We can see by this research how this particular company is managing to beat the competition in Europe as Low-cost airline and stay sustainable even in times of recession. The purpose of this report is to evaluate the key for success of Ryanair corporate strategy, using both theories and live case studies. The research paper starts with a brief history of Ryanair and their competitive advantage, and then goes through the main academic models used in the report such as: Porter’s five forces, Environmental PESTEL analysis and Porter’s generic strategies. The last section of the report is summary of the findings with recommendations. 2. Company Background Nowadays Ryanair is placed as the biggest low cost airline in Europe.
The company was founded in 1985, by Ryanair’s family as a small company operating only between Ireland and London with as little as 5 000 passengers a year (ryanair. com, 2011). Since 1994 when Michael O’Leary took over, the company started rapidly expansion reaching today 272 aircrafts and caring more than 73m passengers a year to 160 European destinations, all around the continent. (Ryanair, 2010). The annual passenger traffic grew by 8% in 2010, and the profits rose by 26% to over 401m despite the global recession. (Ryanair, 2010) -3- For the past seventeen years, the company has built respectable brand name and image, for providing high quality products and services.
The company’s future vision goes beyond number one airline in Europe, but to be the biggest airline in the world: “Ryanair could become one of the biggest airlines in the world if chief executive Michael O’Leary’s plans to increase passenger numbers to between 120m and 130m over the next decade come to fruition” (McAteer, O. , 2011) 3. Competitive Advantage Competitive advantage can be defined as a factor allowing one organization to serve better its customers than others. In other words the process is consisted of creation of better understanding the customer values, and gaining exceptional output. (Hao Ma, 1999) Stewart (1997) argues that exist assets which can boost the organization’s performance and build stronger competitive advantage.
Researchers like Porter (1999) argue that the key condition for the company’s success in a rival environment is finding and attracting unique resources which can bring great value to the firm. But if we take that businesses manage to find competitive advantage and increase the level of performance, usually the rivals compete by adjusting or even enhancing the successful strategy as their own initiative, and the consequence of that is loss of competitive advantage. (Zook and Allen, 2001; Ghemawat, 1986; Reed and DeFillippi) -4- 4. Porter’s five Forces The Porter’s five Forces concept, was developed by Michael Porter; it is very plain but powerful tool, usually used to understand where lays the power in a business situation.
Once you understand, where power lies, it is easier to enhance strengths or weaknesses in a particular situation, in other words easily you can evade taking wrong steps. The most common usage of the tool is when it comes to identifying weather new businesses, products or services have the potential to be gainful. Yet it can be very misleading, if it’s used to find the balance of power in different than those situations. The five forces model described by Porter (Figure 1) argues that there are 5 generic drivers shaping rivalry; and can be used to evaluate the congeniality and ability of a market or industry to be profitable. (Hooley G. Piercy N. F, 2008). According to Luthans F. & Davis K, (1993) they are:
Also in Porter’s work (1980, 1985) is analyzed, how the five forces framework can show the structure of an industry and display the extend of deviation industries and the impact -5- on the five forces. The industries can be measured how attractive they are, depending on the power of each of the five forces and the specific strength of company’s position in relation to each of them. How strong the competition is depends on other factors such as investments by competitors bringing new value to the market. 4. 1. Competitive Rivalry Competitive rivalry can be described as a moving power within industries, which can energize companies to be creative and innovative (Porter, 1980). Being an entrepreneur, plays a central role of gaining competitive advantage in today’s business climate.
Traditional thinkers like (Porac et al. , 1995) believe that competition will occur only out of similar businesses. The accent here is on the number and capability of the competitors. If there are many competitors offering similar products and services the organizations have little power, If we have a look on the attempt of Ryanair to acquire Aer Lingus in 2004(see appendix 2), if succeeded what power and control would have had Ryanair upon the Irish air transport? 4. 2. Threats of new entrants There is a high threat of new entrants into the aviation industry, because nowadays the entry barriers have fallen into the form of regulatory controls, technology and purchase.
