Internal and external factors

Executive Summary:

For identifying an appropriate strategy for a company, one has to look into its internal and external factors. This report will critically analyse these factors regarding Ryanair and also take into consideration of future opportunities and threats which Ryanair is likely to face in current situation and in near future. This report will also form the basis of Ryanair future strategies in the form of strategic recommendations which Ryanair can persuade to get sustainable competitive advantage and higher growth in the future. The success of a strategy is determined by company’s initiative actions, how well it anticipates competitor’s responses to them and how well company’s anticipates and reacts to its competitor’s actions.

Introduction:

Ryanair which is a European leading low fare Airline belongs to Ireland with it’s headquarter in Dublin. One of its biggest operational bases is at London Stansted Airport in UK. It is one of the key players with in the market, and perhaps the most profitable air line. Ryanair is World’s favourite airline with 41 bases and 1100+ low fare routes across 26 countries, connecting 153 destinations. Ryanair operates a fleet of 232 new Boeing 737-800 aircraft with orders of additional 82 new aircraft that will be delivered over the next 2.5 years. Ryanair currently has employees of more than 7,000 and expects to carry approximately 73 million passengers in fiscal year 2010/11 http://www.ryanair.com.

Ryanair was setup by the Ryan family. They had started their first route in July having daily flights on a 15-seater Bandeirante aircraft, operating daily from Waterford in the southeast of Ireland to London Gatwick. In 1986 the company has started second route flying Dublin- London Luton in direct competition to Aer Lingus and BA by introducing low fare charges for the very first time. By 1991 even though the number of customers have increased to greater extent but the airline was running at a loss. Michael O’Leary had been charged to turn the airline profitable. Michael O’Leary has deeply studied the ‘Low fare/no frills’ model of Southwest Airline of USA to come up with the idea that the key to Low fares was to implement quick turn- around times for aircraft. “no frills”, no business class and working on a single model of aircraft.

Ryanair strategy has always been to be a cost leader and its mission statement and objectives are consistent with its strategy mix.

Mission statement: “The objectives of Ryanair is to steadily establish itself as Europe’s leading low-fare airline through constant improvements and expanded offerings of its low-fares service. Ryanair aims to offer low fares that produce amplified passenger traffic while maintaining a permanent focus on cost-containment and operating efficiencies.” (Ryanair Ltd, 2008)

By having a look on their policies available on Ryanair’s website like wheelchair assistance, pregnant passengers, sporting equipment and others seem to be consistent with each other, with the mission, objectives, strategies and with the internal and external environment (Ryanair Holdings PLC, 2008). As a whole Ryanair current practices group their strategy approach and business style decently.

External Analysis:

The organisation exits in the context of a complex political, economical, social, technological, environmental and legal world. The environment changes and it has different impact on different level of organisations. A problem that has to be faced is that the range of variables is likely to be so great that it may not be possible or realistic to identify and understand each one. Therefore it is necessary to distil out of this complexity a view of the key environmental impacts on the organisation. In case of Ryanair we will analyze its macro- environment using PESTEL framework. What are the key drivers of change that can impact the strategy of Ryanair. Then how these key drivers can be used to construct scenarios of possible future. After that we will analyze its industrial environment by using Porter’s five forces to understand the attractiveness of the airline industry and the potential threats from outside the present set of competitors.

PESTEL ANAYLSIS OF RYANAIR:

In Pestel analysis we will consider Political, Economical, Social, Technological, Environmental and Legal factors that can affect the future strategy of Ryanair regarding threats and opportunities.

Political:

Political highlights the role of governments that can have direct or indirect impact on the growth, competitiveness and hence the future strategy of Ryanair. For the airline industry some out of many issues are restriction on flying to some destinations, the security controls and in most of the case the government support for national airlines. Ryanair has been facing some of these sort of issues in the past and have these kind of challenges in the future. The tax policy is different for different countries. New European Union regulations and existence of new routes means new competition. The stress on high security solutions which in turn become a cause of higher costs for Ryanair and other airlines. Moreover, “Irish government announced plans to break up the state monopoly”. This plan may be brought some questions in European airline industry. However, Ryanair will be seriously affected by this plan. It may block Ryanair future expansion in its home base.

