Ryanair Case Study Analysis Essay Example

been their competitive advantages. Firstly, this paper analyses the industry strategy using the Porter’s five forces framework. Then, it scrutinises the firm’s strategy using the SWOT analysis and VRIO framework. Following this, it investigates the company’s competitive advantages. Finally, a long term view of the sustainability of its strategies will be analysed. Ryanair was founded in 1985 as a network airline.

Following an EU deregulation of competition barriers in 1992 (Kawagoe, 2008), under the influence of CEO Michael O’Leary it restructured and adopted the model of the US carrier South-western Airlines. It became the first European airline to implement such a flexible and low cost pricing strategy. Thanks to this cost leadership strategy, Ryanair has been able to outperform competitors, become the European market leader and manage to remain profitable even during global economic downturns. The drivers of such successful operations are the competitive advantages which distinguish Ryanair from its competitors.

As mentioned, the firm has a low-cost ethos which itself commands high operational and cost efficiency. Crucially, no other European airlines are able to achieve similar performances. Furthermore, the firm benefits from other competitive advantages, for instance, being the industry driver and holding a solid brand image. Through analysis of firm and industry, we noticed some threats to the sustainability of their successful operations. Resultantly this essay asserts some remedies to insure they sustain and develop competitive advantages.

Having introduced the firm, it is now appropriate to describe the airline industry, the industrial sector in which it operates. By implementing Porter’s five forces, it is possible to investigate its main characteristics. With regard to the degree of rivalry among competitors, it must be said that deregulating laws

have led to an increase in competition. Specifically, international hubs such as London, Milan and Madrid have become airports where numerous low cost airlines concentrate their operations.

Furthermore, such competitors are not extremely differentiated in matter of market influence, size and product offering. Accordingly, price is the most distinguishable element. On the other hand though, high entry barriers, low industry growth rate and expensive exit costs, pose considerable obstacles to new market entrants. This is because for example, large start up costs and initial losses are threatening to new firms. In that, immediate price wars are apparent due to the inherent low cost characteristic of the industry. To make matters more difficult, there is scarcity of landing slots.

National carriers use a high percentage of these, as do established firms with high traffic consistency like Ryanair themselves. Thus the threat of new market entrants is at a moderate level. Crucially, Ryanair have been able to differentiate their market position from the ones of competitors, both in terms of price and the product’s added value. In fact, the Irish firm operates via secondary airports. Such a strategy has meant they avoid firstly, expensive taxes charged by primary airports and secondly, engagement in direct competition with network airlines.

Nonetheless, Ryanair is in direct competition with another low cost ticket provider, easyJet. Resultantly, these two largest low cost carriers (LCC’s) within the industry implement different strategies. Fundamentally, easyJet flies from primary airports and offers relatively better services. For instance, there are no weight limits for luggage brought on board. This differentiation is vital to the company. It is clear that on many levels other than ticket price, the firm is successful

in avoiding operational contact with closest rivals, by using these alternative strategies.

A further limitation of the firms in the industry is the bargaining power of suppliers. With only two suppliers of aircraft, there is high dependence on both suppliers, Boeing and Airbus. Furthermore, switching costs from one supplier to another are considerably high with regard to re-training mechanics and pilots. Ryanair has traditionally used only Boeing aircraft to avoid such issues. However the firm has shown an interest in acquiring new Airbus aircrafts, as it claims it has sufficient enough economies of scale to run a mixed fleet. Also, the bargaining power of aviation fuel suppliers is high.

Though Ryanair attempts to control instability of fuel price through hedging, this is still a problem for the firms in the industry. Furthermore airports themselves hold a certain degree of bargaining power over LCC’s. Ryanair on the other hand is relatively less exposed to this kind of bargaining power, as it mainly operates via secondary airports which charge cheaper taxes. Customers also have bargaining power due to the numerous airline companies in the industry. Moreover, they are price sensitive and have no switching costs. Subsequently many LCC firms are not profitable as a result of their primary operations.

Therefore, the increase in ancillary services has been progressively implemented by firms, with Ryanair the industry driver. As we have seen from the above investigation, there are many forces acting upon the industry which prevent most incumbent firms from exceeding competitors. However, in many cases Ryanair have adopted strategies which helped penetrate such a competitive market. The SWOT analysis shows how Ryanair has been able to outperform through their operations. The

most evident Strengths of the firm include the low cost based practices. Historically, this has been the core advantage for Ryanair.

