Operation and Strategy management for Ryanair Essay
Operation and Strategy management for Ryanair
The company chosen in this report is Ryanair in the airline industry. Ryanair is a low cost budget airline travelling across 1600 routes from 57 bases connecting 180 destinations in 29 different countries (Ryanair.com). Ryanair first started its operations in 1985 between Ireland and London. The first year it commuted around 5000 customers but the company really took off in 1990 when Michael O’ Leary was appointed the CEO of the company. The company was envisaged by its CEO Michael O’ Leary and adapted the Southwest airline model from America and brought it to Europe and since then the company has also embraced a no frills, low cost model where it plans to get their customers from A to B at the cheapest rate possible. This has revolutionised the travel industry and made travel cheaper and reliable within Europe. Ryanair has a strong hold on market in most of the countries Europe with 44% in Ireland where its headquarters are, followed by 23% to 21% in Poland, Italy and Spain (centreofavaiation.com). In the UK the company holds a modest 16% of the market with its overall customers estimated at 81.5 million for the year 2014. The company gets a stiff competition from Easyjet, Lufthansa, Aerlingus and Alitalia. These airlines try to follow the same model as well but Ryanair has been the leader by far generating revenues of €3.789 billion for the fiscal year 2013 with profits of €374.6 million.
Figure 1: Market share of different airlines ( Source: Centreofaviation.com) PEST Analysis
The political factors tend to affect the airline industry the most if they are flying from one country to another. In case of Ryanair, it only flies within the EU, thus there is no question of arising uncertainties. One factor which has helped the airline sector grow is deregulation. In 1978 the United States removed government control over many aspects of air travel, including fares and routes, in the Airline Deregulation Act (Liberty of Economics and Liberty). This shifted the power to the market sphere. Following the success of this, Europe completed their own faze of deregulation by April 1997. This allowed passenger planes to fly between member states freely. Ryanair added several new routes to their repertoire after deregulation, taking the opportunity to add routes to new parts of Europe and Scandinavia. A further form of deregulation came in March of 2008 when the EU and United States agreed to let any city within each other’s territory fly between each other. This was called the Open Skies Agreement. Although Ryanair have still to take full advantage of this, they have announced their desire to start transatlantic flights at a very low cost to the consumer (RTE, 2007). This unprecedented step could shake the air flight market, increasing the volume of passengers able to fly more freely across the Atlantic and could have a knock on effect with Ryanair’s transatlantic competitors, forcing a change in the market. In 2012 a new law was introduced where all flights coming to and from the EU had to buy their CO2 emission allowances, whereas before they were exempt from the Emissions Trading Scheme. Many airlines have expressed their anger at their inclusion in the scheme, pointing to the fact that only 2% of global CO2 emissions are caused directly by air traffic. Many airlines have increased ticket prices to cope with the extra costs incurred. Ryanair have passed on the cost to customers in the form of a 25c charge (Irishtimes.com)
During a deep recession Ryanair has flourished, recording a +18.71% 1 year return in 2012 ( Bloomberg, 2014) and announcing that it is Europe’s leading scheduled airline. In comparison to other airlines that are cutting jobs and have planes grounded, Ryanair are experiencing high demand and adding extra flights, creating new jobs for many sectors in their business, from pilots to sales and marketing people (RTE, 2007) One of the upmost problems facing the airline industry is the fluctuating oil prices. To compensate the rising oil prices most airlines have to put ticket prices up, which directly affects their customers. However, under the exceptional leadership of Michael O’Leary, Ryanair has addressed the problem through hedging. Hedging could be termed as an agreement between the oil companies and the airlines where oil prices are agreed in advance. In Ryanair’s case they have increased its fuel hedging capacity to 90% of its requirements (Centre of Aviation). This exceptional thinking by Ryanair gives them a cost cutting advantage over its competitors and thus still being able to offer its customers the same low fares which have been Ryanair’s forte.
The airline industry as per any other industry has to comply with the customer’s requirement to sustain in the market. A very god example that could be stated in this case is that of Ryanair, whereby, during the recession times when the unemployment grew to almost 15% and thus people did not have much money to spend, Ryanair gave its customers cheap flights to commute from one place to another taking away all the inflight luxuries. This has helped the airline grow even in the toughest times the economy has faced and thus also creating new jobs. But also to with stand the competition by other luxury airliners, Ryanair would offer its customers to book their cars and train tickets while booking their flights as it mostly flies to secondary airports. This, therefore not only attracted middle class customers but also people on business. The airline industry especially in Europe has had a last few troublesome years due to natural disasters that have cost the company extensive amounts. To point out a few, the ash cloud in 2010 cost the company 29.7 million Euros (Irish times, 2011) and these are huge costs for the airline to bear and thus, to compensate these compensation chargers Ryanair now chargers a €2 levy to compensate these claims in the future (Irish times, 2011).
