Case Study: Ryanair | Analysis

Case Study: Ryanair | Analysis The report is mainly a case study analysis based on Eleanor OHiggins review of Ryanair conducted in 2007. However, other secondary research has been analysed and used to support the arguments put forward in this document. Purpose of this case study is to conduct a strategic analysis of environment and the industry as well as the company. Firstly I conducted a critical evaluation in-order to figure out the critical issues of the five restructurings of Ryanair. Next I have conducted an environmental scan to analyse the external and internal environment of the organization. Then I took my attention to carry-out a SWOT analysis in-order to identify the strengths, weaknesses, opportunities and threats of the firm that would shape the competitive advantage of Ryanair. In sorder to justify my argument I will be using strategic management models and theories such as, PESTEL analysis,Poters 5 forces model,Market segmentation analysis,Strategic grouping model, Value chain analysis etc.. After concluding the analysis I will deliver my recommendation for Ryanair. Overview of the Company Ryanair started in year 1985 with only 57 staff members and with one 15 seater turboprop plane from the south of east of Ireland to London-Gatwick which carried 5000 passengers on one route. In 1986, inspired from the story of the company go after the big guys for a slice of the action and end up smashing theor British Airways high fare cartel on the Dublin-London route. The staff increased from mere 57 to 120 staff members and the plane carried for about 82,000 passengers on two routes. In 1989, the company employed 350 staff and their average maximum passengers increased to 600,000. In 1990-1991, the company has 700,000 passengers. However, despite of the increase of passengers, the company is not so good in managing cost that the company has lose its money. A new management team is brought in to sort it out and re-launch as a low fares or no frills airline, closely modelling the Southwest Airlines model in the U.S. And in 1994, Ryanair bought its first Boeing 737 aircraft which carried over 1.5 million passengers. In 1995, Ryanair is the biggest passenger carrier on Dublin-London route, the largest Irish airline on every route being operate and carried 2.25 million passengers in the year. In 1997, the EU air transport deregulation allowed the airline for the first time to open up new routes to Continental Europe with over 3 million passengers on 18 routes carried. Ryanair launched services to Stockholm, Oslo, Paris and Brussels and took time out to float Ryanair plc on Dublin and NASDAQ Stock exchanges. The company was awarded as Airline of the Year in 1999 by the Irish Air Transport Users Committee. In 2000, they announced the launch of 10 new European routes for the summer 2000 after much deliberation and watching others burning money. The company has also jump onto the internet with the launch of their new online booking site and in just 3 months the site is taking over 50,000 bookings a week. By 2001 there are more than 1500 employees working for Ryanair and more than 10 million passengers are carried to 56 cities in 13 European countries. The company has opened Frankfurt-Hahn in 2002 as their second continental European base and announce a long term partnership with Boeing which will see the company acquiring up to 150 new Boeing 737-800 series aircraft over an eight year period from 2002-2010. The booking in their web accounts have increased to 94% which has probably has something to do with opening another 26 routes. In year 2003, the company is characterised by rapid expansion and the start the year by announcing that the company has ordered an additional 100 new Boeing 737-800 series aircraft to facilitate the rapid European growth plans. They acquired Buss from KL M in April and re-launched 13 buss routes in May. In February they opened their first base in Italy at Milan-Bergamo and launched their Stockholm base in Sweden with six new European routes. In all 60 new routes are added throughout 2003 to bring the company a total of 127 routes. By 2004, the company is named as the most popular airline on the web by Google and they launched their 10thand 11th bases in Rome Ciampino and Barcelona Girona and continue to add more routes to their already extensive network. The company has also passed out British Airways to become the UKs favourite airline in United Kingdom and throughout Europe. Critical Issues Although the company had encountered different problems, specifically in line with its cost structures, the company had been able to survive and grow in the marketplace. Ryanair implement different marketing strategy to make the company survive in the competition and to be able to gain competitive position in the airline market. It is said that the company was regarded recently as the most punctual airline between Dublin and London. And because of the strategy of the industry, Ryanair is now recognised as the second largest airline in United Kingdom and Europes largest low-fares airline having a network of over 57 routes in 11 countries and served by a fleet of 31 Boeing 737-200 and -800 aircraft with over 1,400 staffs and personnel. In order to position itself in the marketplace the company continuously concentrates on driving own its costs to offer the lowest fares possible and remain profitable. In addition, Ryanair offer minimum standards of service and very low prices for point-to-point, short haul flights. The goal of Ryanair is to meet the needs oftravellingat the lowest price. The Critical Success Factors (CSFs) are as follows in airline industry: the strategic focus of having the lowest prices, being reliable within the marketplace, comfort and service and frequency. It is noted that low-cost companies concentrate on this first critical success factor by trying to offer the lowest prices. Although Ryanair has eliminated extras such as in-flight meals, advanced seat assignment, free drinks and other services, it still prioritises features which remain important to its target market. Such features include frequent departures, advance reservations, baggage handling and consistent on-time services.