Ryanair Strategic Capabilities
Last November 22nd, the low-cost airline Ryanair was making news once more after the announcement of a 30 traffic reduction on its flights departing from Budapest. The motive given as a reason by the CEO of the company Michael O’Leary is an increase in the airport charges (Eddy, 2012). This example of exacerbated cost-reduction obsession is far to be the first one for the company. Though leader of the European low-cost market, the yellow and blue airline keep on maintaining pressure on a forthright goal: being the most profitable possible. Other low-cost airlines follow similar cost-oriented models but still, Ryanair remains first in the competition. What makes its strategy different from other low-cost companies? How does the business manage to do his strategy?
In order to figure out how Ryanair builds its success and remain first on the market, we need to understand how the strategic environment of this market is organised and later used to put into action the company’s strategy itself.
In a first part, we will carry out an external analysis on Ryanair’s strategic environment and then in a second part we will evaluate the strategic capability of the company.
The first part aims at understanding the strategic environment in which Ryanair operates. We first have a look on the low-cost airline industry, its competitors and markets in order to understand the market-segmentation of the company. We will go deeper in this analyse through a PESTEL analysis.
The low-cost airline industry in Europe is based on offering an easy access to regular flights on point-to-point short and medium-haul airliner for very cheap prices and exempt of any complementary service usually offered (on-board meals, attributed seats and correspondence) (Gross, 2007).
The low-cost airline industry appeared in the US in 1971 after the open-skies liberalisation with the launch of Southwest and its three Boeings 737. In Europe, it was initially launched by Ryanair in the mid-1990 in Ireland and in England and then progressively developed in Europe followed by other companies (Doganis, 2006).
Based on Porter forces, there is positive force for businesses as the establishing costs for new entrants are very high and given security requirements, a lot of EU member states possess a blacklist of companies not meeting the safety sky policy. As a result, many airlines cannot trade in Europe and reinforce the position of airlines in the current market. The substitutes are mostly national; that is also positive force for the European industry (European Commission, 2012). However, the competitive rivalry is causing troubles and concentration tends to overwhelm, so the buyer power tends to increase and the supplier power to reduce.
Competitors and markets
In this expanding marketplace, the competitors can be divided in five sections: the market leading low-cost airlines, the major airlines, the operator airlines, the niche low-cost airlines and finally other indirect competitors.
The market leading low-cost airlines are respectively Ryanair and EasyJet; so this is most important low-cost competitor of Ryanair. Together, they represent in 2008 71% of the European low-cost market (Airfance corporate, 2008).
Then we have the major airlines; they have large resources and historically used to have a monopoly on their national market before the open-skies liberalization. These responded by developing their own low-cost airlines.
The tour operator airlines also created low-cost airlines relying on their massive customer network. For instance, MyTravel created in 2002 My TravelLite with a base in Birmingham or TUI with Germania Charters created Hapag Lloyd Express.
The niche low-cost airlines are competitors who appear on very specific markets. For instance NetJests airline was operating on long-haul airliner for European customers and now associated with Lufthansa to create Lufthansa Private Jet in 2005 or Elysair, an airline targeting business class customers.
Other indirect competitors are the train transport and other substitutes are a competitor. For certain some trips offered by low-cost airlines, the train transportation appears to be more interesting for customers when it takes lower time for comparable prices.
The market segmentation is the process of defining customers or potential customers in a market divided in groups or segments (McDonald, 2012). In Europe, the air traffic market for leisure and business is composed of about 20 low-cost companies (Burghhouwt, 2007). Ryanair is operational in the European airline market and leads the low-cost market. Its value proposition is clearly cost-oriented with the implementation of yield management and cost-reduction processes. The company targets leisure cost-sensitive travellers not willing to pay a lot to travel within Europe and also attempts to attract business travellers thanks to low prices and punctuality on flight arrivals (Gross, 2007).
PESTEL analysis is one of the tools “to help the organisation to detect and monitor weak signals in the hope of recognizing the discontinuities or fractures shaping the environment” (Henry, 2008). To study the factors that are beyond the control of companies, PESTEL analysis (or sometimes referred as STEEP or PEST analysis (Bensoussan & Fleisher, 2009)) is very popular and provides invaluable insights into the external environment that needs to be taken into account. Thus, using PESTEL analysis the external factors influencing Ryanair are emphasized below.
