Analysis of Ryanair Essay

Ryanair established in 1985 carrying more than 5,000 passengers between its route Waterford Airport in Ireland to London Gatwick during its first year. The company expanded by 1989 had 350 employees, 14 aircraft and carrying more than 600,000 passengers a year. In 1997 there were dramatic changes in the European airline industry with deregulation of European Union air transportation allowed airlines to open new routes into Europe. The European Low fares association reported that low fares airlines are carrying more passengers than before with an increasing number of destinations in Europe set to increase from 38% to 53% in European travel (elfaa.com, 2011). Ryanair took advantage from the deregulation with routes from London Stansted to Stockholm, Oslo and Paris. By 2001 Ryanair launched its own travel website and within 3 months received 50,000 bookings (Ryanair.com, 2011). The report will focus on the low cost industry environment by identifying the opportunities and threats as well as five forces of the external environment. The report will also identify the strengths and weaknesses of Ryanair. Part 1: Low cost Airline industry The low cost airline industry has become the most profitable with all segments in the market with low prices and high load factors. This strategy has been challenged since the 1990s with the liberalization of services allowing new entrants to compete for business (Economist.com, 2011). The low cost airline industry operates all activities by reducing costs in order to gain strategic success and competitive advantage. This approach has a lot of opportunities as well as threats. Political Governments in the UK have the highest tax compared to Germany with a $1.3bn departure tax and Austria’s similar $119m duty tax (Independent.co.uk, 2011). The threat of passengers paying higher prices as a result of increased tax for their airline tickets can lower profits for airlines. This can affect low cost airlines such as Ryanair and Easyjet as the higher taxes cut profits for the company for example Easyjet stated they had lost  £21m of its  £153m in 2011 (IATA.com, 2011). Acts of terrorism can also be a major threat to the airline industry. Initiating further routes is an opportunity for low cost airlines to other destinations in Europe with its growing economy and additional 15 EU countries that joined in 2004 such as Lithuania, Poland, Slovakia, Latvia can offer new opportunities for new routes to increase the number of passengers(Delfmann, 2005). There has also been a threat with the plans to sell Stansted airport, the main location for low budget airlines after the Competition Commission to reduce its dominance in the market. This will bring greater competition to low cost airlines and benefit passengers with more low fare airlines from regional airports such as Gatwick and Stansted competing more (Telegraph.co.uk/travel, 2011). Economic The threat of rising oil prices caused global airlines to lose $16 billion in profits which did rebound in 2010 with higher traffic. The threat continues with oil prices averaging $110 a barrel and estimated to further increases in the industry’s fuel bill which will rise from $10 billion to $176 billion (Bangkokpost.com, 2011). This threat has also been warned by Willie Walsh, the chief executive of British Airways and Iberia who cautioned that European carriers have to bear the impact of the high fuel costs with some operators having to go out of business (Guardian.co.uk, 2011). The recession in 2008 resulted in travelers seeking cheaper fares and led to growth in sales for budget airlines. This opportunity during recession allows budget airlines to take advantage and of more travelers seeking low fares with budget airlines rather than more expensive airline tickets. With the higher oil prices, natural disasters in Japan, discontent in the Middle East, North Africa and can force competitors in the airline industry to increase prices and fuel surcharges which pose major threats to airlines profits and survival of airlines. Social The growth in demand for passengers seeking low cost airlines for cheaper fares is an opportunity for budget airlines. People are living a better standard of life with declining inequality of incomes made up mostly of middle class income people. People are also more well-travelled, experienced and seek new destinations with the growth of vacation property (Goeldner and Ritchie, 2009). This is an opportunity as budget airlines frequently service short haul destinations for short trips or weekend trips for leisure or business purposes offering more destinations and new experiences to people with low fares. Migration has also made commuting a factor with people seeking employment opportunities and education as a motive for travelling as well as the rising quality standards has shown to expect growth for low cost airlines (Gross and Schrà ¶der, 2007). There are significant