2017-01-05
Five-Force Analysis 3
Key Success Factors of the Company 4
SWOT-analysis 5
Recommendations 6
III. Conclusion 7
Introduction
This paper is devoted to the strategic analysis of the company Ryanair. It is an Irish low cost airline that is well-known in Europe. This company operates since 1985 and offers flights to around twenty seven different countries. There are no any incidents that could be associated with human victims during the whole company’s activity.
Ryanair has become a truly budget airline in the 1990s. It has abandoned the business class, expensive airports and long-distance flights. As a result, in 1995 Ryanair has reached figures of 2.25 million passengers per year. In 1990 this indicator was about 82 thousand of people (Ryanair.com, 2017).
In the middle of the 1990’s the airline company has successfully placed its shares on the Dublin stock exchange, after which the company has opened access to mainland Europe. Ryanair has established a base in Paris, Brussels, Oslo and Stockholm. The company invested most of the funds in the renewal of its fleet by purchasing forty five new Boeing 737-800.
In 2000, Ryanair has launched its website and began selling tickets through the Internet. The e-tickets were not popular at first, but the company followed to focus on the segment of online sales in order to reduce the infrastructure maintenance and personnel costs. As a result, during the first year after the implementation of the new system the share of electronic tickets has increased to 75% of their total number.
In 2001, the airline company has ordered 155 aircraft, Boeing 737-800, which it gradually bought until 2010. The emergence of new aircrafts caused the emergence of new routes. The Ryanair Company has established several bases across Europe, creating the largest network of nearly 500 routes. Nowadays, Ryanair also increases the number of routes and bases. Its rapid growth allows the company to stay ahead of all competitors. In this case, some major airlines as well as companies of the low cost segment are inferior to it.
Today, the company’s fleet consists of 321 aircraft and its network includes 185 destinations. Capitalization of the company amounted to € 17.3 billion, the proceeds - € 5.7 billion, and net profit - € 866.7 million in 2015. Over the past year, the Ryanair Company has carried more than ninety million passengers (Ryanair Annual Report, 2016).
Discussion
Five-Force Analysis
As we know, the five-force analysis is based on the following aspects: market power of suppliers, market power of customers, threat of new companies and possible new products/services, the competition level in the market.
The prices of aircrafts manufactures as well as prices of suppliers of components can significantly influence the airline industry, because the prime cost of air ticket includes these operating costs. At the same time, the prices on the fuel also impact on the airline industry and politics of the airline companies.
Nowadays, the air transport becomes more popular and more people use it from year to year. The main reason is that the air tickets become cheaper and air transport is no longer perceived as a way to travel only for rich people. The airline industry amounts quite many companies, which offer different flights and services for customers worldwide. It is quite difficult today to enter this market from scratch. Thus, the threat of new companies is low. The majority of new companies can be created only through the processes of merger or acquisition. At the same time, the services, which the airline companies offer customers, are constantly improving. It can suppose that in ten or twenty years, the airline companies will offer completely different services to the population.
The aspect of the competition level in the market is the most important. For example, during 2001-2003 years, when the airline industry was hit by terrorism and wars, the majority of traditional airlines suffered heavy losses, while many low-cost airlines declared profits. It should be noted that the low cost airlines also successfully compete with charter airlines in the tourist areas (Knott, 2008).
The entry of new countries from Eastern Europe into the European Union and the change in the EU legislation in relation to those, who have not yet joined, have led to so-called agreements as “open skies”. This led to the further development of the concept of low cost in Europe and the emergence of new operators (such as Wizz Air from Hungary, which made its first flight on May 19, 2004 and SkyEurope (now bankrupt) from Slovakia, which started flights on February 13, 2002). During 2004 – 2007 years, new routes have appeared in Austria, Bulgaria, Slovenia, Slovakia, Poland, Romania, Hungary, Czech Republic, Turkey and Israel. More than forty five low-fare airlines served more than 3 500 destinations in Europe and routes around Europe by the end of 2007 (Kumar, 2006).