In the current climate technology plays an important part in the airline industry. Firstly, with the increasing fuels costs, fuel efficient aircrafts can save the companies a substantial amount of money. Another way is the internet; with the growth of internet all the companies’ use online advertising to push the sales and television advertising is also second to none. The internet is also a medium where people look for cheap airline tickets. In the case of Ryanair, the company makes the utmost use of technology to cut the human involvement out and thus keeping the costs down. It has a very good online ticket booking system where 85% of its tickets are booked (Ryanair.com). In 2009, Ryanair introduces the self-service kiosks whereby the passengers can check in using the machine and thus taking the human element out of the equation. This service was already available for passengers travelling without luggage but it was now developed for the customers travelling with check-in luggage. This was a chip and pin service developed in collaboration with Ingenico and thus gave the company a competitive advantage over its competitors and thus delivering low price flights for its customers (BBC News, 2009).
Value Chain Analysis:
A firm’s competitive advantage could be determined by the value chain analysis. The value chain consists of primary and support activities. Understanding the company’s linkage between the primary and secondary activities gives the company’s business model and helps one understand the secret of withstanding the competitive advantage.
Figure 2: Value Chain Analysis model
In the case of Ryanair, a clear linkage could be made between the inbound and outbound logistics in the primary activities to the Technology development in the support activity. Now, to obtain a clear understanding of this model, inbound logistics are the deals that the company is able to acquire from its suppliers on the promise of higher volumes. These include food, drinks, duty free goods, fuel which have to be delivered, stored and controlled on time as to avoid any delays for the aircraft. Ryanair, also puts a great deal of effort in its operations as it promises its customers a 25 minute turnaround period which could be one of its core competencies and for the company to do so all the inbound logistics should be delivered on time. This 25 minute turnaround period also, gives the company the advantage of flying two extra flights on the same route compared to its competitors and enables high aircraft utilisation. The company also offers nonstop direct services to its destinations and does not link with any other airline, thus giving them a timely departure from the airport and also avoiding the costs for through services for its passengers and does not have to rely on other flights coming on time to schedule their departures. This has helped them gain a competitive advantage over its competitors as 95% of Ryanair’s flights are on time compared to 88% that of EasyJet. Ryanair also uses the standard Boeing 737 model of aircraft and thus, the company manages to get maintenance services and spares at a very minimum cost. This also reduces the cost of staff training and offers flexibility in scheduling aircrafts and crew assignments. On the outbound logistics, Ryanair operates to the secondary airports and thus have to arrange onward journey for their customers. They have teamed up with certain vehicle companies to give its business customers the advantage of that service however some of the routes are so obscure that these services cannot be provided constantly, a prime example are some of the Scandinavian routes.
Thus, Ryanair has certain limits when acquiring the market share. On the contrary, Ryanair’s competitor EasyJet does the opposite and flies to major airports and cities and thus paying higher landing charges which are then reflected in the fares for their customers. The advantage of flying to secondary airports is that Ryanair pay fewer chargers and they are also in a position to bargain with the airport authority and get a deal that favours them and the secondary airports are less congested and thus turnaround times are much faster (Centre of Aviation), 2014). The inbound and the outbound logistics are coupled nicely with the technology to gain a competitive advantage over its competitors. Ryanair has tried to eliminate the human element as much as they can. They have introduced kiosks at the check-in desks for customers to check-in themselves at their own leisure. Thus, reducing staffing costs which is then reflected in the prices they charge their customers. The company does not invest much in advertising as well, the main advertising is done through its very own website and 90% of the tickets are booked through the website as well( Ryanair.com). It only uses ticketing agents when they’re opening new routes and trying to venture into unknown markets; otherwise it is the website that people book their tickets through. The company constantly monitors its planes minute by minute through its own website and thus, keeping the human element out and using its website for mainly everything saves them on an average €6 million a year (BBC news, 2014). Amongst all the competitive advantage the company have, the one that has not been mentioned is the good leadership of Michael O’ Leary and his ability to create a vision for the company. He has successfully managed to adapt to the change as and when required and adopt different model to envisage the change for the betterment of the company which has helped the business to grow.
To conclude this report, Ryanair has emerged as a successful company since it was established in 1985. It had a few hiccups on the way for the first 5 years but since Michael O’ Leary took the reigns over in 1990 as the CEO the company has gone from strength to strength. Its success has been helped by the conducive nature of the industry and the external elements within the airline industry. This industry has its threats but since the de regulation act and the expansion of EU, there have been a lot of commuters within these countries for business and leisure, thus this higher demand and low costs have helped Ryanair emerge as a low cost budget airline. Just because the company operates all its routes within the EU, it does not really have to deal with changing political factors and that it has always used them to their advantage. Ex. De regulation act and the open skies act even though the company has not started its flights to the US as of yet. The changing oil prices are a concern for every airliner but Ryanair counteracts through a process call hedging and uses the most advanced technology to remove the human element to curb the costs down for its customers and another reason for its success even during recession is because it gave the customers cheap flights to commute taking the luxuries out which were the demands at that time. Ryanair has a competitive advantage by the virtue of its inbound activities and the outbound activities combined with the technological aspect of it. It uses the same standard Boeing so the costs are less and also, flying at secondary airports mean less landing charges and they’re also in a position to get a favourable deal for themselves from the airport authorities. The turnaround time is only 25 minutes as well and thus giving their customers more daily flights from the same destinations compared to its competitors.
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