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Case Study - Ryanair - The Low Fares Airline

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Background information

Ryanair is a low-cost airline and has its office in Dublin airport and most of its operations are based in the airport.   Apart from the Dublin airport, the airline also operates in Stansted Airport. Currently the airline owns 300 aircrafts flying several routes across Europe. Since its inception in 1985, Ryanair witnessed a rapid growth. The rapid growth was as result of the low cost and favorable aviation rules across Europe. Ryanair was carefully nurtured by Michael O’Leary who started the famously low cost fare idea and proved to work for several years. O’Leary championed for the deregulation of the aviation industry whereby in 1997, the regulations were deregulated.  During his career with the airline, O’Leary when through ups and down; He has been severally accused for arrogance and disrespectful to the competitors. O’ Leary is still the Chief Executive in the airline.

History  

The Ryanair airlines started its operations in 1985 in London with an airline heading to Watford only; the airline carried 14 passengers only. The airline was in for a market which was dominated by the British Airlines. In 1986, the airline expanded its routes to two with the target being the Luton airport. After the easing of the aviation rules in Europe, the airline started making international trips. The number of passengers increased drastically however the airline was in a loss in 1991; the airline was forced to restructure in the same year. Among the changes made by the airline was the low fare which was to capture the market. The airline then made an international debut with the low fare which resulted in a substantive market share in the international airline. The deregulation of the European aviation law in 1992 was a major boost to the airline after introducing the low fare. The airline entered in the stock market to enhance its investment in the airline market. The airline invested in airlines whereby it subsequently launched several routes across Europe. In the year 2000, the airline launched an online booking, the strategy worked on further reducing the cost of the flights. In 2004, the airline faced a loss, in reaction; the airline bought more 70 Boeing 737-800 to increase its customers to 50 million. Since 2005, the airline has been in a steady positive profit margin.  The airline also wanted to buy its competitor (Aer Lingus) in two instances. In 2006, the airline launched a bid which was later down by the Irish government; it only manages to buy 16 percent. In 2009, again the Irish governments reject the bid to sell its stake to the Ryanair.

                                                           Case Analysis

            Ryanair has experience tremendous growth over the years proving to be the first  airline attain must  growth in  revenue lowering costs and often increasing revenue even at times when the  economy is  depressed,  this  has  made the airline stand  to be the market leader in the airline industry in Europe with ever increasing it  number of customers.

            In analyzing the airline growth this paper will focus on analyzing the Porter’s five forces, SWOT analysis, PESTEL analysis and analyzing the various scenarios in the air transport Industry in Europe and the international market that Ryanair serves and later recommend strategy to be adopted by Ryanair .

                                               Porter’s Five Forces

From the five competitive forces which an organization faces that Porter developed, this paper critically evaluates them  with reference to the Ryanair and also develop the possible strategy that can help the airline overcome the competitive forces.  The five forces will include;

            Threat of new entrant in the market: The European Union in the move to liberalize has deregulated the air transport industry thus   removing restriction that restricted new entrants in the European markets, this is in line with the agreement that the member countries resolution to eliminate a market that is politically controlled so benefit the member countries citizens. This act of deregulation by the European Union made it easy for new companies which are establishing themselves in the market to be able to venture in the European markets, due to the removal of restriction which were earlier barring them for accessing the market before.

            After the deregulation other airlines based in the European Union market has embraced the advantages that deregulation offers, and seek to reestablish themselves in the markets to be able to increase their customer base and enhance they operation. The newly developed airlines and the existing ones have expressed interest in the region that is highly dominated by the Ryanair line, most targeting the customers of Ryanair thus posing a threat .

            European Union has also gained new ten members; this means that the airlines of the member countries can now easily gain access to the European market this increase the threat of the new entrant in the market which is greatly controlled by the Ryanair.

