The Competitive Strategy Of Ryanairs Business Commerce Essay

Ryanair is currently following a No-Frills strategy model where they offer the cheapest air fares. The tickets are cheap, but for almost every other service you have to pay high surcharges. But how much are people willing to give up for a low price? Can Michael O’Leary continue with charging more for extra services in order to keep their ticket fares the lowest? Is Ryanair’s competitive strategy sustainable?

The strategy of Ryanair is to firmly establish itself as Europe’s leading low-fares scheduled passenger airline through continued improvements and expanded offerings of its low-faresservice. Ryanair aims to offer low fares that generate increased passenger traffic while maintaining a continuous focus on cost-containment and operating efficiencies.

First the strategy is analysed using the Porter’s Generic strategy model and Bowman’s strategy clock. To analyse the forces that influence their strategy Porter’s five forces model is used. Several articles are added to analyse the sustainability of their strategy.

Ryanair is an airline what has its strategy totally focused on cost leadership. To be more sustainable they have to increase their hedging to guarantee prices and costs. Next to this, the strategy of Ryanair has to be changed mainly due to their lack of bargaining power with their supplier Boeing. Their current strategy is based on rapid growth and expansion to new routes. Whenever they can’t grow larger they have to change their strategy into a more mature stage.

1.0 Executive summary 3

2.0 Introduction 6

3.0 Problem 7

4.0 Strategy of Ryanair 7

4.1 Competitive advantage 7

4.2 Bowman’s Strategy clock 9

5.0 Ryanair growth 10

6.0 Porter’s Five forces model 10

6.1 New entrants 11

6.2 Bargaining Power of Suppliers 11

6.3 Bargaining Power of Customers 11

6.4 Threat of substitutes 12

6.5 Degree of rivalry 12

6.6 Ryanair Staff 12

7.0 Conclusion 14

8.0 Bibliography 15

9.0 Appendices 16

Appendix 1: Bowman’s Strategy clock 16

Appendix 2: Low-cost, but Ryanair is not family-friendly 17

Appendix 3: Pay-Toilets and the No-Frills Model: Ryanair CEO Defends it All 20

Appendix 4: RyanairHYPERLINK “#__RefHeading__115322_1286186180″‘HYPERLINK “#__RefHeading__115322_1286186180″s latest cut on costs: staff banned from charging phones 21

Appendix 5: RyanairHYPERLINK “#__RefHeading__115324_1286186180″‘HYPERLINK “#__RefHeading__115324_1286186180″s fuel fiasco forces new fare gamble 23

Appendix 6: Aer Lingus rejects Ryanair offer 25

Appendix 7: Ryanair HYPERLINK “#__RefHeading__115328_1286186180″‘HYPERLINK “#__RefHeading__115328_1286186180″to cut frills furtherHYPERLINK “#__RefHeading__115328_1286186180″‘ 27

Appendix 8: How far can Ryanair go? 29

Appendix 9: Ryanair to make passengers stand 32

Table of figures

2.0 Introduction

Ryanair is an airline with 232 aircrafts flying more than 1100 routes to 153 destinations in 26 countries. The airline has been established in 1985 by the Ryan family with a share capital of only £1,-. In the first years of business the family struggled to keep the company running. Michael O’Leary, which started as the financial controller of the business, suggested to let him try and redress the situation. By copying the Southwest Airlines low fares model, Ryanair became the first European low fares airline. During the last years it grew massively and now it is one of the most favourite airlines in the world, but how did they manage to become such an icon? (Ryanair.com, 2010)

This report will describe the competitive strategy of Ryanair and will discuss if their strategy is sustainable in the future or that another route has to be taken in order to keep up with the competition.

At last, a conclusion is given which will state how Ryanair will have to change in order to be sustainable in the future.

3.0 Problem

Ryanair is known for its No-Frills model with the cheapest air fares. The tickets are cheap, but for almost every other service you have to pay high surcharges. But how much are people willing to give up for a low price? Can Michael O’Leary continue with charging more for extra services in order to keep their ticket fares the lowest? Is Ryanair’s competitive strategy sustainable?

4.0 Strategy of Ryanair

The key elements of this strategy are:

Low fares

Industry-leading customer service

Frequent flights on short-haul routes

Low operating costs, addressing aircraft and equipment, personnel productivity, customer service costs and airport access fees

Taking advantage of the internet

Commitment to safety and quality maintenance

Enhancement of operating results through ancillary services

Focused criteria for growth.

(Ryanair.com, 2009)

4.1 Competitive advantage

Competitive advantage is an advantage over competitors gained by offering customers greater value, either by means of lower prices or by providing greater benefits that could justify higher prices. The competitive strategy of Ryanair aims to establish a profitable and sustainable position against the forces that determine industry competition.

There are two sources of competitive advantage. It depends on the product and the strategy of the enterprise which one of the two needs to be used.

