The Low-Fares Airline - Case Study Example

Running Head: RYANAIR THE LOW-FARES AIRLINE RYANAIR: THE LOW-FARES AIRLINE of the of the RYANAIR: THE LOW-FARES AIRLINE Q.1 Analyse the European airline industry, with implications for the budget sector, and especially Ryanair. Ryanair is a major force in the low-cost airline sector and is one of the big players in Western Europe. In global terms the company held a 0.7% value share of air transportation, to rank 27th in 2008. The company was established in 1985 and is one of the oldest low-cost carriers in the world, having converted to the low-cost carrier format in 1992. In terms of international passengers boarded, however, it holds the number two position in the world, behind the Air France-KLM Group. Ryanair, established in the Republic of Ireland, quickly grew to be one of Western Europes most successful and profitable low-cost airlines, flying from 23 bases and covering 563 routes at the end of 2008. (Alessandro, 2008) In addition to its main flight services, Ryanair also sells car rental, hotel accommodation and associated travel services through its main websites. Western Europe Ryanair has continued to increase its share of air transportation in Western Europe, and, depending on definition, has increased its share of European passengers to a little over 7% in 2008. Ryanair states its own market share as 12%, but excludes markets in which it has no presence, such as Russia, Ukraine, Turkey, Greece and Iceland. Rival company easyJet held a similar share of 7% in 2008, more than doubling its share since 2001. As consumer demand for low-cost travel and European city breaks boosted the low-cost sector both companies managed to take customers away from the full-service carriers, such as British Airways and Iberia. However, the full-service airlines continue to compete in the market where the short-haul flight is a connecting leg of a longer journey, such as, say, Lisbon-Madrid-Mexico. In Ryanairs home market of Ireland, the company competes with, but also is the largest shareholder in Aer Lingus. Between 2004 and 2007, traffic on Aer Lingus short-haul routes, all of which were to and from Ireland at the time, increased by 32%, whilst total Irish airport growth over the same period was 28%. It appears, therefore, that Ryanair did no more than maintain its share of the Irish market during this period. (Alessandro, 2008) Both Ryanair and easyJet will increasingly find that attracting new customers will become harder to achieve without expanding routes as new competition enters the sector. Although the market is awash with low-cost competitors, only the top three (including Air Berlin) have pan-European brand recognition and Ryanair’s cost base sets it apart in being able to offer very low fares. Moreover, many of its competitors, such a Wizz and Sky Europe, are losing money at present. In October 2007, IATA forecast that air travel in Western Europe is expected to grow at a CAGR of around 5% over the 2007-2011 period, which is broadly in line with the global average for the period. However, Ryanair, however, has forecast a CAGR of 14% in passenger volumes from 2007 to 2012. (companiesandmarkets.com) Such growth can expected to be achieved through maintaining its low-cost base, further expansion and the bankruptcy of competitors, particularly low-cost carriers. Low-Cost Aviation Sector The low-cost aviation sector in Europe has been dominated by three big players – Ryanair, easyJet and Air Berlin – for a number of years. However, the future is set to change, as a number of new brands will expand during the forecast period creating greater competition and heralding a period of gradual consolidation. However, the new era of high oil prices could also cause some bankruptcies in the sector, particularly among smaller operators with little critical mass. Ryanair generated around 55% of its revenues from the UK in 2003. However, in 2008, 58% of revenues came from outside the UK. Of the 12 new bases opened since 2005, only three – Belfast, Nottingham and Bristol – have been in the UK. However, future expansion eastward into Europe will provide the low-cost carriers such as Ryanair with challenges as well as opportunities. In Eastern Europe low-cost airlines that wish to compete in this region will have to maintain even tighter cost controls, as margins will come under pressure and its two principal local carriers, Sky Europe and Wizz, are presently losing money. In addition, the ongoing high cost of fuel will mean that only the most innovative and resourceful airlines will manage to survive. Ryanair is the best placed to face the challenges during the forecast period as it has maintained rigorous control over costs and has widened its revenue streams. In 2003, the airline received around EUR103 million in ancillary revenues beyond its main airline activities. This extra income stream represented 13% of all turnover. By 2008, this had increased to over EUR362 million, 17% of the 2008 revenue figure. (companiesandmarkets.com) Of note has been how Ryanair has developed its additional revenues. Internet income (charges for credit and debit card transactions) and in-flight sales have increased roughly in line with passenger volume and ancillary revenue from car hire has actually declined since 2003, in spite of passenger volumes being 2.5 times as high in 2008 as in 2003. The true growth came from “non-flight scheduled”, from EUR35 million in 2003 to EUR242 million in 2008. This category covers charges for carrying bags in the hold, excess baggage fees and checking in online (switched in 2008 to a charge for checking in at the airport). Financial Performance Ryanair has continued to perform well during the review period, with net sales reaching EUR2.5 billion in fiscal 