Strategic Management Issues in Low Cost Airlines

Low cost airlines have been a trend nowadays anywhere in the world. There are many airlines that have adopted this strategy and have become more successful because of this. The low cost airlines have the advantage over the premium airlines due to the fact that they will never get their costs to a point where they can make a profit at low fares in bigger markets. Among these low cost airlines that are in existence nowadays is Ryan air. The Irish airline company Ryan air is the first low-cost, no-frills European airline to have any impact.

Ryan air started operations in July 1985, flying between Waterford in the southeast of Ireland and London’s Gatwick airport. Three brothers, Catlan, Declan and Shane Ryan were the founding shareholders of Ryan air, which was set up to offer low-cost no-frills services between Ireland and London. Now, Ryan air, with its rapid growth occupied a most sought position in its own field, being “Britain’s favourite airline”. Ryan air currently has a team of more than 7,000 people and expects to carry approximately 73 million passengers in fiscal year 2010/11.

1.3 Current Strategic Positions:

To evaluate any organisations strategic position certain factors have to be assessed. These include those below and also the environmental analysis which follows later in the report.

1.3.1 Market Segmentation:

Ryan air lay claim to their market segment by stating they were ‘Europe’s first no frills airline’, www.ryanair.com. Ryanair have made strategic decisions based on increasing their competitive edge, the main one becoming involved in attracting customers at both ends of their routes. Haberberg and Rieple (2001), support this by showing that Ryanair’s key source of revenue from as far back as a decade ago has been in enticing passengers from France, Italy and Scandinavia. This has had the advantage of increasing their market share as well as the added bonus of creating a well recognised brand name across Europe.

1.3.2 Prescriptive, Emergent or Something Unique?

‘A prescriptive corporate strategy is one where the objective has been defined in advance and the main elements have been developed before the strategy commences….an emergent corporate strategy is one whose final objective is unclear and whose elements are developed during the course of its life, as the strategy proceeds’. Lynch (2000)

As is shown above by Lynch (2000) the two recognised strategy models are extremely different, however these are the two dominant strategy approaches as stated by Dennis Foster in his lecture on Managing Strategic Change (2006).

It is safe to recognise straight away that Ryanair does not sit uniformly with either strategy. However certain aspects or functions could certainly adhere to one or the other as these are sections that make up the carrier as a whole and for an organisation of Ryanair’s size different parts would have different aims and objectives underneath a main umbrella strategy for the organisation.

For example any planning undertaken by Ryanair for new routes or planes would follow the prescriptive model as the objective would have been defined beforehand and elements such as finance will have had to have been agreed before any purchasing goes ahead.

On the other hand emergent strategies may be in place for things like training and development where elements can be discovered along the way for example if an issue arose where staff needed more health and safety training then the training programme could be redirected.

Ryanair, as already stated, follows neither strategic approach religiously and possesses a strategy unique to their organisation, which has identified their needs and objectives. However their approach to strategic management isn’t unique in itself as the majority of organisations will tailor strategies to suit their business’ own individuality.

1.3.3 Competitive Advantages:

Their main competitors are carriers including Easy Jet, BMIbaby, Fly Be and Thomson Fly all of who try to attract potential customers by emphasising their low cost tickets. This makes the competition in this market segment fierce as in order to offer the lowest fares, costs must also be kept to a minimum.

Ryanair 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 remains profitable. This is done through:

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.

Contracting Out of Services

Other than Dublin Airport where the firm maintains its staff and services, Ryanair 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 party service outsourcing also limits Ryanair’s direct exposure to employee relations responsibilities and potential disputes.

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.

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.

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.

2.0 External analysis:

For success within the airline industry, an awareness of the external environment is essential. This section aims to highlight the position of the industry, in particular looking at competitors and assessing Ryan’s capability to meet current and future challenges.

2.1 PESTLE Analysis

In Pestle analysis we investigate macro external factors for companies, which are very important for identify their strategies. There are 6-core elements of Pestle analysis. These are Political, Economical, Social, Technological, Legal and Environmental options. We can examine these factors in the airline industry to realize Ryanair’s future external threats and opportunities.

PESTEL Factor

Key Points

Implications for RYAN

Political

Heavy regulation (AEA, 2009).

Compliance is essential if Ryan wants to continue operations.

Increased security due to past terrorist threats (DFT, 2008).

Sufficient security measures should be in place to ensure consumer confidence and competitive advantage is maintained.

Economic

Global economic crisis:World growth is projected to just over 2 percent in 2009 (IMF, 2008). Pound weakens especially against the Euro.

