Environmental analysis of european airline industry

Pestle analysis is a tool that can aid company making strategies by helping them understand the external environment in which they operate now and in future. This tool looks at political, economic, social, technological, legal and environmental factors.

Political:

Uk government put on compulsory security measures and restrictions due to terrorism attacks on airlines due to which ryanair had to cancel 279 flights in the days immediately following the incident and refunded £2.7m in fares and approximately 40,000 passengers, ryanair is estimated to suffer a lose of £1.9m in reduced bookings. French government supports for nationalised carriers. To protect Air France-KLM Ryanair was vigorously defending French government attempts by forcing easy jet and Ryanair to move the staff they employ from British employment.change in government policies and regulations affected the raynair, the EU regulation on 17th Feb 2005 proposed to reduce the inconvience caused to passengers by cancellations, denied boarding and by delays. Ryanair typical compensation cost would likely fall into the €250 category unless the airline can prove that it was caused by unavoidable extraordinary circumstances. Irish government opposed the bid made by the raynair CEO against the aerlingus opposition is due to loose alliance representing almost 47% of Aerlingus shares and this include the irish government. One of the political issue is due to increase in route charges by government 21% at certain exisisting airports due to increase in number of sectors flow

ECONOMICAL ISSUE:

Some of the economic issues are Increase growth rate in gdp,Unemployement rate slash down to 8.7%,Depreciation in us dollar, European union’s inflation rate is 1.7%,Increase in grey market, Increasing business travelling, Increase in travelling attack due to which Change in the mode of travelling

Low cost airlines will help to attract a wide range of demographic products

Economic change within countries they fly to or would hope to open new routes to, for example war with Iraq has shut off any hope of tourism there for the foreseeable future and other factors such as SARS (O’Higgins, 2004) and more recently, Bird Flu. Ryanair may have spoiled its public image. In one wicked incident,Ryanair refused to provide meal vouchers and accommodation to passengers when planes were cancelled or delayed and also refused to refund taxes and fees when tickets are cancelled by passengers, but for handling refunds introduced an administration fee of €20 per ticket. This is poor cost management on Ryanair’s behalf or it’s a fuel surcharge in disguise.In 2005 fuel cost represented 35 percent of operating costs in 2006 compared with 27 percent the year before airport and handling charges increased by 21 percent slower than the growth in passenger numbers reflecting a net reduction in costs from deals at new airports and bases, despite increased the cost of certain existing airports such as stansted. route charges also increased by 21% ryanair continued to protest at charges and conditions at some airports.

ENVIRONMENTAL

Ryanair refused to pay high taxes to environment board for using the skies. Oxford University study predicted that carbon from aviation would accelerate and impacts on climate negatively. So, the airline should pay environmental taxes for the contributions made to global warming. But Ryanair argued that airlines with low end factor generates high fuel consumption and emissions and airlines that offer connecting rather than point to point flights, should be penalized

The main environmental issue facing by Ryanair is greenhouse emissions. At present, aviation accounts for roughly 5% of UK’s emissions, but this is expected to rise upto 25% by 2030 (Economist 2005:35). By visiting Ryanair’s website and going through ‘Ryanair and the Environment’ link opens up the ‘Story so Far’ page – it is not clear whether this is an error or O’Leary’s way of expressing lack of interest in environmental issues. A news release on Ryanair and environment is posted on the site: it states how Ryanair’s strategy has positive environmental impact, but at no point implies that this is intentional. For example, operations between under utilised airports rather than use of hub structure was adopted because it was key factor in Southwest’s success rather than because of its environmental benefits.

A second environmental issue is the noise, and 737-800s will help reduce this. With increasing focus on environmental issues and pressure on governments to address these concerns, it is likely that airlines that work to become more environmentally friendly will not be affected by tightening of legislation to the same degree as those who adhere to legal minimums, and this could be an issue for Ryanair. However, positioning itself as a environmentally sound operator is not consistent with its strategy. To explain this further, we must consider Porter’s theories.

