[Class Title]
Introduction
This paper would like to discuss Ryanair’s business strategy and how it is linked with the company’s financial accountability. As stated by Friedman, a business’s primary accountability is to increase its profit. Apparently, financial accountability does not only relate to providing accurate reports and financial statements to avoid fraud. An equally important concept of financial accountability is on how it relates to managing company resources, expanding on strengths and how it effectively uses accounting tools to develop strategies that would provide economic benefit for the company. However, economic forces can sometimes become confusing. Due to the advancements in communication, technology and globalization, significant challenges such as increased competition and supply chain management arise that adds to the complexity of running a business. For the same reason, business strategies can easily go astray. At some extent, the growing complexities of operating in the airline industry have made a significant impact to most of the airline companies especially to Ryanair who at first failed to recognize the economic forces that govern the changing environment of the airline industry. Ryanair was founded in 1985 by Christopher Ryan, Liam Lonergan, and Tony Ryan . Initially, the company started with only 51 employees featuring a 15-seater Bandeirante aircraft that transports passengers from Waterford, Ireland to Gatwick, London and back. Because of the small aircraft cabin, the company was forced to recruit flight attendants that are less than 5 feet, two inches tall so they can easily operate in the tiny Bandeirante aircraft. The airline industry is not easy to penetrate. Being a new company, Ryanair faces intense competition from airline companies that are already established in Europe. There was also the regulatory issues from the Irish government who wish to protect the duopoly of British Airways and Aer Lingus, two of Ireland’s largest commercial aircraft during the time. In its infancy, the company struggled to operate its Dublin-London route yet today; it managed to become Europe’s biggest airline in terms of passenger and number of routes. It is quite interesting how Ryanair was able to survive and succeed in the competitive environment of the airline industry. Primarily, Europe’s biggest airline have undergone an extra-ordinary journey to provide its most important financial accountability and that is to provide service to stakeholders while keeping itself financially stable for its shareholders.
Management Strategies
Managerial decisions have been largely influenced by a company’s financial status. In fact, most of a company’s strategies are focused on making financial gains. Vise-versa, managerial decisions affect the business financial status significantly. For the same reason, new breeds of business managers are incorporating accounting and financial strategies to their decision making. Accordingly, modern management can be considered as ‘dynamic’ to convey the flexible and ever-changing management environment of today. In the modern management, an organization is not seen as some set of fixed, impersonal forces but rather a complex and dynamic web of information and people interacting with each other the result of which is the unprecedented flow of products and information that enabled businesses to expand and compete globally. Business environments are indeed dynamic and one of the major challenges in today’s business is the concept of change. For a fact, change drivers such as globalization, new technology and new accounting and financial systems are just a few challenges that businesses would have to deal with. Considering these game-changing factors, traditional business practices are at risk of becoming obsolete and ineffective in a current setting. Among the industries that have been largely influenced by change is the airline industry. Traditionally, business strategies of airlines are kept in line with its romanticized nature of being a luxurious and expensive. For years, this expensive notion on airline services characterized the industry where demand is believed to be closely related with the luxury of service that is being provided. Today, airline travel has changed. From the traditional luxurious and pampered flight experience, air travel has transitioned into providing only the basic customer needs. Accordingly, “Air travel has gone from being a romantic to being functional”. As a result, airline fare has dramatically decreased with serious implications to how the airline business is being managed operationally and financially. The first company to conceptualize low-cost air travel is Southwest Airlines. In fact, Ryanair’s business strategies have been largely modeled from Southwest’s revolutionary cost cutting strategies. It should be noted though, that Ryanair have once attempted to lower down its price while operating like traditional airlines. Accordingly, “While Ryanair’s price of £99 for the Dublin-Luton is quite high by today’s norms, it far undercut the £209 regulated rate offered by British Airways and Aer Lingus”. Ryanair’s attempt to lower their ticket price greatly increased the company’s consumer base yet the company was financially struggling despite the rapid expansion. As observed, while the company was making rapid expansion, it was actually accumulating losses primarily because of its poor promotional strategies. Apparently, its price is not sufficient to maintain the cost of its operation and the company’s uncalled generosity. In just four years of operation, the company accumulated a loss of £20 million and in 1989; the company was at the brink of bankruptcy. Michael O'Leary, the company’s accountant, was tasked to investigate the company’s drawbacks. According to him, Ryanair is a bottomless pit for Ryan’s money and advised the latter to shut it down. Instead of closing, Ryan commissioned O’Leary to go to the U.S. and study how Southwest Airlines operates in the hope of learning how Southwest operates. Southwest Airlines is famous for being a ‘peanut airline’ so called because of its snack offerings instead of the conventional full meals that are offered on traditional airlines. The airline company was founded by Rolling King and Herb Kelleher in 1971. From its humble beginnings, Southwest grew to dominate the U.S. commercial airline industry and pioneered the low-cost air travel revolution. Ryanair’s airline service starkly contrasted that of Southwest. Accordingly, the company’s generosity is becoming its undoing as it offers free meals that are now criticized as comparable to “feeding time at the zoo”. On the other hand, Southwest Airlines only provides the basic airline services although it compensates for the lack of exemplary service by the cheap fare that it offers. When O'Leary saw how Southwest Airlines was making money, it became “blatantly obvious that this was the way forward”.