2008, which represents an increase of 32% from the previous year. The company has achieved strong growth from net sales of EUR843 million in 2003. The operating margin has declined gradually since 2003 to 23% in 2008, reflecting the tougher market environment in which Ryanair now operates. (companiesandmarkets.com) Nonetheless, this margin is the envy of most of the world’s airlines, and Ryanair is reportedly the world’s most profitable passenger airline. In contrast with this, easyJet has experienced a weaker operating margin during the 2003-2008 period, at an average of 8%. However, easyJet does operate in many ways a different business model to Ryanair, with higher levels of customer service, uses smaller aircraft and serves many more primary and second hub airports than its Irish rival. From an investor’s viewpoint, Ryanair continues to outperform its competitors in Europe. In September 2008, its return on capital employed (ROCE) stood at 12.1%, whilst easyJet’s was 8% and British Airways’s at slightly over 7%. (Alessandro, 2008) Q.2 Ryanair’s Strengths And Weaknesses Strengths Ryanair has the highest net margin of any airline in the world. It has continued to increase revenues year-on-year during the review period despite the global aviation industry experiencing difficult trading conditions. The company’s brand is clearly communicated as low price and low quality and has achieved a major fillip with its “No Fuel Surcharges – Ever!” promise.Thanks to early penetration into tertiary airports in many parts of Europe, it holds dominant positions in many regions of Europe that it serves, whilst its competitors continue to focus on primary and secondary airports. Weaknesses Compared with other low-cost carriers, Ryanair has a poor reputation for customer service and for abandoning passengers when flights are cancelled. Whilst this will not be an issue so long as its fares remain significantly below average, Ryanair can expect to lose share due to its current reputation if other airlines succeed in cutting their cost per seat-km to a level approaching Ryanair’s. Q.3. Is Ryanair’s strategy sustainable? Ryanair’s Strategy Ryanair’s strategy is based on four pillars. First, although it is an Irish-registered airline, its operations are Europe-wide. Ryanair operates from 23 bases around Europe, in Sweden, Belgium, Ireland, the UK, Germany, Italy and Spain. (Pankaj, 2007) Although the UK and Ireland have traditionally been Ryanair’s largest markets, an increasing proportion of revenue and hence profit, is derived from routes elsewhere. As most European competitors, especially full-service airlines, fly from a much smaller number of bases (all of which are in their home country), Ryanair now hold more international passengers than any other competitors in the world. (Siobhan, 2007) The second pillar of strategy has led to a sustainable competitive advantage; more than any other low-cost carrier, Ryanair uses tertiary airports (i.e. ones which were effectively moribund before Ryanair’s entry into the market and where it is now the dominant carrier). By comparison, both easyJet and Air Berlin, Europe’s second and third largest low-cost carriers respectively make much greater use of major hubs and secondary airports. According to IATA’s analysis, this utilisation of tertiary airports gives Ryanair a 1.4 cent per available seat km (ASK) advantage over easyJet, which based on roughly 40 billion ASK, gives Ryanair a cost advantage of over EUR500 million per annum. The third and final pillar is aircraft size. Ryanair has a single marque fleet with 189 seats per aircraft, compared with 150 for easyJet and 141 for Air Berlin. The extra capacity accruing to Ryanair carries a very low marginal cost and, as long as the seats can be filled – and indeed, its load factor is not significantly different from easyJet and is rather higher than Air Berlin’s 77% (January-September 2007) – then Ryanair will have a sustainable competitive advantage over its rivals. Operational Issues and Strategic Challenges Ryanair’s growth is likely to decline in future years. First, the extent of competition within the European aviation sector has intensified in the last few years. Second, Ryanair’s latest expansion has been in large or medium-sized airports rather than small ones, which will increase its average cost per seat-kilometre. (Richard, 2005) Unless its fares on these routes are significantly below those of competitors or their flight times are more convenient, performance on these newer routes is likely to be poorer than on the “classic” routes to the small airports which Ryanair has traditionally served. Strategic sustainability Quadrant 1 - most sustainable Quadrants 2 4 - sustainable Quadrant 3 - unsustainable Ryanair is likely to be in quadrant 2 of in terms of sustainability by offering customers consistent, short-haul air services at low fares. The company is creative and accessible in constantly innovating to cut its costs. They recently have announced their plan to strip out window blinds, reclining seats, headrests and seat pockets. But, some of their cost-cutting efforts might put off passengers. The case of wheelchairs can be served as a good example. (David, 2004) At the present time when there are more and more no-frill airlines emerging within Europe, Ryanair should shy away from competing solely on price and try to add some more value to its customer offerings. (Paul, 2005; Peter, 2006) They need to understand their clientele, especially the new clientele, as they roll out routes and open up hubs in mainland Europe so that they could move strategically towards quadrant 1 for larger profit. (Gary, 2007) One way of adding up more value is the reorganization of its human resource management. Ryanair should empower more in its staff training. Once again, Southwest could be taken as a model. Target other travellers Ryanair claim to please all clients but in fact the most of their customers are tourists. Thus, we believe that Ryanair must work more efforts on this market sector. Likewise, students with short-haul flights are a prospective target group as they are expected to fully take benefit of no-frills airlines. The company can offer a bonus of student discounts and other special offers for a return back for Christmas, fitting in with end of year semesters. 