PORTER FIVE FORCES

Porter’s Five Forces theory is useful in discussion of Ryanair because it looks at how influences affect competing companies within an industry. The Porter’s five forces help to identify attractiveness of an industry or sector in terms of competitive forces” (Johnson et al, 2009). Porter’s Five Forces Method is used for identifying the market structure in which Ryanair is operating.

Ryanair Competitive Rivalry- Competitive rivalry for Ryanair is very high. The rivalry among existing firms in the airline industry is very high and slow growth. There is also low product differentiation and also high fixed costs. Existing rivalry of ryanair is very high competing with national carriers as well as low budjet carriers for their share of market overall the industry which rayanair is currently in is of medium attractiveness due to increase in rivalry, due to deregulation, and last but not the least increase in competitors on more routes creating overcapacity of airlines from different competitors.which itself increases power of buyers,airlines try to counter increasing rivalry by forming different and periodical strategic alliances various mergers and acquisition ex air france KLM.

various attempts by airlines to increase number of customers flyers in specific airways,through mainataining database pof frequent flyer programmes. giving special perks and discounts to frequent flyers, to increase customers loyalty for specific airways various other airlines were thinking to provide comfort and extra services to their premium business passengers. different comfort zones and services to different class of customers due to economic downturn in US and overcapacity of different competition on north atlantic routes forces carriers to concentrate rivalry on european countries.The LCC market is highly competitive.Most cost advantages can be copied immediately

Low levels of existing rivalry as the two major low-cost airlines have avoided direct headto head competition by choosing different routes to serve However if any company does decide to compete on the same basis as Ryanair there willbe heavy pressure on prices, margins, and hence on profitabilityNot much differentiation between services Price is the main differentiating factor.

ryanair perspective:ryanair has intense and increasing comepetitive rivalry

Threat of new entrants – The threats for new entrants is medium as the market is saturated with different price segments. Because of high initial fixed costs and less overall margin, the cost of entry is very high for any new airline to enter the low fares airline market. Unless the new entries are highly competitive the threats for new entrants is high. It isn’t easy to enter into airline industry, must have enough assets and capital. Yet in 2003 there were an increasing in new entrants.threats of new entrates is medium as entrance to travel industry needs special licenses etc as well as high capital investments. In European countries a regulation was passed with removed barriers for new and different competitors in airlines to enter european airline industry

new entrates in European national markets were either the European based airlines or newely based competitive airways giving competition to other airways by taking advantage of deregulation newly established airlines or new entrates in European aviation industry on different routes might lose money in the beginning ,so all the new entrats need big financial backing european countries has many landing slots which were reserved or used by national carriers, so due to scarcity of landing slots it act as barrier for entry for new and competitors airways which in turn helped existing players to play for a long time in aviation industry. ryanair suffered from moderate threat of entry.Some barriers to entry,High capital investment,Restricted slot availability makes it more difficult to find suitable airports.Immediate price war if encroaching on existing LCC route.Need for low cost base Flight Authorisations are some of the threats of new entrants

Threat of substitutes:

Threats of substitutes is medium for ryanair and basically is in the form of land travel,and indirect substitutes like video conferencing which may reduce the needs for air travel.There aren’t many substitutes for long journey. A customer uses other forms of transport like trains or cars but none of them are comparable to flying. So, Threat for substitutes is low. P&O saw passengers numbers fall by 3% in 2004.This suggests that low-cost airline plan is generally more attractive to consumers. there were other forms of transport which were convenient and safer than airways such as fast rail and land travel. Other means to travel were cars which were used by vacationers more than anyone Other modes of transport, e.g. Eurostar, TGV, Eurolines, Ferries, Cars etc.

