Issues facing european low cost airlines

As predicted in the beginning of the millennium year by the International Air Transport Association, the low cost airline sector has grown at a rapid pace during the last decade from carrying 6.3% of the domestic and international passengers within Europe in 1999 predicting to increase to 16-18% in 2005 and has become the order of day in Europe. Although the European airline sector was dominated by flag carriers such as British Airways, Lufthansa, Air France etc. with a share of 70%, this fact transformed with the deregulations coming into effect, increasing the need for an optimal model of operation. That is, as the average airfares in the low-cost airlines sector account for just 3% of the average monthly EU industrial wage, customers turned towards these airline services (Datta & Chakravarty, n.d).

3.0 “Ryanair” Profile in brief

Ryanair Airlines, founded by the Ryan family was initially a full service conventional airline in 1985 which was introduced as an alternative travelling between Ireland and the UK to then state monopoly Aer Lingus. However due to financial issues it successfully restructured itself in early 1990s as the first low-fares, no frills carrier in Europe modeling based on Southwest Airlines. The responsibility of Ryanair was taken over by a management team lead by Michael O’Leary and was soon floated on both Dublin and London Stock Exchanges in 1997 and admitted among NASDAQ 100 (O’Higgins, 2007).

Ryanair as a leading low-fares airline offers cheap flights to 150 destinations up-to-date along 1000 low cost routes and provide its customers with cheap and fast air travel excluding fuel surcharges with 100% possibility for online check-ins (Ryanair website, n.d). Although Ryanair has not published its vision and mission clearly, they look to find the big picture and set a broad direction and O’Leary’s direction is to be the largest Low Cost Leader in the European airline industry. This vision is supported by absolute dedication to low cost performance in every element of the value chain, quick gate turnarounds, nonunion operations, performance-based incentive compensation plans, standardization on one type of aircraft, and flying (in most cases) to secondary airports, which provides significant savings for Ryanair (Box & Byus, 2007).

4.0 Internal Analysis

4.1 Organizations’ Strategic Capability Analysis

Ryanair has positioned itself as the largest low-fares carrier in Europe and as a business which returns value for money to its fare-concuious leisure and business customers. That is, as Ryanair explains, “At Ryanair we guarantee you the lowest air fares on the internet. However our success is due — not just to our low fares — but also a winning combination of our No.1 on-time record, our friendly and efficient people and our new Boeing 737-800 series aircraft” (Puget, 2003) which all add up to its value. Its ancillary services improve its value which is 13% of the total revenue.

Although there are low-fares airline services in the European market due to the effectiveness of Ryanair it has been able to become market leader with 29.9% of market share in 2006. Their competitors have not been able to effectively copy the low cost strategy and usage of secondary and regional airports.

Inimitable

Organised

Ryanair holds its uniqueness in its operating strategy which is based on low-cost. It adopts point-to-point flights to secondary or regional airports which no other service follows and occupies a one-way pricing policy which eliminates direct comparison with competitors (Ryanair, n.d).

Ryanair is well organized within its low-cost strategy. It offers 100% online check-ins and flies to 150 European destinations along 1000 routes. There is no physical check in where passenger is required to forward his passport and reference number (Marketing Teacher Ltd, n.d). It has one-way pricing strategy which eliminates minimum stay requirements within airports (Ryanair, n.d).

Valuable

Rare

4.2 Company Resources

The resources of Ryanair could be categorized and explained according to the following.

Type

Ryanair resources

Physical resources

Head office at Dublin airport – Ireland

202 Boeing 737-800 aircrafts with 189 capacity

150 destinations through 1000 routes (as at 2010 April)

Financial resources

Total assets worth €4,634.2 million

Shareholder equity of €1,992 million

Total operating revenues worth €1,693 million (all as at 2006 March)

Human Resource

Over 6,300 employees (2008)

CEO – Michel O’Leary

Intellectual resources

Market share of 29.9% (2006)

Customer base of 34.9 million (2006)

Largest travel website in Europe

The fifth most recognized brand on Google

Most profitable airline in the world based on operating and net profit margins on a per-airplane and per-passenger basis (2006)

4.3 Company Competencies

No frill, low cost leadership could be considered the most significant aspect of Ryanair and thereby cater from low to middle level customers

The ancillary revenue methods such as accommodation services, care rental, in-flight sales etc. which add up to 15.3% (2006) which had a 36% increase during 2005-2006

Possessing the preemptive advantage and being the market leader provides opportunity to expand into other markets including USA, Asia and Africa.

Allowing internet access to its consumers leads to elevate sales and reduce the per-units cost

Point-to-point short haul flights and usage of secondary and regional airports reduce passenger congestion and thereby avoid high airport charges.

