Pestel And Swot Analysis Of Ryanair Management Essay
RYANAIR is an Irish based low cost airline which specialises in short-haul flights and has its headquarters at Dublin Airport, Ireland, and with primary operational bases at Dublin Airport and London Stansted Airport and 34 other secondary bases. It is Europe’s largest low fares airline with over 950 routes across Europe and Morocco, carrying approximately 67million passengers in 2009 with a staff strength of 6000 people. The airline has been characterised by rapid expansion, a result of the deregulation of the air industry in Europe in 1992.
In 2009, RYANAIR reported a 78% decrease in net profit after tax from a record â‚¬ 481m in 2008, a Net Profit of â‚¬105m (ahead of market expectations), despite suffering substantially higher oil prices. During a year in which fuel costs rose by â‚¬466m (+59%) to â‚¬1,257m, revenues rose by 8% to â‚¬2,942m as air fares fell 8% and traffic grew 15% to 58.5m.
Michael O’ Leary, the current CEO of Ryanair was responsible for launching the first unique low fares, ‘no-frills’ airlines in Europe. Flights were scheduled into regional airports that were keen to attract new airlines, and offered lower landing and handling charges than larger established international airports. Michael O’Leary, known for his pugnacious and aggressive management style, employed a flat management hierarchy and vigorously followed the low cost policy, on all fronts. (www.air-scoop.com)
The review of the UK Competition Commission on BAA’s monopoly and CAA concluded that both BAA’s monopoly and CAA’s regulation were adversely effecting competition. The UK airline industry believes that if BAA’s monopoly is broken will enable competition amongst airports and also improve passenger service (RYANAIR, 2008 [online]).
The announcement of airport tax cuts for the carriers that maintain or grow traffic by the Spanish, Dutch and the Belgian governments will reduce operating costs for airlines. This reduction in airport tax will help reverse the recent decline travel and tourism especially in the airline industry.
The effect of the financial crisis on the aviation industry has led some airlines to go bust; it translates into good news for RYANAIR as it reduces the number of options available to air passengers. Also, as both business and private passengers are cutting costs, more passengers will fly low-cost airlines like Ryanair.
When the long-haul route flights are introduced at cheaper fares, the airline industry will witness an increase in the passenger numbers, job vacancies, and availability of cheaper choices to air travellers (BBC, 2009 [online]).
To be successful in this economic situation, carriers should be able to absorb the higher oil prices and thereby offer its clients with lowest possible fares.
Despite the economic situation, air travel cannot be totally eradicated. There will always be trips that can only be made by air either because of time, distance or convience constraints.
Also some passengers opt to drive their own car from their home to the nearest European destinations due to non-availability of tickets and high ticket rates.
There is an increase in mobile phone usage and in the capabilities of the mobile phone today such as access to the internet which can enable passengers purchase tickets and check in via their phones. Some industry experts believe that mobile boarding pass could save the aviation industry US$500m as the world moves towards a paperless travel (Travel Daily News, 2009).
Availability of high speed trans-atlantic trains like Eurostar provides passengers alternatives to air travel especially for European destination. This is a threat to airline industry.
The airline industry is under pressure to reduce fuel burn, Co2 emission, and noise levels. To be competitive in this market, the industry should focus on reducing the fuel burn and CO2 emissions at least by another 4%.
Airlines will have to adopt new technology airlines that lower CO2 emissions and reduce noise levels.
As passengers get more aware of their rights and litigious, the risk of being sued increases, especially in Europe. Recently, RYANAIR is facing its first group of legal action from passengers fighting to force the low-cost airline to stand by EU compensation rules (The Guardian, 2008).
Hence as the global credit crunch bites and passengers become more litigious, airlines should be careful in dealing with its passengers.
Porter’s Five Forces
Level of Competition
The level of Competition in the aviation industry is high. Although the number of airlines have reduced due to the recession, but mergers and acquisitions which took place between some airlines have created bigger airlines which can leverage on economies of scale to reduce cost to the customers.
Threat of Substitutes
The threat of substitutes for RYANAIR is high. This is because passengers can decide not to travel at all and relate via the internet e.g. video conferencing for business meetings, travel by Eurostar, by ferry across the channel or by road.
