Bargaining power of suppliers

Introduction

In this report Ryanair has been analysed in the European airline industry which is considered to be a low cost airline market leader with no frill operations. Ryanair operates a low-fares scheduled passenger airline serving short-haul, point-to-point routes primarily between Ireland and the U.K. In operation since 1985, the Company began to introduce a low cost operating model under a new management team of Michael O’ Leary in the early 1990s.

At the moment Ryanair operates 181 Boeing 737-800 NG aircraft; the Company offers approximately 475 scheduled short-haul flights per day serving 800+ routes and 32 bases in the U.K., Ireland and continental Europe. During 2008 the number of employees in Ryanair rises by 21% to 6,369. Offering widely-available low fares, Ryanair carried more than 59 million passengers during the calendar year 2008.

Ryanair has been considered overtaking Easyjet to become Europe’s largest airline in terms of passengers, overtaking British Airway’s UK/Europe traffic to become “Britain’s favourite airline”.

With turnover of €2714m and profits of €481 after tax Ryanair has proven to be the Europe’s largest airline both in terms of revenue and the high volume of passengers to its credit. They have an average flown passenger load factor of around 82% along with average scheduled passenger yield of €54. The market’s has accepted Ryanair’s low fares and dubbed it the “Ryanair Effect” . They have a history of growth in annual passenger traffic on the new routes it has entered since 1991.

According to stastistics released by the International Civil Aviation Organization (the “ICAO”), the number of scheduled airline passengers travelling between Dublin and London have grown from around 1.7 million passengers in 1991 to more than 4.4 million passengers in 2002.

Ryan Air has benefited from growth in each international route it has entered since 1991. Although a variety of factors contributed to this increase in air passenger traffic, including the relative strength of the Irish, U.K. and European economies, management believes that the most significant factor across all its European routes in such growth has been Ryan air’s low fares service.

Ryanair’s no-frills service involves maintaining low-cost fares, such as offering no meal options or extended service elements such as beverage consumption, thus keeping labour-related costs low and inviting the more humble or thrifty consumer to enjoy travel to regional destinations without the worry of excessive airline expense. Thus, in 2004, the company’s short-term market orientation involved segmenting by lifestyle and by income bracket in the European marketplace in order to appeal to a broader target consumer audience.

The key stakeholders in the firm include all staff members responsible for carrying out strategic objectives, the communities in which Ryanair thrives, as well as the customers who frequent Ryanair as their low-cost carrier of choice. Satisfying the stakeholder appears to be the firm’s long-term mission in Europe in lieu of having no established, formalised mission or vision statement. Lack of such a mission or vision may be involved in the rationale for why Ryanair experienced sales declines in 2004. This report will highlight factors in both the internal and external business environment which are plaguing Ryanair in terms of maintaining a strategic orientation that is completely missing.

Porter’s 5 Forces

Before the idea of Ryanair or indeed any low cost carrier was even devised the European airways industry was, as already illustrated, highly regulated. Therefore post 1992 and deregulation, great changes came about. By identifying with Porter’s “five forces,” one is able to ascertain what this meant for Ryanair within the European air transport market. These five factors are threat of entry, competitive rivalry, bargaining power of suppliers, bargaining power of buyers and the threat of substitutes.

Threat of Entry

In the case of Ryanair a strong brand identity built up over the period since deregulation has meant that any potential new entrants would have to invest quite an amount of money in terms of sunk costs in advertising to compete on a level playing field. Allied with this, direct bookings on the Ryanair website has meant that there have been savings in the region of 42.6% in marketing and distribution costs. Also the new entrant will have to go through the step by step authorization of routes, and there is as very small slot at busy airports.

Competitive Rivalry

The cost of increased competition can be quite high with customers benefiting from price wars between rival airlines. This is why Ryanair has an advantage over other airlines because their policy of bundling low frills and low prices together means that they are competing for the more price sensitive customer. Demand for short haul flights around Europe is ever expanding. Ryanair is a trendsetter amongst the low frill airlines as their moves have led other ‘copycat’ airlines to follow suit. Davy (2003) believes that there are only two pan-European low cost operators where first mover advantage and scale and cost efficiencies gave the two largest players, Ryanair and Easyjet, a significant advantage. In fact, since deregulation, of the 80 low cost operators that had begun operations, 60 had gone bankrupt (Lee, 2000). Michael O’Leary is so confident that this particular aspect of Porter’s 5 forces is almost inconsequential for Ryanair that he has said “at the lower end of the market Easyjet and Go don’t really compete with Ryanair.” Having said this, the threat of competitive rivalry is important for the industry because fierce competition can lead to a decline in sales. The cost advantages offered by one airline can easily be copied by another airline; any other competitor will have to play with very low margins and very high investments.