Economic:

Economic factors refers to macro- environment factors such as exchange rates, business cycles and differential economic growth rates around the world which can have direct impact the overall objectives and strategy of Ryanair which is to provide lowest fares to their customers and hence stay as the cost leader in the long run. So, these factors has to be very clearly measured to stay consistent and for getting competitive advantage for its competitors. Some of the risks which are not only for Ryanair but also for the same industry in this context are the threat of increasing oil prices, taxes, interest rates and rise of airport handling charges and exchange rates. However, “Ryanair removed some of the risk through foreign exchange hedge and fuel risk management policy”.

Social:

Social influences include changing cultures and demographics, for example ageing population in many western societies. In recent days in time of recession people do not want to fly abroad for holiday vacation. Terrorism attacks in some part of world time to time have also left serious effects on the airline industry because people started to hesitate to fly. Besides, there was an interesting phenomenon. “A lot of passengers seek less expensive travel alternative”, however, there was a trend of high fare in European. The utmost divergence was created in European airline industry. Different price policy was implemented by mainstream and budget airline. Nevertheless, Ryanair can obtain this advantage to develop its business, as the direction of Ryanair fitted the market.

Technological:

Technology is one of the key factors in success and failure of many organisations. Those organisations that react to technology change and equip their selves with it remain competitive as compared to others failed to do so. Technology where it has good impacts on Ryanair like having online check in facility, generation of sales and revenue from website which actually removes third parties like agents so at the same time it may have direct negative impacts on its growth and sales. With the help of technology businessmen can do video conferencing and can resolve their issues and matter while staying in their organisations instead of travelling to other places.

Environmental:

Environmental concerns about greenhouse gases from carbon emissions continue to climb up the public and political agenda worldwide, and especially in Europe, with ever greater focus on the impact of aviation. A report warned that failure to curtail greenhouse gases would lead to catastrophic human and economic consequences. Hence the airline industry should pay environmental taxes for the contributions they make to global warming1.Ryanair is primarily oppose to any form of environmental taxation (ticket tax, fuel tax, emissions levy, etc). Ryanair has minimised and continued to cut fuel burn and CO2 emissions. The combination of operations and commercial initiatives and Ryanair’s extensive investment in new aircraft has led to an overall reduction in fuel consumption and emissions of over 55% between 1998 and 2007 (www.ryanair.com). This is outlying superior than, for example, British Airways’ 27% improvement in fuel efficiency between 1990 and 20052.

Legal:

EU commission had been reiterated a rule against illegal state subsidies. It hoped to establish fair deal environment in European airline industry. EU decision was based on non-discrimination legislation preventing airport from offering differential deal to different airline operators. The interests of European airline industry were protected by non-discrimination legislation. Legal issues that confronts to airline industry are illegal subsidies from airports, competition laws in aviation industry and regulations about carbon emission level.

Industrial Environment:

From a strategic management prespective it is useful for organistaions to understand the competitive forces in their industry or sector since these will conclude the prettiness of that industry and the likely success and failure of particular organisations within it.

I will use Michael Porter’s five forces framework for Ryanair’s industry analysis. It will clearly depict the intensity and implication of different factors on Ryanair and its strategies and define its position in its competitive rivals.

This analysis has five core elements/forces. These are:-

1. Competitive Rivalry
2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of buyer
5. Bargaining power of suppliers

Competitive Rivalry:

The exiting rivalry is high with Ryanair competing against low budget carriers and national carriers for their share of market. Any company does make a decision to race on the same basis as Ryanair there will be serious pressure on prices, margins, and therefore on profitability.

Threat of New Entrant:

Threat of new entrant for Ryanair is medium because it requires quite high capital investment to enter in this industry.It is also hard to find suitable airports. Even with capital investment it is very hard for new entrants to challange incumbent players like Ryanair that has experience of years and solid name in the market.