International regulations such as “Open Skies” are making the access to the market by foreign interested parties very easy. Also thanks to common technology usage within the industry, renting opportunities are possible too. The most threatened markets are the short-haul. However, usually established operators -6- have the advantage of higher slot presence into the key airports which acts like a barrier for the new airlines- forcing them to operate from smaller ones(FAA, 1999) 4. 3. Threat of substitute offering When we talk about the aviation industry, we should have in mind that the threat of substitution is relatively high. Nowadays advanced technology makes the communication very simple and easy, which reduces the travelling demand for business people.
Sometimes is more convenient the land than air transport- ash cloud in 2010. Thanks to the technology again-fast and comfortable trains, the convenience of this transport grows even higher. (Shaw S, 2007). 4. 4. Purchasing power Airline industry relies on very few supply channels, and as such they have very low negation power. Airplane manufacturers such as: Boeing, Airbus, Comac, General Electric and Irkut Corp. have the trade power and make huge profit out of the civil aviation. This is not the case with Ryanair. The CEO of the company operates by radical autocratic leadership style; “my way or the high way” causing cancellation of big order airplanes from the current supplier- Boeing. (Ryanair. om, 2009) At the moment Ryanair is negotiating with Comac and Irkut Corp. waiting for better deal. (J. Areddy, A. Galbraith, 2011) But changing manufacturers also has big consiquences- also the company has to change: aircrafts, spare parts, training and eqiupment, also maintaning different types of airplanes increases the costs. (Shaw S, 2007). 4. 5. Selling power -7- The high competition and narrowed level of separation within the market suggests us how little is the connection between airlines and customers. Operators try to stimulate customers by offering loyalty memberships, but in the low-cost market, people are willing to be more prices orientated. (Shaw S, 2007). 4. 6. Summary
The Porter’s five forces analysis brings negative impression on the airline industry and evaluates the market as being an unattractive. Porter’s framework asses: strong competition, high entrance threat and substitute offerings, low selling and purchasing power. Trusting Porter’s method beliefs, it is very difficult for a business to succeed in such environment. The conflict here is that Ryanair doesn’t fit in this picture, but in fact strives to grow more from year to year. So this method doesn’t answer our original question why Ryanair is so successful? 5. PESTEL Analysis 5. 1. Political Political factors are playing very important and crucial role into the aviation industry.
The raise of terrorist attacks since 2001, led the establishment of so tight security measures that we use today (M. Maynard and L. Robbins, 2009). There has also been a change from controlled and regulated network to deregulated, “open skies” and privatisation, which has empowered Ryanair to enter more markets and open competition. There’re also government subsidies meant to support the national carriers (P. De Man, 2004). Such benefits count 22% of Ryanair’s annual revenue (ryanair. com, 2009). However the political influence upon Ryanair is very lowregarding the stability in EU. The company must bare in mind for future EU -8- regulations- like the increasing of Air passenger duty (D.
Jonas, 2011) and the EU expansion which bring more opportunities. 5. 2. Economical The demand for air transportation is closely related with the world’s economy, if the economy grows the air travel demand also increases. Currently Ryanair is experiencing average revenue growth rate of 20 percent a year. (Ryanair,2010). Fuel represent 40% of the total operating costs of Ryanair for 2010. For a comparison the fuel cost has risen by 42% from 2009 where the fuel was 35% of the total operating cost and 666. 4m and in 2010 the cost was 943. 9m (ryanair, 2011). The increase price of fuel per gallon also plays crucial role in determining the ticket price in the aviation industry.
So the economical impact upon Ryanair is high, because of the constant fuel price increase and current economic instability in EU. 5. 3. Social When it comes to air transportation, consumers are usually price orientated and often has a priority over quality. The current economic instability resulted in a fall of industry sales, but surprisingly in fact the percentage of people travelling in economy class raised (Euromonitor, 2010). Furthermore social changes affecting the company are the new EU members. The EU membership opens opportunities for migrant workers, the trend is people from Eastern Europe to move west, and are likely to return home via cheap flights(S. Drinkwater, 2003).