The personality of Michel O’Leary has a great impact on the success of Ryanair where he personally looks into unique marketing strategies.

4.0 Industry Analysis

4.1 Porter’s Five Forces

4.1.1 Competitor rivalry -High and increasing

The direct and main low-cost competitors of Ryanair include easyJet, Air Berlin, Germanwings, Lufthansa and Tranavia and the industry was joined by approximately 60 new low-cost airlines in 2004 (Experience Festival, n.d). A major reason for the development of this sector was the airline deregulation in 1997 due to which many companies were attracted towards the industry. This resulted in full-service airlines adopting the low-cost strategy eg. Aer Lingus – 2002. The economical recession increased the aggressiveness of all competitors as they were compelled to survive in the market which resulted in frequent flyer programmes by many competing businesses including Lufthansa, Aer Lingus etc (flyertalk, n.d). However the attractiveness of the industry is high for Ryanair due to its low-cost structure, use of secondary airports and first-mover advantage along with experience of almost 2 decades.

4.1.2 Threat of new entrants – Moderate

Although it is accepted that the European budget airline industry is healthy with huge potential and incremental growth, the effect on Ryanair from new entrants could be considered as moderate due to its position in the market, its strong brand name and economies of scale achieved with time. For instance, Ryanair saved 42.6% of marketing and distribution costs through direct bookings in 2002 (Brophy & George, 2003). Although the deregulation practices minimized the barriers of entering the industry challenging the market leader would consume both time and resources of the new companies.

4.1.3 Bargaining power of suppliers – Low to Moderate

Types of suppliers of Ryanair would mainly be fuel suppliers, aircraft suppliers, airport authorities and suppliers of support services. Travel agents would not count at present due to on line bookings. Ryanair has no control on fuel prices which is totally governed by world trade and Middle Eastern countries. However it has a very healthy relationship with the main aeroplane supplier, Boeing (Brophy & George, 2003) which also provides the company with ancillary goods and services including technical support and training, spare parts support, training of flight crew etc. Accordingly it could be said that the power of suppliers is at low to moderate level. Eg. Ryanair cancelled its contract with OnAir, the supplier of the on board mobile communication service due to financial issues (Robertson, 2010).

4.1.4 Bargaining power of consumers – High

The passenger base of Ryanair was 34.9 million in 2006 and 58.5 million in 2008 (Ryanair, n.d) and increasing due to recessionary effects and current recovery stage resulting in attraction towards low-cost air travel. As Brophy and George (2003) explain, the power of buyers depends on standardization of product, elasticity of demand, brand identity and the quality of service. The switching cost is very low for customers due to the parity of services and online bookings. Accordingly Ryanair is compelled to practice competitive pricing.

4.1.5 Threat of substitutes – Low to Moderate

The major substitutes for air travel in Europe are rail, road and to some extent boat travel. With advantages such as ability of localization, easier accessibility along with safety railway is significant but may take longer to reach the destination. Ryanair with its low-fare structure is comparatively cheaper than railway which directly substitutes its services through excellent continental services. Road travel would provide similar benefits but Ryanair could overcome it through emphasizing on effective short haul schedules. Development in communication could also be a threat to some extent as business professionals could communicate through video conference etc. from one corner of the world to the other instantly sitting at their office desks.

5.0 Macro-environmental analysis

5.1 PESTEL analysis

5.1.1 Political

Government laws and regulations regarding increase of airport landing charges

“The law for carbon emissions” passed by the government on the aviation industry charging environmental taxes

EU regulation to reduce the inconvenience caused to passengers by delays, cancellations and denied boarding where airlines are to provide standardized and immediate assistance to them

Severe security measures imposed by UK authorities due to terrorist attacks

5.1.2 Economical

Real GDP growth rate of EU at a reducing trend since 2007 -4.2% in 2009 (eurostat, n.d)

Reduction in inflation rate of the EU from 3.7% in 2008 to 1.0% in 2009 (eurostat, n.d)

Recessionary effects and current practices for recovery and depreciation of the US dollar

5.1.3 Social

Increase in numbers of business travellers

Negative perceptions on air travel due to safety issues

Attraction to low-cost airlines after the economic recession

5.1.4 Technology

Internet competition for online bookings

Fuel efficiency, low carbon emissions and low noise emissions from Boeing aircrafts

Other technological expansions e.g. Web sales

5.1.5 Environmental

Cancellation of thousands of flights due to spread of volcanic ash from Iceland

Strict regulations on carbon emissions

Considerations on global warming and noise pollution

5.1.6 Legal

Laws relating to airport charges and route policies

Safety measures taken by governments due to terrorism regarding passengers and airline staff

Regulation regarding misleading advertising

6.0 SWOT Analysis

6.1 Strengths

Brand image and reputation

Ryanair possesses the privilege of being the initial company to the low-fare air travel industry in Europe and thereby has the advantage of being the First Mover or preemptive mover. Most importantly as the market leader Ryanair presents its brand as a bundle of functional benefits including punctuality and efficiency (Puget, 2003).

