Ryanair was set up in 1985 andzz is one of the oldest and most successful low-cost airlines of Europe. In fact, Ryanair was one of the first independent airlines in Ireland. In 2001, many believed that Ryanair was like the Wal-Mart and Southwest Airlines of Europe. Ryanair transformed the Irish air services market where other airlines like Avair failed to compete with the more powerful national carrier Aer Lingus.
2. INTRODUCTRION – RYANAIR: The ‘Southwest’ of European Airlines in 2007
Ryanair, Europe’s biggest low-fares airline (LFA ) reported its third quarter results for 2007 with net profits dropping 27 percent compared to a net profit of 48 million a year earlier. Ryanair cited poor market conditions, fuel costs (oil prices at $90 a barrel) and concerns on recession in the UK and many other European economies for its current performance and not so strong future profit expectations. With average winter fares dropping almost 5 percent its’ underlying net profit in the three months to end December fell to 35 million euros ($52 million). Other factors that contributed included doubling of airport charges combined with reduction of winter capacity at Stinted , significant cost increases at Dublin Airport combined with longer sector lengths and staff costs which increased by 18 pct to 67 million euros. Ryanair’s net profit figure excluded a one-off gain of 12.1 million euros ($17.99 million) arising from the disposal of 5 Boeing 737-800 aircrafts.
3. CURRENT FACT THAT MAKES RYANAIR SUCCESSFUL
* the World’s favourite airline’
* 37 bases and 950+ low fare routes across 26 countries, connecting 150 destinations
* 210 new Boeing 737-800 aircraft with firm orders for a further 102 new aircraft
* employs a team of more than 7 000 people
* expects to carry approximately 66 million passengers
4. ENVIRONMNETAL ANALYSIS
4.1 PESTEL ANALYSIS
For determining the key issues will be faced by any of internationally growing organisation such as Ryanair, PESTEL analysis plays a key role to highlight the problems in different sectors of competition issues. These factors are mentioned below:
4.1.1 POLITICAL FACTOR
* Strengths and pressure of trade unions.
* Global Village (I-e Growth and expansion of EU countries).
* Terrorism increased number of security measures.
* Involvement of environmental organisations is increasing environmental protection charges.
* Support of French government to their own national airlines.
4.1.2 ECONOMIC FACTOR
* Day by day increase in fuel charges.
· Devaluation of dollar price.
· Increase use of high speed travelling through cars and trains.
· European Union expansion.
4.1.3 SOCIAL FACTOR
* Increase in grey market
* Increasing travelling lifestyle
* Increasing business travelling
4.1.4 TECHNOLOGICAL FACTOR
· Increasing volume of internet advertising.
· Use of satellite TV.
· Environmental friendly cars (Hybrid technology).
· Internet competition.
4.1.5 ENVIRONMENT FACTOR
· Control of noise level.
· Green house / carbon emission effect.
4.1.6 LEGAL FACTOR
* Misleading advertisement driving towards increased number of allegations
* Illegal subsidies for Airports
* Wheelchair charges
4.2 PORTERS FIVE FORCES
4.2.1 BARGAINING POWER OF SUPPLIER (LOW)
1. Boeing is RA’s main suppliers
2. Only 2 possible suppliers of planes – Boeing and Airbus witching costs from one supplier to the other is high because all mechanics and pilots would have to be retrained.
3. Price of aviation fuel is directly related to the cost of oil (Ryanair controls these through hedging).
4. Regional Airports have little bargaining power as they are heavily dependent on one airline
5. Bigger airports, where Ryanair’s competitors operate, have greater bargaining power. Ryanair’s policy is to try and avoid these airports.
4.2.2 BUYER POWER (LOW)
LOW Bargaining Power of Customers
1. Customers are price sensitive
2. Switching to another airline is relatively simple and is not related to high costs (Internet-all airlines are online)
3. Customers know about the cost of supplying the service
4. No loyalty
4.2.3 THREATS OF NEW ENTRANTS (HIGH)
LOW New Entrants
1. Some barriers to entry (restricted number of licenses for air carriers)
2. High capital investment
3. Restricted slot
4.2.4 THREAT OF SUBSTITUTES (HIGH)
1. Fast speed trains running on short hales.
2. New hybrid technology introduced in the new cars which save fuel of holidaymakers and thay can enjoy nice breaks in different countries.
3. Other competitive new European airlines.
4.2.5 COMPETITIVE RIVALERY (MEDIUM)
1. Deregulations and increase in number of new routes will encourage other people carriers/ competitors to fill the gap which indicates the sign of increase in buyer power.
2. New mergers and alliances by big airlines such as British Airways and Iberia.
3. Other big competitors such as Air France and KLM etc. Will attract the customer by gathering the data of frequent flyers and offering them special perks/ discounts to increase their customer loyalty.
