Ryanair Business Strategy: Internal and External Analysis

Ryanair Business Strategy: Internal and External Analysis Ryanair:  Case Analysis Report Introduction Ryanair, established in 1985, is considered the main instigators of the â€Å"low cost â€Å" airline carriers, creating a new niche in a market previously dominated by former national airlines such as BA. The company has grown to a position where in 2005 it has 15 bases and 150 aircraft operating throughout Europe, carrying thirty million passengers (see figure 1), with a five year target to increase this to seventy million (Ryanair 2007). This position has been achieved by creating a â€Å"no-frills† approach on price (Pettigrew et al 2002), which gave it a competitive advantage over the established airlines (Porter 2004, p.207 and Kotler et al 2004, p.407), although attempts to extend this to include charging for ice used in in-flight drinks (Creaton 2004, p.169) was rescinded after customer complaints. The objective of the business is to become Europe’s leading â€Å"low-cost† airline and first for customer service, the latter position which was first reached in 2002 according to independent sources (see appendix A, figure 3). Similarly, the company also seeks to maintain value growth for shareholders. External Analysis Liberalisation of the airline industry in the 1970’s opened up the industry to new entrants and a new business model. Being one of the â€Å"first movers† in this new sector (Faulkner and Campbell 2006) Ryanair has taken advantage of the growth opportunities offered by creating a â€Å"low Cost† model based on the successful Southwest Airline (2007) strategy. This move has been partially responsible for increase in passenger numbers using UK airports in the last three decades (see table 1), with expectations of a threefold increase by 2030. Table 1 Airline passengers Year Passengers (m) 1980 50 1990 90 2000 180 With former eastern bloc countries converting from communistic to democratic political structures this growth is set to continue, providing the business with further opportunities (see appendix A, figure 4). Many of these former Baltic States have now joined the EU, which also provides Ryanair with the opportunity of expanding its destination network. However, the industry growth has also seen new competitors enter this niche market, including EasyJet, BMI, Virgin express and Aer Lingus. To maintain its competitive advantage the two major players have sought to consolidate their position by strategic acquisitions. In this area Ryanair, with its successful acquisition and integration of the â€Å"Buzz† lo-cost carrier, has been more successful that EasyJet’s experience when acquiring â€Å"Go.† Although the major airlines such as BA have responded to threats from Ryanair, to date these have not proved successful. The creation of this niche industry sector has also led to significant changes in the consumer’s perception (OConnell, J., and G. Williams 2005). Demands for cheaper fares has increased as prices have fallen, and the consumer perception and lifestyle has changed with regard to types of holidays has expanded rapidly, with weekend breaks and formerly unknown destinations increasing in popularity. Ryanair has also made full use of the advances in technology and digital processes within its â€Å"low-cost† business model. It was one of the first â€Å"low-cost† airlines to recognise the changes in the consumer buying habits resulting from these technological advances, using this diffusion to improve its services, encourage further consumer change and continue cost reduction advantages (Johnson et al 2007, p.481). Evidence of this can be found in the business move to paperless tickets, with more bookings being made through the Internet and, more recently, a move towards automated booking–in procedures at the airport, reducing the need for expansion of human resources to meet demand increase. At the same time, this technology use also helps Ryanair to maintain one of its key corporate objectives, which is to return success and value to the shareholders. There are two other external factors that impact upon the business and affect the determination of strategy. The first is environmental issues., which includes the concerns expressed by consumers and governments relating to the impact that air travel growth has upon the local communities and infrastructure and the second is the natural environment, where businesses are now required to consider the impact that their operations have upon issues such as climate change. The second issue is in the increase of legislation, particularly from the EU. In this respect Ryanair operations have to comply with regulations in terms of fair competition, which affects mergers and acquisitions and unfair practices, and targets set by the EU in relation to emission reductions required to address climate change.[PL1] Internal Analysis As Lynch (2006) and Faulkner and Campbell (2005) stated within their respective researches, for organisation’s such as Ryanair, who have targeted their strategy at a â€Å"low-price† product, it is imperative that, to maintain competitive advantage, who submitted that to achieve and maintain low price in the market place, the business itself had to be structured in a way that provided a limited cost base throughout all aspects of the business, in order to retain a profitable result. Porter (2004) suggests that this cost reduction process has to be communicated throughout the value chain (see appendix B, figure 6). Michael O’Leary, and the Ryanair management team have strived to achieve this position through a number of measures. Use of resources Ryanair makes good use of its resources. For example, all of the aircraft are of one design, the Boeing 737-800 series. This has several positives. Firstly, the company receives a discount from Boeing. Secondly, It reduces costs in terms of maintenance and training. In the latter case, unlike EasyJet, which has to train pilot and cabin crew to operate on a number of different aircraft designs, Ryanair’s staff only have to familiarise themselves with the one. Similarly, the turnaround of aircraft at destinations is quick and efficient, thus reducing unit cost. Human resources Despite the number of routes operated and the logistical problems of running a business of the magnitude of Ryanair, the company operates with a minimalist attitude towards head office, admin, aircraft and maintenance crews and administration staff. At the end of the 2005 financial year the business