Ryanair perspective: ryanair faced very low threats from substitutes

Bargaining power of suppliers : oversupply of aircraft parts and their engineering technology from different suppliers .number of suppliers for aircraft parts was increased so there was a fierce rivalry between airbus and boeing fuel suppliers. fuel depends on supply subject to fluctuations for eg in 2004 due to uncertainty from suppliers and their supplies from Nigeria, Russia and Iraq three of world’s top producers, oil prices rose, there are two types of airports called primary and secondary airports. primary have greater power because air traffic is more on these primary airports.power of airports increases as air traffic increases.. Bargaining Power of Suppliers. Boeing are RA’s main suppliers. Only 2 possible suppliers of planes – Boeing and Airbus. Switching costs from one supplier to the other is high because all mechanics and pilots would have to be retrained. Price of aviation fuel is directly related to the cost of oil (Ryanair controls these through hedging).Regional Airports have little bargaining power as they are heavily dependant on one airline Bigger airports, where Ryanair’s competitors operate, have greater bargaining power. Ryanair’s policy is to try and avoid these airports.

Ryanair perspective: ryanair was affected from low to medium power of suppliers

Bargaining power of buyers – Consumers can switch to other low cost carriers if Ryanair doesn’t cater to their wants or needs. is high as low budget air travel is almost a commodity today and carriers are many. buyers are well informed of prices and deals via internet and other medium. Millions of new consumers from new european member states were taking intresting flying from one distination to other due to low prices of airlines Distribution power of travel agents was decreasing as prospects used to book tickets from internet through direct booking.so it was threat for travel agents, so they used to offer complete travel solutions to customers. Customers are price sensitive

Ryanair perspective: ryanair faced strong power of buyers

Strategic group analysis

“Strategic group are organisations within an industry or sector with similar strategic characteristics” (Johnson et al, 2009).

According to Johnson et al the strategic group concept can be used in knowing the competitors in the same industry, analysing strategic opportunities and mobility barriers.

Easy Jet is one of the main competitors for Ryanair in the Low-fare airline industry with slight difference strategy. However Ryanair offers really cheap fare compared to EasyJet. There are some strategic difference between Ryanair and EasyJet. It is evident in the case study that Ryanair always flies to secondary airports and regional airports to avoid congestion in the main airports whereas Easy Jet flies to major airports and uses only new aircrafts. On comparing EasyJet wants to build frequency but Ryanair wants to expand its network.

Aer Lingus is another competitor to Ryanair in the same industrial sector. Their strategy is to earn profit from diversification and to provide customer service as in flag carriers.

Mobility barriers

Swot analysis:

“A SWOT analysis summarises the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategy development” (Johnson et al, 2005).

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STRATEGIC CAPABILITIES OF RYANAIR:

“A strategic capability is the resources and competences of an organisation needed for it to survive and prosper” (Johnson et al, 2009)

Ryanair possesses the threshold capabilities to meet the minimum basic requirements of its customers. As stated by Johnson et al, the threshold capabilities are required for any organisation to exist or survive in the market. Ryanair possess the minimum required tangible and intangible resources to meet the customer basic requirements and provides the minimum required customer service. Thus these are also called no-frills airlines where there is extra charge for additional service and facilities. Ryanair offers online or direct booking to avoid the paperwork, utilisation of aircraft is to its maximum capacity, point to point service and quick turnaround. These make the major difference between the low-fare airlines like Ryanair and other full-fare airlines.

Low fare airline to be the biggest airline in Europe continual growth-disciplines &dynamic, the walmart of European airlines. capability and competency are the main factors helping companies in gaining its competitive advantage and maintaining its competitive position in the market. In order to achieve these goals, companies must use its resources effectively and professionally. Ryanair’s objective is to firmly establish itself as Europe’s leading low-fares passenger airline through continues improvements and expanded offerings of its low-fares service and to offer low fares that increase passengers by maintaining a continuous focus on cost containment and operating efficiencies. The key elements of Ryanair’s strategy are:

Low Fares:

Customer service : Ryanair’s strategy is to deliver the best customer service performance

in its peer group.

Frequent Point-to-Point Flights on Short-Haul Routes: Ryanair provides frequent

point-to-point service on short-haul routes to secondary and regional airports in and around major population centres and travel destinations

Low operating costs: Management believes that Ryanair’s operating costs are among the lowest of any European scheduled passenger airline

Aircraft Equipment Costs: Ryanair’s initial strategy for controlling aircraft acquisition

costs was to purchase used aircraft of a single type.

