A detailed study of Ryanair

Introduction

Ryanair is Europe’s largest low-fares, no-frills carrier; the organisation started in 1985 as a routine passenger airline but re-launched itself in 1990 as a low-fare carrier, imitating itself on the Texas based Southwest Airline’s business model. The company currently operates its business over 27 countries, and carries more than 66 million customers annually.

This report undertakes a detailed study of Ryanair. It will look at Ryanair’s current strategy and how that strategy is managed, including an examination of the resources and capabilities which allow Ryanair to gain a competitive advantage on its competitors. It seeks to identify how its core business’ operations and functions affect the airline’s customer relations and leaderships with regard to its overall strategy.

This report will also evaluate the successful Southwest Airlines model (on which Ryanair based itself) and will analyse a comparison between the two organisations to understand the fundamental differences.

A brief overview of Ryanair

Ryanair, Europe’s Leading Low Fares Airline, is an Irish airline with its main headquarters in Ireland. It is Europe’s biggest low-cost airline. In 2009, Ryanair was operating across 27 countries from 44 bases. Ryanair has been typified by its rapid growth, a result of the ‘open skies’ deregulation of the air industry in Europe in 1997.

Ryanair has grown significantly since its establishment in 1985, from a small airline flying a short route from Waterford in Ireland to London, into one of Europe’s largest passenger airlines.

Ryanair was established in 1985 by the Ryan brothers (after whom the company is named), Liam Lonergan (the then owner of an Irish tour operator named Club Travel), and the Irish businessperson Tony Ryan, founder of Guinness Peat Aviation and also head of the Ryan family.

When operations began in 1985, the airline started with one airplane (a 15-seat Embraer Bandeirante turboprop aircraft) (Ryanair.com), flying between Waterford in Ireland and London Gatwick. The ultimate aim of the company was to eventually break the monopoly on London to Ireland flights, which at that time were held by British Airways (BA) and Aer Lingus.

A year later, the company successfully added a second route – flying from Dublin to London Luton which was then in direct competition with Aer Lingus and BA. With two routes and two planes, the new airline significantly increased his passenger numbers to 82,000 in one year.

Although passenger numbers continued to rise, the airline was running at a financial loss, and by 1990 was in serious trouble. Michael O’Leary (who was Ryanair’s accountant at that time) was charged with the task of making the airline profitable. O’Leary was persuaded to visit the USA to study the ‘low fares / no frills’ model being successfully used by the Texas based company, Southwest Airlines. O’Leary was quick to learn that the key to low fares was to implement quick turn-around times for aircraft, introduce “no frills” or extras on flights, no differentiating class i.e. business or first class, as well as operating a single model of aircraft.

At that time the air industry was dominated by long established national carriers who were heavily subsidised by their own countries. However, following his visit to the USA, O’Leary was convinced that Ryanair could make a huge impact on the European air market. He competed with these major airlines by introducing a “no-frills”, low-cost service.

Ryanair flights were scheduled into regional or secondary airports, which offered lower landing and handling charges than the larger established main City airports. Within 10 years Ryanair was carrying over 2 million passengers across Europe.

With plans to buy additional aircraft from Boeing, the phenomenal growth is planned to continue. It is forecast that by 2012 Ryanair will have increased its fleet to over 300 planes in operation (Ryanair, 2009).

Ryanair’s Strategic Fit

Johnson & Scholes state that strategy is about matching the actions of a company to the environment and to the organisation’s capabilities. Strategic fit however, looks at the optimisation of performance by recognising and understanding any success factors, threats and opportunities in existing markets and then ensuring that the company’s resource capability matches those factors and enables opportunities to be taken and to protect against threats in existing markets.

A benefit of a good strategic fit is cost reduction (owing to economies of scale) and the transfer of knowledge and skills. The most important strategy of Ryanair is their low-cost, ‘no frills’ strategy, which is based strongly on cost reduction.

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Leadership in the budget-airline industry

As already stated, Ryanair is considered to be the largest low-cost airline in Europe. The company carries in excess of 60 million passengers across 27 countries in Europe (Ryanair, 2010). The airline has 44 bases, approximately 250 aircraft and more than 8000 employees. For Ryanair to maintain its leadership position in the low-cost airline sector, Ryanair operates point to point services rather than the more common hub and spoke services thus cutting airport charges.

Porter states that to maintain a sustainable competitive advantage, a company must follow one of the following strategies:-

Low cost leadership

Differentiation (based on advantage)

Focus (concentration on a particular market niche), and

Developing expertise and resource strengths that competitors cannot easily imitate

Ryanair would appear to typify most of the characteristics of a cost focus strategy. To enable costs to be kept low, Ryanair sustains a ‘no frills’ strategy. By removing all frills and any extras from a product or service, this is a direct approach to low-cost. By using this approach the objective is to create a cost advantage that is maintainable.