The airline industry is affected by myriad of factors. Political environment is very challenging and key factors are EU regulations, barriers by different countries in the form of higher taxes and landing charges and so on. The effect of political factors has always had its say on Ryanair. For instance, the flag carrier has been forced to let the controversial Air Lingus takeover bid go for the third time by European Commission recently (Ruddick, 2012). Since the company is international and bases its success on diversified low-cost routes in different European countries, it is very sensitive to political moves by the governments of these countries. To demonstrate, in 2007 the French government imposed French laws on foreign airlines having bases in France which was met with an outcry by Ryanair and it resorted to legal action (BBC News, 2007).
Economic factors are wide-ranging as well. Like other airline companies Ryanair is particularly sensitive to oil prices which it tries to hedge against. In addition to fluctuations in oil prices, weakened economic growth and most notably economic recessions should be taken seriously despite the fact that low-fare airlines are considered resilient (Forbes, 2009).
Among social factors the necessity of taking into consideration the needs of the ageing population (demographics), changing the advertising policy with regards to targeting the elderly should be considered as important since the average age of the population has increased (Shaw, 2011). Moreover, the preferences of people and perceptions they have of the company might affect the airline industry and Ryanair as well. Since Ryanair has received some negative publicity, the company should take perceptions seriously.
The Internet has been one of the major technological factors so far and Ryanair has utilised it effectively by for instance, preferring web-based check-in and offering some on-board entertainments. The acquisition of more cost-effective airplanes (Johnson, Whittington, & Scholes, 2011) is a result of technological advancements that Ryanair took advantage of and should continue doing so.
Environmental factors involve being responsible and environmentally-friendly. The company might be targeted by environmentalists if it fails to comply. An example of buying cost-effective airplanes is relevant here as well.
Last but not least, legal factors which mainly cover taxes levied on the company might be legal maximum on CO2, landing charges at different airports and so on. Legal factors are usually connected with political factors as well.
Strategic capability and appraisal of Ryanair
Now that we illustrated how the strategic environment of Ryanair is structured, we will focus in this second part on the strategic capability, business level and competitive appraisal of Ryanair. We can measure it with benchmarking, VRIN, SWOT, value chain and value network and finally activity mapping models.
Benchmarking is the process by which an organization compares there performances against companies present in the same sector of the industry or between similar services providers taking into account a set of performance indicators. There are various benchmarking indicators that are used by different companies today namely; Matrix technology, SWOT analysis, Graphs, Comparison tables, etc.
In the case of Ryanair, profit is what conveys the thorough achievement of the firm. Collections from additional sales are way more than any other international airline company, e.g. advertisement sales, on-board sales, etc. There is certain benchmark that Ryanair has set which makes it really difficult for its competitors to match up with. There are four of them, Landing on regional & secondary airports which propose lower landing fees, Airport cost per passenger is calculated, the weighted average number of full service carriers at the airports served, it has created a monopoly in budgeted airline industry (Mason & Morrison, 2009). All this components make this airline company (Ryanair) best-in-class benchmarking in Europe’s airline industry. Airlines offer a variety of products and services nowadays, e.g. rent a car, access to internet in the plane, etc. but these services aren’t really the core products and service of the flight. Ryanair, as a rule of thumb, is the benchmark if one is budget conscious and it also has the widest coverage. But sometimes British Airways could be cheaper when we factor in all the add-ons. Ryanair spent a lot of time with the Southwest Airlines to get the knowledge of developing a low cost airline (Calder 2002).
Information collected through a SWOT analysis describes the relationship between the organization now and where it wants to be in the future, therefore it is necessary in making improvement decisions. Strengths are attributes that the organization could use in order to make the best of the opportunities in the external environment. While weaknesses are considered the internal lack of attributes that an organization needs to perform in the external environment, especially if there were many threats that would reduce the organization’s performance (Gerson 2007).
Malighetti et al. (2009) stated that Ryanair adopted the low-cost business model in 1992 and was one of the first airlines to do so in Europe. Ever since, Ryanair has been a well recognized airline. Ryanair choose regional airports because their landing charges are cheaper and less congested than major airports such as Heathrow (Kangis and O’reilly, 2003). They also have only one kind of aircrafts, Boeing 737-200, on their fleet which minimises service costs and staff costs as it allows the crew to be able to fly any aircraft and therefore increase the staff productivity (Barrett, 1999). Ryanair has its own travel website which people use to book their tickets and that reduces the cost of having travel agents.