Today, not all low cost airlines are similar. Over the past decade of rapid growth around the world more than one hundred new airlines have appeared and they have begun flights on the principles of low cost – low fare (or low cost – low tariffs). Some classic airline has also changed its business model under the pressure of competition, becoming a discounter airline company. The emergence of new and development of the existing airlines diversifies the business model that is based on low costs.
Key Success Factors of the Company
The Ryanair Company has quite many success factors. It has reached such low costs and a significant reduction in air freight rates through the performance of the following tasks.
rejection of the traditional types of service on the board. This task includes a lack of power, separation of the interior by class, a spacious interior layout, which ultimately allows the company to take on board more passengers.
the optimization of the route network. One of the ways to make cost-effective and profitable business of the airline that abandons from the traditional services is to maximize the use of available aircraft fleet and reducing downtime. In other words, it comes into effect economies of scale – the more plaque is, the overall costs are lower. Ryanair Company mainly orients to short and medium distances (up to 2000 km). The lack of food/drinks on the board, and high density of cabin arrangement makes the long-distance flights unattractive for the passengers. Also, the maximum use of the existing fleet can be achieved by reducing service time at the airport. The time required to complete maintenance and loading (turn-around time), is one of the most important factors for the airlines. There are many companies in every European airport, which are mutually competing for ground handling (Cederholm, 2014).
Ryanair Company has the opportunity to save on commercial maintenance fees for aircraft. The flight attendants clean the salon, saving around 20 minutes per call the team with equipment. In addition, this company brings food with it, so that loading catering saves another 20 minutes. Thus, the aircraft parking time is shortened to 35 minutes, while planes are normally served in the airports for 50-60 minutes, and according to the IATA standards the average time of the aircraft maintenance at the airport is around 45 minutes. Reducing the time is quite profitable for the airline company as well as the airport. It allows the company to accelerate the turnover of aircrafts and allows the airport to quicker exempt facilities: parking and staff (Corporate News of Ryanair, 2017).
one more success factor is the unification of the fleet of the airline. This condition reduces the cost of training of flight personnel, the purchase of simulators, the cost of spare parts and maintenance of aircraft. This company principally uses the new aircrafts. The age of the aircraft has no effect on flight safety, but it impacts on that how much time the aircraft maintenance and repair will be conducted (Trubbach, 2017).
the use of secondary airports. Since the traditional ticket includes the cost of airport charges, which are often quite high, the use of secondary airports can reduce this article of costs.
on-line ticket sales exclusively through the own inventory system, thereby reducing the cost of maintaining their own ticket offices and the use of global distribution systems.
the new single-type aircraft fleet, which is usually ordered from the manufacturer in the most cost-effective configuration and single-class layout;
strict requirements to the free baggage allowance;
the aggressive management model of the airline’s revenues (tariff model);
the use of the aggressive fuel hedging techniques.
SWOT-analysis
According to the SWOT-analysis technique, there are four main points, which characterize the company: advantages, drawbacks, threats and opportunities. Let’s analyze each component in more detail.
The most important advantage is that the Ryanair Company makes business more efficiently than traditional carriers. It gets more flights on each aircraft, more revenue per employee and lower costs per passenger seat.
This is achieved through the use of modern and young fleet (new aircraft consume less fuel and breakages are rare). Also, the company refuses from the optional elements of luxury spending (most of people can fly without the business lounges at airports, on-board meals, miles of frequent flights, and so on) and uses a smaller number of staff.
The Ryanair Company uses very simple and clear tariffs without any restrictions. Thus, the company does not need specially trained cashiers to understand the tariff model. However, sales management system of the Ryanair Company always complies with one rule: the higher the occupancy of the aircraft is, the more expensive the cost of air tickets is. Therefore, if a customer wants to fly very cheaply, he must buy a ticket in advance.