Bargaining Power of Suppliers

At a very basic level the airline industry suppliers are limited in two areas: actual purchase of places and the supply of fuel. Ryanair has a very healthy relationship with the main aeroplane supplier, Boeing. With the downturn in the economy airlines were putting their purchasing on hold. Not Ryanair however, as O’Leary saw this as the perfect opportunity to buy. In addition to the 2002 contract with Boeing where they have supplied up to 150 737-800 type aircraft for Ryanair, they are also required to provide various ancillary goods and services to Ryanair. These include technical support and training, spare parts support, training of the flight crews, software and field services engineering. This will, over the next few years, give Ryanair a fleet of 250 Boeing 737-800’s, making it the youngest carrier in Europe and the second largest worldwide behind Southwest in the U.S. In terms of the fuel price there is very little that Ryanair can do, because the price of fuel is governed by world trade and the Middle Eastern countries have market dominance.

Bargaining Power of Buyers

There are many determinants to the power possessed by buyers in the airline industry. These include the standardisation of the product, elasticity of demand, brand identity and the quality of the service. In this respect buyer power in the European airline industry in quite strong because switching costs are very small. For low cost carriers, the switching costs may be found by simply clicking on a rival’s website, hence switching is very simple. The fact that most low cost carriers sell their seat via the internet means that any price discrepancies can be found very easily. This means that Ryanair have to keep their prices competitive in relation to the industry level. Ryanair does not expect any customer loyalty because there is none.

The Threat of Substitutes

The threat of substitutes to the airline industry comes in three main forms. These are road, rail and to a lesser extent the boat service. Of these, rail would seem to offer the greatest threat because, certainly around Europe, it offers an excellent continental service around the major cities that Ryanair fly to. Rail travel has several advantages over air in terms of the fact that they can be more localised and more accessible but one must endure a longer journey also. Ryanair can offer a faster journey at prices that can often be far cheaper. As an example, a return ticket from Frankfurt to Amsterdam costs between 121.20 Euros and 175.60 Euros. This compares with Ryanair’s average fare of less than 50 Euros (Davy, 2003). In fact, there is even the perception that there is much greater penetration of fast trains in the EU than in the like of the US, and that this is a limiting factor on demand. However, trains in continental Europe are very expensive, which is reflected in the fact that Europeans think nothing of driving from one country to another to make a saving. Car travel offers similar advantages to that of the railways but Ryanair will always be able to boast shorter journey with less hassles. Another, less obvious threat comes in the form of global communications. As technology develops there may be less of a need to actually meet with people as business meetings could take place via video conferencing. Although, relatively speaking, this is not very prevalent at the moment; there may be less of a need to physically meet up with associates in the future.

External analysis – PEST

PEST analysis is an acronym for political, economic, social and technological (Channon, 1997). Each of the aforementioned forces are categorised by a particular macro-level external influence, each of which directly impacts strategic direction at Ryanair.

Political-Economic Environment:

The external political environment is one of significant advantage to Ryanair, as the majority of its operations are contained within Europe. It is relatively common knowledge that this region maintains political stability, thus Ryanair does not experience issues with governmental instability in Europe as a concern regarding passenger volumes or flight destinations.

However, outside of the European marketplace, the firm maintains significant economic difficulties posed by political forces such as OPEC, the organisation responsible for oil production in the Middle East. The majority of the oil reserves come in from the Mid-East. the current methodology of global supply chain (in relation to where oil is delivered based on price and overall demand) incurs large-scale costs to Ryanair who, like other business entities, is unable to secure low-cost fuel due to political forces which drive oil distribution. This assessment of the external political environment is well-supported by Ryanair documentation highlighting 2004 as a year of challenges stemming largely from the cost of oil which continued to escalate in this particular period (Annual Report, 2004).

The economic environment in which Ryanair thrives in 2004 is relatively stable in terms of maintaining operations successfully and contributing to the financial well-being of European nations in the process. The European Union, consisting of a large quantity of developed countries in Europe, maintains a high value for its integrated currencies, suggesting that this region is
economically-stable and can provide Ryanair with significant value in the form of higher volumes of consumer patronage. Shifting operations into undeveloped market environments, outside of Europe, would require a significant assessment of the micro- and macro-level environments to determine whether any non-European nation would be a viable business strategy. For the most part, European consumers are economically-stable and Ryanair is not largely affected by minute changes in local governmental or economic policies.

Social Environment:

The social environment, however, appears to be an external factor which greatly impacts business strategy at Ryanair. This environment is categorised by changing consumer demographics and fluctuating consumer preferences, most of which are completely uncontrollable from the perspective of Ryanair. Boone & Kurtz (2006) offer that consumer behaviours are becoming increasingly difficult to predict as contemporary consumers tend to shift loyalties from one brand to another due to price differences or even lack of basic consumer consistency. As the majority of the company’s revenues are founded on consumer-generated revenues, the firm must come to understand its intended markets in order to fully market the firm utilising a methodology that will bring the most value and can relate to the needs of a diverse consumer audience. At the same time, increased competition with carriers offering lower-cost fares is impacting the consumer mentality regarding which carrier to choose when travelling within European destinations.