Threat of Substitutes:

Threat of substitutes for Ryanair which is a short haul airline can be in the form of land travels and if we talk about indirect substitutes then it is video conferencing which may reduce the need for air travel. The most important point to mention here is that in both of the above mentioned cases there is no switching cost for the customers so they will not feel any hesitation to choose in between these.

Bargaining Power of Buyers:

Bargaining power of buyers is high as people are well informed of prices and deals via different resources and internet is one of them. Now most of airlines they are trying to reach this market segment where they can acquire more market share by providing lowest fares. The customers are price sensitive and they will switch to any other airline which will give them lowest fares.

Bargaining power of Suppliers:

Ryanair has number of suppliers in respect of aircrafts, fuel, regional airports. Ryanair main aircraft supplier is Boeing and the other possible supplier for aircraft is Airbus. Even though Ryanair has very healthy relationships with Boeing Company inform of technical support and training but they also know this fact that they have only one choice of Airbus after Boeing. In term of fuel prices again suppliers has bargaining power because the price of fuel is governed by world trade and the Middle Eastern countries have the market dominance. Regional Airports use to have low bargaining power but as the competition between low cost airlines is increasing so their bargaining power is also increasing.

Resources and Capabilities:

Ryanair has always stressed on competition in costs. Yet, it is obvious that pursuing the strategy effectively takes more than just demanding blindly to get minor costs. According to Kay (1995), the distinguishing core competences or capabilities of an organisation are what present a competitive advantage. A capability is “a set of business processes strategically understood” (Stalk, Evans and Shulman 1992). Porter (1998) declare that strategic capabilities are core competences that how the resources are deployed into activities and therefore build competitive advantage. In core, Ryanair has evolved from challenging on costs to a capability-based competitor. We can list ryanair resources and capabilities as following:-

Cost – Cutting (Low fares & Profitability)

Ryanair attempted to exploit output and lower cost in every feature of its operations, from removing in-flight facilities to negotiating favourable rates for airport charges and having direct sales from its website. An organisation choosing a cost leadership strategy is parallel to a cost focus one, Porter (1998) claims that “a low-cost producer…normally sell a standard, or no-frills, place and product substantial weight on reaping scale or absolute cost reward from all sources.”

Pay Structure (Performance Based)

Competing on costs involve not imply only achieving low costs. The maximization of productivity in an operation area also make up to saved costs. Ryanair is offering performance related pay to its pilots and commission to cabin crews from sales of duty-free goods and in-flight refreshments.

The no-frills policy of the company generates opportunities to boost efficiency and employee motivation in the course of sales commission and excess total remuneration.

Selection of Regional/Secondary Airports:

In order to minimize the airport charges that include landing fees, passenger loading fees, aircraft parking fees, the firm avoided congested main airports and select regional and secondary airport destinations.

Outsourcing:

Ryanair has contracted out aircraft handling, ticketing, baggage handling and other functions to third parties. In this way the firm is able to obtain competitive rates and multi – year contracts at fixed prices which limit exposure to cost increase.

Strategic Situation:

Strategic situation reflects the company overall position with respect to its rivals. A SWOT analysis explores the relationship between the environmental affects and the strategic capabilities of an organisation compared with its competitors. So SWOT analysis is really useful it if is comparative – if it examines strengths, weaknesses, opportunities and threats in realtion to competitors.

SWOT ANALYSIS OF RYANAIR:

Strengths:

The following includes in strength of Ryanair which give it competitive advantage on its competitors.

