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“Ryanair –”Southwest” of European airlines Essay

The objective of my report is to analyze the external environment in “Ryanair-‘Southwest” of European airlines” case, which is very important factor for the firm’s formulated effective strategy. The external environment consists of a wide array of economic and sociopolitical factors. It is the specific market arenas that the organization has chosen in its strategy; it provides the business opportunities to the firm and it’s also a source of threats or forces that may impede the successful implementation of a strategy.

Macro-environmental Analysis (PEST factors affecting Ryanair Airlines)To analyze the macro environment, I will use the PEST analysis, which refers to political, economic, social and technical factors that confront Ryanair airlines. This analysis provides a no exhaustive list of potential influences of the environment on the organization. Each of the forces is categorized by a particular macro-level external influence, which directly impacts strategic direction at Ryanair.

The political environment can have a significant influence on businesses as well as affect consumer confidence and business spending. The political environment is one of major advantages to Raynair, as the majority of its operations are contained within Europe. This region maintains political stability, thus Ryanair does not experience issues with governmental instability in Europe as a concern regarding passenger volumes or flight destinations. Political factors in our case are:-Irish government policy from September, 1989. This policy were known as “two airline policy” valid for three years and was directed at benefiting both Irish carriers Aer Lingus and Ryanair. The new policy ruled that the two major Irish airlines will not compete on any international route and they both had to have separate routes-European Union deregulation of the airline businesses from 1997; set up a number of low-cost airlines offering no-frills services. This deregulation enabled Ryanair to open new routes to continental Europe.

-European Union expansion enabled the company to expand its business to new countries in Europe.

Other very important factors that have near- and long-term effects on the success of company’s strategy are the economic forces. They include inflation rates, tariffs, the growth of the local and foreign national economies, exchange rates, as well as unemployment rates. Economic factors include:-Economically- stable European Union market provided Ryanair with significant value in the form of higher volumes of consumers.

-Increasing oil prices inflated the costs of fuel and impacted profit margins-At the same time people in Europe are willing to travel more for lower price and this was option for low-budget airlines like Ryanair.

-European Union deleted duty-free on intra- European Union countries, and this new taxation policy affected Ryanair in loss of revenue, increased landing charges and increased the number of flight attendants.

The social and cultural influences of business vary from country to country. Social cultural factors in Ryanair case include:-Increasing of the people’s mobility in Europe, where good transportation is essential for every European citizen and it was a great opportunity for Ryanair to expand its business.

-Personal disposable income of people in Europe was rising which increased travelling lifestyles and business travelling.

-People in Europe travel for leisure, business, and searching for new jobs, as well as the number of senior citizens who were enjoy travelling.

-Travelling low cost has become a norm on European market.

Technology is vital for competitive advantage and is a major driver of globalization. Technological factors have a major effect on the threats and opportunities firms encounter and in Ryanair case they are:-A new trend in European airline industry which was website establishment. Airlines set up websites through which they sell tickets and other ancillary products and services such as car rentals and travel insurances. This led to cost decreases and to greater reach to customers. With creation of its website, Ryanair saved on cost and increased its revenue (no agent commission costs, but good advertising income).

-The improvement of technology aid European airline industry development and competition.

-Airlines provided satellite TV and phone services on board as well as broadband Internet and thus enhance value to customers.

-Information systems allowed airlines collect data about passengers, cost, and prices as well as ensure better service when boarding and handling luggage.

Industry Analysis: The effect of the Five Forces of Industry Competition on Ryanair.

The five forces were identified by Michael Porter as the industry Five-Forces model. This is a framework for evaluating industry structure according to the effects of rivalry, thread of entry, supplier power, buyer power, and the thread of substitutes.

Rivalry is the intensity of competition within an industry. The European airline industry is highly intense; market is highly competitive. Passengers have choices to switch to another mainstream (KLM, or British Airways) or low-cost budget airlines (EasyJet), because there is a low level of switching costs. The airline industry, therefore, is highly competitive and barely attractive. At the same time, the low-budget sector is in a more favorable situation due to greater traffic and customer affection. This sector is more attractive, as entry costs, as well as bargaining power of both passengers and suppliers are lower. Most cost advantages can be copied immediately, but if any company does decide to compete on the same basis as Ryanair there will be heavy pressure on prices, margins, and hence on profitability. In this industry there is not much differentiation between services and price in the main differentiating factor.