Possible reduction in the amount of business travel as companies are cutting costs and using alternative means of communication such as teleconferencing.

Oil prices: declined by 50 % since their peak retreating to 2007 levels. Decline in fuel price = strengthening of the dollar (IMF, 2008)

Fluctuations in oil prices and exchange rates will directly affect Ryan’s cost base.

UK consumer spending saw its sharpest decline for 13 years between July and September 2008 (Channel 4, 2008).

More intense competition

Social

The UK has an aging population (see appendix 3) (National Statistics Online, 2008).

Potential opportunity for growth as older generations havemore time to spend on leisure activities such as international travel.

Increasing unemployment (Kollewe and Sager, 2008).

Increased bargaining power as an employer.

Technological

A recent survey revealed that 34% of online consumers plan to use price-comparison sites more in 2009 (NMA, 2009).

Increased consumer awareness and therefore bargaining power.

Online booking services and check-in is becoming increasingly used by the airline industry.

Ryan must ensure that they remain up to date with these technological advances whilst avoiding becoming overly reliant, as this may isolate certain consumer markets (i.e the elderly) who don’t feel comfortable using such technology.

Environmental/Ethical

Noise pollution controls,and energy consumption controls (DFT, 2008).

New legislation (e.g. Climate Change Bill) enforcing tighter environmental regulation may increase operational costs each year.

Limited land and for growing airports – Expansion is difficult at Heathrow as it would result in a loss in the London’s Green belt area. (BBC News 2006)

Limited capacity=>utilisation of capacity.

Consumers are becoming increasingly ‘green’ and more aware of the environmental impact of their actions.

Failure to adopt an integrated environmental strategy could lead to a detrimental effect on the Ryan’s reputation and income.

Cancellations of flights and loss of baggage (Channel 4, 2008).

Such ethical issues could have a detrimental effect on reputation if left unresolved.

Legal

Recognition of trade unions and industrial action e.g. Cabin Crew strikes.

Good employee relations are essential if Ryan wants to avoid industrial action and interrupted operations.

Open Skies Agreement (AEA, 2009)

Opportunity for Ryan and its competitors to freely transport aircraft between the EU and US.

There is a cruel competition in airline industry. Especially, after credit crunch in 2008 the competition has become crueler. Companies have to fight with recession also and in this economic situation we can see lots of threats in sector. If you reverse these threats to the opportunities you will be one step further in the competition. Ryanair is the most suitable company to gain advantages from today’s world. With this assignment we answered the questions, which frequently asking for their future strategy and their position’s of the future competition. That’s why; they have started to corporate social responsibilities.

2.2 Porter’s Five Forces

Before starting to write analysis of the Ryanair based on Porter’s five forces I should write some special information about Ryanair or all low cost airlines. The main characteristics of these companies are designed for reducing costs. Because it is obvious that the most competitive – maybe just one- side of them is their low fares.

For Ryanair, their aircrafts seat density is very high and they prefer just one aircraft types (Boeing 737-800). All of their bookings are via Internet so they earn huge amount of money because of no sales commissions. They haven’t got any frills such as free food or haven’t got any air-mile promotions. They always prefer secondary airports.

Actually these all I mentioned above are had mentioned at their S.W.O.T. analysis in strengths part. In my opinion we can use every single detail from S.W.O.T. analysis of Ryanair when we are writing about Porter’s Five Forces analysis of it.

This analysis has five-core element. These are

1. Bargaining Power of Suppliers

2. New Entrants

3. Threat of Substitutes

4. Competitive Rivalry

5. Bargaining Power of Customers

Bargaining Power of Customers

Ryanair customers are highly price sensitive. It is very easy to change their airline and it is not related to high cost. In this century customer’s knowledge about the cost of service is high and there is no customer loyalty for Ryanair. Even though there is no customer loyalty, bargaining power of customers is low. Ryanair is the cheapest airline for all Europe destinations and customers are -especially in recession times- highly price sensitive.

New Entrants

It is very hard to be new in airline industry. There are lots of barriers to entry. You should take the flight authorizations. The capital that you will invest in this sector is very high. It is also hard to take a place current competition and also hard to find suitable airports for your flights. In my opinion in short time period there will not be any threats of new entrants against Ryanair even though some existing companies are changing their strategy and reducing their ticket price (Lufthansa).

Threat of Substitutes

As I mentioned before there is not any brand loyalty of customers and Ryanair preferred customer relationship is “not-close relationship”. If their customers find better way to travel they will not feel any hesitation to chose it. So the threat of direct and indirect substitutes is very high and the most important point is there are no switching costs for the customers.