Customer Service Costs: Ryanair has entered into agreements on competitive terms with

third party contractors at certain airports for passenger and aircraft handling, ticketing

and other services that management believes can be more cost efficiently provided by

third parties

Personal productivity: Ryanair endeavours to control its labour costs by continually

improving the productivity of its already highly-productive work force

Taking Advantage of the Internet: During January 2000, Ryanair converted its host

reservation system from the BABS (British Airways Booking System) to a new system called

Flightspeed, which it operates under a 10 year hosting agreement with Accenture Open Skies

(“Open Skies”)

Airport acess fee: Ryanair attempts to control airport access and service charges by

focusing on airports that offer competitive cost terms

Commitment to Safety and Quality Maintenance: Ryanair’s commitment to safety is a

primary priority of the Company and its management

Enhancement of Operating Results through Ancillary Services : Ryanair provides

various ancillary services and engages in other activities connected with its core air passenger

service, including non-flight scheduled services, the in-flight sale of beverages, food and

merchandise and internet-related services.

Focused Criteria for Growth.: Building on its success in the Ireland-U.K. market and its expansion of service to continental Europe, Ryanair intends to follow a manageable growth plan targeting specific markets

Market positioning:

Ryanair has the leading market share on most of scheduled routes between Ireland and provincial cities in the UK, carrying approximately 43% of all scheduled passenger traffic between Dublin and London. Additionally, the company has more than 45% market share on scheduled routes from Dublin, which include London, Manchester, Glasgow and Edinburgh, and London, which include Venice, Rome, Milan, Hamburg, Valencia and Gothenburg, as of January 2005. (Datamonitor, 2005) Ryanair has also been voted as the airline with the best punctuality highest frequency which, combined with the company’s leading market position, provides the company with the ability to leverage its market position to further expand its operating network.

Core competence

The lowest cost airfare is always sure to win the competition even in the direst, most intense circumstances. By keeping the logistics simple, no-frills airlines cut turnaround times on the ground and maximize revenue-generating air time by minimizing landing and ground-handling fee.

The lowest cost airfare is always sure to win the competition even in the direst, most intense circumstances.  This is a significant strength of Ryanair.  With its impressive cost management and outlook to increase more passenger seats and expand routes, Ryanair may come off just fine after the 2004 crises.  Ryanair knows how to anticipate difficult times due to increasing fuel prices and rivals and set their goal.  Bearing these segments and economics in mind, Ryanair must select routes carefully to generate enough traffic to fill the larger aircraft they use.

COMPETITIVE STRATEGY AND ADVANTAGES:

Competitive strategy:

“Competitive strategy is concerned with the basis on which a business unit might achieve competitive advantage in its market” (Johnson et al, 2009).

Ryanair had offered a differentiating product as continuous lower fare and achieved a sustainable competitive advantage over there competitors. In the market for cheap flight airline, Ryanair have succeeded but others have not. This is mainly because the idea of Ryanair which Chief Executive Michael O’Leary simply adapted from the Southwest Airlines’ business model to the European environment – the low-budget airline works for them. Ryanair’s model of low-budget airline which passes its costs directly to its customers in order to maximize profit had leaded them to the profitable route of success. It is the integrated business strategies which combines resources-based view and positioning view that added value to Ryanair and help them to achieve the significant result in the cheap-flight industry by leveraging its competitive advantages and competitive position. Ryanair’s core competencies are the variety of destinations and routes they serve within the continental Europe, the rapid amount of flight and sufficient capacity. Ryanair serve variety of destinations and routes which increase their market share and had become one of the major core competencies for them to sustain competitive advantages.

Generic Strategies

 According to Porter (1986), there are a number of ways an organisation can achieve a competitive advantage over its rivals. Competitive advantage is achieved either by having lower costs than competitors, or by differentiating the product. Differentiation is achieved by offering customers something, which they value and is not offered by competitors. Companies can choose from “generic” strategies: Cost leadership; cost focus; differentiation and differentiation focus

Each generic strategy helps the company to establish and exploit a competitive advantage within a particular competitive scope (Hitt, Ireland & Hoskisson 2003). By applying these strengths, three generic strategies are resulted: cost leadership, differentiation and focus (Johnson & Scholes 1997).  The strategies used by the company include cost leadership, differentiation strategy and focused differentiation.