opportunities for low cost airlines that can benefit from the demand of increasing passenger from various destinations and purposes. Many people also seeking new destinations is a good opportunity for budget airlines to increase passenger numbers and revenue by providing different destinations of regional airports. Technological The increasing popularity of information technology is an opportunity for low budget airlines as they don’t use travel agents to sell tickets and allows consumers to be informed about schedules, compare prices and itineraries as well as flights with other airlines (Pease etl al., 2007). The new ‘saddle seat’ which is designed to allow 23 inches of legroom compared to 30 inches on a normal seat space and shaped to sit at an angle increase the number of seat for an airline (Telegraph.co.uk/travel, 2011). The seats offer an opportunity for low budget airlines such as Ryanair and Easyjet to allow more storage space and more passengers in a plane which can increase revenues. The opportunities in technology allows airlines to take advantage of potential revenues with the internet offering direct marketing for customers and value added service by bringing offers to the customers directly. The opportunities for of the new seats can offer planes to fit more passengers and is a further potential a growth in revenue for budget airlines. Legal The airline industry has considerable regulations with issues concerning legislation and guidelines. For example low cost airlines have aggressive advertising campaigns to emphasize low fares which have become an issue with consumer protection legislation. Separate details of surcharges such as government tax, airport tax and fuel surcharge have to be included so that it does not consumers are not misinterpreted and misunderstood when buying a ticket. This is a threat to low cost airlines as it disregards the concept of low fares with all the taxes passed on by governments and aviation authorities. Low cost airlines can be substantially threatened with EU regulations and laws which can lower profits and damage the reputation of an airline with a negative image. Environmental Natural disasters such as the 2010 Iceland Volcano which caused 14,000 Ryanair flights cancelled. Costs of the 2010 Iceland disruption to the global airline industry soared to  £1.1bn according to estimates from the International Air Transport Association (Iata) (Guardian.co.uk, 2010). This threat to the airline industry faced by natural disasters such as the Iceland volcano can occur at any time and stop people from travelling costing airlines major disruptions with delays or cancellations. Emissions used by the airline industry have been increasingly growing rapidly over recent years, increasing 98% between 1990 and 2006 with predications of further increases to another 88% by 2050. This threat to the aviation industry enforcing airlines to pay for carbon dioxide and lower profits (Ftadviser.com, 2011). Porter’s five forces Porter points out the five forces which consist of bargaining power of suppliers, buyers, threat of potential new entrants and threat of substitutes to the industry. A company can adapt to the forces in order to increase chances of gaining sustainable competitive advantage and profitability. In understanding the strategic decisions a company has to make, it can be useful to look at the five forces of rivalry amongst the firm, substitution, new entry, the power of customers and the power of suppliers. Figure 1.1: Porters five forces Source: (Fouris and Oswald, 2006) Barriers of entry: to obtain aircrafts is extremely expensive and acquiring a basis at airports is also difficult (Gross and Schrà ¶der, 2007). With the success of Southwest airlines and deregulation and liberalization of the airline industry has allowed 40 budget airlines in the airline such as Easy Jet. This level is high as a result of these factors. Substitution- for the short haul flights, the substitute products include car, train and boat services. Travelling by train is clearly a substitute choice for travellers as it is high speed or travelling by car with the many motorway links available can have an impact. Technology can also be a substitute, for example business travellers may choose to conference skype calls over the internet. This level is moderate as flying is the main method of travelling long distances at a shorter time. Bargaining power of buyers: consumers can now purchase their own tickets from low cost airlines and can choose airlines with for higher level of quality, better service and lower price. Customers have the power to easily switch to another product that have lower prices with the ease of the internet (Hitt, et al, 2008). This popularity of comparison internet sites allows passengers to compare flight prices and choose the lowest cost airline of their choice. Therefore to survive with these intense factors airlines have to provide lowest fares