Competitive Rivalry

The market is highly competitive. Most of Ryanair’s cost advantages can be copied immediately. In Europe it seems like there is an agreement between Ryanair and Easyjet about not to compete head to head. However if any company does decide to compete on the same basis as Ryanair it will be highly crucial for Ryanair. There will be heavy pressure on prices, margins, and hence on profitability.

2.3 Bowman’s Strategy Clock

Bowman created his “Strategy Clock” in “The Essence of Competitive Strategy” book. With this strategic model he illustrates company’s competitive position in comparison with their rivals. For him the real advantage of companies being achieved cost and differentiation. His strategy clock has 8 options.

First two options are about the low price. First option is totally low cost low added value but the second option totally about to be a “cost leader” without caring its value. Second option has the risk of price war and low margin.

Third option is a hybrid option. Mainly the low cost but not the lowest price. The most important difference between second and the third option is in third option reinvestment in differentiation.

Fourth option is about differentiation. For option five the biggest difference is the differentiation is highly focused. It perceived added value to a ‘particular segment’ warranting a premium price.

Rests of the options are failure options. At option six the price is increased but the value is standard. Option seven is worse than option six. In option seven you can see increased price with low values. It is only feasible in monopoly situation. Last option is option 8, which is the cause loss of market share. Because your low value has a standard price.

Ryanair had dramatic changes during last decade period time and this was flabbergasted its competitors. Their profitability rose within a short period of time. Their low-fares strategy without frills and punctuality in flight service helped their high profitability period and it brought a significant value on the growth.

The high level competition needs efficient strategy to gain advantages and at the same time high profit. In different times we can put Ryanair’s strategy in different options in Bowman’s Strategy Clock. But all of them can be placed between options 1 to 5. Their strategy never placed in failure part of Bowman’s clock. Mainly, in these days Ryanair place in the clock is between options 1-2, which is mainly about low price. We can easily realize Ryanair is the best example for this option. If they can secure their price and gives higher valued service they can easily take a place option three and they will be strongest company in the competition. In my opinion, hybrid strategy is the most preferable strategy in the clock that is why Virgin Airlines prefer this option. If Ryanair updates their lowest price strategy with a standard service they easily will be the strongest company in the competition.

3.0 SWOT Analysis:

Strengths

Ryanair has been known as Europe’s first low-cost, no-frills airline brand.This fact alone credits is the company’s strongest selling point. Ryanair started in year 1985 with only 57 staff members and with one 15-seater turboprop plane from the south of east of Ireland to London-Gatwick which carried 5000 passengers on one route. In 1986, inspired from the story of David and Goliath the company go after the big guys for a slice of the action and end up smashing the Aer Lingus or British Airways high fare cartel on the Dublin-London route. From therein, Ryanair’s lower fares offering increased their market share rapidly resulting to the establishment of low-cost subsidiaries of established airline companies such as British Airlines and KLM.

The ‘low-cost, no-frills’ strategy resulted to a rapid increase of customers and expansion of their operations, wherein the staff increased from mere 57 to 3, 400 staff members and almost 35 million passengers. In terms of operations, the EU air transport deregulation allowed the airline for the first time to open up new routes to Continental Europe with over 3 million passengers on 18 routes carried in 1997. Ryanair also launched services to Stockholm, Oslo, Paris and Brussels and took time out to float Ryanair Holdings plc on Dublin and NASDAQ Stock exchanges. The company was awarded as Airline of the Year in 1999 by the Irish Air Transport Users Committee. In 2001, while almost all traditional airline companies suffered from losses and stiff competition, Ryanair, being a low-cost airline became more than merely profitable by recording 26 percent in operating margins – results that the former only dreams

about. In June of the following year, Ryanair made a market capitalization amounting to 4.9 billion euro ($4.82 billion), breaking the records of 45 percent more than the mighty British Airways that has 20 times larger in terms of revenue.

Ryanair possesses the sophisticated and able technology that can cater to the fast changing global marketing management trends. It has core competence in its use of information technology that can support its management and marketing operations. Thus, adding to its innovations in service providing among the wide range of clientele. Its IT supports competent procurement of services (e.g. bookings and ticketing) in e-marketing or online aspect. After establishing its website in January 2000, it became one of the busiest sites in the country with 14 million impressions a month. The booking in their web accounts have increased to 94% which has probably has something to do with opening another 26 routes. In year 2003, the company is characterized by rapid expansion and the start the year by announcing that the company has ordered an additional 100 new Boeing 737-800 series aircraft to facilitate the rapid European growth plans. The company is named as the most popular airline on the web in 2004 by Google. The company has also passed out British Airways to become the UK’s favorite airline in United Kingdom and throughout Europe. In sum, Ryanair’s strengths rest on the company’s commitment to low fares, deep-seated management, and willingness to address managerial challenges and marketing trends (e.g. competition, expansion, and IT solutions).