employed around 2,800 personnel, a figure which has changed very little over a five-year period. All of the Ryanair employees are expected to multitask. For example, cabin crew are required to clean cabins and remove rubbish between flights. Technology As mentioned earlier, Ryanair computerises as many services as possible. With Internet booking, paperless tickets, automated booking-in processes and many other parts of the operations being streamlined in this manner, this ensures that production and other costs remain low. Destinations Another imp0ortant aspect of the Ryanair cost reduction strategy is the concentration of its destinations into secondary rather than primary airports. Landing fees and other charges at these airports is substantially lower than the main airports and, even with the â€Å"sweetners† paid by Ryanair, the unit costs per passenger of flight into these destinations remains cheaper. Travel format Finally, the product itself has been simplified. There is only one class on a Ryanair flight and no pre-booking of seats. Furthermore, virtually everything but the seat costs. This includes drinks, meals and the other retail products available on board, with even free levels of baggage is limited. The success of this strategy can be evidenced when comparing the met profit margin of Ryanair with other carriers. The following data, taken from the various organisation’s websites and financial statements show the differnce (see table 2 below): Table 2 Net profit percentages Company Percentage Ryanair 17.81% EasyJet 7.98% British Airways 7.28% Diagnosis of current challenges However, like all businesses, Ryanair is not immune from challenges as it moves into the future. From the analysis of the business operations it is apparent that these challenges and threats will come from five main areas (appendix A, figure 4). Competition As mentioned earlier, with the emerging democracies within Europe, together with the regional and global harmonisation of competition rules, Ryanair is likely to find increased competition developing from these areas within the next few years to a decade. With the increased market place and, as can be seen from the share of the market that low cost airlines have (see figure 2), there is ample scope for new competition. The discussions about the â€Å"open skies† agreement between the EU and US (Milmo and Gow 2007), if these come to fruition, will also pose a threat as it creates a potential for US airlines to enter the industry sector. These actions could adversely affect the business continued financial success. Consolidation and growth There has already been some consolidation within the sector. It is likely that this will continue for the foreseeable future, and this could pose a threat to Ryanair’s dominant position. Furthermore, the corporations own growth pattern could impact negatively upon profitability. Despite growth attracting economies of scale, it can involve additional costs that threaten efficiency (Creaton 2004, p.250). Political intervention There are three main aspects of political intervention that are like to affect Ryanair in respect of its future development within Europe. The first of these relates to the EU’s competition laws, which is an area where Ryanair has come into conflict with the commissioners in terms of payments being made to secondary airports and other similar issues (BBC News 2004). The second is the threat by the EU to reduce or eliminate the subsidies given to the sector, worth an estimated  £6 billion annually (Bized 2004). This includes report, this VAT, Landing and Fuel tax benefits. The removal of these benefits will have a significant impact upon profitability. The third issue is the EU intention to force budget airlines to pay compensation for cancellations, which is not done at present. Environmental issues One of the major issues is the environment. Following the EU adoption of the IPCC[1] report recommendations, focus has been concentrated upon setting emissions targets for airline industry player, with stringent targets being set (see table 3). Future strategic options All researches promote the need for corporations to ensure corporate strategy addresses future challenges (Lynch (2006) and Faulkner and Campbell (2006)). In Ryanair’s case, it is suggested there are three strategic options that could be adopted (see appendix C, figure 7). Low price – low added value The aim of this strategy is to achieve the lowest price by a process of continually reducing the additional elements that attach to the service. For example, in terms of the budget airlines, from the consumers’ viewpoint this has meant reducing the facilities offered in-flight, such as changes to the quality of seating, increasing the seating capacity on the aircraft and reducing choice of services that involve human resources, such as hot meals, snacks and drinks. For the business is requires a continual drive to continue cost reduction throughout the value chain. Low price The intention of the low price strategy per se it to achieve reduction in the cost of fares, whilst retaining the consumers’ perception of the value of the product. To implement this strategy means that the business will need to seek cost reductions in areas other than those that directly impact upon the quality of the in-=flight service provided. This could be achieved by the further use of technology to automate in additional areas of the operational processes. Focused differentiation A strategy if focused differentiation is intended to set the business product apart from that of its competitors. Price can be used in the differentiation process, but in this case it needs to be inclusive with other elements that make the product unique. Evaluation of strategic options Following an evaluation of these strategic options, using the criteria recommended by Rumselt (see appendix D, figure 8), the following is an outline of the results that this produced. Option 1 – Low price – love value added This strategic option is consistence with the policy that Ryanair has followed in the past and is in accord with the previous intentions of the business strategy, which has been to reduce price at the cost of services, in other words achieving a â€Å"no frills† situation. However, it would seem that Ryanair would find it difficult to further reduce the level of service provided to its customers and it is unlikely that this approach would secure its market position. Option 2 – Low price Low price, as with option one, is in line with the