4. Various other airlines are thinking to provide comfort and extra services to their premium business passengers.
4.3 INDUSTRY PROFITABILITY
1. High forces are applied on other industrial competitors specially for new entrants as the gap in the industry is already covered by Ryanair and Easyjet after capturing low traffic airports.
2. By easily building a good infrastructure by Ryanair is made difficult for other competitors in industry to setup a new heavy budgeted cost to compete.
4.4 STRATEGIC GROUP ANALYSIS
Strategic group is the group of firms in an industry following the same or similar strategy along the strategic dimensions. (Page No. 129 Porter 1980)
1. In the light of all points discussed above, it is quite clarified that other strategic groups such as Easy Jet and Flybe are using nearly same kind of techniques to attract market share towards their company.
2. On the other hand, latest merger between British Airways and Iberia will be a new intimation for Ryanair in U.K as they will introduce low packages for American division where Iberia is already effectively working so that is the barrier for Ryanair to grow its market share in American region.
3. Cheap flights already offered by Lufthansa to get the good competition with Ryanair.
4.5 RESOURCED-BASED OF RYANAIR
The resource based view does not focus so much on the actual labour and capital deployed by the company, but rather on the way in which these resources are utilised.
(Strategic Planning, Prof. Alex Scott 2008)
Resources are tangible and intangible assets a firm uses to choose and implement its strategies. Capabilities are the skills a firm uses to bring its resources to bear. The capabilities of the firm are:
* Lowest airfare rates
* Simple processes (no frills)
* Large brand awareness
* Clear offer (focuses on particular market segment)
* Innovative strategies on cost cutting
* Quick turnaround time
The resource-based approach uses various terms for different types of resources. Resources include physical resources, human resources, financial resources and intellectual resources. Competences arise from the continual deployment and integration of resources over time and across activities. Core competences are necessary for successful performance. Distinctive capabilities are competences superior to competitors. Taken together these can be regarded as the company’s strategic capabilities.
4.6 ANALYSIS OF CORE COMPETENCIES
Ø Fleer Commonality
Ø Quantitative Carrier Services
Ø Keep maintaining Low Cost
Ø Online Reservation Resources
Ø Load Competence
Ø Experienced/ Specialised Management
Ø Customer Service
Capabilities for Competitive Analysis
Ø Flight Frequency
Ø Cargo Service Quality
Ø Objective to Keep Low customer Fare
Ø Provide Good Service of Online Booking/ No Luggage Booking
Ø Low Fare Air Carrier in European Industry
Ø Michael O’Leary
Ø In Flight Customer Care
4.7 USE OF PORTERS VALUE CHAIN MODEL BY RYANAIR
Europe’s bloodbath (again)
4.8.1 RECESSIONARY CONDITIONS SUIT TRUE LCCS BEST
The synchronised global economic recession has handed Ryanair and similar carriers near-perfect operating conditions. As Ryanair explains, “this recession has encouraged passengers to become much more price sensitive which is why they are switching to Ryanair’s low fares and unbeatable customer service over all other competitors”.
The carrier’s near term outlook is “bloody brilliant”, according to Mr O’Leary, who has warned, “we’re determined there will be no green shoots of recovery for any of our competitors. In the coming Winter, there will be a bloodbath and we will be causing that bloodbath”.
The carrier expects a 15-20% reduction in average fares this year to around €32 per passenger. Ryanair is banking on several of its smaller rivals being unable to withstand falls of this magnitude over a sustained period. The resulting rationalisation of capacity would lead to a stabilisation of yields after the “bloodbath” – or so the theory goes. Regardless, Ryanair is in a position to profit handsomely over the next 12 months.
Ryanair’s CFO, Howard Millar, summed it up; “we’re the only airline in Europe predicting a profit for next year at this point in time”. The airline forecasts a profit after tax of between €200 million to €300 million for the year ending 31-Mar-2010.
4.8.2 “COLLAPSING” AIRCRAFT ORDER BOOKS:
Ryanair is also on the offensive for a cheap aircraft deal to cover its requirement for 200-300 aircraft between 2013 and 2016. Talks with Boeing have reportedly been scheduled for late Summer. With its negative net order book this year and a customer that is arguably too big to lose, Boeing may be more willing to deal than Airbus. The US dollar is certainly heading in the right direction for Ryanair at present, with a substantial delivery log.
But both manufacturers know Ryanair needs more aircraft to keep its model working next decade and will not be too eager to discount. Contrary to O’Leary’s charge that the aircraft order backlogs of Airbus and Boeing are “collapsing”, although there has been some churn in orders, the manufacturers still hold the upper hand. 12-18 months from now, it might be a different story.