Pricing Strategy
In contrast with traditional airline pricing strategy, Ryanair’s low-cost air fare is a quite a break with airline pricing traditions. Traditionally, air travel is marketed as though it is a Veblen good. In the Veblen good concept, it is believed that demand is generated when goods are priced higher than its true cost. Accordingly, the Veblen effect exists when consumers are willing to pay for a high price in exchange for a functionally equivalent good or service. In the case of airlines, though, instead of increasing the price, it is the service that is increased in order to generate traffic. By increasing the quality of their service, airlines are forced to keep their price ceiling high in order to keep up with the cost of the free services that they offer. Obviously, the low fare offering of Ryanair is made to stimulate traffic. According to the company’s website, “low fares are designed to stimulate demand, particularly from fare-conscious leisure and business travelers who might otherwise have used alternative forms of transportation or would not have traveled at all”. The company also strives to keep its low-cost pricing stable despite the fluctuating costs of fuel as part of its ‘no fuel surges guarantee’. This makes Ryanair’s fare more stable as compared to other airline companies that have fuel surcharge. By analogy, Ryanair’s low-cost strategy is based on a simple financial theory of generating demand by lowering the cost of their product. For a fact, Ryanair’s new pricing strategy after its brief observation with Southwest airlines has is now based on the price-elasticity of demand that applies to basic goods and services. The effectiveness of categorizing air travel as a basic service has a huge implication for Ryanair and Southwest airlines. For a fact, air travel is comparable to any basic goods and services that people patronize. Lowering the cost of airline travel then is only logical when it is considered as basic service and doing so would certainly increase consumer traffic. Walmart, for example, is among the companies that successfully applied the low-cost pricing strategy as based on the nature of the goods it sells. Walmart’s pricing strategy has been based on selling products in a low price while maximizing profits by compensating it with volume. In the same way, Ryanair’s extremely low air fare is compensated by the number of passengers that the company caters every day. While rightfully categorizing a company’s product and employing a pricing strategy based on how the company’s product is categorized can give amazing results, failure to do so is indeed devastating. One particular example is the pricing strategy employed by Ron Johnson on J.C. Penny. In his attempt to over-turn the company’s success, Johnson embarked on several pricing strategies wherein he patterned J.C. Penney from Apple Co.’s pricing strategies by taking out the store’s discounts . As observed, Johnson tried to sell J.C. Penney like Apple without realizing that J.C. Penny’s department store setting is very different from Apple. According to observers, Apple was able to maintain their no-discount policy apparently because “they sell stuff that people really, really want and that they can’t get anyplace else” .