Sustainable competitive advantage

Ryanair continues to be the lowest cost airline in Europe. Despite other low cost airlines operating in Europe, i.e. Easyjet, Go, ThomsonFly, the company is able to maintain its cost leadership position. The basis of Ryanair’s competitive advantage is its capability to reduce costs in order to maintain low fees whilst at the same time making a profit. In Ryanair’s case this is done through:-

Fleet standardisation – the fleet is made up of Boeing 737’s. By only utilising this aircraft the company is able to reduce costs in obtaining parts and maintenance services.

Contracting out of services – in the main Ryanair contracts out all aircraft handling, baggage handling and other functions to third parties. In utilising third party services, Ryanair does not expose itself to potential workforce disputes.

Airport charges – airport charges include landing fees, passenger loading fees etc. To minimise these fees, Ryanair avoids main City airports and uses smaller secondary regional airport destinations.

Staff costs and performance – to control pay costs, Ryanair has implemented a performance related pay structure. This means that employees can supplement their earnings with additional remuneration which is based on their job performance i.e. sales of in-flight duty free goods etc (Johnson, et al., 2008).

Marketing costs – the company’s main advertising routes are through the media and its own website.

SWOT – Analysis

Strengths:

Brand name: has developed a well known brand name

The company benefits from low airport charges.

Internet site (96% of bookings are made on line) www.ryanair.com: This eliminates the need for travel agents.

All Boeing aircraft: A standard fleet saves on maintenance and training costs.

Fast turn-around at airports.

High Service performance: Punctuality, low baggage loss, these all give a good picture of the company’s reliability.

Fuel and other risks through hedging.

Small headquarters: This means low overheads

Point to point: No hub and spoke which means lowers costs as no through-services are needed.

Weaknesses

Negative media attention: Michael O’Leary can come across as arrogant and enjoys the media spotlight.

Niche market:

Distance of some regional airports from advertised destination: Over time customers may find this an inconvenience, especially the business traveller.

Poor service:

Ryanair is sensitive to changes in charges.

Opportunities

There may be opportunities for new routes in Europe:

Economic downturn: as customers from traditional carriers seek lower fares.

Threats

Dependence on oil markets: Fuel costs are dependent on the oil market.

Increase in low fare competition with other airlines

Customers are very price conscious

Potential increase in air traffic control charges

Unable to prevent introduction of duty for fuel or environmental charges:

Construction of the Value Chain

The value chain analysis sets out the specific actions of a company that can create competitive advantage over their rival organisations in the same market sector.

Value-chain activities are of two types: primary activities and supportive activities. When the most critical of these are performed better or more cheaply, competitive advantage is created. The activities are related by linkages within the value chain (Porter 1985), meaning that how one is performed affects the performance or cost of another, and key linkages generate competitive advantage.

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Primary activities include inbound logistics, operations, outbound logistics, marketing and sales and services. Support activities include human resources, accounting and finance operations, technology, and procurement. All the activities, primary and support, are potential sources of competitive advantage or disadvantage of any organisation. For Ryanair, some of these activities are shown below:-

Primary Activities

Inbound logistics

Low-cost deals are negotiated against the promise of a growing business;

Dependency on suppliers to deliver fuel as well as snacks, drinks and duty-paid products to be sold on-board.

Operations

Fast turnarounds of 25 minutes – this is the most important cost advantage as it allows high aircraft utilisation.

Point-to-point flights mean no interlinking with other carriers. Ryanair can offer direct non-stop journeys thus avoiding the cost of providing through-services for connecting passengers and delays caused by late arrival of connecting flights.

Use of standard model airplane, Boeing 737, means that Ryanair is able to obtain spares and maintenance services on favourable terms, limits the costs of staff training and offers flexibility in scheduling aircraft and crew assignments.

Outbound logistics

The use of isolated secondary airports often requires further transport arrangements for customers. This limits the level of market share Ryanair can achieve i.e. business travellers where time is as important as price, whereas EasyJet does the opposite and flies to major cities. However, this does incur higher landing charges which are reflected in their increased ticket prices.

However, using regional airports does save costs as charges are lower, facilities cheaper and Ryanair can negotiate favourable deals. It also enables fast turnaround times, and more on-time departures as the airports are less congested.

Marketing and Sales

It could be said that Ryanair does not consider its branding to be as important to customers as price. This is reflected in Ryanair’s not always positive image in the media whereas Southwest Airlines contributes a large part of its success to its well established brand values.

Expenditure on advertising and promotions to expand its market is reduced as most advertising takes place on the website.

Over 90% of Ryanair bookings are made directly, either on the website or through reservation centres. The website saves on staff costs and agent’s commission, while significantly contributing to its growth.

Services

Virtually ‘no frills’ or extras will lower costs significantly; it enables quick turnarounds and very low ticket prices.