One more feature of the Ryanair Company is that it puts the client’s interests in the first place. Most likely, the flight attendants will meet customers with a joyful smile on board; commander of the aircraft will greet customers during the flight (Malighetti, Paleari and Redondi, 2009).
At the same time, Ryanair is characterized by some drawbacks. For example, the main drawback of this company is primarily the insufficient level of service and comfort. It is very often, when the company increases the number of seats on the plane, and it even plans to introduce standing places. There is also no differentiation into classes, all people fly in a common salon.
There is only one economy class for all customers that sometimes is not equipped with the most comfortable chairs. Incidentally, the number of seats is not indicated on the ticket, so the sooner the customer gets on board the plane, the more likely he would get the most convenient seats. Of course, all this is partly justified by the low price of the ticket.
One more drawback is that aircrafts of Ryanair are based in the more remote airports. Planes make only direct flights. As a rule, they are carried out in the unloaded opening hours of the air hub: in the early morning and at night. Such time frames are not convenient for the customers.
One more point is the savings on airline sales offices and additional staff that can negatively impact on the whole service level for the customers. The company usually sells the airline tickets exclusively by means of the Internet. However, when buying a ticket, even on the official website of the airline, it needs to be very careful. For example, Ryanair offers low prices on the tickets, which not include the additional taxes of airports and surcharges. The last ones can suddenly appear at the last step of ticket purchase or at the stage of final confirmation.
Despite the existing drawbacks, the Ryanair Company has quite many opportunities for its further effective development in the market. In the near future the company plans to conquer new markets, in particular, German one. This Irish low-cost airline company that amounts to around 5% of the German market currently wants to increase its share up to 15-20% during the next five years.
The main threats, which the company can face in the market, are linked to the increased competition level among the existing airlines. For example, in 2013, competitors have announced the price war to the company (Ryanair) that is ranked the second in Europe in terms of passengers. In this case, not only the other low-cost airlines, but also the ordinary air carriers took part in this price war. All of them started to reduce the cost of travel. As a result, the risks associated with the reduction of profit began to raise doubts of investors, so Ryanair had to quickly look for a solution (Henckels, 2017).
Recommendations
Today, the Ryanair Company offers its customers more than a thousand different routes, covering more than a hundred airports across Europe. More than ten millions of passengers use the services of the company each year.
Initially, Ryanair did not hesitate to use the image of the company-provocateur in its business strategy. The company’s CEO, O’Leary, admits that he has become a “villain from the cartoon” in those years. Due to its reputation Ryanair has frequently appeared in the news that, in fact, has provided it a free advertising.
It should be noted that sales of air tickets is not the single source of the company’s revenues. The company receives nearly 20% of all revenues from the sale of airline optional services. It is the highest indicator in the world. Optional services include the selling of insurance policies, lottery tickets, rooms in hotels, meals on board, car rental, fees for excess baggage, the implementation of advertising space in the aircraft and much more. All this is no less important part of the airline income, as are the air tickets. Strong growth of the additional income allows company leaders to make bold statements that eventually Ryanair flights will be free, and the airline will receive income from other sources (Geller, Folan and Shain, 2013).
In general, the strategy of diversification can be the most appropriate for the Ryanair Company. Diversification is possible in the case that the company has technological developments, core competencies and the resource base to compete successfully. Thus, diversification strategy is suitable if:
the scope of the current business reduces,
diversification opens up new possibilities,
it is possible to transfer opportunities in other sectors,
diversification in related industries allows to reduce production costs,
the company has the financial and organizational resources for diversifying.
The diversification strategy is implemented in that case if the company cannot develop further in the same market with the same product within the single industry. Thus, all four components change: the market, the industry, the product, the company’s position in the industry.
The development of diversification strategy includes four elements:
the choice of new areas of activity and input methods to the new branch;
increased productivity in the new sectors;
the conversion of strategic alignment and other features of diversification into a competitive advantage;
determination of investment priorities and direction of financial resources in the most promising divisions.
