natural disasters Changes in customer behaviour Read More