Strategic Planning In The Airline Industry Management Essay
Today we can see that low cost airlines have become a trend around the globe. Numerous airlines applied such strategy, some succeeded and some not. One of the main benefits that low cost airlines have over superior airlines is that there cost will not be to a point where they can create a yield at low fares in larger markets. One of the pioneers in Europe of such strategy of low cost and no-frill airline was Irish company Ryanair
1985 was the birth year of Ryanair, it employed only 57 and with one 15 seater turboprop plane they use to have flights from South of East Ireland to London-Gatwick airport they carried about 5000 passengers on one route (Harrison, 2002). 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 Air Lingus or British Airways high fare cartel on the Dublin-London route. Employees of Ryanair increase from 57 to 120 employees, and as they use to carry 5000 it increased to 82 000 passengers on two routes. Within next two years company hired 350 staff and there average maximum passengers increase up to 600 000 people, next two years in 1991 it reached 700 000 passengers.
The Macro-environment (PESTEL)
PESTEL analyses stand for Political, Economic, Social, Technological, Environmental and Legal. These are factors that affect the business in present and in the future.
Rise of route charge by the government
Upsurge in trade union density
New law was passed by government ” the law for carbon emission”
Due to terrorism attacks on airlines UK government put additional security measures
Nationalized carriers supported by French government
Dispute in Business deal from Airports and Airlines regulators bodies with Remain lead to of Ryanair being the legal eye of the government.
Government supports their own lost cost carriers because of nationality.
Rise in tourism
Rise growth rate in GDP (Bank 2006)
petroleum products and fuels ceiling high price
Unemployment rate slash down to 8.7% (NA, unemployment in Europe 2006)
Devaluation of US dollar
1.7% inflation rate of European Union’s (NA Euro Area Annual Inflation Down 2006)
Uncertainty of fuel and energy costs
Rise in older market
Corporate traveling growing
Fear of air traveling due to terrorist attack (09.11)
Increase in traveling life style (more and more people traveling now, it’s becoming common thing)
As the economy was increasing before credit crunch there was increase of interest to fly for a vacation which helped to Airline Industry
Company may fly more frequently if it costs them less
Comprehensive range of demographics of views can be attracted by low cost airlines
Technological development (High fuel efficiency, less noise pollution and lessening of carbon emission by the supplier Boing
Rise of Internet rivalry
Web sales/ services (online check in)
Low fuel consumption transport (airlines, cars, buses e.g.)
Noise level controls
Green House-carbon emissions
Charges of false advertisement (such in case of Ryanair related to secondary airports)
Favoring of company to state owned company
Safety of passengers and cabin crew
Increase of airport administering charges
2.2 The industry environment (PORTER)
Porter’s five forces consist of threat of entry, suppliers’ power, buyers’ power, substitutes and rivalry.
Threat of entry
A ruling was passed in Europe which removed barriers for different competitors to enter European airline business.
New competitor or newly established competitor established airlines on established airways lose money in different routes at start, therefore high capital required.
Also high capitals required in order to purchase or rent aircrafts, and cover all other costs.
European countries has many landing slots which were reserved or used by national carries, so due to scarcity of landing slots it act as barrier for entry for new and competitors Airways which in turn helped existing players to play for a long time in aviation Industry
Limited slot accessibility makes it challenging to find appropriate airports
Moderate threat of Entry for Ryanair
Switching cost is high, If Ryanair wants to switch from one supplier to another they have retrain there pilots and mechanics
There are two main aircraft suppliers Airbus and Boing. However there has been increase in aircraft parts suppliers which lead to fierce competition between Airbus and Boing.
In last decade there was rise and fall in oil price which has direct relation to fuel.
There are two types of Airports called as primary and secondary Airports.
Primary have greater power because high demand for such airport. Power of Airports increases as Air traffic increases. Whereas secondary airports have low power, because they depend on airlines.
Low-Medium power of suppliers for Ryanair
Millions of people in Europe who are willing to travel by air.
Power of travel agents have fallen due improvement in technology and now customers can purchase or oven check in online. Also some airlines such as Ryanair provide not only flight tickets but also various services such as hotels, car rentals, and travel insurance.
In low cost airline customers very price sensitive
For customer switching from one airline to another is simple and no costly
Strong power of buyers for Ryanair
There are ways of traveling such as train ways, buses, boat and cars. However they are not fast as airplays and can be used for long destinations
Very Low threat of Substitutes for Ryanair
Some competitors thinking of adding new feature to their services such as comfort and extra services for their premium customers or business class. Better destination routes for example usage of primary airports. (however this all costs extra)
Because of economic recession especially in United States rivalry in European increased.
Various Merges and Acquisitions (Air France-KLM)
Some airlines using discounts and special promotion to attract customers and create brand loyalty.