There are two possible options for further strategic development of the Ryanair Company. The first of them is the centered strategy of diversification. It is based on finding and using additional opportunities in an existing business for the production of new products. At the same time, the existing production remains in the business center and the new one arises on the basis of the opportunities that are enclosed in the current market, the used technology or in the other strengths of the company’s activity.
Another option is the strategy of horizontal diversification. It assumes search of growth opportunities in the current market through the new products or services, which require new technologies, different from the used ones. With this strategy the firm should focus on the provision technologically unrelated services that would use the existing opportunities of the company, for example in the area of supply chain management. Since the new service should be directed to the current consumers, then it should be a concomitant one to the manufactured products and services. An important condition for the implementation of this strategy is the preliminary assessment of the company’s own expertise in the provision of new service to the customers.
Conclusion
In the end one can say that the Ryanair Company is one of the well-known low-cost airlines, which operate in Europe.
Nowadays, the low-cost carriers represent a serious threat for companies with a traditional full-service maintenance, since a high level of cost of traditional carriers does not allow them to compete on price. The last one is the most important factor, on which the consumer chooses a low-cost carrier. The airline industry largely depends on the market power of suppliers as well as customers.
Nowadays, the low price remains the main advantage of the company. But, more and more companies reduce their services and also offer big discounts for their customers. Thus, the Ryanair Company should find new solutions to support current revenues and profits.
The transition to the diversification strategy can be the most appropriate solution for further profitable development of the company. While the company makes a profit at the expense of growth in the current industry, diversification is not necessary. However, the slowdown of the industry causes the necessity to use diversification as the attractive mean of improving the company’s prospects.
References
Cederholm, T. 2014. Low cost carrier strategies to maintain competitive advantage - Market Realist. [online] Marketrealist.com. Available at: http://marketrealist.com/2014/07/low-cost-carrier-strategies-to-maintain-competitive-advantage/ [Accessed 4 Jan. 2017].
Corporate News of Ryanair, 2017. Welcome. [online] Ryanair.com. Available at: http://corporate.ryanair.com/ [Accessed 3 Jan. 2017].
Geller, D., Folan, B. and Shain, B. 2013. Ryanair Strategy Report. [online] Bridges Consulting, pp.1-28. Available at: http://economics-files.pomona.edu/jlikens/SeniorSeminars/Likens2013/reports/ryanair.pdf [Accessed 4 Jan. 2017].
Henckels, E. 2017. Airline Industry Overview. [online] Columbia.edu, pp.1-25. Available at: http://www.columbia.edu/cu/consultingclub/Resources/Airlines_Eric_Henckels.pdf [Accessed 4 Jan. 2017].
Knott, P. 2008 Strategy Tools: Who Really Uses them? Journal of Business Strategy, 29 (5), p. 26-31
Kumar, N. 2006 Strategies to Fight Low – Cost Rivals. Harvard Business Review, 84 (12), p. 104-112
Malighetti, P., Paleari, S. and Redondi, R. 2009. Pricing strategies of low-cost airlines: The Ryanair case study. Journal of Air Transport Management, 15(4), pp.195-203.
Ryanair Annual Report, 2016. Ryanair Annual Report. [online] Ryanair.com. Available at: https://investor.ryanair.com/wp-content/uploads/2016/07/Ryanair-Annual-Report-FY16.pdf [Accessed 4 Jan. 2017].
Ryanair.com. 2017. Official Ryanair website | Book direct for the lowest fares. [online] Available at: https://www.ryanair.com/gb/en/useful-info/about-ryanair/about-us [Accessed 3 Jan. 2017].
Trubbach, N. 2017. Low-cost carriers eliminate rivals with unique fleet strategy. [online] ch-aviation. Available at: http://www.ch-aviation.com/blog/2013/07/10/low-cost-carriers-eliminate-rivals-with-unique-fleet-strategy/ [Accessed 4 Jan. 2017].