Cost advantage for similar products at a lower cost

Differentiation advantage for a unique product with a price premium

Michael E. Porter recognised three generic strategies where the source of competitive advantage is compared with the competitive scope. The competitive scope is divided into two target groups. The first one is the broad target or the industry -wide target and the other group is the narrow target or the single segment target. With a narrow target the organisation is using a focused strategy to attract customers in different segments within the industry in different ways.

Figure : Porter’s Generic Strategies (Porter, 1985)

The figure shows how the competitive advantage is divided over the industry as a whole or over the industry segments.

Cost leadership doesn’t has to mean that they also apply the lowest price, but Ryanair operates a policy that it will offer the lowest fares available from any carrier. If a competitor tries to undercut their prices, Ryaniar will try to match their prices.

Ryanair has a cost leadership but also uses this for profit maximisation and to strengthen their strategic position. Cost leadership is a competitive advantage which allows Ryanair to push prices down and to amplify the fiscal pain on higher cost competitors. Ryanair is especially known for its price competition. They started with the fierce competition in 1986 by offering tickets half of the price of tickets from British Airways and Aerlingus on the London-Dublin route.

(ryanair.com, 2010)

Ryanair uses price as a big differentiator and it compensates for the fact that they are flying from secondary airports to secondary airports which are slightly further away from the main city airports. Furthermore, Ryanair differentiates itself with its customer service, they are regarded as being 100% upfront with their customer service. With the customer service is meant the punctuality, fewer cancellations, lost bags and complaints, and not the friendly treatment of staff. Also, they outsource many of their operational services to keep their price low.

4.2 Bowman’s Strategy clock

The strategy clock is based on the work of Cliff Bowman. He designed a kind of clock with eight different types of strategies. It sets the price against the perceived added value. A firm is than able to analyse their competitive position in contrast with the competitive position of their direct competitors. In appendix 1, more information is provided concerning the strategy clock.

Figure : Bowman’s strategy clock

(Marketingteacher.com, 2010)

In the strategy clock, Ryanair is seen as low price for no frills, number 1. When flying with Ryanair the tickets are cheap, but they have surcharges on whatever extra you can think of. First of all on too-heavy luggage, extra bags and they really encourage you to use internet check-in. This is not all, Ryanair CEO Michael O’Leary is expanding his No Frills-model by charging for toilet use. He said:

“Most passengers – the ‘discretionary toilet visitors,’ as he calls them – would eventually forgo in-flight bathroom use altogether, Which is good, because he would also like to reduce the number of bathrooms per plane, to one.”

After the pay-toilets there is expected that Ryanair will come up with standing room only on planes. This will allow Ryanair to transfer more people on a single flight. (farecompare.com, 2009)

Ryanair is totally focused on reducing costs, but it is not really sure if they keep an eye on the service in the planes. The latest planes that Ryanair has ordered have been delivered with vinyl seats that do not recline, no seat-back pockets, safety cards stuck on the back of the seats and the life vests stowed overhead instead of underneath the seat. This allows Ryanair to save on aircraft costs and faster cleaning and safety checks during the short turnaround times. Ryanair even wanted to order their planes without window shades, but due to legal restrictions it was cancelled.

Other ideas that were presented by Ryanair to cut costs are a fat-tax for overweight passengers and passengers carrying their own bags to the airplane. Most of the time, these ideas are generated for free publicity. (News.bbc.co.uk, 2004)

5.0 Ryanair growth

Ryanair has grown rapidly in the last years, passenger growth has been 15% on average annually. The latest results are for the first half 2010, where Ryanair has its profits up by 70 percent, passenger numbers up by 15 percent and fares own by 17 percent. Ryanair stated it expects to drop prices by 20 % on average for the coming two quarters, which will result in losses in both quarters.

Figure 3 shows the profit after tax for Ryanair in the past 5 years. In 2009 a dip in profit is observable, a reason for this is the global financial crisis with oil prices almost 60 percent higher than the year before.

Figure : Profit after tax Ryanair

(Centre for Asia Pacific Aviation, 2009)

6.0 Porter’s Five forces model

One of the best ways to investigate if the strategy of Ryanair is sustainable in the future is to see how the different forces have influence on Ryanair. The Porter’s five forces model describes how strong Ryanair is in the Low Cost Carrier (LCC) industry.

6.1 New entrants

There are some barriers to enter the Low Cost Carrier industry. A high capital investment is needed and new entrants will find immediate competition when entering on an existing LCC route. As a new airline you need to acquire a low cost base and the restricted slot availability makes it difficult to find suitable airports.

There are some barriers to enter, but still there are quite a lot of low cost competitors entering the market each year. Many of the larger airlines have opted to launch their own no-frills airline. Most of the airlines who have done this have sold their no-frills airline to Ryanair.

6.2 Bargaining Power of Suppliers

Ryanair orders its planes at Boeing which is its main supplier. Boeing has a lot of bargaining power as there are only two main suppliers of planes, Boeing and Airbus. A change to the other supplier would have high costs as all mechanics and pilots would have to be retrained.