4. Would you recommend any changes to ryanair’s approach? Growth Opportunities Increased competition during the forecast period from companies like easyJet will provide Ryanair with challenges. Despite its rival easyJet having expanded its network at an exponential rate it may well have overstretched itself. A slightly more cautious approach from Ryanair may therefore pay dividends in the future. (Graeme, 2007) Ryanair has also extended its services beyond Europe and into North Africa in 2006, flying to Morocco. The new destination marks a departure for the airline as it seeks new opportunities to grow its revenues and extend its geographical coverage. However, fellow rival easyJet has also launched services into the country and will continue the tension between the two as they increasingly find themselves head-to-head in the same markets. Ryanair has proposed that it may be able to offer exclusively free tickets by 2015, providing it can leverage new revenue streams. Although a difficult challenge, if achieved then the airline would certainly create a sea change in how the low-cost air travel sector currently operates. Limited Potential As the low-cost air travel sector is likely to begin a period of gradual consolidation in Europe not all operators will survive. It is therefore important for Ryanair to maintain a tight focus on costs, as it will be the financially more viable airlines that will dominate the skies in the longer term. International political and economic climate, armed conflicts, terrorist attacks and threats may affect consumer sentiment in air travel. General global economic and business conditions may impact levels of disposable income and net revenue yields. Providing the companys key region of Western Europe continues to develop economically then the low-cost travel sector is likely to achieve sustained growth. (Siobhan, 2007) The impact of rising operating costs, including changes in foreign currency exchange rates, interest rates, fuel costs such as by higher world oil prices, foodservice, payroll, insurance and security costs is of major significance. Ryanair has pursued a strategy to avoid financial losses in currency transactions although this is an issue that can ultimately damage revenues. However, the threat of high oil prices will be the largest single test that the company will have to face during the forecast period. Finally, uncertain oil prices will also pose a risk to airlines. High fuel costs in 2008 are widely believed to continue into the forecast period. If costs remain high then this will place pressure on the aviation industry, particularly rival low-cost carriers with higher cost bases than Ryanair. Future Ticket Costs Ryanairs management on several occasions has indicated, most recently that it may be possible to introduce exclusively free tickets in the future. The only means by which this could be achieved is to increase ancillary revenues from the current level of 16% of total revenue. Ryanair will shortly be introducing Onair technology to enable mobile telephone calls to be sent and received whilst in flight. Some form of gaming activity could also be introduced; in November 2005, Ryanair hoped that revenue from gambling could reduce fares, possibly to zero. Although it hoped to have gambling installed by 2007, there has been no recent movement in this area. As the market leader in low-cost carriers, most of the new ruses for raising ancillary revenue have been initiated by Ryanair and, after gauging their acceptability to customers, have been copied or otherwise by other low-cost carriers. For now, therefore, it is up to Ryanair to determine the extent to which the proportion of revenue from air fares can be reduced. (Siobhan, 2007) 5. Evaluate the strategic leadership of Michael O’Leary The Leadership Style of Michael O’Leary The CEO Michael O’Leary can be characterized as an eccentric, charismatic leader. He has never been conventional and has always been ready for controversy. Thus, he dressed as the Pope, St Patrick and an aviator to promote his company. He also repeatedly challenged his rivals in very outspoken and extraordinary ways (e.g., challenged EasyJet sitting on top of a tank etc). His leadership style can be seen as transformational rather than transactional because under his management people tried to work harder and achieve challenging goals and felt commitment to what they were doing. FT called O’Leary one of the 25 greatest European business stars (‘A head for numbers, a shrewd marketing brain, and a ruthless competitive streak’). Bibliography Alessandro Cento (2008) The Airline Industry: Challenges in the 21st Century (Contributions to Economics) Physica-Verlag Heidelberg Barrett, S.D. (2004) The Sustainability of the Ryanair Model, International Journal of Transport Management, 2, 89-98 David Gillen and Ashish Lall (2004) Competitive advantage of low-cost carriers: some implications for airports Journal of Air Transport Management, Volume 10, Issue 1, Pages 41-50 Doganis R., (2002) Flying Off Course, Routledge, Berlin. 187 Fewings R., (1999) Provision of European airport infrastructure, Avmark Aviation Economist 7, pp. 18–20. Gary Hamel, Bill Breen. 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