Tourism companies in partnership with other airlines provide holiday packages with low air fares (Yahoo, 2008 [online]).
Threat of New Entrants
Threat of new entrants is very low in the current global economic climate as it needs special licenses and high capital investments.
Most existing airlines have gained competitive advantage either by differentiation via excellent customer services or low cost – such as Ryan air, thus creating barriers to entry to new entrants.
Bargaining Power of Buyers
The bargaining power of buyers is very high at the moment as customers have little or no switching cost.
There are numerous airlines catering for similar destinations and hence passengers have the tools to make informed decisions based on their budget.
Bargaining Power of Suppliers
The bargaining power of suppliers is said to be medium, although RYANAIR has a huge base and large scale operations, the number of aircraft suppliers are limited.
As it can be clear from the appendix 1 that using game theory RYANAIR has to be ready to analyze and jump into any new moves made by its competitor. The Airline industry, being a fiercely competitive market, keeping an eye on the competition and their every move will be crucial for its own strategy.
Resources and Capabilities
RYANAIR has a market share of about 18.7%. It is financially strong and has an excellent low cost business model which enables them make use of the first mover advantage in the low fare segment and also expand its European routes and other destinations.
It has a very good brand image and reputation in the European low cost segments.
Due to its strong position in the market, it is positioned to perform strongly in the ensuing recession.
RYANAIR has a special advantage when it comes to leveraging the Internet for its purpose. Almost 94% of its bookings are done on the Internet, thus achieving huge cost savings (Vestring et al 2007).
It is also known for its reliability and it’s built that reputation by having most of their flights on time, low baggage loss and has a quick turnaround time.
There is very high aircraft utilization rate with RYANAIR. It means that it can fly planes for longer and thus generate more income.
Image issues in relation to customer services and business risks associated to new product launches such as the new plans to abolish check-in desks and the idea of charging its passengers for using the onboard toilets.
Lack of expertise in long haul segments could create implausible positioning amongst customers.
Providing easy access to RYANAIR’s website through increased internet facilities such as wireless connectivity.
Operating a cheap coach service
Introduction of Transatlantic routes in the near future.
Major threats are development in telecommunication technology such as video conferencing and web conferencing, rising fuel costs and exchange rate situations.
Due to increasing aging population across Europe people aged more than 80 are less likely to travel by air due to health restrictions.
Competition from other transatlantic carriers such as BA and American Airlines is on the rise.
Value chain analysis
The appendix 2 shows us the Value chain analysis of RYANAIR.
It shows that RYANAIR’S cost reduction strategy focuses on fleet commonality ,contracting out of services -( ticketing, baggage handling and different other functions to third parties, obtained multi-years contracts at fixed prices limiting exposure to cost increases), Airport charges (the company avoided all the fees of the main expensive airports and the major airline competitors choosing secondary and regional destination), marketing costs (RYANAIR cut its rate of commission to travel agents and focuses more on its website which is said to be designed by staff). All the above enable RYANAIR to have low fares and so, target customers that are price-sensitive (Emett 2003).
The cultural web, mentioned in Appendix 3, helps to understand of the culture of the firm and the changes that can be made in the future. A change of culture is very important and very difficult to achieve. Ryanair uses a power structure, as it is completely driven by Michael O Leary and his thought. Hence the culture has become of being ruthlessly low cost and productive. This can hurt the airline, as it is crucial for it to be a customer focused company, like Virgin, so that it has a friendlier, open image to the customer.
RYANAIR COMPETITIVE ADVANTAGES IN SUMMARY
Operation denominated in euro
One class travel
Owns own fleet
No cargo services
Use of secondary airports
Point to point flying
Hedge fuel risk
No refund policy
Reduce turnaround time
Highly successful ancillary service offering
Outsourcing of service at international airport
Limited airport transportation
High service levels
General cost reduction
Ryanair has steadyily increasd its revenue base over the past 5 years at an average of about 25%. It also made profits steadily over the past 5 years except for 2009 when it made a loss of about 143%. The earnings per share rose steadily over the years, but depreciated in 2009 to -144% .