We place the social impact high because of the changing consumer demographics and varying consumer’s preferences. 5. 4. Technological -9- The aviation industry has experienced significant technology progress throughout the years. The main tools which are used from Ryanair to gain competitive advantages are: internet booking system, which increases the quality of the booking process and improves the contact with its clients. The company operates with identical airplane fleet, which lowers the maintaining costs (C. Marcou, G. Cros, 2011). Although the recent development of low fuel consumption cars and highspeed trains, the technology impact on Ryanair is considered low. 5. 5.
Environmental The Airline industry felt significant problem in 2010 due to natural adversity. The Volcanic ash cloud situation, which spread all over Europe is estimated to have caused loses to Ryanair of about 50m (Ryanair, 2010). There are also few things that the company must consider nowadays regarding the environment and they are: noise level controls and Green house carbon emissions. 5. 6. Legal Ryanair must follow various legal obligations such as: wheelchair chargers, safety standards, misleading advertising, air traffic regulations and etc. The company got involved in numerous allegations of law suits for illegal subsidies in the past few years.
It is accused of using its dominant position at small, regional airports forcing them to reduce the fees, Lufthansa, Air Berlin and KLM-France are claiming that the Irish company must repay all the “illegal subsidies” (W. Lyffy, 2011) 5. 7. Summary – 10 – The PESTEL analysis, has demonstrated that is good analytical tool which can be used for environment analyses of Ryanair. It evaluates very well the main external factors and the important here are: supporting social demands and expectations, threat of alternative transportation and future regulations. As a reaction to the alternative land transport, Ryanair have to think about how can improve its services to make the air transport more convenient and attractive to people.
Ryanair has proven as very innovative and determinant company, which make it very reliable in case of future challenges. Times like the current economic recession, make it clear who are the big names in the business and why! – 11 – 6. Porter’s generic strategies Porter’s generic strategy framework allows the organization to find appropriate and appetizing rival position in a market. Further devotion can enhance customer delight; breaking down the risk and gaining benefits to their reputation, approaching skills and technology, enhances fully the visibility of controlled infrastructure, avoiding capital investments. Porter argued that at some time, company strengths go into either cost advantage or differentiation.
By using those, appear 3 generic strategies: cost leadership, differentiation and focus. The low cost leadership strategy doesn’t mean cheap selling price for goods and services. As the pricing environment is very sensitive, Ryanair has clearly set reinforcement of its strategic position in the market over temporary profit maximization. Ryanair manages to push prices even lower by using its cost leadership position, so as to increase the fiscal pain on higher cost competition and most likely for as long as it takes to push a market streaming that would contribute a return to a more normal pricing environment. The constant change of customer decision frames has a crucial role in imrpving the differentiation strategies.
Each company no matter the industry is dealing with various ways of product differentiation. Ryanair makes price big differentiator and compensate the fact that flies from and to secondary airports. This shows the importance of understanding the supply chain and the hidden potential by seeing things in different – 12 – way. Furthermore Ryanair understand that at some point customers will exchange benefits for cheaper price. Porter’s generic model evaluates that a business can be winning even in less attractive market, depending how position itself. Known weakness of the model is that cannot fully identify the forms of competitive advantage and evaluate the firm’s action (Wilson R. M. S & Gilligan C, 2005). 6. 1. SWOT Analysis
The SWOT analysis is the most known analytical tool used for making complete strategic placing of the business and its environment. The focus of the model is to create successful strategy upon organization’s internal strengths and weaknesses, and external opportunities and threats. (Faulkner D. O & Campbell A, 2003, p 250). 6. 2. Strengths • • • • • Low Cost Leader(U. Nwagbara, 2011) Innovative Cost Reductions First-mover Advantage Established Market Share Substantial Growth(ryanair. com,2011) – 13 – • • • • • High Load Factor(ryanair. com,2011) Strong Public Image Established Routes/Network Range of Ancillary Services Safety Committee(ryanair. com, 2011) 6. 3. Weaknesses • • • Still refuses to recognize trade unions(B. Sheehan & C.