Weaknesses

Despite of the increase of passengers, the company is not so good in managing cost that the company has lose its money. At the moment, there have been urgent and deliberate mechanisms that were implemented to address such weakness. Such cost reduction strategy relies on five main aspects like fleet commonality, contracting out services, airport charges and route policies, managed staff costs and productivity and managed marketing costs. Ryanair, in spite of its strategies has other problems that serve as weaknesses too. One of the problems is in terms of handling customers or target market. Reports say that Ryanair accumulates ‘hidden’ taxes and other fees, restricted customer services, and deceiving advertisements. In addition, another problem is assuring quality service. According to the result of poll conducted by BBC involving air travelers in 2003, 56 percent of respondents claimed that the airline caused them ‘the biggest headaches’ in terms of services and customers. Also, in 2007 Ireland’s Commission for Aviation Regulation recorded a total of 60 percent of all complaints accumulated by the commission. There has been significant number of bad publicity for the company, thus, creating a negative impression to the airline brand. The company is faced with different unsolved issues because of lack of strategic decision making in several areas of human resources particularly in relation to trade union policies.

Opportunities

With the management system of the company and the strengths that it has, Ryanair has bigger opportunities to still dominate and catch up with the competition in the European airline industry in terms of providing more quality service standard and at the same time preserving it low-cost no-frills strategy to its clients or even have an opportunity to be the number one airline company in the whole region after its eventual application of its proposed plans in the future. Another opportunity that can be attached to the company is it would gain more customers if they would be able to determine the latest trends in airline management and marketing to meet the demands of their target market. The continuous initiatives of the company in diversification of its revenue resources also open new opportunities to make the business become stronger to outgrow all its rival companies. Such opportunities will include e-business development by strategic alliances as well as suppliers, leveraging the company’s investment in the World Class Customer Satisfaction Systems, and other business opportunities in both non-core and core areas.

Threats

Operating in the most competitive marketplace especially European airline industry, Ryanair is faced with the inevitable threat of stiff competition. For a company to succeed in global competition there is a continuous plan to develop new products with higher quality than its competitors. New product and new business development must be highly effective and efficient, however that alone will not ensure its competitiveness. The expansion of its operations to other areas means adjusting to the trade policies and political problems of the locality. The dynamic needs and demands of customers served to be a challenge to the management. Furthermore, consumer behaviour and satisfaction with regards to the product/service procurement is also a risk. If the company will continue to be a vertically integrated corporation, the company may fail in terms of management ability. The division of the company may tend to have internal complexity. Additionally, fast paced technological advancement may be a threat to Ryanair as a whole. In terms of the competitors, the company should be able to provide unique and more technologically advanced services to be able to survive in the competition in the world airline industry.

Future Strategy and Recommendations

Mergers and Acquisitions

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. As Ryanair continues to grow it is expected that the company will acquire other companies such as Buzz, in order to improve its capabilities and acquire more competitive advantage.

Strategic Human Resource Management

Ryanair, in its commitment to low-cost airfare have 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 source 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.

Marketing Plan Strategies

Ryanair should has a detailed plan for its strategic moves in the market and be able to provide good customer services to the customers like by having discounted flights and value promotion to keep the competitive advantage at a stable mode within its competitors and will need to focus more on the core competencies that allow Ryanair to practically and wisely designs suitable airline operations within the bracket of their marketing network services in a market standard-based perspective. Ryanair need to be goal oriented and must not stop to rejuvenate and change their marketing plan strategies from time to time in order to re-invent the performance process upon the upgrading of rules and regulations mandated by the state. Ryanair is to overcome the lack of product differentiation and increase it that will have the ability to revive revenue generation.

Operational Effectiveness

It is then recommended that Ryanair should outsources as many non-core functions as possible that may abandon peripheral services such as catering or ground handling services and can be required to perform such activities as external specialist companies defined to be independent profit centers.

Recommendation

Based on above analysis, it is recommended that Ryanair consider the expansion in to haul markets – specially the transatlantic routes which accounts for more than 60% of world’s air travel. By moving in to this new market with its low fare strategy coupled with added service options the company can utilize its existing business with introducing complementary goods and services via its web site its also recommended as this will allow the company to further reduce its cost base per unit of customer.