Cost advantages can be easily copied, hard to have competitive advantage
As we know Ryanair and Easy jet hold most of market which around 80% for low fares however these two companies never faced face to face they usually flight to deferent routes, but if they go to same rotes have rivalry could be seen (price war) because there services do not differ at all.
Medium High threat of Rivalry
2.3 SWOT analyses
Following graph illustrates Ryanair’s strength and weakness and industry opportunities and threats.
Resources and Capabilities
Resources and capabilities assist the company for achieving competitive advantage. Although the market and environment create outside limitations and forces, a firm’s reaction over resource distribution and capability development become a foundation of competitive advantage. Resources can be tangible and intangible assets that firm may implement into its strategies. Capability is how firm uses its resources in order to have competitive advantage. For Airline Industry (especially Ryanair) it can be:
Simples processes (no frills)
Concentrating on specific market segment
Ground-breaking approaches on price cutting
Speedy turnaround time
Coming back to Ryanair, there resources are:
Human Resource- the company employees 2700 people
Intellectual Capital – skills, abilities, skills, talents and knowledge
Financial Resources -Ryan Family, shareholders, investors and creditors
Physical Resources – aircraft fleet, headquarter, secondary airports
Following graph shows Ryanair Resources
Following Graph presents Ryanair Capabilities
Sustainable Competitive Advantage
Even today Ryanair is market leave for low cost airline in Europe. They manage to have lowest price even though the existence of other low cost airlines in Europe. Its ability to drive down costs to keep low fares while it stands lucrative gives them competitive advantage over there competitors. As stated Michael O’Leary “Any fool can sell low airfares and lose money. The difficult bit is to sell the lowest airfares and make profits”
Aircraft commonality: Ryanair use Boeing 737 aircraft most common aircraft used in the market, due such reason they can easily cut on costs in getting replacements and maintenance services for this aircrafts.
Third party introduction: Ryanair contracts out its ticketing, baggage handling, aircraft handing and other services to other companies who specifically specialize on such areas. In such was they can gain competitive advantages, also by making multi-year contracts with those third parties in order no expose to rise of prices.
Cost of Marketing: Ryanair amended its rate, commissions to travel agents in order to reduce marking costs. They also use radio, television, newspaper and their own website to advertise themselves (Ryanair website is top five recognized name in Google)
Route Policy and Airport handing costs: each airline have to pay airport handling fees such as: passenger loading fees, aircraft parking fees, noise surcharges and landing fees. In order to save on these costs Ryanair uses secondary airports where these costs are much lower and easier negotiable. For example Ryanair uses Frankfurt Hahn, 123 kilometers from Frankfurt, Torp, 100 kilometers from Oslo and Charleroi, 60 kilometers from Brussels.
Productivity and employee cost: Ryanair uses performance related pay structure as most companies do now. This strategy may benefit both company and employees. In this structure employees can earn additional pay or remuneration base on their performance. So better they work more they paid.
Ryanair’s Cost efficiency strategies
Cost reduction Strategy
In order to have competitive advantage Ryanair uses “cost-reduction” strategy this consists of five major areas (in Aviation industry):
Contracting out services
Manageable staff costs productivity and managed marking costs
Economies of scare:
Ryanair achieved economics of scare from start until end of its function process same as any other low cost airline there market aiming to achieve. The have reduced the half point in time of airlifts in airports and they have resourcefully used their staff. They also have great deals from Boing during bulk purchases.
Ryanair uses secondary airports in order to avoid high prices and air traffic, which reduces costs and time, crucial aspects of low cost airlines.
Texas based functioning “South West Airlines” is benchmarking of Ryanair
In addition to low price flight Ryanair also offers different subsidiary services and employments in various activities associated with its “middle air customer’s service”. They offer travel insurance, accommodations, car rentals all necessary things that required for a trip. Ryanair believes that thanks to internet this services become easier to be sold online and this lead to increase of sale, which lead to dropping costs per unit basis. By avoiding primary airports they manage to keep their costs very low so as there prices. So as non -flight instinctive services, in-flight public sale of beverages, food and suppliers and internet-related services.
The strategic situation
Ryanair cost leader in European market for low cost airlines, they have numbers of rankings such as:
No.1 for passenger traffic- over 23m for 2004 – overtaking Easyjet.
No.1 for passenger growth- 50% + this year
No.1 for European routes (149) and bases (11)
No.1 for customer service delivery- punctuality, flight completion and fewest lost baggage
Ryanair’s set up its aim as being leader in the low-fares market in Europe. Their aim to offer cheapest fair and increase passenger traffic, by having large amount of customers at lower price profit may rise even though price be so cheap. Their aim to offer low fares that generate increased passenger traffic. A nonstop focus on cost control and functional efficiencies is a dynamic amount of the Ryanair way of doing things. Followings are key strategy elements of Ryanair: choice of roots, low operating costs, low fares, frequent point to point flights on short haul routes, personal expenses, customer service costs, aircraft equipment costs, airport access fees, focused criteria for growth and maximizing of website.