business existing strategy. However, from the analysis of the internal situation at Ryanair, it would seem that there are limited options in terms of reducing existing resources, particularly if the business wishes to maintained a sustained growth programme and market share. Furthermore, it is not in accord with external trends, which indicates that consumers are becoming more discerning and the political arena more concerned with the consumers’ rights and environmental costs. Option 3 – Focused differentiation Focused differential, which could still include low price, would also be consistent with the Ryanair strategy. The differential of â€Å"low price, no frills† has been the core differential upon which the business has promoted itself previously. However, with other competitors entering the market place, that differential needs to be extended to other areas. In summary therefore, it is felt that the focused differentiation option would be most appropriate for the business future and will assist it to retain and improve its competitive advantage. Overview of selected strategy The core elements of the proposed â€Å"focused differentiation† strategy being proposed will be threefold. Free flights An aggressive strategy aimed at achieving free flights to be pursued. This can be achieved by seeking third party turnover to replace the ticket cost. For example, the business could introduce sponsoring, where travel and venue destinations, such as holiday locations, theme parks and local tourist boards pay for flights. Similarly, in-flight facilities could be introduced, such as Internet shopping, gambling and pay to view telephone. Furthermore, other services such as car rental and insurances could be used to cover the lost ticket revenue. Consolidation The business should be looking to make acquisitions, particularly with organisations within the Eastern European countries that have recently joined the EU. This enables the business to achieve market growth and maintain its dominant position. It also reduces the future competition. Aircraft fleet Fleet replacement is an area that Ryanair has concentrated upon in the past. In the future, in addition to discounts, this should be linked to conditions that ensure the fleet includes the latest environmentally friendly specifications, with aircraft being regularly upgraded as part of the purchase options. Implementation plan To enable the selected strategy to be implemented, several courses of action need to be undertaken. Short term Moves towards a â€Å"free-flight† position can be commenced within the immediate future, with the management and marketing departments of Ryanair discussing this concept with potential sponsor from the commercial leisure world, as well as tourism boards within the region and in specific destinations. Medium Term In the medium term two actions required for the strategy can be undertaken. The first of these is the gradual refits that will be required to aircraft to include the various new technological facilities that have been recommended. The second action would be to assess the potential market players to ascertain which, if any, would provide the business with a strategic fit for expansion of its market reach within the region. Long term Contracts with Boeing need to be re-negotiated to ensure that environment related conditions are included as an inherent part of the purchase process for replacement aircraft. Conclusion There is no doubt that Ryanair faces a number of key challenges in the future. To ensure that the business can successfully deal with the changes these challenges present, it is important that the future strategy is sufficiently robust to be able ensure that the business retains its competitive advantage and profitability levels. The aggressive strategies recommended within this analysis study are designed to achieve this objective. The â€Å"Free-flight† with added services, albeit being paid for, will maintain the unique and differentiated service that the Ryanair brand has become known for. Bibliography BBC News (2004). Ryanair faces new payment probe. Retrieved 17 May 2007 from http://news.bbc.co.uk/1/hi/business/3458423.stm Bized (2004). Low Flying Fares: An End to Cheap, No Frills? Retrieved 27 July 2007 from http://www.bized.co.uk/current/leisure/2003_4/010304.htm Brassington Frances and Pettitt, Stephen (2006). 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Retrieved 17 May 2007 from http://ec.europa.eu/comm/competition/speeches/text/sp1999678_en.html Appendix A – external environment Figure 4 Pestel analysis Political Airline liberalisation Extension of democracy in EU Open skies policy Economic Internal financial performance Disposable income Abolishing of international tariffs Competition Acquisition Social Consumer attitudes Brand image Lifestyle and travel changes Technological Automatic booking in systems Online activity Change in consumer buying habits Environment Investor added value EU and international environment concerns Legal issues European legislation Environment regulations Competition rules Figure 5 Opportunities and Threats Opportunities Threats Growth of network Increased competition Growth of passenger numbers Industry consolidation Maintenance of cost reductions Political intervention Continuing price reductions (free?) Environmental issues Expand cooperation between â€Å"Low cost† carriers Further acquisitions Appendix B – Internal environment Figure 6 Value Chain Source: Porter (2004) Appendix C – strategic options Figure 7 The strategy clock Source: www.marketing teacher.com Appendix D – evaluation criteria Figure 8 Rumelts evaluation criteria Consistency Are the external strategies consistent with (supported by) the various internal aspects of the organization? You must examine all the various functional and internal management strategies employed by the organization and compare them with the external business strategy. Consonance Are the strategies in agreement with the various external trends (and sets of trends) in the environment? To answer this questions, you need to look at all the major trends that impact the selected strategy both positively and negatively. Feasibility Is the strategy reasonable in terms of the organizations resources? Money and capital Management, professional, and technical resources Time span Advantage Does the strategy create and/or maintain a competitive advantage? Resources Skills Position Source: Johnson et al (2007, p.593) 1 Footnotes [1] Intergovernmental Panel on Climate Change [PL1]1