            Despite the deregulation, restriction in the market still exits since the establishment and maintenance of an airline firm in highly competitive market or rather where marginal cost keep on decreasing proves difficult for the airlines to fully establish themselves. This because of the strong capital base required might impede some of the new airlines from entering the market. The new established firms will most likely opt to establish themselves in new routes than the current one therefore they are likely to face large cash outflows there by adding more difficulties in establishing themselves in the new routes.

            Another barrier that would impede new entrants in the market reservation of landing slots for international as well as the national carriers like British Airways and the scarcity such landing slots in the major airports. In reference to this threat, Ryanair has modulated strategies to moderate this threat. It has embarked on indentifying the customers’ wants or demand that would make them attracted to the new entrants in the market, so as to maintain the existing customers and eventually attract new clients by proving such wants.  Also Ryanair plans to acquire AerLingus as it subsidiary so as diversify its market base and prevent such airlines from establishing themselves in the European market . 

            Power of customers: After the expansion of European Union membership the ten new members have an average of seventy potential customers this increase the customer base for Ryanair. With the increased number of customers   the airline will increase the numbers of customers that it will extend its services to.

            Despites the in crease in the number of potential client in the market, the increased number of airlines operating in these market gives the customers more bargaining  power and they demand quality services  at  cheaper prices since they a wider choice. The customers bargain power also has been increased by the use of internet to book for air tickets and the customers’ ability to compare the different prices that different airline charges and services online. Customers now have access to wide range of information from the internet that enables to shop for flight.

            Ryanair has a perspective that the buyer’s posse’s strong power therefore it provides  a budget airline that offer the most appealing prices to travelers this to be able to maintain a larger number of travelers who will earn the company more profits. Apart from this the company has also designed value adding products, since the customers now consider additional features that every service has.  Lastly the internet booking and online payment is one of the new services that the company has introduced.

            Power of suppliers: In this industry the many supplier of carriers are Boeing and airbus. These two main suppliers have highly competed over the last one decade with each of them releasing new product the market regularly thus resulting to over supply this decrease the bargaining power of supplies. Another major supply in this industry is gasoline. With the increase uncertainty from the oil rich countries such Nigeria, Iraq and currently Libya have forced the price of gasoline to increase. Air ports are gaining power from the increasing air traffic this has caused the landing slots to become scarce, making airports to be suppliers who have the highest bargain power of all the suppliers .

            Ryanair have laid down strategy to make sure that the suppliers regulated to be low as possible and by use of they budget airline they cannot pass on increase in gasoline prices due to the capacity of budget airline is efficient. For procurement of carriers the airline makes large orders thus getting favorable deals.

            Threat of substitutes: Other transport systems have become popular in Europe like rail a transport which is fast, cheap and convenient, thus poses threat to air transport. Another substitute is the increasing use of automobiles by mainland residents this tends to discourage use air transport. Another important factor is the reducing price of rail transport as electric trains dominated the rail transport sector.  Ryanair has come up with budget air line which will be able substitute the short journeys that people advocate to use other modes of transport thus making it more difficult for trains to be able to survive the low fares that budget airline charges to the customers.

            Rivalry among firms: Ryanair faces much completion from other airlines, with many interested in expanding their market share. This make firm face fierce competition and in order to survive in this highly competitive market when mergers and acquisition rule, due to the benefits derived from the synergies the company has plans to acquire AerLingus and it have competitive advantages through cost leadership . 

                              PESTEL

            In this model we discuss or rather analyze the political, social, economical, technological, legal and environmental factors. These are external factor affecting Ryanair which the management has no control over.

            Political factors: For a company to be able to operate efficiently in a country the political conditions in that country must be stable. Ryanair operates both inside the European Union and the outside in Middle East. Inside Europe there is political stability therefore the airline operates efficiently without any threat but Middle East the countries are characterized by political instability therefore the airline is likely to flourish well in Europe than outside Europe. Another political factor that Ryanair faces is OPEC. This is an association of countries that produces oil thus they are able to control oil prices, the driving force behind this association is politics. This factor is considered to have low impact on Ryanair.