Pricing strategy

As the first low-fares airline in Europe their pricing strategy was extremely unique where 70% of the seats are sold at lowest two fares and the rest is at higher prices with 6% sold at the highest and customers are ruled out of fuel surcharges (Marketing Teacher Ltd, n.d). Customers are content with the aspect of “value for money” and best prices compared to other competing airlines.

Marketing strategy

They utilize adverts which basically communicate the low-fares factor to its customers. Mostly they use controversy as their promotion method where for instance, bidding to purchase Aer Lingus, the Irish rival of Ryanair, charging £1 per person for the use of washroom on board from 2010 (Crouthamel 2010), publishing controversy calendars with female cabin crew for charity purposes etc. Also another important factor is the ancillary services or non-flight scheduled services such as hotels, car hires, in-flight sales etc.

6.2 Weaknesses

Cost Structure

Ryanair is at continuous attempt to reduce costs at any possible situation and therefore it has a negative impact on customer satisfaction due to this high cost consciousness. According to a poll by TripAdvisor in 2006 Ryanair was voted as the world’s least favourite airline and Ryanair is ranked as a “2 Star low-cost airline” by airlinequality.com (n.d) which also explains the negative perspective of customers about low quality. Also this cost structure is constantly challenged by the fluctuations of fuel prices.

Staff issues

Ryanair scores low regarding industrial relations where they are alleged of providing poor working conditions. Ryanair recruit young pilots who could work hard and with experience and knowledge gathered at Ryanair they tend to move on as a result of low commitment.

6.3 Opportunities

Expansion to the USA

The low-fares structure is not common in the US as it is in Europe and therefore Ryanair would be the first mover to the US domestic airline market as it plans to extend itself under a different brand for long haul flights between US and Europe (McGrath, 2007). It is said that Ryanair would be the cheapest USA flights in history and its popularity and success in Europe would spill over to the new brand.

Recession

Price has become an extremely important factor in making purchase decisions and therefore Ryanair could score due to its low-fares nature during and at the aftermath of the global economic recession. The grid (Appendix B) illustrates the increased demand towards Ryanair where its passenger numbers has grown by 13% from 2007-2008.

New aircrafts and focus on business professionals

Ryanair currently owns 189 Boeing 737-800 which are more environmental friendly and larger in capacity. Also discussions are underway for an order for 200-300 aircrafts for 2013-2016 requirements (centre for aviation, 2009). Also with changes in the business world and focus on countries such as China and USA the demand for long haul flights have increased.

6.4 Threats

Fuel prices and other charges

As Ryanair does not pass on fuel surcharges to its customers, the unpredictability in fuel prices and inexperience in effective hedging compared to its competitors it is at risk of continuing with lowering costs. Also increase in airport and handling charges and route charges due to expansion would also threaten its cost structure.

Political influence – As Ryanair operates in more than one country it is influenced by various legal requirements which are different to one another and therefore faces difficulties in standardizing processes and practices.

7.0 Recommendations

Considering a much more structured marketing strategy which does not depend on controversy publicity.

Taking measures to reduce negative publicity through practicing CSR projects and demonstrating ethical behaviour moving away from merely being profit conscious

Proving customers with benefits of the low-cost structure through effective customer service which would increase numbers and thereby would positively affect profit margins although costs may increase in the process.

8.0 Conclusion

Ryanair as the largest low-fares carrier and the market leader of the European budget airline market has been able to succeed due to its unique and out-of-the-box thinking. With a high rate of rivalry within the industry with big players such as easyJet, Lufthansa, Air France practicing competitive strategies time-to-time Ryanair is required to follow the correct strategies in order to remain at its throne. Accordingly effective analysis of its internal, external and industrial aspects would increase its possibilities.

Ryanair with its low-cost strategy and powerful brand reputation could match its strengths with the opportunities in the market, especially those which have arisen due to the economical downturn increasing the demand for low-cost travel. Furthermore, due to its capabilities the industry attractiveness is at a high level for Ryanair. However the business is at a spotlight due to its controversy practices which they utilize as a means of publicity could negatively affect its brand in the long run and therefore should take steps to reduce these effects.