Internal analysis of Ryanair Essay
Internal analysis of Ryanair
1. Internal audit of tangible, financial and intangible resources
1. Human Resources
* Ryanair currently employs 2000 people (2003) from 25 nations.
* The pay is performance related and among the highest in the airline industry (Annual Report 2004, p. 5). Travel concessions and participation in the share option program is granted to all employees. In 2003 over 30% (639 in total) of employees took part in the stock option program – the average pay per employee was about 53.000 (Annual Report 2004, p. 21).
* CEO Michael O’Leary has significantly shaped Ryanair.
2. Physical resources
* Ryanair operates 72 aircrafts (Annual Report 2004, p. 3). All aircrafts are of a single type. Ryanair has ordered 225 brand new Boeing 737-800 aircrafts. The average aircraft age was about 10 years vs. easy Jet’s was 5.1 years (2003). However with the deliver of the new aircrafts, Ryanair’s figure will enhance. The average age of the fleet is important, as maintenance costs depends on this.
* Facilities: Dublin Airport facilities, but no major other ones.
* Ryanair will stay mostly unhedged in 2005 (Annual Report 2004, p. 12).
* With a quick ratio of 2.7 Ryanair has enough cash even if all liabilities have to be paid at once (Brealey et al., 2001). Ryanair has also shown good profitability.
* Ryanair is listed on a stock exchange, obtaining capital in form of equity capital. In total, Ryanair has 1.5 billion in shareholder funds (Annual Report 2004, p. 12). The stock was very attractive to investors, outperforming its benchmark index.
* Ryanair has access to medium sized airports which provide cheap slot licences. The average airport charge applied to Ryanair was less than 7 .
* Ryanair has an option to get 200 additional brand new Boeing 737-800 from Boeing.
* Internet as major distribution platform with very huge attraction
Ryanair’s most important assets are aircrafts and access to secondary airports. But this alone doesn’t make this airline successful: the real assets are the employees and particularly the CEO Michael O’Leary. Ryanair has a solid financial statement and a good profit track which is currently negatively influenced by the ongoing price war.
2 Threshold and core competences and resources
1) Threshold Resources
* Availability of aircrafts and access to (low cost) airports
* Internet as sales and marketing device
2) Threshold Competences:
* If a sudden oil price shock occurs or the exchange rate develops unfavourable this may have negative effects on net income. The ability to hedge exchange rate risks and oil prices is therefore a core threshold competence.
* Customers expect to get cheap ticket prices, punctuality and highest safety standards from Ryanair. Ryanair must therefore be able to provide customers with lower fares than their competitors.
* The ability to generate income from ancillary services (in order to subsidise the lowest ticket prices).
Threshold capabilities of Ryanair are: the ability to keep flying from A to B on a low cost basis and sustaining competitive ticket prices.
Efficient low cost base
Ryanair always searches for possibilities to cut costs. Low operating costs within the complete value chain, subcontracting and economics of scale (performance related pay, efficient aircrafts, use of secondary airports, internet as marketing and sales device…) make it possible to provide the cheapest ticket prices available.
Sound financial statement
Very sound financial statement (e.g. liquidity ratio, shareholder funds…).
Leadership style of Michel O’Leary
CEO Michael O’Leary (Effective, charismatic leadership) and Ryanair’s management. The management of Ryanair received several awards and Michael O’Leary was named one of “25 European business starts by the Financial Times”.
High market power
Ryanair has a high market share, and the possibility to act as a price leader (sound financial figures making it possible to initiate and sustain a price war)
Effective employment handling: Every 7th employee (191 in total) was promoted internally (Annual Report 2004, p. 5), keeping people who already know the company which in turn reduces costs (introduction…) and enhances motivation. Employees have also the interest to bring the company forward because over 30% already are shareholders.
Sustainable competitive advantage according to Lynch (2003) of Ryanair is: the low cost basis (key success factor), offering of the cheapest ticket prices (in order to target price sensitive customers) and the abilities of the management and the CEO (leadership) of Ryanair. In addition to that first mover experience (experience from competing against BA and Aer Lingus at the beginning) may also have benefited the company.
3 Ryanair’s dynamic capabilities
Dynamic capabilities provide a constant flow of opportunities (Lynch, 2003), from which Ryanair could take advantage in order to sustain the competitive advantage:
* Ryanair immediately responds to opportunities and threats in order to cut costs and sustain the low cost basis (e.g. abandonment of ice cubes…) or to increase profits (e.g. ancillary services…)
* Constantly shaping the internet as the main communication device to its customer (marketing and sales, booking…).
* Ryanair wants to provide the lowest fares. Therefore the company must be very flexible and always at least react (or outperform) competitors in terms of the price.
* Ryanair’s aim is to enlarge. This means to add constantly more routes and boost of frequencies on rotes with high demand.
As it can be seen, Ryanair’s dynamic capabilities are flexibility and the ability of rapid adoption to changing conditions. Hence the competitive advantage is not static (e.g. low cost basis). This is what Brown and Eisenhardt (1998) define as “continual revolution” (Lynch, 2003 [p. 130]).
4 Strength and weaknesses of Ryanair
By referring to the above said, it’s possible to identify the following strength and weaknesses.
* Efficient and low operating costs (e.g. airport charges, same type of aircraft, economics of scales, cost cutting where possible…)
* Immediate reaction of the management to use opportunities (e.g. when ice cube weren’t fee of charge anymore, Ryanair stopped ordering them)
* Excellent career opportunities and effective employment handling (e.g. no union exists so far, good integration of employees in the company via the stock options program)
* Because of their obtained size they have to some extend pricing power
* The financial statement is sound (e.g. for sustaining the price war)
* High load factor (about 85%, which is one of the best in the industry)
* Strong performing CEO and management (e.g. several awards)
* First mover experience (Ryanair and its management shaped the whole European airline industry)
* Good safety record
* Hedging policy (Ryanair remains unhedged although PESTEL analysis concluded an instable environment)
* Ryanair added too much capacity in a short time frame (overcapacity may lead to deteriorating load factor and danger of high fixed costs)
* Ryanair doesn’t consider people without internet (more passenger may be attracted if Ryanair wouldn’t merely use the internet)
* The behaviour of the CEO towards government officials
As it can be seen, Ryanair fulfils all key success factors. The cost leadership approach is certainly Ryanair’s major strength and provides competitive advantage. However there were some weaknesses identified: for now, the company should at least rethink its hedging policy.
The classification of factors into strength and weaknesses can be misleading. For example, the enlargement of the fleet can lead to economics of scope. But at the same time, there is the risk of creating overcapacity (and thereby deteriorating performance indicators, e.g. load factor). Hence some issues may be both, a possible strength and weakness. The same is true for opportunities and threats. This is a limitation of the SWOT analyses.
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