Ryanair's Cost-Leadership Strategy: Achieving Competitive Advantage

A company's business model is the management's model for gaining a competitive advantage and achieving superior profitability by implementing their pursued strategies.

Business strategies refer to the actions that management takes in order to implement a business model.

The main objective of a business level strategy is to create a unique business model that allows a company to outperform its competitors in the market or industry (Hill and Jones 2004). Ryanair adopts a cost-leadership strategy with the goal of surpassing competitors by establishing a cost structure that enables it to offer air travel services at a lower unit cost.

The central aspect of this strategy is to maintain low fares, earning the reputation as "The Low Fares Airline". By focusing on reducing its cost structure, Ryanair aims to achieve a competitive advantage and higher profitability. A company possesses a competitive advantage when its profitability exceeds the industry average for all firms. The greater the difference between a company's profitability and the industry average, the stronger its competitive advantage.

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Hill and Jones suggest that a cost-leadership strategy offers two key advantages. First, if competitors in the same price range or market segment charge comparable prices, the cost leader can achieve greater profitability by having lower costs. Second, the cost leader can outprice its rivals due to its lower cost structure, which gives it a competitive edge. Ryanair aims to do just that. Although they offer slightly less customer service compared to their competitors, the overall value of their service is similar, and the significantly lower price attracts a larger customer base.

Despite Ryanair's decision to opt for lower prices, the company's profits are expected to surge as a result of increased sales volume. According to Hill and Jones, competitors can only regain passengers by lowering their prices to match the cost-leader. By having a lower cost structure, Ryanair will be better equipped to withstand competition and is likely to come out on top, earning above average profits.

According to the case-study, the company acknowledges that becoming the top budget airline in Europe relies on being the least expensive airline. To achieve this, the company must consistently prioritize reducing costs to maintain affordable fares and profitability, even when faced with low returns. Ryanair's strategy for cost reduction centers around five primary areas:

1. Fleet Commonality.

2. Services can be contracted out.

3. The cost of using an airport.

4. The cost of staff.

5. The expenses associated with marketing.

Ryanair's decision to exclusively use the Boeing 737-200 as its aircraft has numerous advantages for its cost structure. Being the most widely flown airplane globally, Ryanair can easily find reasonably priced spare parts from various sources. These sources are eager to supply Ryanair, a major buyer, ensuring the company does not have to pay a premium price to a sole supplier. Additionally, Ryanair can benefit from cost reductions due to bulk purchases of certain parts and the likelihood of repeat purchases over time. This strategy protects Ryanair from one of Porter's five forces (Bargaining power of suppliers) by giving the company considerable bargaining power, ultimately keeping operating costs low.

By choosing to have a diverse fleet of aircraft, Ryanair would lose the ability to buy generic spare parts in large quantities, which hampers their ability to negotiate price reductions. However, by selecting the widely used Boeing 737-200 as their main commercial jet, Ryanair can benefit from cost savings. This is because there is a surplus of staff who are familiar with this aircraft type, including pilots, mechanics, and engineers, making the labor market competitive. Consequently, Ryanair avoids significant investments in training specialist staff for operating and maintaining its fleet - an expense that would be considerable. Furthermore, by having professionals with rare specialized skills that are essential to the airline's operation easily replaceable in case of defection or departure, Ryanair protects itself against potential increases in labor costs.

Another cost reduction strategy implemented by Ryanair is the outsourcing of airport services. These services, including baggage handling, aircraft handling, ticketing, engine maintenance, and heavy maintenance, are entrusted to third-party organizations that compete for contracts. Ryanair has the freedom to select the most suitable company according to their strategic plans. The chosen subcontractor is expected to deliver high-quality services at the lowest cost to secure the contract. In order to prevent complacency, Ryanair offers short-term contracts and periodically invites other companies to tender for the contract.

One of the key factors for the success of Ryanair's business model is the selection of airports. The company chooses smaller secondary and regional airports in Europe instead of major congested ones. This decision has helped minimize costs incurred by Ryanair as these smaller airports are eager to increase passenger throughput and their profits. Airport charges, including landing fees, passenger loading fees, aircraft parking fees, and noise surcharges, have been minimized by this strategy.

Ryanair is able to negotiate favorable access fees and lower rental expenses at secondary airports due to its high air traffic volumes. These airports heavily rely on Ryanair for a significant portion of their services, making the company a powerful buyer. Similar to its spare parts suppliers, Ryanair can leverage its purchasing power in this position.

Ryanair has faced controversy for its attempts to reduce costs in every possible way. One such example is the wheelchair levy for disabled passengers. Instead of offering free wheelchair service to those unable to walk, Ryanair outsources this service to a third party and charges customers up to fifteen euro. While this aligns with Ryanair's overall business model, it has not gained favor with the public. The airline has eliminated any non-essential activities that hinder their ability to provide dependable low-cost flights.