Porter’s Generic Strategy
Porter’s generic strategy is one the tools that can be used to find out position of the company in the marketplace. By using this tool we may find out position of Ryanair in the marketplace that’s its operating. A company positions itself by leveraging its strengths. Aim of each organisation to be recognized in the business area (except charity organizations and no profitable organizations), with such aim, these organizations try to identify there position in the marketplace by using Porter’s generic strategies that enhances their competitiveness. Business may choice one of the five different generic strategies: cost leadership, differentiation, focused cost leadership and integrated cost leadership/differentiation. Each of these generic strategies assists particular company to locate and use competitive advantage within specific competitive score.”By applying these strengths, three generic strategies are resulted: cost leadership, differentiation and focus”. Cost leadership, differentiation strategy and focused differentiation strategy can be used by a company.
Cost Leadership Strategy – business categorizing and handling its value-adding activities in order to have lowest cost of the product in the market that it’s operating. Cost gain might be because of product quality, design or the services that comes with it.
Differentiation Strategy – is about that seller’s product is superior to other competitors products in that specific market. This might be because product may have uniqueness that other products that offer by other competitors do not have or the service that that company provides with specific product, for such differentiation company may charge its customers premium price for that differentiated product. But there is a risk in this strategy; the risk is that differentiated product may be easily imitated by other competitors or customers tastes may change.
Focus-Differentiation Strategy – aim of this strategy is to target specific segment of the market for a product, and do not target many markets or entire market. The best to use this strategy is to dosing and exploit product specifically for particular segment in the market. However there is risk of imitation and changes in the targeted segment.
Ryanair strategy was combination of all three strategies. At start company focused on a narrow customer segment (Irish and UK citizens who didn’t wanted to fly by brank airlines). Also they offered the lowest cost of fare in airline industry in Europe. Last but not lease they were first who started low fare no frills airline in Europe before competitors imitated there differentiation.
Aim of Ryanair is to provide low fares and no frills service in order to stimulate demand. Initially they did not planned to have lowest price, but as they expended to Europe they had to focus on critical success factors to survive and succeed in such greater market from their started segment. Today Ryanair considered as cost leader, they have large passenger volume at the same time they have lowest fares in their own market.
Originally when Ryanair was born in 1985, they delivered listed passenger airline services among Ireland and the UK; however it has reformed itself and moved from a full service conventional airline to the first European low fares, no frills carrier. Before they shifted towards such strategy in late 90th Ryanair faced some trouble and had to dispose of five chief executives, recoding losses of IRÂ£20 Million even though passenger volume increased. In order to survive Ryanair needed some innovative strategy therefore new team was created, headed by Michael O’Leary. This new team especially Michael O’Leary decided to redesign the company and soon they become first low fare no frills airline in Europe, following step of successful American Southwest Airlines.
By using Porters generic strategy it was hard to define which strategy Ryanair using, it located itself somewhere between cost leader and a focuses as they had lowest cost and focused product and segment, but it can be said that it is more focused strategy. As it was stated before each strategy has its own risks, and this strategy which is used by Ryanair may have risk: being that the niche can get saturated and competitors assault the segment that they operating currently. When Ryanair become first low fare no frill airline in Europe it did not had any competitors, so they were easily and without fear experimenting with their strategies, trying and mixing focus and cost leadership and deciding which one of them they want most. However being the only one in the market did not lasted much, soon new and first competitors entered Ryanair’s segment. Which met that Ryanair urgently needed to define their strategy. So Michael O’Leary decided to stay with cost leadership strategy (in which they succeeded in 1997, Ryanair was floated on the Dublin Stock Exchange and on NASDAQ)
Long Term Vision
Ryanair have one the highest amount of routes in low fare European airline market and outperform every other carrier on that sector even in not low fare sector. They also seek to endorse a high level of progression. Ryanair’s strategy have been assisting them to become cost leader in the low fare market, but how long this strategy will help them to have competitive advantage, what will have in the future? Will this strategy work and can they have competitive advantage? From USA market of low fare airlines it was seen that there can be only one or two major players (southwest Airlines have approximately 50% of market share) in specific area, same as in Europe two major’s Ryanair and easy Jet (Ryanair and Easy Jet have 88% of market share, and 12% other minor players). But there is no guarantee for being always market leader, one day Easy Jet may easily takeover Ryanair market position and be cost leader in there market they operating currently. However there is big gap between low-cost airline within air industry in European and USA. In European air industry, a low-cost airline represents only 7% of total air industry, far less than 25% of their American counterparts. So there is large potential for future growth within European for Low-fare airlines in air industry.