Ryanair is trying to get the cheapest deals when ordering their planes. The last negotiation round with Boeing failed, because they could not agree on the conditions of the deal. New planes will arrive until 2012 and growth and expansion to new routes is possible until that date. After that Ryanair will change its strategy, decrease its growth and eventually it will return more profits to their shareholders. This will definitely affect the future of Ryanair.

The price of aviation fuel is closely related to the oil price. Ryanair is reducing this risk by hedging. Still, this has a large influence on the net profits. In 2008 the profits were less mainly due to an increase of almost 60 percent in oil prices. (independent.ie, 2008)

Next to these suppliers, Ryanair also has to deal with the airports. The regional airports are small and are largely dependent on the airlines. The bigger airports, which Ryanair is avoiding, do have a greater bargaining power as there are more airlines willing to leave from these sides.

6.3 Bargaining Power of Customers

The customers for Ryanair are very price sensitive. It is very easy for them to change to another airline as most of the people book their tickets through the internet. Among the low cost carriers there is almost no loyalty to any airline, these people are just looking for the lowest price. Ryanair is in this way very dependent on their customer and don’t have much influence on them.

The customer service of Ryanair, concerning punctuality, lost bags, fewer cancellations and less complaints is 100% upfront when compared to their competitors. This could be a thing where people care about and may become loyal to the airline. On the other hand, the cabin crew of Ryanair is not so friendly. Ryanair has to increase the friendliness of their staff in order to get more loyal customers.

(thepost.ie,2006)

6.4 Threat of substitutes

The customer shows no loyalty to a low cost carrier because this is mostly created through a differentiation strategy. There is also no close customer relationship to build some loyalty. Ryanair is flying short-haul routes in Europe where you can also go to by train, ferries, cars and busses.

6.5 Degree of rivalry

The market where Ryanair is in is highly competitive. Most cost advantages can easily be copied immediately. There is not a lot of difference between services, price is the main differentiator. At the moment, there is a low level of competitiveness as the two major airlines (Ryanair and Easyjet) have avoided direct competition by choosing different routes. On the other hand, as soon as any other player decides to compete directly with Ryanair there will be heavy pressure on prices, margins and profitability.

Ryanair is trying to keep a large market share by buying up smaller airlines who might cause a threat as a competitor. Ryanair has already made an offer twice for a takeover of Aer Lingus, but the Irish government is not willing to sell it. (news.bbc.co.uk, 2008)

6.6 Ryanair Staff

The porter’s five forces model sometimes contains another force. Staff can be seen as another influence and the sixth force that can influence the sustainability of Ryanair. The grievance among its employees is rising, as they think they don’t receive the wages they deserve for the long work they put in. Staff in workplaces with a union and a collective agreement gets better pay and conditions, and better income. Easyjet, for example, has a better collective agreement and staff gets a better pay.

One of the things that staff banned for was the charging of their mobile phones at work. This will save Ryanair a £28.60 on a yearly basis. A Ryanair spokesman said: “It’s all just general cost control, which is very important to us. It’s the same as taking out reclinable seats and head covers on our planes.” (guardian.co.uk, 2005)

The high turnover of staff is especially among the junior pilots and cabin crew. Staff are expected to pay for their own uniform, crew meals and training courses. It requires staff to pay as much as £2.700,- upfront for training.

Ryanair might need a Union in order to reduce the high turnover of staff they have at the moment. This could also increase the image of the company, which might return in higher profits. There are more no-frills airlines, but none of them have such a high turnover of staff as Ryanair. In order to be sustainable in the future they need to decrease the grievance of staff, because only with low prices there is no future.

7.0 Conclusion

Ryanair is an airline what has its strategy totally focused on cost leadership. Michael O’Leary is coming up with different kind of new things that can save them costs. The airline is very sensitive to the changes in charges what makes it difficult to predict profits. To be more sustainable they have to increase their hedging to guarantee prices and costs. The mistake they made with the oil price is accepted only once by the shareholders.

The strategy of Ryanair has to be changed mainly due to their lack of bargaining power with their supplier Boeing. They could not agree on a deal for new planes to be delivered after 2012. Their current strategy is based on rapid growth and expansion to new routes. Whenever they can’t grow larger they have to change their strategy into a more mature strategy. Profits will be returned to their shareholders instead of reinvestments. This offers the opportunity for other small airlines to grow and capture routes. It will certainly increase the competition for Ryanair.

In order to be sustainable in the future they will have to change their staff handling. They need a Union for their staff to achieve common working conditions. This will reduce the bargaining power of the employer’s side, but staff will be much happier. This will return in more friendly staff in the cabins of Ryanair planes and hopefully increase the image of poor service of Ryanair. At the moment they are prone to press and the slightest incident gets a lot of press coverage. To increase the amount of loyal customers, staff is important as well. They see service as an additional feature where Ryanair is not able to charge for. Customers are very price sensitive and there are no barriers to change to another operator.

Ryanair is an airline that is willing to operate solely and if there are direct competitors that can influence them they will try to take them over. In the future they might want to continue this. They are not able to get other planes after 2012 for a certain period, so for expansion mergers and acquisitions can be the outcome to keep growing.

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