The text highlights various services and policies offered by Ryanair, an airline company. These include advance seat assignments, in-flight meals, multi-class seating, frequent flyer programme, complimentary drinks, and provision of ice for purchased beverages. The company's decision not to provide ice saved them approximately forty thousand Irish pounds annually. Ryanair faced criticism for requiring their staff to pay for their own uniforms and laundering of these uniforms. It is worth noting that passengers will not receive a packet of peanuts from the air hostess during a Ryanair flight.

Ryanair operates as a completely unitarist company, meaning it does not acknowledge the authority of Trade Unions in representing its employees. This lack of recognition has led to reduced bargaining power for the staff, as they are unable to negotiate collectively. Consequently, the company has been able to avoid the costs associated with resolving large-scale labor disputes. Each of Ryanair's staff members negotiates their own contracts on an individual basis, discouraging acts of solidarity among colleagues. Additionally, Ryanair has attempted to eliminate intermediaries in marketing its services.

Ryanair acknowledges the expenses related to paying commissions to travel agents for managing Ryanair flight bookings. The company has reduced the commission rate from 9% to 7.5%, which has caused dissatisfaction among travel agents. The case study demonstrates that Ryanair thoroughly examines all possibilities in order to decrease its cost structure. The company spares no effort in its pursuit to become the leading low-cost airline in Europe.

Ryanair does not strive to distinguish itself from competitors in the air travel industry. Any difference in service, compared to competitors, solely results from the company's aim to reduce costs. Essentially, Ryanair is unwilling to spend money on differentiation. The actual service of providing short-haul intra-European flights is not significantly inferior to that of differentiating airlines like British Airways or Aer Lingus, but it is noticeably more minimalist. The cost leader of the industry does not attempt to be the leader in differentiation in any way, as doing so would risk being stuck in the middle.

As a cost leader, Ryanair prefers to wait until a service provided by a differentiating airline like Aer Lingus becomes a necessary requirement for all customers before investing in it. Unlike other airlines such as Aer Lingus and British Airways, Ryanair does not target a specific market segment in the industry and avoids offering multi-class seating. Instead, Ryanair focuses on attracting the average customer by providing a generic service that appeals to the highest number of customers. Aer Lingus and British Airways, however, adopt focus strategies to cater their services to specific customers in particular market segments determined by socio-economic status. For instance, British Airways offers a first-class service exclusively for wealthy customers. The absence of customization in Ryanair's service results in significant cost savings.

Advantages and Disadvantages of a Cost-Leadership Strategy

Ryanair has developed distinctive competencies as it has grown. Its efficiency in airport turnaround time is particularly notable, and this competency has been achieved through experience. However, Ryanair and its leadership strategy are still susceptible to competitive forces according to Michael Porter. As a cost leader, Ryanair is protected from competition primarily due to its cost advantage. Its lower costs mean that increases in input prices, such as jet fuel or airport charges, will have a greater negative impact on competitors compared to Ryanair. Additionally, any reductions in air travel prices due to buyer power will not impact Ryanair as severely as competitors with higher costs.

According to the case study, Ryanair holds significant bargaining power over its suppliers because it hires a large amount of airport runway time from small secondary airports. The threat of substitute products is also evident in the case study, with the rise of high speed bullet trains and the emergence of low fare airlines imitating Ryanair's model. However, as the cost leader, Ryanair can lower its prices to compete with these substitutes and maintain its market share. This cost leader advantage also acts as a barrier to entry as other companies cannot immediately match Ryanair's costs or prices. Hill and Jones argue that a cost leader remains secure as long as it can maintain its cost advantage and when price remains the primary factor for most buyers.

Ryanair's pursuit of the cost leadership strategy is advantageous as long as competitors are unable to lower their own cost structures and outperform Ryanair. In theory, it is not difficult for rivals to imitate Ryanair's methods and use them against the company, as demonstrated by the emergence of other "No-Frills" airlines like EasyJet and Virgin Express (although Virgin does offer cold drinks). However, Ryanair has an advantage over these new competitors due to its experience and expertise gained from being in the industry for a longer period of time.

Another potential danger for Ryanair is that their relentless pursuit of cost leadership may lead them to make decisions that reduce costs but also decrease demand for their flights. An example of this is the decision to charge handicapped passengers for wheelchair usage. This policy was widely criticized for its lack of morality, leading many people to swear off flying with Ryanair until the fee was removed. Some customers even stated that they would rather pay higher fares on competing airlines than support a company that takes advantage of the physically disabled.