• Point to Point Services
• Hedging of Fuel which covers risks in terms of fuel costs
• Punctuality
• High quality fleet
• 100% booking via their website : reducing costs
• Low Airport charges: reducing costs
• High seat density: reducing cost
• Higher turnaround time

Ryanair Passenger number growth and load factor growth: FY06 to FY09

Ryanair Passenger Growth Rate

Passenger Load Factor Y06 to Y09 (Centre for Asia Pacific Aviation)

Weaknesses

Ryanair where it has mentionable strengths at the same time it is suffering from weaknesses as well. One of the problems is in terms of handling customers in terms of quality of services. Reports say that Ryanair accumulates ‘hidden’ taxes and other fees, restricted customer services and deceiving advertisements. In 2007 Ireland’s Commission for Aviation Regulation recorded a total of 60 percent of all complaints accumulated by the commission. The company has faced with different issues caused by lack of strategic decision making in several areas of human resources particularly in relation to trade union policies.

Opportunities

Ryanair with its management system and the strengths that it has can dominate the competition in European airline industry preserving its low- cost no -frill strategy to its clients. To be based on Europe it has less exposure to geopolitical risks. The continuous initiatives of the company in diversification of its revenue resources also open new opportunities to make business more stronger and outgrow to all its rival companies. The opportunities that it can avail are development of strategic alliances, opportunities in core and non core area.

Threats

As the European airline industry is most competitive marketplace so Ryanair is facing inevitable threat of stiff competition. Other threat for Ryanair is rapid increase in fuel costs which can largely affect its competitive edge of providing low cost fares to its customers. The expansion of its operation to other areas means adjusting to trade policies and political problems of locality. The dynamic needs and demands of customers served as a challenge to the management. The fast paced technological advancement can be a great threat to Ryanair as it may be possible that people prefer video conferencing rather than wasting time in travelling to comparatively short way distances. Another threat is increase of cost in terms of regional airport charges as their bargaining power is increasing with time.

Ryanair Operating Profit margins FY06 to FY09

Strategic Choice:

Taking its environment, strength and weaknesses into consideration we may give some suitable options available to Ryanir for its future growth in terms of market share and profitability. These are:-

Options:

1. Continuation with low Cost Strategies (Cost Leadership)
2. Introduction of new sophisticated fleet, investments which will lead to minimum maintenance cost of aircrafts and also act as an opportunity to invigorate airline image. It is a common perception that low cost means low quality and Ryanir can change public’s perception about Ryanair with intense marketing and modernising their staff’s look which is comparatively less expensive exercise in long run. It means ‘upgrade’ without increase in fare prices- Differentiation without price premium (Bowman’s Strategic Clock – Strategy # 4).
3. Market Development- Try to expand its current European market to accommodate more European countries. Move in to long haul market segment (parts of North America, Carribean and South America)
4. Market new products complimentary to air travel.

Option 1: Continuation of low cost strategies-

Michael Porter suggests that any organisation/company can obtain sustainable competitive advantage by following one of three strategies.

• Cost Leadership
• Differentiation
• Niche Strategies

Cost Leadership:

One of the strategic options available for enhancing its growth is Porter’s Generic Strategy – Cost leadership. It involves organisation to continue to be the lowest cost producer in airline industry. One way of achieving is to increase profits by reducing but at the same time charging industry- average fares.

Evaluation of Strategic Option# 1 (SAF Test)

A useful way of looking at evaluation criteria is to view them as falling into three categories: Suitability, Feasibility and Acceptability JOHNSON,G., and SCHOLES, K.(1997).

As far as the first option of cost leadership is concerned, it suits to Ryanair in this sense that it holds all that strengths to implement it. It has built in low cost model and exiting experience in industry. It is market leader in the segment and with its financial strength and low cost base it support price cuts and promotion like free ticket giveaways. Ryanair being in the position of maturity that recently is in, with the continuation of low cost strategies, would serve as a booster to increase sales and hence profitability in the future. The threats to these options are developments in telecommunication which can substitute short distance air travel. Second rising fuel costs and fluctuating currency positions can seriously effect this strategic option which Ryanair can persuade in near future.

Option 2:

Option#2 comes under product development according to Ansoff Matrix. This is where Ryanair will market newest investment, more modernised flee (new product) to their existing customers. By doing this Ryanair can have a better position in justifying that it is not just low fare airline but at the same time it provides better quality to other low cost airlines. By introducing new fleet the overall maintenance cost will be very reduced and will become more uniformed with only one model (737 -800).