Threat of new entry is the degree to which new competitors can enter an industry and intensity rivalry. There are difficulties to enter European airline industry, since high initial investment and fixed costs. High barriers to enter suggest that only early entrants such as Ryanair could succeed. There has been much industry shake-out and many airlines left the market. There are high entry costs due to the necessity to buy expensive aircraft and equipment, to pay high airport fees, and to advertise massively. In addition to some of the barriers to entry I would like to include restricted slot availability which makes it more difficult for airline companies to find suitable airports, the needs for low-cost base and flight authorizations.

The threat of substitutes is the degree to which products of one industry can satisfy the same demand as those of another. In Ryanair case the degree for subsidies is in medium to high level. By this I mean that the European airline industry as a whole faced a lot of pressure. There was a high internal industry competition, encountered by other travel industries such as- cars, ferries, and high-speed trains in Europe (especially on short-haul routes are posing an increasingly serious threat).

Supplier power is the degree to which firms in the supply industry are able to dictate terms to contracts and thereby extract some of the profit that would otherwise be available to competitors in the focal industry. The bargaining power of suppliers is rather low because there are four major aircraft manufacturer (Boeing, Airbus, Bombardier and Embraer), which gives options for Ryanair to choose if decide to switch suppliers. But the switching costs from one supplier to the other would be high, because all mechanics, engineers and pilots have to be retrained.

Boeing is Ryanair’s main supplier and has an interest in co-operation with Ryanair because of stability of orders and high volume of outsourced services. Ryanair also proved its high bargaining power with aircraft suppliers (Boeing) by getting favourable contracts. Price of aviation fuel is directly related to the cost of oil and Ryanair controls it through hedging and future contracts. Also, the regional airports have low bargaining power as they are heavily dependant on only one airline- Ryanair. Major bigger airports, where Ryanair’s competitors operate, have greater bargaining power, and Ryanair’s policy is to avoid these airports as much as possible.

Buyer power is the degree to which firms in the buying industry are able to dictate terms on purchase agreements that extract some of the profit that would otherwise go to competitors in the focal industry. The bargaining power of customers in our case is from low to medium. If Ryanair increase its prices, the customers are price sensitive and they could switch to another airline relatively simple, with no high costs, because all airlines have internet web sites through which they sell services. The volume of the passengers’ traffic is great that airlines can afford not to satisfy all customers at all times. Even if a lot of passengers are not satisfied with customer care of Ryanair, company’s profits continue to rise. Customers know about the cost of supplying the service and the trade off between the price and quality of service.

Analysis of Opportunities and ThreatsOpportunities and threats are factors which contribute to the success or failure of achieving the organization’s mission, and which are outside of the organization’s direct control. Ryanair’s opportunities are:-Expansion of the European Union would bring larger population base and larger transportation needs. There would be more new destinations open up and Ryanair could launch new routes.

-Potential to capture market share, where low-cost carriers’ market share could double.

-Advanced technologies could improve Ryanair service, as well as there would be possibilities of expanding aircraft.

-Benefits from less exposure to geopolitical risks as Ryanair operates only in Europe.

-Economic slowdown helps Ryanair, because customers replace traditional mainstream carriers as they seek lower fares.

Threats for Ryanair are:-Ryanair’s fuel costs depend on the oil market. The cost of fuel is increasing, due to oil prices raise globally. This affects company’s speed development and earning ability; Ryanair operating expense has increased.

-Increasing low fare competition on the market and limited economic growth on the South and East European markets.

-Customers, as I already mentioned are very price sensitive and also regional airports gain bargaining power for “second round”.

-Increase in air traffic control charges as more planes fly in the sky.

-Weak employees’ relationships cause less production efficiency and effectiveness. It may waste Ryanair resources and capabilities.

-The high salaries the company pays for its pilots and flight attendants would increase Ryanair operating cost.

Resources:

Fottrell, Quentin. “The Rise and Rise of Ryanair”, June 6, 2004, www.thepost.iePorter, M.E. (1979) “How competitive forces shape strategy”, March/April, 1979, Harvard Business Review.

Channon, Derek. (1997). “The Blackwell Encyclopedic Dictionary of Strategic Management.” , July, 1997, Oxford, Blackwell Publishers.

Carpenter, M.A. and Sanders, W.G. Strategic Management: A Dynamic Perspective Concepts and Cases, 2nd edition. Upper Saddle River, NJ: Pearson Prentice Hall, 2009Thompson, J. L. (1997) Strategic Management. International Thompson Press: London.

Delfmann, W., Baum, H., Auerbach, S., Albers, S. “Strategic Management in the Aviation Industry”, September 30, 2005, Kolner Wissenschaftsverlag, Koln, Germany.


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