            Economical factors: As discussed earlier Ryanair operates mainly in Europe and Middle East. This two markets have different economic characteristics with, Europe being economically developed, thus it has a stable economy and customers who are economically stable, this implies that Ryanair business in Europe might be better than in middle east which underdeveloped and by unstable economy and customer who are not economically stable thus the airline may not have stable earnings from this market because of these instability.  This factor is considered to be of low impact Ryanair airline, since it has specific Services suited for the two different consumers .

            Social factors: Over the years the population has increased with world population estimated to be over six billion .The number of middle class people increasing and disparity in distribution of wealth increasing, thus leading division of society into social classes.  The social stratification of the society is an important factor to the airline when branding and designing it products to offer to the society. Another social factor that affects the airline is the different consumer preferences, with a very large number of customers Ryanair aims at satisfying who have different needs thus social factor has a high impact on the decision of the airline on products and services it offers to its clients .

            Technological factor: Technological factors that affects Ryanair includes the innovations in kinds and models of aircrafts being developed in terms of capacity and efficiency. Another innovation is the software program in supply chain which has improved the operations and customer services of the airline, but this has impact to the operation of Ryanair. Internet booking is another technological innovation has embraced which is proving to be successful since the year 2000 with over 50,000 bookings per week.

            Environmental factor: The global aim is to reduce the amount of carbon that is released to the atmosphere.  There many aircrafts operated by the airline must reduce the carbon emissions it emits to the atmosphere and should not degrade the environment. Ryanair must consider this factor as it is turning out to be more popular.

            Legal factors: Legal factors have a high impact on the operations of Ryanair airline where it has to conform to rule and regulations which may include operational laws, incorporation laws, environmental laws, air transport regulations and any other relevant law in air transport . Also it is currently is involved in legal suit in which outcome are uncertain these threatens the concentration of management  in overseeing the company goals.

Ryanair’s Strengths and Weaknesses

Strengths

The airline market (where the Ryanair operators) has been faced by a steady growth in competitions in the last ten years; for the airline to operate in the atmosphere with a positive growth, there are basically strengths to keep it going. The airline is considered one of the most famous airlines in Europe. Basically the airline has relied on major strengths which include:

  • The name of  the  Ryanair is normally an associated with  low fares, that is the company is known all the world  for lower than any other company this  a strength since  travelers are fare  conscious when deciding the flight to book.
  • The airline has a strong network of routes across Europe therefore over holding the capacity of its competitors. The competitors can’t enter the Ryanair market base easily due to its low cost and the consistency in travel. The frequent flight by the Ryanair airlines makes it hard for the competitors to master the market.
  • The low cost tickets offered by the airline gains more confidence from the customers thus the competitors would only convince the customers through a much lowers and efficiency. The low cost woe more customers thus proving more profit to the company. The airline also enjoys the reduced break-even loading factor. 
  • Due to the consistent in the innovative ways of doing business such as the online booking.  The airline has enhanced growth in the flights and subsequently growth in profits. The consistency has been about by the dedicated management who oversee the growth of the airline. Michael O’Leary has been in the refurbishment of the airline when in losses into becoming a profit making airline .

Airlines’ weaknesses

Due to non performance in some areas, the airline has been involved in losses in two cases of its operations. In 1991 and 2003, the airline suffered losses; there were some basic reasons for the failure that includes:

  • The airlines capacity being not fully utilized properly. Unlike its competitors, Easyjet, the Ryanair airlines rarely utilize its operations properly. The daily flights are much lesser than its capacity.
  • Apart from the low-fare strategy, the airline has low profile in the treatment of its customers. The dissatisfaction with the poor services would give a hand to its competitors such as the Easyjet.
  • Following the article on the Sunday Times that the airline was considering the reduction of the operational cost by limiting the fuel reserve. The move is illegal and against the standards thus it would further their problems in competing in a market where quality is a priority to customers. The publication resulted in the loss by the airline which has enjoyed the support from them for a long time.