to attract customers which is important for budget airlines and as a result the power of buyers is high as they consumers choose lowest fares causing risk of survival to an airline. Bargaining power of suppliers: Airlines rely heavily on the inputs for the company to survive which would be fuel, materials for the planes, services and manpower. Airlines either use Boeing or Airbus together with high maintenance fees, training staff. Additionally with the increase of cost for fuel to $50bn in 2011 resulted in travelers paying higher prices for tickets (Reuters.com, 2011). Therefore these inputs have high bargaining power over airlines as it can affect profits of an airline substantially. Competitor rivalry: may occur from price competition, product differentiation, advertising against other competitors is likely to affect the business (Bowhill, 2008). The intense rivalry occurs between low fares carriers are Ryanair, Easyjet and the carriers that provide ‘frills’ service with lower fares are British Midland Airways. Rivals also have to invest high capital investment and have a unique selling point to attract a large majority of customers and offer significant discounts and special offers. According the annual reports of Ryanair and Easy Jet, in 2010 Ryanair carried over 66 million passengers in comparison to Easy Jet carrying just 34 million. Therefore the airline’s low cost model delivers increased revenue and passenger growth as customers seek cheaper flights and benefit from price wars between airline fares. However budget airlines are still affected by rivalry with Ryanair and Easy Jet competing for customers flying with no frills airlines and the level of competitor rivalry is moderate. Conclusion Finally the analysis has demonstrated the attractiveness for the budget airline based on the ease of entry regulations and with the low expenditure costs lower than charter airlines that provide more service. The unstable environment has led to an increase in fuel costs with airlines paying heavily for their supply and in contrast the unpredictable economic environment has caused consumers to spend less and look for cheaper travel and prefer budget airlines such as Ryanair. Even though there is intense rivalry between airlines, budget airlines have an attractive strategy with more airlines using the low cost model to compete for passengers. Part 2: Internal analysis The internal factors of Ryanair’s concerns strengths and weaknesses to assess the extent to which the strategies for the airline in order to be successful, these summarizes the internal business environment and the capabilities (Johnson et al., 2002). The strengths of Ryanair are: The company has a successful low cost model benefitting from low expenses by using staff to clean the plane, passengers have to pay to print boarding pass reducing the need for staff at check in desks and take advantage of the internet to sell tickets. Ryanair’s low fares are aimed at encouraging demand especially with price sensitive leisure and business travellers that might choose alternative forms of transport method. Ryanair have set fares on the basis of demand on particular flights with higher fares on flights that have the highest demand for bookings booked nearer to the date of departure. Ryanairs competitors also do not operate on comparison sites and save commission or fees to other comparison websites. The company loses fewer bags and with 88% punctual flights compared to competitor’s ant explains why the company is a favorite airline for customers with over 73 million passengers in 2010 (Ryanair.com, Annual report 2010). Flights to secondary airports: the company offers point to point service on short haul flights to secondary and regional airports around the major hub centers and cities. The point to point routes rather than hub airports allow the company to provide direct nonstop flights and avoid the costs of providing services through connecting passengers, baggage transfers and transit passenger assistant costs. By choosing secondary locations allows convenience for a large majority of the population and is generally less crowded than in major airports. This has also resulted in on time flights, faster turnaround times, less terminal delays as well as more competitive airport access and handling costs or operating restrictions that can reduce expenses (Ryanair Annual Report, 2010). Low operating costs: Ryanair maintain low operating costs as a low budget airline company and aims to reduce costs in main areas which include: aircraft equipment, personnel productivity, customer service costs and airport access and handling costs. Weaknesses Ryanair have been negatively perceived as arrogant as the company does not take into consideration the competition by putting other low fares airlines out of business creating a bad image with negative media. Ryanair is viewed as not caring too much about customer needs or problems which reflect