Growth of Low-Fare industry within Europe
It is been predicted that within five and ten years low fare7% low fare airline industry representation will grow up to 14%, which is about 1.4% per year (which is low number). Fast pace at which the industry has been developing, assisted Ryanair to be triumph. However now the market they have been operating will no longer be growing so fast in upcoming future. Therefore it is necessary for Aryan to develop in order to tolerate their performance. There are some options there are available:
Ryanair should increase the frequency of Existing Routes
At the moment Ryanair losing customers who demand for more flexible schedule, they losing because they have only 3.88 flights per day, which is considered very low number compare to traditional carries and Easy Jet. Therefore they must increase the frequency of Existing routes, in order to regain lost customers, and steal customers from Easy jet and traditional carriers.
Open new routes in Europe.
At the moment Ryanair operating in many routes, it might be good strategy to increase number of routes and therefore frequency. They may open new routes that they are not operating yet. It may be that routes where the rivalry is a more costly traditional carrier, therefore by offering cheaper price (with no frills) they may easily attract new customers
Improve mainland functioning areas
By looking other destination that they (Ryanair) does not operating they should not forget about rotes that they already operating. Although they already operating in most countries of Europe there is still demand for some flights.
Expand into North Africa
Interests of tourists and business have been rising towards North Africa. At the moment SN airlines are major airline that provides with flights to North Africa from Brussels, however it is not low-cost airline or traditional carrier. Therefore Ryanair may easily enter and offer low cost flight to North Africa and may easily gain market share.
Expand into Eastern Europe
This area of European becoming more popular by tourists and business travel, and still growing popularity. However there are only low numbers of low-fare airlines that provide flight to there, Airlines such as Sky Europe. However there are a lot of routes that are not reveled yet and have large potential. And it is good strategy for Ryanair to enter those markets first and be market leader.
Gaining Market Share from Charter Flights
Ryanair may try to gain market share from charter flights, because charter market represents 25% of overall European air traffic, which is very high percentage. Today’s modern world educated most European citizens with internet and online usage, this comes perfectly for Ryanair (top five website in Google) to use their website as resource. More and more people using internet to purchase online therefore travel agents becoming no longer popular. Currently Ryanair offers some packing holidays, but by increasing those package holidays they may gain some market share form charter flights.
They also may continue promoting there website in order to pursued customer to by online, making them save on cost of call centers and no agents strategy.
More cost cuts
As we know Ryanair is cost leader in low fare market in airline Industry in European, However there is always gap to cut more cost, therefore they could try to find where else to cut cost and not lose value and attitudes of customers towards them.
Strategic Decisions and Recommended strategy:
Ryanair should increase the frequency of Existing Routes
They may add three more extra plains to the existing plains and routes that they already have form London Stansted. Currently London Stansted airport already operating at its capacity therefore only three plains can be added there.
They also need to add four more plains from London Luton which they already have such route. London Luton airport provides positive substitute for those companies that seek to expand their London base
It would be good if they add ten more extra plains to Dublin Airport. At the moment Ryanair having some problems with local airport authorities (Aer Rianta) which already under discussion of dealing with this problems and improving there relationship. Therefore this expansion at this base is planned.
At last add extra 8 planes to the Spanish and Italian routes currently already operated in those markets, also few more planes to trend holiday destinations, this will allow them to rise there market share by taking from charter companies there market share.
Open New Routes in Europe
Even though Ryanair has already entered most countries if not all in Europe it is very difficult for them to find new market and more risky going outside European countries. As Ryanair stated they plan to add extra 25 new rotes within 10 years.
Improve mainland functioning areas
Within in last decade Ryanair went through rapid expansion, and got functioning bases around all Europe: Milan (Bergamo), Barcelona (Girona), Frankfurt (Hahn) and other popular business and tourism detestations, those areas also have popularity for future growth. Additional 25 plains can be added to these new areas in order to strengthen their position in this already operating area for over the coming years.
Enter into North Africa Market
Two routes will be set up in North America; each route will have four flights per day, so in total eight flights to North Africa per day. The frequency of flight to North America over the years will grow. New language may be added to the website of Ryanair in order to facilitate new customers.
Expand into Eastern Europe
This market can be served by three bases. Each of these bases will have 7 destinations which lead to total of 21 routes. Same as North African flights frequencies will rise over the years. But will lower margin compare to North Africa. New language may be added to the website of Ryanair in order to facilitate new customers.
Ryanair order 15 extra plains which will be deliver in 2010-2013 basically these coming years however they are unallocated yet. These planes may be allocated to new rotes or to existing rotes depending on the analyses that will be done by Ryanair. Maybe they enter new market. This plains maybe easily used for the strategies mentation before at point 1-5.
www.ryanair.com Ryanair official website
Ryanair Case study
Research done by Solvay Business School on Ryanair Plc.