(Ryanair vision,mission,goals and objects has been elborated in Appendix 01 External Environmental Analysis By using a PESTEL Analysis we scan the macro environmental factors that would influence the performance of an organization. It is often used to generate market ideas and product ideas. PESTLE Analysis of Ryainair (P)olitical/(L)egal Change of government/policy Ryanair have been involved in various legal disputes with governments both in this country and the EU regarding their business deals with airports and airline regulatory bodies Political changes in countries where they have routes to (could also be affected by above point) Governments in countries they fly to may support their own flagship carrier Local councils objecting to noise and new runways being built as in past Governments looking to increase tourism might welcome Ryanair and therefore act in their favour. (E)conomic Potential economic recession, Irelands economy has already been stated as growing however this may suddenly change. Because of above main customers wouldnt fly for business as would be cost cutting Energy and fuel costs are cause of uncertainty Economic change within countries they fly to or would hope to open new routes to, for example war with Iraq has shut off any hope of tourism there for the foreseeable future and other factors such as SARS (OHiggins, 2004) and more recently, Bird Flu. (S)ocial Because of economic growth at the moment it has become normal to fly away for holidays therefore market has expanded and new opportunities for tourism have opened in previously unconsidered countries. Business trips, although Ryanair do not offer luxury they are possibly more attractive because less cost to a company means they can travel more frequently. Lower costs means attract a wider demographic of consumer (T)echnological Main threat to business market is video conferencing To a lesser extent VOIP Online check-in, self service check in at airport OHiggins, (2004) discusses that Ryanair currently have a fleet of mainly Boeng 737s which are one of the best known and used commercial aircraft. Thus, the company is able to obtain spares and maintenance services on favorable terms thanks to economies of scale, limit costs of staff training and offer flexibility in scheduling aircraft and crew assignments (E)nvironment Using more environmentally- friendly aircraft. Aviation represents 2.6 per cent of carbon emission in the EU and airline industry should pay environmental taxes for the contribution they make to global warming. Deploying more efficient aircraft that use less fuel and produce less pollution. Industry Analysis Industry can effects profitability and the competitive positions of members. To identify it we can use, Market Segmentation Ryanair lay claim to their market segment by stating they were Europes first no frills airline, www.ryanair.com. Ryanair have made strategic decisions based on increasing their competitive edge, the main one becoming involved in attracting customers at both ends of their routes. Haberberg and Rieple , support this by showing that Ryanairs key source of revenue from as far back as a decade ago has been in enticing passengers from France, Italy and Scandinavia. This has had the advantage of increasing their market share as well as the added bonus of creating a well recognised brand name across Europe. Competitive Advantages Their main competitors are carriers including easyJet, BMI baby, FlyBe and ThomsonFly all of who try to attract potential customers by emphasizing their low cost tickets. This makes the competition in this market segment fierce as in order to offer the lowest fares, costs must also be kept to a minimum. The well discussed fact that Ryanair possesses a more than favourable relationship with airport operators has benefited the carrier in a time of industry growth and aggressive pricing. The carrier continues to pay little or no costs despite being the focus of the EU Commission in February 2004, which ruled that Ryanair had been receiving illegal state subsidies for its base airport at publicly-owned Charleroi Airport, OHiggins (2004). Ryanair and the airport in question defended themselves by declaring they paid a fee for every customer and therefore complied with the EU state aid rules. OHiggins (2004) claims that Michael OLearys main argument was that the state aid rules allow the Wallonian government to stimulate traffic at an unused airport facility in exactly the same way that every private airport reduces its charges it if wishes to grow its business. However, although these decisions by the EU Commission went against Ryanair, it also made them even more of a household name across the EU. The free publicity was an added bonus, as well as the position Ryanair took, of being almost a savior of the lesser known airports, bringing them trade and tourism and then being persecuted for it. Porters Five Forces Model Porters five forces analysis is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developed in Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. Porters five forces model has been fully elaborated more on Appendix 02 Threat of substitutes is medium for Ryanair and is basically in the form of land,travel. Barganing power of buyer is high as low budget