Although Ryanair is one of the leading airlines when it comes to being a low fare airline company which gives the company a little edge in the market, it also has certain drawbacks. One of the main concerns for the company is the usage of the secondary airports, which makes it difficult or unsatisfactory for certain customers because the distance from the main locations is generally far away. Ryanair has big Boeing aircrafts meaning high availability of seats, which might be a problem when flying to less popular destinations. Ryanair gained negative publicity in the press because of its indigent customer service whether at the airport or within the flight.
Ryanair has many opportunities to benefit from; the European Union enlargement could have a great effect on the business as there will be new destinations opened up. The economic circumstances could actually help Ryanair as people seek low fare flights to save money.
There are several threats that affect Ryanair’s strategy. Brophy and George (2003) focused on threats such as new competitors entering the industry and how it might lead to a decrease in returns for companies already in the market like Ryanair. They also mentioned the threat of substitutes. The most important substitute that threatens the airline is the rail service since it is more localized and more accessible especially in Europe. Another threat is the increasing change in fuel prices; Ryanair cannot predict or control these changes therefore if an unexpected increase occurred they must be ready to cover the increase in their expenses.
Value chain, value network and Activity Mapping
Activity Mapping details the activities within and around an organisation which together create a product or service and the Value Chain directs these activities towards a final product ( Johnson and Scholes, 2011). For a company such as Ryanair, these activities include such things as training staff, acquiring and maintaining a safe, working fleet of aircraft, as well as marketing the company product and the processing of sales and administrative information.
The methods of performing, managing and linking these activities, and others within Ryanair’s value chain, is the integral determinant of the value of the product which customers receive. In order to produce a trade mark high value product, low-cost air travel, Ryanair’s business strategy focuses on an intensely efficient deployment of assets, resources and competencies, (Ryanair Charter, 2012).
The overall, organisational competence of Ryanair contributes to the delivery of product value by ensuring proficiency in separate organisations and in the linking of activities (Johnson and Scholes, 2012). By working with a standardised fleet of the Boeing 737 Next Generation aircraft, Ryanair eliminate the need for staff training on multiple aircraft models. Cockpit crews are effectively able to fly any plane in the Ryanair fleet, and cabin crew to work in any plane. Staff are trained to be flexible- cabin crew work within the cabin to ‘tidy up’ in turn around periods, eliminating the need for specially contracted and cleaners. Back up inventories of plane parts are also standardized, and only one category of engineer is required to maintain the 275 plane fleet, each with a 189 person, standard class capacity, a total seat count of 48,573 at any one time. (Kangis and O’Reilly, 2003), (Ryanair.com, 2012).
Ryanair also works with a fairly small staff, for the 75,814,551 passengers transported in 2011, 8,438 staff were employed (Ryanair.com, 2012). Staff wages are paid in part on an activity based method, and cabin crew salary is subsidised from commission on duty free, in-flight sales. Incentivised activity based pay, which do comply with flight time legislation, allows employees certain control over their own work and pay.
Regarding secondary activities within the business, online activity is extremely high, and in even in 2005, nearly 80 % of bookings were taken online (O’Connel and Williams).
While this eliminates the need for staff working in call centres and on booking desks, the association of low fare airlines is that customer services are lost. In fact however, the flexibility of staff, efficiency of both flights, check in and the management directing operations, mean that Ryanair is the number one airline for customer service.
Effective logistical organisation regarding renting secondary airports, as well as quick turn around periods between flights, and equality between passengers are all examples of efficiently and competently run activities that contribute to the final low cost air fare product (Rivkin, 2000), (Casadesus-Masanell and Ricart, 2009).
This flexible approach to technology and human resource management indicates that Ryanair operate a Value network strategy, rather than a value chain. The components of their networks are extremely fluid, giving them a competitive advantage that is difficult to match without a lot of time spent on training and a bulk purchase of aircraft. These small unit like activities all contribute to the competitive advantage of Ryanair- they are different activities which all draw the business in the same cost cutting, high production volume direction, reinforcing the benefits of each other and creating a strong overall business strategy simultaneously.