From the financial report of Ryanair, it can be ascertained that their fiancial performance is good, therefore able to compete and take up any new opportuniteis in the market
Critical Success Factors
The Critical Success Factors (CSFs) are as follows in airline industry: the strategic focus of having the lowest prices, being reliable within the marketplace, comfort and service and frequency. Ryanair’s critical success factor is providing travel services at the lowest possible price and frequency.
It does this by managing its resources efficiently and employing economies of scale. It still prioritises frequent departures, advance reservations, baggage handling and consistent on-time services.
Cost Reduction Strategy
Ryanair uses a cost reduction strategy to gain competitive advantage. The cost reduction occur in five main areas including
– Fleet commonality – It uses only one kind of plane which limits the cost for staff training, maintenance services and facility of obtaining spares, facility in scheduling aircraft and crew assignment. They were able to avoid the fit of EU-conform equipment on old fleet by purchasing the Boeing 737.
– Contracting out services – They contracted out non-core services like aircraft handling, ticketing, baggage handling engine and heavy maintenance to third parties.
– Airport charges and route policies – The use of using secondary and regional airports where traffic is not as heavy and fees incomparably lower with the major airports. They have an increased bargaining power to get favourable access fees. They incur no cost with connecting passengers as they provide only point-to-point service.
– Managed staff and productivity costs – the company pays its staff modest salary but has set up a performance related pay structure which urges employees to maximise the number of sectors flown daily.
– Managed marketing costs – Ryanair advertises mainly on its website with its logo “Ryanair.com, the Low-Fare Airline”.
The Strategic Situation
Using the Ansoff combination described in Appendix 4, it can be said that RYANAIR has managed to attract and penetrate many markets by offering them products that are affordable and reasonable. It provides a no – frills air transport service between two locations. It has grown both in the UK market and has also penetrated other European markets. It has a diversified staff in terms of race and skills which enable it gain entry into the new markets.
As can be seen in appendix 5, is in low growth sector with a high market share thus serving the company as a cash generator or a cash cow.
As its Annual Report suggests (RYANAIR 2009), the ancillary services have been growing rapidly over the past many years and are serving as the stars for the company.
It is extremely important to note that its e-ticketing technology is within the question mark area of the BCG matrix. This is a potentially high growth sector, as more customers will be undoubtedly using the Internet for ticketing. However, as all companies can purchase the technology its market share and accruing benefit is in doubt, but it can be a strategic option for the future.
Looking at the strategy clock in Appendix 6 it can be said that RYANAIR focuses mainly on the no-frills strategy. They provide basic travel with no extra comfort attached
The main reason behind low fares is to stimulate demand. They target fare conscious business travellers primarily and sells its seats on a one-way basis. RYANAIR sets its fares on the basis of the demand for particular flights and by reference to the period remaining to the scheduled date of departure. 70% of seats on a flight are sold at the minimum available fare assigned for the route, once these are filled the price per seat rises.
Robert Myles and Charles Snow model
Since Ryan air owns 18.7% of the low cost airline industry, it can be considered to be a market leader. It can be said to be a low-cost defender. It minimises its costs in order to maintain its market share and possibly steal market share from its main competitor, Easy jet.
They maintain their hold in the market by further reducing cost, coming up with ideas like people standing in planes for free( although they will pay for their luggage), they also make use on e-ticketing reducing commissions they have to pay agents.
From our analysis of the Ansoff model above, we recognise that the strategic options available to Ryanair include:
Market Penetration – Ryanair can increase the number of air passengers using the airline in its current market. This can be done by use of promotions, and possibly the idea of flying for free if the passenger flies for free. I believe it can increase by improving its image of little or no customer service to its customers.
Market Development – Since the European and British market is getting saturated, it will be a good idea for Ryan air to expand into new markets. They take their business models to Africa e.g. Nigeria and other African countries. This I believe will be highly beneficial to both potential customers and Ryan air. For Ryan air, since the company’s operational cost is in euro, which is stronger than most African currencies, their operational cost will be greatly reduced.