air travel is almost a commodity today and carriers are many. Buyer are well informed at prices and deals via internet and other mediums. Barganing power of the suppliers as Ryanair with its large scale holds the power to switch suppliers and demand better terms, especially to cut cost.Threat of new entrants is medium- as entrance to tarvel industry needs special licenses etc as well as high capital investments.Existing Rivalry is high with Ryanair competing against national carriers as well as low budget carriers for their share of market. Overall the industry witch Ryanair in is of medium attractiveness. Strategic Group Analysis The value of strategic group analysis as a tool for understanding industry dynamics and structure. Studing strategic groups, but that the analysis can help a firm in effort to understand the industry in which it competes and to identify its most relevant competitors. Internal Environmental Analysis Resources There are two kind of resources, tangible and intangible again movin further it can be categarise as financial, human, physical resources. Physical Resiurces and Human Resources has been fully elaborated more on Apendix 03 Financial Resources In the low cost structured airline industry Ryanair was the highest profit making airline.(ratioes has been fully elaborated on Appendix 04) Value Chain Analysis An analysis of an organisations resources can include its financial, physical, human, intellectual and reputational resources. In the deployment of these resources, it is also important to understand the competences and core competences of an organization. Porters (1985) value chain concept is an important part of this process. Ryanair strongly manages and forms relationships with various suppliers e.g. Boeing and food/beverages etc, to ensure goods are received of requirement standards and on time in-order to add value throughout its value chain In addition to this by forming strong relationships with Boeing, they are able to obtain spares and maintenance on favorable terms reducing costs, thus offering lower prices to passengers and safer flights (adding value). In-order to add substantial value for its service by providing low-fares, they closely monitors relationships with airports around Europe, so they provide subsidies to the airliner in order for them to provide low-fares and seen as adding greater value for customers. Furthermore they have agreed with these airports to provide storage hubs as to when a plane enters these sites its automatically refueled and beverage/duty free products are reloaded at negotiable prices reducing costs and quicker turnaround timing is achieved, thus seen as adding val ue. For the airliner to provide low-fares to consumers it contracts staff for aircraft handling, ticketing and baggage handling to third parties at competitive rates as well as engine repairs and heavy maintenances of its aircrafts. Thus reduces direct exposure to employee relationships and disputes reducing costs all through value chain. Additionally, to add greater value for customer, the aircraft staff e.g. pilot, cabin-crew, they holds close relationships, giving the right training making them competent enough to feel confident to answer on flight questions. The airliner has a commission placed for its aircraft crew linked with the sales of duty-paid goods (rewarding mechanisms).Thus close management with aircraft crew ensures good labors turnover reducing the threat of staff being absent for flights, thus seen as adding value for customers.(more on Appendix 05) SWOT Analysis of Ryanair Factor Ways which factor applies to Ryanair (S)trengths Marketing strong branding and reputation, aggressive price strategy. Low costing due to airport operator deals. Reputation as biggest budget airline. Lots of publicity due to OLeary and controversial issues. Air Transport World magazine announced that Ryanair was the most profitable air line in the world. 2006 Annual Report, Ryanair desinged itself as the Worlds Favourite Airline. (W)eaknesses Cash tied up in purchase of new planes. Entire company based on European low cost airline market. Shock profit warnings may have used cash reserves and weakened fiscal structure Refusal to back down over issues such as EU Commission Poor employee relations Total dependance on the CEO Michel O Leary (O)pportunities Possible new routes, New planes = larger capacity. Advertising space on website and planes, more revenue International Airline colloborated EU expansion (T)hreats Competitors BMI baby, Easyjet, ThomsonFly. Economic recession would mean less disposable income. EU Commission could put restrictions on company if do not adhere to state aid rules Subsitute transpotation like car and high speed trains. Fluctuatioans in fuel prices Conclusion On the whole Ryanair seem to be following a strategy which works for them. They are obviously aware of their business environment and understand the importance of monitoring it as they took advantage of the opening in the market when they restyled themselves over a decade ago. However they need to be aware that this environment is constantly shifting and evolving and therefore maintaining a close eye on it and being ready to adapt to any changes should be a fundamental part of their strategy. Recommendation Ryanairs aim to keep fares low, mainly by not introducing fuel surcharges. Actions like this, which were of course highly publicised, ensure Ryanair is constantly attracting customers. Part of Ryanairs success is made possible by the fact they are such a lean company, both in the way they operate and the services they offer. OHiggins (2004) claims that when the carrier dropped their cargo services, although they were going to be losing  £500,000 of revenue a year, they