Value-Chain Strategies
The company acknowledges that their low cost fare is a result of having a low cost operation. In the ‘peanut airline’ industry such as Ryanair’s, cost-cutting is a culture that the company has strived to build up. Following on Southwest’s footstep, Ryanair embarked on cost cutting strategies and value-adding strategies to support its low-cost fare offering. After restructuring the company in 1990, Ryan together with O’Leary, the company’s current CEO, both embarked on shifting the company’s strategy towards the Southwest Airlines model. Ryan invested another ₤20 million to keep the company running while lowering its ticket price even more from £99 in the U.K. to £59. Just like Southwest Airlines, to compensate for the low-fare rates, Ryanair increased its flight frequency on selected airports where it can gain the lowest landing charges. While other European airlines are offering full meals, Ryanair scrapped expensive meals on board as well as other perks while keeping only the basic services. In spite of the collapse of passenger traffic due to the Gulf War in 1991, for the first time in the company’s history, Ryanair posted a profit. According to the company’s website, that year, the company made a £293,000 profit although its passenger traffic decreased from 745,000 in 1990 to just 651,000 in 1991. Apparently, it was the restructuring and cost-cutting strategies that kept the company afloat despite lowering their fare even more. Some routes were also closed as the company focused on smaller airports to get cheaper landing charges while just like Southwest Airlines, the company uses only Boeing 737 jets, which helps keep maintenance and training of personnel costs low. By employing Southwest’s strategies of cost-cutting and value-adding techniques, Ryanair posted phenomenal growth. In 1995, the company’s passenger traffic reached more than 2 million while its fleet of Boeing 737’s numbered to 11 aircrafts. Its major competitors, Aer Lingus and British Airways, were replaced by the company as Ireland’s largest passenger aircraft in terms of traffic and scheduled routes. The company has more than doubled its passenger traffic while modestly increasing its number of employees between 1990 and 1995. Today, no other airline company in Europe can compete with Ryanair as far as pricing and flight frequency is concerned. Obviously, the airline company is poised to dominate the airline industry of Europe as what Southwest Airlines, its U.S. counterpart, had efficiently accomplished in the U.S. In order to support its expansion, in 1997, the company has public with an initial public offering of €11 to close at €25.5 on the first day of trading. It is quite notable and interesting to note how Ryanair and Walmart are similar in their business approach. Primarily, Walmart’s low-cost pricing is one of the company’s strongest strategic positions as much as Ryanair is. Ryanair’s expansionary strategies can also be compared to Walmart. Accordlingly, Wal-Mart’s expansion pattern is comparable to “dropping a rock into a pond” wherein its stores are located within a certain radius from its distribution center. For every mile that a store is closer to its distribution center, Wal-Mart saves $3,500 a year. In a region that is determined to be feasible for the company’s expansion, a distribution center is built and several stores are built around it in close proximity with each other. Similarly, this expansion model is observed in Ryanair’s expansionary strategies wherein it establishes a flight base in some major cities while expanding around it. The company continuously opened new routes increasing its radius of influence to include destinations such as “Malmo (Sweden), St Etienne and Carcassonne (France) and Venice, Pisa and Rimini in Italy”. The company also created flight bases to assists its growing fleet of international flights. Among its first continental base was in Brussels Charleroi Airport and serviced daily flights from Brussels to other parts of Europe. Ryanair also launched its services in Germany in 2002, placing increasing pressure to Lufthansa, Germany’s traditional airline company. Ryanair easily pushed aside Lufthansa’s monopoly of the German airline industry and emerged as the largest low-fare airline in Europe. The company’s current market monopoly implies that airline service is indeed basic services that need not have fancy perks and freebies. This only proves that in basic goods and services, consumers would choose what is cheap and reasonable. Taking out the competition is also one of the strategies that made Ryanair dominate the airline industry of Europe. With its enormous flight routes and low-fare offering, the company can penetrate any European market and strangle any small, medium and large airline companies along its area of expansion. Accordingly, since 2002, the company’s phenomenal growth continued unabatedly by acquiring commercial airlines and travelling on their franchised routes. Another value-adding service that the company engaged in was investing on online technology as part of its marketing strategy. In 2000, the company launched its first website, which enabled the company reach a wider market and provided easy booking access to its consumers. As observed, “Within three months the site is taking over 50,000 bookings a week, and becomes the only source of the lowest airfares in Europe”. By 2004, Ryanair.com was named as the most popular airline website by Google thereby generating ancillary income to the company while its online ticketing service accounted for 98% of the company’s flight bookings. Ryanair’s investment in online technology was a brilliant move in line with the observation of Amazon’s founder Mark Bezos who said that the internet is increasing at a rate of 2,400% per year. Despite its size, the company has stayed focus on giving its customers the best value for their money. In fact in 1997, the company has garnered numerous awards and recognition from aviation authorities as well as the business community of Europe. The U.K. Civil Aviation Authority, for example, recognized Ryanair as the most punctual scheduled flight carrier. The company was also voted for the ‘Airline of the Year’ award by the Irish Air Transport Users Committee and was voted as the ‘Best Managed National Airline’ by a prestigious magazine in 1998. The company was also awarded as the ‘Best Value Airline’ in 1999 by another prestigious magazine and in 2002; Ryanair was recognized as the best airline in customer service and the least number of lost bags. Punctuality is crucial for the company who is operating numerous flight schedules, which is one of the reasons why most people prefer their service.