Higgins, 2010) Antagonistic Relationship with Competitors. The secondary airports used by ryanair, could become less attractive because of the long distances from city centers. • • • Uncharacteristic Management Expansion(A. Brohan, 2010) Dependence on Michael O’Leary(McAteer, O. , 2011) Shareholders- dividend policy(Ryanair. com, 2011) 6. 4. Opportunities • • • • • • Further Growth of the company Adding more tourism routes Advanced Cost Reduction Offering child free flights(Ryanair. com, 2011) New EU member countries. Expansion of ELFAA 6. 5. Threats • Increasing Competition within the industry: New Low Cost Entrants Competitor Alliances ¦ Industry Criticism – 14 – Strict politic of EU Commission ¦ No further expansion of EU ¦ The syndicalism ¦ Alternative Transportation: Cars, Buses Speed Trains 6. 6. Summary Apparently Ryanair has enviable portfolio of strengths and opportunities, rising by the current fleet and route expansion. Innovative low cost leader, with strong public image and pioneer in cost reductions, are key success factors of the company making it sustainable in today’s uncertainty. However other crucial aspects that need consideration are the constant increase of fuel prices, the investments into the alternative land transport and the new entrants into the low cost aviation market. 7. Conclusion
It is evident from these strategic analyses that regardless of the intensive competition, Ryanair has succeeded to become the biggest low cost airline in Europe. The reported unseen levels of sustained growth, predict the company to become with the biggest and youngest fleet in the world, building it strong and respected name in the industry. As a contrariety to Porters theory, that an industry’s structural characteristics define the attractiveness and profitability of a market or industry Ryanair went beyond it. – 15 – Apparently the factors which made the organization so successful are in three main areas: the investment into rapid growth, clear corporate vision and financial backing.
Ryanair”s strategic advantage comes from its know-how to position itself as no-frills and suitable low cost airline. Since the company appeared in the industry, maintained the vision of cheap but reliable service. Ryanair’s success has reached the point where its airplanes, work force and financial assets contribute to its unquestionable strengths. The Environmental change place many problems to the resistance of the airline market, where in many occasions Ryanair has no control. However Ryanair shows tendency for nimble change and have adapted, risk management practices on to external forces, which determines flexibility and ease of finding temporary advantages.
Ryanair’s fleet is among the youngest with goal to become one of the largest in the world, providing consumers with the best technology at convenient cost. The increasing movement of labour force and political deregulations facilitate Ryanair’s expansion plans. In today’s uncertain climate of increasing terrorism threats and economic crises, the aviation industry faces difficult times. Ryanair’s unbeaten cost reduction strategy and heavy commitment to its customers has managed to place the company where it is today. A key challenge for Ryanair in the next few years would be not only to keep winning the low cost segment but to expand in new non- European markets. – 16 – 8. Bibliography 1. Clark, Pilita. Lunch withe the FT: Michael O’ Leary. Document] s. l. : Financial Times Limited 2010, 2009. 2. http://www. ryanair. com/en/about. http://www. ryanair. com. [Online] Ryanair, 2011. [Cited: November 26, 2011. ] 3. Creation and preemption for competitive advantage. Ma, Hao. 3, Smithfield, Rhode Island, USA : MCB University Press, (1999), Vol. Vol. 37 . 0025-1747. 4. B, Hooley G. Piercy N. F. & Nicoulaud. Marketing Strategy and Competitive Positioning, 4th Edition. London : Prentice Hall Europe, (2008). 5. K, Luthans F. & Davis. Strategic Management. USA : Published McGraw-Hill inc, (1993). 6. Porter, M. E. “Creating advantage”, Executive Excellence. (1999). pp. 13- 14. 7. Stewart, T. A.
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