Secondly, the population in Africa is much more than that of Europe, and since it’s a low cost airline, a lot of people will be able to afford the trip especially since for the customer, air travel is deemed safer than travelling by road as the state of most roads are terrible and fraught with risk of armed robbers.
Product Development – This involves developing a new service or product to its existing customers. Ryan air can provide low cost coaches or trains which can serve as alternatives to air travel. The coaches can operate within England and England and neighbouring countries. E.g. London and Paris.
Diversification- I believe Ryan air can either go into unrelated or related diversification. With respect diversification, the coach and train services mentioned earlier can be delved into. They could implement the long haul travel, but I would suggest that they could reduce implausible positioning by using a different brand name from Ryan air. This is so, because customers already believe their expertise lies only in short haul flights.
For unrelated diversification, Ryan air can go into financial services like credit cards, owning a bank, mortgages etc. Although right now they do not seem to have the skill set required for this, they could merge with an organisation with the skill set required. Another problem might be the culture and as the power culture and treating customers ‘shabbily’ will not promote a bank’s image. I also believe that individual branding should be used for this business too.
Evaluation of the options
The various options discussed above will be evaluated using the table below to determine the suitability, feasibility and acceptability of each proposed strategic choice with the organisation’s objectives and organisational structure.
Increase Market Share
Differentiation or innovation opportunities
Competitive bargaining position
Fit and Synergy
Competences and resources
Barriers to Entry
Risk and return
The ratings are (1= Low and 10= High).
NB: the risk to return ratio for market development is 7.5 because the main risk for Ryan air is that they do not understand the African territory, but return on investment is very high. This risk can be mitigated by partnering with a local airline.
Strategic Decisions and Recommended Strategy
Based on the above analysis, I would recommend that Ryan air adopts the market development strategy. By this, I mean Ryan air can begin operations in West Africa with Nigeria has its regional Head office. Ryan air can fly domestic flights within the 36 states of Nigeria and international flights to its 16 neighbouring countries.
In order to achieve this, they can merge or acquire an existing local airline in order reduce the risk created by lack of local knowledge in the industry. This is the strategy already being used by Virgin Atlantic, as it acquired 41% of Nigerian Airways. Recently a bill was passed into law for the construction, ownership and commercial operation of airports by private organisations and State governments. Ryan air, since they have a strong financial base, the advantage the exchange rate of the Euro to the Naira among other strengths can build or look at the avenue of acquiring (existing airport) its own airport charge other airlines for using and maintaining the airport, thereby creating another stream of revenue. The labour force in Nigeria is also cheaper when compared to the European market.
Nigeria is the 8th most populous country in the world with a population of about 154,729,000. It is one of the fastest growing economies in the world with an IMF estimated growth of 8.3% in 2009, and is also the second largest economy in Africa. It is a regional power and has hegemony in West Africa.
Nigeria has 22 airports, four of which are international airports. There is a target market for low-cost airlines in Nigeria due to the fact that the land mass is 923,768km2. Most local travel is done by road, which is prone to accidents because of level of bad roads. The only other alternative is air travel, but it is relatively expensive, thereby creating a market segment price-sensitive air passengers.
Apart from the main risk of not understanding the local air industry, other risks Ryan air will likely face includes:
Difference in Organisational culture – In order to mitigate against the risk, an organisational audit should be carried out on the airline they intend to acquire, in order to determine the gaps in organisational culture. Depending on the outcome of the audit, appropriate actions will then be taken to close or reduce the gaps. E.g. Re-training of staff in acquired company and open communication channels.
Lack of understanding of the Political and Business terrain in Nigeria and West Africa – Since they are acquiring an existing airline, this will greatly reduce this risk. Care should be taken to retain the best hands in this firm. They should also have a regional head that understands the local political and business terrain.
Ryan- air uses mainly e-ticketing, in Nigeria and West Africa internet is not yet as widely available and accessible as in Europe.
A major problem in Nigeria is the erratic nature of power supply. Ryan air will have to invest in alternative sources of power like generating plants for their operations.