Technological Environment:

The technological environment does not appear to significantly impact the firm in a negative capacity as the firm appears to be in a cash position that can sustain purchase of new jets to remain competitive. Additionally, supply chain software programmes and other integrated software applications are available to assist Ryanair in streamlining labour functions and improve internal organisational efficiency. No research evidence indicated any measurable
problems with Ryanair business strategy in relation to technological evolutions in the external marketplace or lack of available technologies to improve business performance.

It might be said that the external environment for Ryanair is relatively stable, however it is clear that the firm’s largest problem involves understanding consumer behaviours and then utilising strategic marketing applications to improve total consumer patronage and improve sales performance.

SWOT – Analysis

Strengths:

• Ryan Air is fortunate that it manages to benefit from low airport charges: This allows it to make more profits.
• They are able to benefit from the fact that they have the first tier advantage on regional airports
• They rely on their external Internet site which gets them around 94 percent of their bookings. This allows them to lower the cost of distribution and save money on extra costs such as Travel
  Agents
• Ryan Air is able to make good sales due to the high level of seat density.
• They have a fleet of Boeing Aircraft which allows them to save money on maintenance and training costs.
• They also have a faster turnaround of costs as they have a highly modern fleet which allows them to save on maintenance costs.
• They have a very reliable service due to their punctuality and high rate of flights.
• They are able to utilise their aircraft for a longer period of time and can generate more revenue as a result.
• They have a point to point service due to the fact that they do not require any services.

Weaknesses

• They have received a lot of flak from the press due to their arrogant corporate image.
• Ryan Air is part of a no frills airline industry which restricts the possibility for them to expand.
• One of the biggest problems with Ryan Air is that most of the regional airports are further away from the advertised destinations. It can prove to be a big turn off for some customers.
• They are infamous for their poor quality of customer services.
• Ryanair is also affected by volatility in the world which leads to charges and also affects their fares

Opportunities

• Ryan Air be able to take advantage of new destinations in the EU due to its enlargement.
• They have a lot of potential to capture market share. It is also possible for themto double their current market share.
• They are less prone to geopolitical risks mainly due to the fact that they only fly to European destinations.
• The Economic slowdown has helped Ryan air mainly due to changes in corporate culture. They are able to grab customers from traditional carriers who are looking for lower fares.

Threats

• Dependence on oil markets: Fuel costs depend on the oil market.
• Dependence on economic cycle
• Increase of low fare competition
• European court decision: This may make expansion more difficult and costs rise in the future.
• Customers are very price sensitive
• Ryanair and Easy jet limit one another’s growth “rout wise”.
• Face increase in air traffic control charges. As more planes fly in the sky.
• Powerless to prevent introduction of duty for fuel or environmental charges: This would reduce its growth potential as it relies on price stimulation.

Conclusion & Recommendations:

It is essential to apply the economic theory and directly correlate it to the airline industry and more importantly Ryanair, since the industry has changed so much over the last decade. It is also clear how Ryanair has grown from being a small airline that serves a limited number of routes, to the dominant airline whose growth within Europe is all encompassing, potentially far outweighing any other firm in the market. The airline industry is not a natural monopoly and the sunk costs are not that dramatic as planes can be both bought and sold, and the “air” that people fly through is essentially free. With deregulation however, the airline industry became a realistic version of a contestable market, and firms such as Ryanair and Easyjet were able to enter. But in the process, Ryanair has managed to take control of the European airline industry.

However Ryanair have forced new entrants into investing in sunk costs far greater than when they entered the market themselves, coming through the importance and strength of the Ryanair brand name. The control and growth potential is and will be so strong that Ryanair appears to be single-handedly taking over the European airline market. This former minnow has persevered with a very simple but effective policy; people will travel for as little amount as possible. By capitalizing on this, it is now the incumbents of ten years ago who are trying to emulate the success of this “little firm that has come out of Paddyland,” (O’Leary, 2003).

Though Ryanair did not experience high levels of total organisational performance in 2009, the proposed recommended strategy changes will afford Ryanair with greater opportunities to develop a more controllable macro-environment. By creating a new sensation with a fickle consumer audience, Ryanair may be able to create a demand where none exists on the current customer market. Controlling the macro environment should be the highest priority for Ryanair, which can feasibly be accomplished through higher marketing expenditures and the establishment of teams designed to fully understand what is driving consumers to competition. Failure to perform these strategic objectives will only erode Ryanair’s long-term future.