                                   Scenario Analysis

            In order analyze on improvement made by Ryanair we will analyze the different scenarios using financial information from the year 2009/2010 versus half year 2010/2011 and compare last year performance  by the company to the performance in  the 2005

 Scenario1. 2004 vs. Half year 2006

Particulars

2004  

Half year performance2006

Passengers

23.13 millions

18 millions

Revenue

€ 1,074.20 millions

€946.20 millions

Profit after tax

€ 226.60 millions

€ 237.0 millions

            From the above scenario it can observed that Ryanair increase the number of passenger in half year of 2006 as compared to such  result of the half year in  2004 where the v total n umber of passenger was 11.3 millions this in turn  reflected by the increase in the amount of profit earned after tax. The increased number of passenger is high and shows Ryanair cost leadership strategies effectiveness           

Scenario2. 2005 vs. 2004

Particulars

2005

2004

Passengers

27.6 millions

23.13 millions

Revenue

€1.337 billions

€ 1,074.20millions

Profit after tax

€ 268.9 millions

€ 226.60 millions

             In this case the number of passenger has increased significantly from 23.1 millions to 27.6 millions which is equivalent nineteen percent increase from last year due to the company with products that perfectly suits the customer needs and improvement in quality of customer service and the airline charging lower price thus attracting more customers.  Also the revenue of the company increased by approximately 2% from 2004 to settle at €1.337 billions in 2005, the reason why the profit are higher in last year than, is because the company is more efficient and there is improve in aircrafts passenger capacity and  reduced aircrafts prices  due competition among the main suppliers.

                                               Evaluation of strategy

            With the Ryanair strategy of low-cost, it performance is in question whether it can work for a longer time. The strategy of the airline depends on the strategies of its competitors and the customer satisfaction.

According to the customer’s point of view, the airline has been quite successful in offering the right flights. Ryanair has a good customer base in the UK and the customers are reluctant to stay with the company . Most of the customers consider the value for money first thus making the airline the popular among most of its customers. Due to the comfort in the price, the customers would prioritize the airline on its low cost tickets. Some customers however may not be satisfied by the way the airline conduct its business. For instance in the airlines, concentration on separating the customers and their luggage may disappoint some of its customers. 

Basically Ryanair has a low break-even factor thus it is able to operate in the business without straining its budget. Due to fluctuation prices in various international markets, the airline may not be able to set the prices as did before . In Stanted for example, the trend of prices has favored the growth of the airlines charging high prices thus minimizing the growth of the airlines that depend on low cost to penetrate the market. Overdependence on low prices would risk the company in losses when inflation occurs. The airline would be vulnerable to the treads of the losing on profits thus may cause a fall down .

Though the airline has high value for money, the profit is limited to the low prices. The customer satisfaction therefore may be arrived as compared to the high value airlines. However a substantive number of customers would still choose the airline because of its cost. The prices offered by the company are relatively cheaper than other competing airlines.

                       Recommendations

The performance of the Ryanair has been magnificent in the past but its future is unclear whether the advantage would work out. In order to keep its customers better, the airline has to embark on maintain the exiting customer and the potential ones. NCache solution has been a success in the operation of the company since its introduction as a customer solution. The software has been useful in preventing the customer from suffering from downtown. It saves the airline the trust from the customers and prevents any inconvenience.

Basically the airline it has to do a number of things:

  • Should continue with its famous low fare airline strategy but lay emphasis on strengthening its financial development to avoid impact of the fluctuating fuel prices.
  • As the airline continues with its expansion, Ryanair is expected to improve its hospitality to enhance customer satisfaction. The airline should advance its services to merge its competitors.
  • With a wider market in the European Union, the airline needs to make new markets in order to enhance its interconnection with the customers.
  • Continuous acquiring of new aircraft should remain a priority. This will ensure the airline meets the customers demand as well as the obtaining the maximum profits possible.
  • The company has developed and maintained a stumpy cost culture that has contributed much to its success. I would recommend the company maintains this culture.
  • The international oil prices keeps on fluctuating much therefore I would advise that the company to strength its hedging practices.

 

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