Evaluation of Strategic Option# 2 (SAF Test)

This option will require huge amount of investment in order to successfully implement it. Ryanair being such a profitable organisation with cash reserve of more than $3,009,041,00011 and high level of dominancy in the European market, this option may prove to suitable for it.

http://finance.yahoo.com/q/bs?s=RYAAY&annual

The returns from this option will yield a significant amount of profit generated from sales in the year 2009. It aims to satisfy the changing needs of customers and acknowledge that Ryanair provides the service which is like no others. In this way they will also greeted with fresh new faces (uniform) of employees and will be treated with best possible customer service. So this option benefits to all stakeholders in Ryanair. Shareholder wil enjoy higher share values, banks, employees (in term of good salaries) and directors of Ryanair. Again its huge investment but this is comparatively small price to pay for higher rewards. In 2005- 2008, there was about two times growth in Ryanair’s revenue and more than 50% in profits. This financial capability proves to be very crucial in implementation of this option. The following charts explore the revenue and growth profit from 2005 to 2009.

Revenue 2005- 20092

http://www.wikinvest.com/stock/Ryanair_Holdings_(RYAAY)/Data/Balance_Sheet

By having new fleet on board, Ryanair will further reduce the impact of passenger flights on the environment. A number of recent studies on Environmental performance of European airline have ranked Ryanair as the greenest cleanest airline in Europe.

Option 3:

Ryanair try to expand its European market to accommodate more European countries (central Europe) and attack new markets by servicing some parts of North America, South America and Caribbean.

Evaluation of Strategic Option# 3 (SAF Test)

Now the strengths that will encourage this are Ryanair’s existing experience in the industry, its financial strength and low cast model which can be modified to adjust the requirement. The opportunities like US and EU opened skies agreement in 2008 open transatlantic routes for European carriers. Now what comes as stumbling block in this option are lack of experience in long haul segment and ‘no frills’ flights may not give customer satisfaction in long distance travel. The greatest challenge that Ryanair has to face is from competition from other transatlantic carriers like American Airlines, Virgin Atlantic, Silverjet, BA and others. One way of getting in long haul segment is to do alliance with the already existing airline in the targeted segment and then transfer core competences and resources to get competitive advantage on other large rivals and settle its position in that market segment. In this way it has lower risk as compared to if it adopts choice of ‘organic growth’ in long haul market segment. Even though Ryanair possess financial capabilities to finance this option but they might not possess the cultural aspect of management to endeavour drastic change in culture between the Europeans and the Americans. Other impediment is legislation which can affect the success of this option.

Option 4 -Market new products complimentary to air travel (Ancillary Revenue)

Michael O’Leary may crystallized the concept of ancillary revenue back in 2001 when he hunted to replace ticket revenue with commissions from retail activities3

BBC News, “Flying for free on Ryanair”, May 13, 2001

The website is unique in the airline industry because it gives greater attention to ancillary revenue activity than to the sale of airline tickets. Michael O’Leary, CEO of Ryanair, is on a mission to make flying free, and his website clearly demonstrates the desire to replace airline ticket revenue with the receipts earned on a wide array of products and services. Ryanair.com seems to deliver on a golden rule of e-commerce – to generate sales. It has been hugely successful in its pursuit of ever increasing ancillary revenue levels. The website alone generated more than €37 million in revenue during the most fiscal year from activities not directly related to sales of airline tickets. This includes the sale of travel insurance, life assurance, online gaming and advertising. The company has now learnt how to tap effectively 22 million consumers that visit Ryanair each month.

Ancillary revenues grew by 23% to €598m4.Ridership of 42 million passengers contributed ancillary revenue in excess of €362 million during Ryanair’s fiscal year ended March 31,2007 on amazing €8.50 per passenger carried5.

http://www.ryanair.com/en/news/ryanair-announces-full-year-net-profit-of-105m-euro-fares-fall-8-percent-as-traffic-grows-15-percent-to-59m-passengers

Ryanair 2007 Annual Report.