A very basic product is offered and it has been reported that Ryanair now plans to remove the last remaining frills i.e. eliminating backseat pockets, air sickness bags on request, no blankets or pillows, removable headrests, charging large penalties for overweight baggage.

Reduced services could damage the Ryanair brand which could lead to reduced business. For example, Ryanair was taken to court for charging disabled passengers £18 for wheelchair usage.

Support activities

Procurement

Purchasing power enables negotiation of favourable deals with suppliers. However, these demand large and growing volumes based on passenger numbers.

Good buyer-supplier relationships ensure reliability and low-cost procurement of services (many functions are contracted out).

Technology development

Ryanair uses its website to monitor bookings. If passenger numbers are low, prices can be slashed to attract buyers thus increasing the load factor.

Human Resource Management

Employee relations appear to be a weakness with Ryanair; it could be said that its desire to maintain low cost airfares has affected its systems and services. The company does not see the human resources within the company as a possible source of competitive advantage. Its workforce is not valued. It is believed that a company’s human resources are the most important sources of competitive advantage (Johnson et al., 2008).

Human resources, or the company’s workforce, are considered to be one source of sustainable competitive advantage. In an ever changing environment where technological developments and other strategies can be replicated, human resources bring about a sustainable competitive advantage (Johnson, et al., 2008).

Comparing Ryanair to it’s role model Southwest Airlines

Ryanair has been portrayed as the company which introduced the low cost model in Europe, whereas Southwest is the oldest low cost airline company in the USA. In comparing these two airlines it is true that they are eacg industry leaders in their own countries.  It is true that they are motivated by the low fare model. However, on closer examination, there are noticeable differences between them.

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Southwest initiated the use of short flights between secondary (smaller) airports, but which are located close to major cities: its business model was based on a decision not to use the usual method of flying passengers to a hub, then to their destination because of the inefficiency this created, for example, planes waiting to transfer passengers (time wasted), and the requirement for passengers to make two journeys with a change (inconvenience). Turnaround times were reduced in order to increase the number of journeys an aircraft could do in a day. There were limited services available on the flights.

Where possible, Ryanair also avoids central airports in major cities so it can benefit from reduced landing fees and more efficient operations. Ryanair works hard to reduce its landing fees to practically zero, playing airports off against one another in a bid to reduce its costs. As a result, Ryanair not only uses alternate airports for major cities, but many of its routes now revolve around servicing airports in small relatively unknown cities throughout Europe.

This strategy illustrates a very critical point that Ryanair does not cater to business travellers. It caters mainly to flyers whose primary concern is price, and who are willing to sacrifice convenience in order to save money. As long as these passengers can fly cheaply, they’ll fly to just about anywhere, which is where Ryanair takes them.

Southwest’s strategies differentiate the airline from its competitors, and were perhaps accepted by Ryanair than any other low-cost European airline. For example, EasyJet operates from major airports.

When examined more closely, Southwest Airlines has a number of strategic elements which are very different to Ryanair’s approach. Firstly, Southwest is closely affiliated with the Unions, and Herb Kelleher (then Chief Executive), supported this. His view was that with a union, employees felt less vulnerable and more protected, whether or not there was a need to. It has been reported that O’Leary has supposedly tried to prevent unionisation at Ryanair for fear of disputes disrupting business. Southwest staff are reported very well paid, in part through shareholdings, whilst Ryanair has looked at reducing staff costs. The company philosophy at Southwest is seen as one of family, fun and jokiness as well as hard work (Southwest Airlines.com).

Ryanair has developed a reputation for poor employee relationships with significantly high staff turnover, especially among flight and cabin crew.

For Ryanair, this is a possible weakness. The costs associated with higher than average staff turnover are reduced efficiencies due to the learning required for new recruits, training costs and recruitment costs. Although salaries are supposedly in keeping with other airlines, there are hidden costs for employees which all impact on their salary, for example uniform costs and training.

Conclusion

It is clear that Ryanair’s strategy is distinct from its competitors in a number of ways, and that these differences ultimately contribute to its competitive advantage.

Through the charismatic leadership of Michael O’Leary, Ryanair fits the ideal company profile – to be successful, an organisation must have a very strong leader who is willing to make difficult choices.

A further possible weakness for Ryanair is Michael O’Leary who is so closely linked with the Ryanair strategy that if he were to leave the company this could have a significant impact on the business.

The one evident weakness in Ryanair’s strategy is its attitude to its employees. Following the terrorist attacks in the USA the airline industry was badly affected; this obviously impacted on jobs. However, the situation has significantly improved in recent years, especially in the budget airline sector. If Ryanair is to continue to expand operations, they need to able to recruit and retain crews. If staffing is affected this could have an impact on flight cancellations and potential cancellation costs.

In summary, Ryanair is a company that has a very clear strategy which differentiates it from its competitors in such a way that it effectively meets its customer requirements.

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