Ancillary Income Generation
Behind Ryanair’s phenomenal growth is the effective generation of auxiliary income. According to the company’s CEO, ancillary sales are the key to Ryanair’s future. Ryanair’s ancillary revenue is steadily increasing. Since 2003, it posted millions of euros in income due to ancillary sales with an average increase of 34% every year. Part of the company’s ancillary generating strategy is to partner with numerous companies that offer different products and services. Among its major ancillary income generators are activities that are tied to the sale of air travel, which includes bus and rail tickets, hotel reservations, and excess baggage fees; car hires, sales of onboard food, beverages and merchandize and income coming from advertisements on its website. According to observers, “The airline has obviously done its math: more partners + millions of website visitors + millions of passengers = major ancillary revenues”. Ryanair have been tagged as one grand bazaar. Apparently, sparkling images of sales and promotions are readily observable on its website, which, according to observers, promotes a Vegas-style advertising. For the company, promoting low-fare is just one way of attracting customers while additional revenue is made through the extras that are sold to passengers. For Miller, Ryanair is just like Las Vegas where even though hotel rooms are minimal, customers are spending large cash on the table.
Financial Performance
In order to evaluate Ryanair’s financial performance, several financial ratios will be considered. These ratios serve as indicators if the company is performing well or not and provide indication of the company’s overall performance. Among the major financial ratios that will be considered are liquidity and profitability. Liquidity is the ability of the business to pay its obligations in due time. There are two common ways on how liquidity is determined and that is through the ‘acid-test test ratio’ and the ‘quick ratio.’ These ratios are given by the formula below:
Current ratio=Total current assetstotal current liabilities
Quick ratio=Current assets-inventorycurrent liabilities
For the fiscal year ending March 31, 2014, Ryanair posted a current ratio of 1.5% and a quick ratio of 1.5% as well. Apparently, the company is very much liquid since its total assets greatly exceeds its liabilities. On the other hand, the company’s profitability ratios would indicate how profitable Ryanair is. There are several ways on how profitability is measured. The most common of which are the gross margin ratio and the profit margin ratio. The gross margin ratio helps determine the percentage left or the total sales revenue after all expenses have been deducted while the profit margin ratio can be determined is determined by dividing the company’s net income from its net revenue. These ratios are represented by the equations below:
gross margin ratio= Revenue-cost of goods soldRevenue
profit margin ratio=Net Income Revenue
Ryanair’s gross margin is at 35% while its profit margin is at 10%. Although its profitability margin at 10% is quite low as compared to previous years, the company has been averaging at 13% profitability for the past six years, which indicates that the return on capital will be kept stable on these numbers for the following years. Overall, the company is rated by McGraw Hill Financial as satisfactory in business risk with low financial risk.
Conclusion
It is quite evident how financial factors such as cost and pricing can affect business strategies. In the case of Ryanair, the relationship of price versus demand was readily apparent as it became a central issue on the company’s success. The price revolution of the airline industry, which was started by Southwest and followed suit by Ryanair is, in fact, revolutionary primarily because it revealed the true nature of air travel. For years, air travel has been highly romanticized resulting to a Veblen effect on airline service. For the same reason, traditional airline strategies revolved around the Veblen notion of airline service until Southwest and Ryanair rightfully classified air travel as a basic service. As a basic service, air travel and the rest of the airline operation should follow the price elasticity of demand applicable for basic goods and services. Apparently, Ryanair clearly demonstrated that in basic services, consumers are more concerned about the cost rather than the perks and fancy offers. However, it should be noted that underlying all these strategies are cost and price maneuverings. For the same reason, Ryanair’s management, pricing and value-chain strategies have evolved in the economic forces that govern basic services. Considering Ryanair’s journey, it can be deduced that the company has grown to develop its strategies based on the airline industry’s changing environment while it capitalized on its advantages to further its growth in order to deliver its most important financial accountability and that is to provide profits to its investors.
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