Evaluation of Strategic Option# 4 (SAF Test)

Large airlines are capable of generating large revenues but Ryanair clearly reaches beyond the benefit of its size, and fully embraces the practice of ancillary revenue in its purest form. So, Ryanair can generate note able revenue from ancillary services. If you just take Ryanair’s website it can develop partnership deals with hotel booking engines and hotels directly to earn handsome amount of revenue. In this case airline receives payments from search engines on the basis of passengers carried and not as a commission paid on lodging sales. Other way of doing is to host advertisements that reach millions of customers. The airline is an ancillary revenue leader in terms of revenue production, marketing aggressiveness and breath of activities .It can be demonstrated by following figures.

http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=6069369-222274-316769&SessionID=ciSZWH0cSYTtB77

This strategic is suitable, feasible and acceptable in this sense that Ryanair has all that resources and competences for doing it. Further, it does not need to build any new setup for and therefore there is not any huge financial cost associated to it. The rewards attached to this strategic option are immense compared to its cost. So, this strategic option is highly suitable, feasible and acceptable for Ryanair.

Recommendations:

Based on above analysis, it is recommended that Ryanair consider the expansion in to long haul markets- specially the transatlantic routes which accounts for more than 40% of world’s air travel. Having couple with it low fare strategy and added service option, the company can utilize its existing expertise in low fare business model as well as financial strength. Mergers and acquisitions have become one of the most important corporate-level strategies in the new millennium. Merger and acquisition strategies are important to firm growth and success in the 21st century (Hitt et al 2001).

Secondly introducing complementary goods and services via its website it is also recommended as this will enhance the company’s revenue and reduces its cost base per unit of customer. As Ryan Air continues to grow it is expected that the company will acquire other companies, in order to improve its capabilities and acquire more competitive advantage. Third recommendation is Strategic Human Resource Management. Ryan Air, in its commitment to low-cost airfare has sacrificed its processes and services. The human resources of the company are not seen as a potential source of competitive advantage. The company do not seem to value its people. There is a growing belief that a company’s human resources is the most important source of competitive advantage. Human resources or the company’s people are one basis of sustainable competitive advantage. In a fast-changing environment where technological innovations and other strategies can be copied, it is the human resources that bring a sustainable competitive advantage.

References and Bibliography

• Johnson, G, Scholes, K and Whittington, R (2006) Exploring Corporate Strategy: Textand Cases. 7th Ed. FT Prentice Hall
• Sir Nicholas Stern, Economics of climate change, Review for UK government, 2006.
• Source: British Airways Annual Report 2006.
• Porter, M.E. (1998) Competitive Strategy – Techniques for Analyzing Industries and Competitors, New York, Free Press
• http://finance.yahoo.com/q/bs?s=RYAAY&annual [21 January 2010].
• http://www.wikinvest.com/stock/Ryanair_Holdings_(RYAAY)/Data/Balance_Sheet[ 29 January 2010]
• http://www.ryanair.com/en/news/ryanair-announces-full-year-net-profit-of-105m-euro-fares-fall-8-percent-as-traffic- grows-15-percent-to-59m-passengers [02 February 2010]
• http://google.brand.edgaronline.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=6069369-222274-316769&SessionID=ciSZWH0cSYTtB77 [07 February 2010]
• Doganis, R 2001,The Airline Business in the Twenty-First Century, Routledge, London.
• Porter,M.E.(1979) “How competitive forces shape strategy”, Harvard Business Review, March/April 1979.
• ARU Advance Strategic Management Lecture Notes
• Hall, R (1993) “A Framework linking intangible resources and capabilities to sustainable competitive advantage”, Strategic Management Journal, vol. 14, no 8; pp 607-618
• Professor Alex Scott MA, MSc, Phd. Edinburgh Business School Heriot-Watt University. Strategic Planning (2003)
• Michael E. Porter (1985) “Competitive Advantage: Creating and Sustaining Superior Performance” pg. 33 the Free Press