Its cost leadership strategy has meant the company has generated a powerful brand identity. Accordingly, the name Ryanair is now synonymous with low airfares and the name is one of the most resonant among customers. The company has navigated customer perception using a source of free publicity and marketing. These include numerous examples of elaborate publicity stunts, especially by Michael O’Leary. Other strengths include the Ancillary income and a strong internet following, which are pivotal to profits. Due to the size and aforementioned potency of Ryanair, the future may hold various opportunities.

Firstly as an industry, when drawing on the US example, it is assumed that it is not at full capacity. Resultantly, further expansion out of Europe could be feasible. Additionally, less funding of local airports by governments means a better competitive environment for Ryanair. Our analyses so far have highlighted some of the rudimentary factors which underline a successful LCC. However there are weaknesses as well. Although to some extent generating free publicity has contributed to the brand resonance, poor customer relations could detrimentally affect the operations in the future.

Elaborate publicity stunts have also failed in the past, with the firm paying large amounts of compensation to various parties after high profile law suits. Furthermore, as the company flies to secondary airports, in a maturing market this could also be a problem, especially for business passengers. Lastly, increasing competition could mean limited slots in primary airports so expansion prospects would be limited. External influences like increases in fuel prices and terrorist attacks are also

noteworthy.

Having analysed the industry and the ways in which Ryanair performs its operations, it is now appropriate to scrutinise the resources and capabilities of the firm. Ryanair’s resources can be broken down into physical resources, that is the fleet of 272 Boeing 737-800, airport (mostly secondary) and offices; human resources, including 8000 employees; financial resources; technological resource, such as its website; and intellectual capital resources, such as their abilities and industry knowledge, including the long serving management (Ryanair, 2011) Capabilities help the firm apply its resources.

These include the lowest airfares in the industry; effective brand identity; focus on specific market segments; efficiency strategy and fast turnaround times. The origins of Ryanair’s prosperous financial statements stem from here, along with its introduction of ancillary services. Through the VRIO framework, we can clearly define the most fundamental competitive advantages of the firm, primarily drawn from the analysis so far. As presented, the whole strategy is based on low cost competency. Accordingly, economies of scale coupled with industry cost efficiency, mean the firm can market offers practically unbeatable by most competitors.

Furthermore, the capability of management to leverage high customer numbers, is a core competitive advantage. As was alluded to earlier, the airline had a first mover advantage in using secondary and not primary airports, to decrease airport charges and fundamentally shorten flight turnover. This drastically increases the amount of daily flights, as air traffic is avoided, adding significant value to the business. Michael O’Leary’s presence is a very rare resource. He was the protagonist at Ryanair who developed the low-cost model and his management team fortify their strategic positioning.

Supplementary to this, many of the firm’s attributes cannot be

imitated by other firms in the industry. Intangible factors like brand reputation and staff skills mean competitors suffer from various problems. These include ‘Time compression diseconomies’, the time it takes to accumulate resources; Asset Mass Efficiencies, where if you have resources in place, it is easier and quicker to develop more (Dierickx and Cool, 1989). Its strategic structure means Ryanair efficiently exploits its resources, reaping the benefits. Other competitive advantages like technological resources help maintain its cost leadership.

Ryanair has influential internet presence, supporting internet-based booking systems, such as online reservations and check-in. These reduce labour costs and retain low cost operations. The obligatory web check-in policy enables the reduction of check-in desks. This coincides with the practical application of the company website, which we revealed previously. The ‘low cost culture’ is obeyed, because marketing costs are minimised, relying mostly on free publicity. This innovation means customers in various locations can be served effectively without additional problems of labour mobility.

A disadvantage of online operations however, could be that competitors have the ability to monitor these public operations. It is thus apparent that the basis of many of these advantages, are applications which conform to the minimal cost philosophy. Supplementary to this, the firm provides complementary services related to the airline services, including travel insurance, accommodation and transportation, enabling the firm to increase sales whilst deducting unit costs. Additionally Ryanair has the youngest fleet in Europe, with the average aircraft age of 3. 3 years.

The new aircrafts are environmentally friendly, contributing to 50% less emissions, 45% less noise pollution, as well as reducing fuel consumption. The competitive advantage here is characterised by the larger seat capacity of

newer planes, without the requirement of more crew. Moreover, Ryanair operates as a one-class travel airline, which differentiates it from other carriers. Finally, the company claims to have high efficiencies – punctuality and less lost baggage compared to competitors. So how successful has Ryanair been in exercising their competitive advantages, and where has this success translated into profits?

We found that the reason for Ryanair’s success was routed in the decision to enter the market niche at the right time. It is evident that they have been successful in meeting their four tenets of customer service, “low fares, a good on-time record, few cancellations, and few lost bags”. They have focused on increasing the quantity of consumers by reducing prices very low. This has been evident by their operations to this point. As a result they have cunningly charged for every extra service and have attempted to limit the quality of service expected by passengers.