In the case of Ryanair, these three generic strategies had been utilised. First, the company offers the lowest cost of fare than its competitors in the airline. On the other hand, Ryanair has also become a focuser because it concentrated on a narrow customer segment which include Irish and UK business people or travellers who could not afro to fly major airlines.

Ryanair’s strategy is clearly cost-focused. To introduce a concern for environment would involve incorporating a feature to product that does not reduce costs but differentiates it, potentially adding value and enabling Ryanair to charge higher fares. This conflicts with their promise to passengers always to offer the lowest possible fare, and to undercut any operator who tries to demean Ryanair.

Porter argues that mixing strategies is a mistake, and it would not be appropriate for Ryanair. There are exceptions to the mixed strategy argument: supermarkets, for example, offer cost-focused ranges , differentiated ranges It is notable that, in contrast, airlines with several ranges have struggled to achieve success with all of them. The most successful low-cost carriers, Ryanair and easyJet, do not run standard or premium operations. British Airways’ CitiExpress, KLM’s Buzz and BMI Baby, all segments of wider product portfolios, have been less successful.

Ryanair has attempted to introduce elements of differentiation on several occasions, with a Business Class and frequent flyer programme and, a lack of take-up of in-flight films offered through personal DVD at 5 (Clark 2005a). Porter’s theories help explain why this was not successful.

VALUE CHAIN ANALYSIS:

Value Chain and Value Network

According to Johnson et al, the value chain and value network concepts acts as an instrument to analysis the activities taken by any organisations and to know at which stage value is added to the product or service and at which stage the cost is reduced. Ryanair follows forward integration strategy where the supply of services and products to its end customer is done by itself for example, sales of tickets through direct sales or internet booking method.

The value chain shows both the primary and secondary activities of an organisation to achieve their margin. The value chain of Ryanair that might represent the value chain of the organisation which explains how it is able to cut down the costs throughout their value chain activities and acquire low-cost producer in the low-fare airline industry.The head quarter is the only infrastructure facility that Ryanair owns. They provide very limited crew on board for on board services and employee trainings are conducted at very low cost. Online booking availability of internet information are the technological development. The purchase of Boeing 737 on a discount rate from the suppliers which helps to cut cost in traning their piolets and maintenance costs.

The advantage of Ryanair in their inbound logistics is their low cost suppliers and agreements with their destination airports. Quick turnover is the main outbound logistics activities for any low-fare airline in the industry. The operations activities of Ryanair are the main area of revenue generation through their ancillary activities by collecting extra charge for additional facilities and services. They offer very low cost services. Yield management is an important task for any airline industry and it is well known that Ryanair does it in a better way. Therefore the value chain shows how the cost is reduced in each activity which helps in maximising their revenue.

The analysis on infrastructure, human resource, technology development, procurement, inbound logistics, operations, outbound logistics, marketing and sales and service of RA provides us its value chain system

Value chain analysis is a powerful tool to identify the key activities within the firm which form the value chain for that organisation, and have potential of sustainable competitive advantage for the company. value chain analysis helps in maximising the revenue

The primary activities of the company include the following:

Inbound logistics:

Ryanair has low cost suppliers and agreement with destination airport purchase of aircraft catering with quality training.

Operations

These are the activities related to production of products and services. Ryanair operates on no frills low cost strategy

Outbound logistics

Ryanair has Quick Turn around frequency so try to maximize the travel time has more frequency compared to other flights with reliable service.

Marketing and sales

Ryanair uses marketing communications tools like low cost promotions, free publicity, yield management and internet sales controversial

Service

Ryanair has low cost service less number of board crew members to offer on board service, limited resources low cost high productivity

Support activities

The support activities of a company include following:

Procurement

An efficient procurement department should be able to obtain the highest quality goods at the lowest prices ryanair has boeing discount, operation alliances, outsourced inbound logistics, private marketing sales and low cost service

Human Resource Management

Ryanair has low cost training with operations on limited crew management control and inhouse marketing and sales service performance contracts.