“Distract and conquer”
4.9.1 AER LINGUS HOBBLED, LUFTHANSA NEXT?
Many analysts view Ryanair’s pursuit of Aer Lingus as misguided by delusions of grandeur. It has certainly cost Ryanair dear, with another EUR222.5 million writedown of its investment booked in 2008/09. But Ryanair’s total outlay for Aer Lingus shares will be a small price to pay for neutralising what was a well-oiled machine just a few years ago. Thanks to Ryanair’s effective interference, Aer Lingus is now leaderless and adrift, discounting aggressively to raise cash to stay in the game. It may not survive the Winter independently. Some sort of rescue – possibly involving Ryanair – would result in a rationalisation of capacity and a restoration of yields in the LCC’s core UK-Ireland markets. That too would help Ryanair, although the carrier would benefit more from simply growing its market even further.
The airline posted a net loss of EUR169.2 million for the 12 months ended 31-Mar-2009, compared with a EUR390.7 million net profit a year earlier. Ryanair said it fell into the red chiefly because of a EUR222.5 million accounting write-down on the value of its 29.8% stake in Aer Lingus and higher jet fuel costs. Its pre-exceptionals operating profit was down 74% to EUR144.2 million, producing an operating margin of just under 5% – well down on previous form.
Ryanair operating profit margin FY06 to FY09
Source: Centre for Asia Pacific Aviation & Ryanair
The Master of Distraction, O’Leary, has now turned his attention to Lufthansa. The German carrier is unlikely to be flattered that Ryanair has identified it as its next biggest threat, but would do well to maintain focused on the delicate task of empire building. If Lufthansa can effectively integrate Austrian Airlines, Brussels Airlines and bmi (plus one or two others), the group will pose a major threat to Ryanair’s dominance, particularly as European economic conditions improve. But Ryanair’s organic growth is arguably a better bet.
4.9.2 FUEL THREAT NEUTRALISED
Surging world oil prices could hamper efforts by many airlines to stem losses this year. After a hedging misstep last year (which contributed to a 59% surge in fuel costs to EUR1.3 billion), Ryanair looks to have got it right, hedging 90% of its fuel requirements for the first three quarters of the current financial year (to 31-Dec-2009) at USD62 per barrel (although there was no word about currency hedging in the report). If oil prices remain at current levels, Ryanair expects its full-year fuel bill will be EUR450 million lower than last year. This factor alone makes its current earnings guidance appear conservative.
Over the longer term, Ryanair faces a massive conundrum regarding fuel costs. Unlike McDonald’s, Aldi and Ikea, Ryanair is unable to control its fundamental cost line. It may have missed the chance to lock-in fuel prices at low levels (like Southwest did at the start of this decade) for the next few years. The airline faces a medium to long-term margin squeeze as fuel costs rise on a scale it cannot cover with ancillary revenues.
Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the mind of the target market. The goal is to locate the brand in the minds of consumers to maximize the potential benefit to the firm.
(Marketing Management, Philip Kotler & Kevin Lane Keller 2006)
Ryanair has the purest form of low cost airline in Europe. Ryanair boasts many No.1’s:
• No.1 for passenger traffic- over 23m for 2004 – overtaking Easyjet.
• No.1 for passenger growth- 50% + this year.
• No.1 for European routes (149) and bases (11).
• No.1 for customer service delivery- punctuality, flight completion and fewest lost baggage.
6. PORTERS GENERIC STRATEGY
So as we can see from the above representation Ryanair is the most radical low cost airline, it
* Differs from the closest competitor on the graph (i.e. Easyjet) because it uses secondary airports
* To lower its cost base whereas Easyjet does not. Virgin Express is nearly stuck in the middle; it
* Still offers seat allocations… Aer Lingus is an interesting case as it has been gradually getting
* Closer to the low cost model on its short haul flights. Ryanair comes out as the purest low cost carrier.
* Also in appendix is a comparison of Ryanair against other LCC and traditional carriers based on
* Some key operational measures. (Revenue, employee/passenger, revenue/employee…).
7. CRITICAL KEY SUCCESS FACTORS
• low ticket prices
• frequent departures
• possibility of advanced reservations (online reservation and luggage bookings)
• reliable baggage handling
COST REDUCTION STRATEGY
• fleet commonality
• contracting out services
• airport charges and route policies
• managed staff costs
• productivity and managed marketing costs
7.1 FLEET COMMONALITY
• Only one kind of plane (Boeing Planes)
• Limits the costs for:
Ø Staff training
Ø Maintenance services and facility of obtaining spares
Ø Facility in scheduling aircraft and crew assignment
7.2 CONTRACTING OUT SERVICES
• ancillary revenue – 16% of profit (revenue from non-ticket ources)
Ø deals with Hertz car rental & hotels
Ø ticketing handling (phone cards & bus tickets)
Ø aircraft handling