decreased the turnaround time of their aircraft from 30 minutes to 25 minutes to attract more business travellers who required the punctuality. Innovativeness like this has ensured Ryanairs sustainability and will carry them forward into the future. To recommend any major changes would be to predict how the airline industry will change which ultimately cannot be foreseen. However it has been concluded that the budget airline will continue enjoying its boom, with many passengers now enjoying the short breaks away at a low price. Also the advent of new routes will bring more custom, from both departure points. If there was to be a drop in demand Ryanair would certainly suffer and subtle shifts in their strategy could be appropriate. For example offering drinks vouchers onboard for the customers next Ryanair flight might entice more people back, or making alliances with hotel groups in order to offer a complete package, rather than just selling advertising space on their website. References Finlay, Paul (2000), Strategic Management. An Introduction to Business and Corporate Strategy. Pearson Education. ISBN 0 201 39827 3 Haberberg, Adrian Rieple, Alison (2001), The Strategic Management of Organisations. Pearson Education Ltd, ISBN 0 130 21971 1 Lynch, Richard (2000), Corporate Strategy 2nd Ed. Pearson Education Ltd, ISBN 0- 273-64303-7 McManus, John, Maybe its time for Ryanair to jettison OLeary, Irish Times, 11 August 2003 OHiggins, Eleanor, (2004), Ryanair OHiggins, Eleanor, (2007), Ryanair the low fares airline www.ryanair.com www.grin.com Appendix 01 Company Vision Ryanairs CEO, Michael OLeary, has a vision of a world where the fare could drop to nothing as local communities would subsidize the airline to bring a steady traffic of business people and tourists to their region. Main Aim To firmly establish itself as low fares,scheduled passenger airline through continued improvements and expanded offerings Rayanairs Main Objective Ryanair will become Europes most profitable lowest cost airline by rolling out the proven `low-fare-no-frills service in all markets in which we operate, to the benefit of our passengers, people, and shareholders (Ryanair Report, 1997). Ryanairs other objectives GOALS AND OBJECTIVES FOR 6 YEARS TILL 2012. To raise the market share within the low cost sector up to 40%. Fleet of 200 airplanes in 2012, To double the annual passenger transportation to 80 million by 2012. To eliminate the rest of our costly call centers To base the distribution only on online booking. To quadruple its annual profit up to  £1,230 billion in 2012. (www.grin.com/ebook/ryanair.) Appendix 02 Suppliersbarganing power low Competitor Rivalry High Threat of new entrants Medium Threat of Subsitutes Medium Buyers barganing power low How poters 5 force analysis effect Ryanair; Appendix 03 Physical Resources The physical resources which Ryanair possess is the 196 Boeing aircrafts. The huge amount of money being spent by them on their physical resources for the maintainance. They need to keep resources proper and running to make sure that these will not harm their low cost structure. They also have the youngest fleet in whole Europe with a highly fuel efficient capacity. Human Resources Human resources can be considered one of the most important functions of a business. The vast majority of organisations all employ staff and Ryanair is no exception especially due to their size. When the carrier was established over twenty years ago they only had fifty one members of staff on their payroll. (www.ryanair.com.) With this amount of staff they have to ensure that, in order to have operations like call centres and cabin crews running smoothly, they keep their staff happy and motivated. They do this by offering incentives and a share option scheme which allows employees to participate in the success of the company overall. Ryanairs technical operations should mainly revolve around their aircraft as this is the core of their business. In February of last year they announced an order placed with Boeng for 70 firm aircraft as well as 70 options, www.ryanair.com. This means that between now and 2012 Ryanair will have 225 firm aircraft and options for another 220, allowing them to grow to over 70 million passengers per year. Due to this excellent deal negotiated by the carrier their growing amount of aircraft will not add huge amounts to depreciation costs as they will be depreciated over 23 years. Technical operations have to run smoothly for obvious reasons, if a plane scheduled to make a flight for technical problems, for example, then this will impact on all of Ryanairs operations and functions and also cause disharmony amongst their passengers, possibly costing them future ticket sales Appendix 04 Financial Ratios Net Profit Margin Net Profit Margin (NPM) tells us how much profit a company makes for every $1 it generates in revenue. Net profit margin indicates, when compared with GPM, how well a firm is managing its indirect costs in addition to cost of goods sold. Return On Assets Return on Assets (ROA) provides a view of how efficient management is at using its assets to generate earnings. ROA for all three primary competitors is virtually the same. Therefore, we can say that all three companies are generating similar revenue per dollar of assets. Current Ratio The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months Inventory turnover Inventory turnover ratio shows how many times a companys inventory is sold and replaced over a period. This should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. Here are unreasonable Inventory turnover ratios of each company. However, the inventory in the motion picture industry is not so important compared to other manufacturing companies.