However, customer complaints are too prominent to suggest that customer expectations have been aligned effectually in this way. Moving on, according to the data from 2009 to 2010, the revenue from each passenger fell, but the percentage of ancillary revenues increased. Ryanair has relied heavily on these types of revenues to increase profits. As we have seen, these include extra charges, priority boarding, in-flight food and drink charges and baggage fees. From a resource based view, incentive payment systems which Ryanair has pioneered increase productivity.

This system encourages employees’ attitudes, increasing unit capabilities. This has contributed to Ryanair having the highest record of passengers per employee in the industry. Another fundamental associated with the customer-firm relationship, is the efficiency borne from internet capabilities,

as technology has accelerated transactions. As we have already commented, the firm’s public profile is mostly based on controversial and topical advertising; they have never evaded any negative controversy. Fortunately, negative news easily draws public attention.

With the exception of publicising their website in the media, instead of investing in heavy marketing, Ryanair prefers to pay fines and have their name amplified through lawsuits and clashes with other social and business entities. There is no doubt this unique way of advertising has been more efficient for them. Not only do more people actively pay attention, but the stories are hard for people to forget. Thus, Ryanair has developed many competitive advantages in order to place itself at the pinnacle of the LCC industry. We now analyse the sustainability of these core strategies.

Specifically, we investigate the pricing strategy and possible threats to operations. Clearly the current low cost approach has led to its ongoing success in the airline industry. Ryanair has been able to remain stable throughout the economic cycle. This is because the recession rewards LCC’s. Nevertheless, its strategy still has some challenges. Though ticket sales have increased, selling prices have fallen. Resultantly, although Ryanair has been successful in increasing overall Operating Revenues, this has been largely supported by the increase in ancillary revenues.

It is clear from the financial statements that scheduled revenues (from primary ticket selling activities) decreased from 2009 to 2010. For the future, there is a threat that the rate of ancillary income will decline. If this is the case, then Ryanair must consider new methods of generating revenues. With regard to ancillary revenues, the company should focus on services which would generate

no costs, such as, priority boarding. Furthermore they should keep expanding into areas where the competition is less prominent, essentially, in airports where few other low cost airlines operate.

This would mean even quicker turnaround times, meaning a further increase in flights each day. One possible threat could be that continuously acquiring new aircraft will result in an over capacity, if at some stage ticket sales plateau. Hence at some stage it is advisable that they stop expanding the fleet. Now we consider further threats to the sustainability of operations. The firm is very sensitive to increases in operating costs. In Stansted and Dublin, airports and governments plan to raise taxes and other fees. One remedy for this issue could be to shift part of their core operations from these two airports, to others.

Furthermore, the cost of jet fuel is increasing, and which already increased by 15. 9% from 2010. This could have detrimental effects on a firm which is driven by a low cost culture. The management must input better hedging strategies to counteract these threats. Fuel efficiency should also take presentence in operating objectives. Finally, up to this point, the negative portrayal of Ryanair in the media has actually acted as an advantage. However the constant rise in customer complaints may pose a serious threat to ticket sales in the long term. For this reason, better customer service is essential for the future.

Conclusion

Throughout our discussion we have maintained that low cost operations are the foundations of Ryanair’s success. Essentially, the firm must maintain its LCC status in order to maintain its profitable position. It has built a reputation within this industry sector and has

capitalised on this. In the short term furthermore it is clear that their business functions and strategies will keep them as a market leader. A study of resources and capabilities showed us the array of competitive advantages that Ryanair has, including their first mover advantages, public profile and technological capabilities to name but a few.

However we have touched upon some future threats to sustainability. For example, after conducting a swot analysis have seen that the company may be reaching full capacity in terms of its ancillary services, as well as increasing competition. Porter’s five forces drew our attention to fluctuating ticket prices due to market pressures, vulnerability due to oil prices, tax burdens and legal issues, as well as many other issues within the industry. This has led to some possible suggestions that Ryanair could adopt so it remains as successful for the future.

Also it is important to recap on the importance of further increasing frequency of flights and identifying new routes to stay on top of competitors. Conclusively with the additional ideas introduced, combining these with the distinguished resources and capabilities of the firm, it can maintain the core competencies which have helped sustain its successful low cost profile and market leadership up until now.

References

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4. Kawagoe, M. (2008) Air Transport deregulation in the EU: Study from the Europeanization Perspective, Hokkaido University, Sapparo, Japan
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