Technology and development:

ryanair has Internet inbound logistics, internet information operations, outbound logistics integrated system, low tech marketing internet sales.

Firm Infrastructure

This includes planning and control systems such as accounting, finance, and corporate strategy etc. (Lynch, 2003). minimium corporate HQ

Sustainable Competitive Advantage

Ryan Air continues to be the lowest cost airline in Europe. The firm manages to maintain its cost leadership despite the presence of other low cost airlines in Europe. The source of competitive advantage of the company is its ability to drive down costs

to sustain low fares while at the same time remain profitable. This is done through:

1. Fleet Commonality

The airline’s fleet is made up of Boeing 737, the most common aircraft being flown in the present. Because of fleet commonality the firm is able to cut on costs in obtaining spares and maintenance services.

2. Contracting Out of Services

Other than Dublin Airport where the firm maintains its staff and services, Ryan Air contracts out aircraft handling, ticketing, baggage handling and other functions to third parties. The firm is able to obtain competitive rates and multi-year contracts at fixed prices, limiting exposure to cost increases. Third [arty service outsourcing also limits Ryan Air’s Direct exposure to employee relations responsibilities and potential disputes.

3. Airport Charges and Route Policy

Airport charges include landing fees, passenger loading fees, aircraft parking fees and noise surcharges. In order to reduce these fees, the firm avoids congested main airports and chooses secondary and regional airport destinations which are very interested in increasing passenger throughput.

4. Staff Costs and Productivity

In order to control employee compensation costs, the firm implements a performance related pay structure. Although the company provides lower labor costs, the employees can earn additional pay or remuneration base on their performance.

5. Marketing Costs

In order to reduce marketing costs, the firm cut its rate commission to travel agents. The firm’s main advertisement tools are newspapers, radio, television and its company website.

The Strategy Clock

“The ‘Strategic Clock’ represents different positions in a market where customers have different requirements in terms of value-for-money” (Johnson et al, 2009).

According to the Bowmans’ Strategic Clock explained by Johnson et al, Ryanairs’ customers are in the first position called ‘no frills’ option which means that their customers are most concerned about the low-fares only when the product or services offered satisfies their threshold requirements. Ryanair adopts no frills strategy to attract a narrow segment of business travellers who are price-sensitive.

sustainability:

This section addresses four key issues influencing the sustainability of Ryanair, namely: the Ryanair product,the Ryanair airport policy, the low cost base of the airline,and external factors. These issues are examined inthis section.

High customer value, keeping ahead of the competition, EUregulations, running salary costs, continued alignment with sw strategy

Ryanair continues to make risks because of increasing and overlapping cost pressures.  However, if it sticks close to its low-fare model as it has been intending to, it may continue its sustainability because true to the Walmart model, the cheapest product always wins.  Eventually being the lowest cost and lowest fair airline will attract several passengers that will compensate for rising fuel costs especially since Ryanair is good at increasing passenger seats and expanding routes. Low quality strategy is not sustainable in long run. purchasing common fleet reduced training and maintaining cost sustainable, wider network travel to more destination then any other air travel,easy accessible cheap air travel, disappointed pilot and crew,largest website travel in Europe and 5th most recognised brand in google.

Resourced-Based of the Firm

The resource-based view presents a perspective of competition that portrays the value of a resource or capability as derived from the dynamic interplay of market forces. While the market and environment establish external constraints and pressures, a firm’s response through resource allocation and capability development become a source of competitive advantage (Boone and Ganeshan pp. 283-284). The resource-based perspective views a firm as an organization that has a bundle of protective resources and capabilities. 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 resources of Ryan Air are:

1. Physical Resources – consists of the resources that are needed to operate such as aircraft fleet, headquarter, secondary airports.

2. Human Resources – the company has 2,700 employees.

3. Financial Resources – The financial resources of the company comes from the Ryan Family, shareholders, investors and creditors.

4. Intellectual Capital – these are the knowledge, skills, abilities and talents that every in Ryan Air possesses.

. No brand loyalty of customersNo ‘close customer relationship’No switching costs for the customer