O’Leary’s opinion that customers pay low prices and get a good deal therefore should expect low standards. There have also been complaints for the extra payments for fees and taxes as well as paying higher prices for stowing luggage and onboard food and beverage. The company has also come across as having a negative reputation by having underpaid staff that are disciplined for any mistakes, work long hours and unhappy staff with staff (itfglobal.org, 2011). The company also charges  £5 for every purchase using bank card,  £40 for printing a boarding pass at the airport and  £100 for changing the name on the booking. Therefore customers often have to pay a lot more than they expected which makes Ryanair’s image appear dishonest (Ryanair.com, 2011). Porters value chain The generic strategies are concerned with the strategies of the company and at the micro level by exploring Porters model of the value chain. The value chain classifies the activities of the company and divided into primary and support activities used to identify the cost leadership strategy as illustrated in appendices b. The core competencies of Ryanair consist of maximizing revenues whilst providing a no frills low cost strategy and keeping logistics simple. This is maintained by Ryanair’s capability to lower operating costs such as aggressive online booking reducing the cost of staff and operate in secondary airports using Boeing 737-800. Through simple services and investing less on employees, Ryanair core competencies provide effective and efficient resource management. The primary activities involved in the inbound logistics of Ryanair consist of its 272 Boeing 737-800 planes that can carry 189 people and agreements to secondary airports. Ryanair have contract agreements with these large aircrafts with the ability to fly long hours and do not charge fuel surcharge (Ryanair.co.uk, 2010). Operations: Ryanair have lower unit costs as part of its operation and save costs through lower handling fees, landing fees in secondary airports and fast turnaround times with the capacity to utilize the aircraft at a shorter time. Ryanair operate in 1,110 routes and 1,400 flights a day from 44 bases. The efficiency of its operation supports the low cost strategy position with fast turnaround times, no meals on board and improved employee productivity (Ryanair.com, 2010). Financial analysis The strengths of Ryanair are quite clear. The company has been profitable with an increase in profits of 26% to â‚ ¬401m and operating profit increase by 28% to â‚ ¬516.2m in 2011. The figure below illustrates how the company increased passengers by 8% and revenue 16% by 2010. Figure 2.1: Summary Table of results (IFRS) in Euro Source: (Ryanair.com, 2011) Figure 2.2: Summary table for EasyJet Source: (Easyjet.com, 2011) As seen from the tables above it can be clear to differentiate the profit revenues. Profit after tax for Ryanair in 2010 was â‚ ¬138 million and for Easyjet was just  £121 million. Revenue for Easyjet in 2010 was  £2, 973 million in 2010 and  £2, 66 million in 2009 compared to Ryanair’s revenue in 2010  £18 million and  £16 million in 2009. According to Ryanair’s annual reports, revenues rose by 16% to â‚ ¬896.8m due to an 8% rise in traffic and a 5% increase in average fares in 2010. Ryanair has been able to gain a growth in revenue even during the financial recession which had a significant effect on other major airlines resulting in bankruptcy and closure. Due to its cost efficient methods through increased passenger traffic with its new routes and low prices Ryanair has been able to uphold its place as the number one low cost carrier. This difference also shows in Ryanair’s current ratio at 1.79 in 2010 compared to Easy jet only gaining 1.33. Conclusion From the internal analysis it is clear to see Ryanair’s low costs strategy means it is less affected than its competitors with its cost leadership. This has required the company to gain a large market share whereby it has purchased large quantities of planes and low cost operations has made shown that cost leadership is the only way to work for the future and globally. Ryanair has built a low cost culture however still needs to pay close attention to the external environmental factors including governmental policies and increased cost of fuel. The core cost savings mentioned has made the company highly successful with its short haul routes with standardized no frills services, higher seating density and its ticketless reservation system. Ryanair have succeeded by becoming a successful airline in Europe with the Southwest airline model and managed to grow its market segment of price sensitive customers through its no frills service. Bibliography Afuah, A. (2009) Strategic Innovation: New Game Strategies for Competitive Advantage. New York: Routledge. Beech, J. and Chadwick, S. (2006) The business of tourism management. 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