Acquiring the local airline will require a large amount of financial resources; this is not likely to be a problem as Ryan air has a strong financial base. Ryan air will need to perform due diligence to determine existing liabilities the acquired airline owns. They also need to assess the current infrastructure owned by the airline e.g. the type of fleet of airlines (to see if they conform to the fleet of airlines Ryan air currently runs). Ryan air will need to train and possibly recruit needed human resources to meet their business objective.
Different frames will be required to achieve the each phase involved in achieving the market development strategy.
Phase 1: Feasibility study of the Nigerian and West African Market (include studying the various airlines and deciding on which one to acquire) – 1 year
Phase 2***: Initiating and Acquiring the chosen airline – 6 months
Phase 3: Recruiting and training man power – 1 year. Once the airline has been acquired, public awareness should be created for the proposed service while recruitment is going on. This will create primary demand stimulation.
Phase 4: Implementation, Control and Feedback: This phase will begin the launch of local and international flights by Ryan air. Feedback will be gotten from both customers and staff on gap between the expected service and the service delivered. This will enable Ryan air make adjustment in-line with their low-cost strategy.
NOTE: *** If Ryan air decides to acquire or build an airport, the period allocated to phase 2 will increase to about 1.5 years. They might also need to acquire additional licences to operate the airport services.
To put in context, game theory is a study of interaction. It means creating a business strategy such that knowledge of a company’s strengths and weaknesses are required but the strengths, weaknesses, intentions etc. of competitors and customers is kept in mind.
An understanding of the game theory is essential to create a powerful strategy as it deals with interaction in complex circumstances.
Value chain analysis
The value chain approach was developed by Michael Porter and it works as a value chain that helps in developing a sustainable competitive advantage for the company. According to this, all organizations have activities that form the value chain of the organization (like purchasing, manufacturing, marketing, distribution etc.) and in order to maximize value the value chain costs need to be minimized (Lynch).
This is a strategic tool presented as a matrix and focuses on a firm’s current and potential products and markets. These are: market penetration, product development, market development, and diversification.
It is a management tool that has four purposes (Kotler 2008):
– It labels products into categories like cash cow; dog, star and question marks
– It is useful in determining priorities within these products
– It helps in identifying an organisation’s cash generation options.
– Provides strategies to deal with product lines.
Low cost airline
Strategy clock is the brainchild of Cliff Bowman and is a suitable method to analyze a company’s competitive position in relation to its competitors. This model can be used to deal with the competitive advantages of companies in spite of any difficult periods it might have (Scholes and Johnson 2008).
Rituals and routines – are related with the everyday behaviour of people in the organisation.
Stories – talk about the culture of the organisation. They could also talk about the company’s heroes, past leaders, etc.
Symbols- may represent logos, language, any status symbol including a company car or an office with carpets may provide a visible reflection of the culture of that organisation.
Power structures- may include Directors and senior managers or groups of directors and senior managers having the most power, or being most influential.
Organisational structure- this includes the formal structure (like the organization chart) as well as the informal structure that may reflect power structures and have an impact on influencing core values in a company.
Control systems – comprise of the measurement and reward systems used in any company.
Ryanair Holdings plc
Condensed Consolidated Preliminary Balance Sheet as at March 31, 2009 measured in accordance with IFRS (unaudited)
At Mar 31,
At Mar 31,
Property, plant and equipment
Available for sale financial assets
Derivative financial instruments
Total non-current assets
Derivative financial instruments
Financial assets: cash >3months
Cash and cash equivalents
Total current assets
Accrued expenses and other liabilities
Current maturities of debt
Derivative financial instruments
Total current liabilities
Derivative financial instruments
Deferred income tax
Non-current maturities of debt
Total non-current liabilities
Issued share capital
Share premium account
Capital redemption reserve
Total liabilities and shareholders’equity
Michael O’Leary became CEO of Ryan air in 1994, further developing the low-cost business model of the organisation He has an abrasive management style, and also has been extravagantly outspoken in his public statements, sometimes resorting to personal attacks and foul language. One advantage of this controversial approach is the huge free publicity it generates: the comments are often made in the context of a new route launch, or special offer.