Ryanair Airline

Ryanair Airline is low price offering passenger friendly airline having a point to point operational strategy due to which it has been able to sustain growth during a time when other airlines are reporting losses and filing for bankruptcy.

Ryanair airline came into existence in 1985. It was a mutual venture of Ryan family and it began its flights from scheduled routes between United Kingdom and Ireland in June 1985. At first it faced major drawbacks due to existing competition of Aer Lingus airline in Ireland but after considerable struggle and many management changes it landed into the hands of Michael O’Leary in 1993. O’Leary came forward with the motto of “We must amuse surprise and entertain” which infused new spirit into the workers and turned the tables for Ryanair Airline.

With passage of time Ryanair Holdings has established itself with a network of 200 Boeing 737-800s aircrafts. It has established its structure to be a low fare scheduled passenger airline service that is known for its short haul, point to point routes between Ireland, United Kingdom and the Continental Europe.

Ryanair Airline maintains an online Website www.ryanair.com/ for online information and ticket reservations. It also gives the option of online check in and issuing of boarding pass.

External Analysis:

Before going forward with the strategic options and recommendations for Ryanair Airline let us briefly discuss the Airline and Aviation Industry so that when making choices for Ryanair we must be aware of recent conditions of the airline industry and the limitations imposed by the condition of the market.

Industry Analysis:

The airline industry has been facing many problems lately. Over the last five tears there has been considerable losses among different airlines who are constantly reporting losses and filing for bankruptcy. Today the Airline industry faces many threats but the industry has grown most vulnerable to expensive labor contracts, rising fuel and energy cost and a constant decrease in the consumer demand. Let us explore the impact of these factors on the Airline Industry in general and Ryanair in particular through Analysis techniques available.

PEST Analysis

Political and Legal Analysis

Airline industry faces many political and legal bounding and these factors have great effect on the smooth running of the airline industry. Incidents like September 11 effect directly on the aviation industry creating fear and resistance in the minds of people. Also, there are many legal regulations and international standards that have to be followed by each aircraft of an airline. They are for safe and efficient flying environment. Neglect on the part of airline may cause severe penalties.

Economic Analysis

Airline industry is going through a weak period and that is due to economic issues like high fuel costs. Many Airlines and having continuous losses and some are filing bankruptcy because they are not able to maintain their costs with the growing cost of fuel.

Social Analysis

Social effects are always present when there are people involved. Social issues can be categorized as employee issues like employee disputes or labor cost issues and customer issues like fear of traveling or price sensitivity of customers. All these issues affect airline industry directly.

Technological Analysis

Technology has recently found its way in the airline industry as more and more airlines are turning towards internet to publicize their airline and offer services like online reservations and online check ins. This has created ease and convenience for customer but had a negative impact on travel agents that keep their own share in bookings.

Porter’s Five Forces

Market Definition

The industry is facing many challenges in the recent times in the market and the situation has worsened after the September 2009.

The market definition for Ryanair Airline is that it is classified as category 4811 “scheduled Air transportation” by the North American Industrial Classification System. It is a major passenger transport service that operates under “Scheduled Air passenger Transportation” (481111).

Ryan air Airline extends its service to about 150 destinations, including more than 24 in Ireland and the United Kingdom. Overall, it provides its robust services to more than 25 countries throughout Europe.

Internal Rivalry

The airline industry in recent years has been cornered into a very weak position due to current market conditions. It is characterized by numerous airlines that have none or very small differentiation in their product to make it unique from other similar services. A price war has started between airlines which have resulted in losses for many major airlines. Price competition has become the primary mode of rivalry between airlines; this has been due to limited uniqueness of services provided by different airlines and increased sensitivity of consumer on the fare price factor. This Price competition has reduced profit margins for airlines to minimum. Besides this the emergence of low cost airlines like Ryanair itself has increased the already evolving price competition in the airline industry.

An Increased rivalry has been observed in the airline market due to increased consumer price sensitivity. This has led many airlines into difficult negotiation positions as they are not in a position to raise their fares when other low cost airlines are their offering the same service at low prices.

Ryanair is also among the low fare operating airline providing quality services to its consumer with the added benefit of low cost. Its main competitors are Aer Lingus, British Airways and Easy Jet.

Many rivals observing Ryanair success have tried to follow in the footsteps of Ryanair by offering low price point to point airline market but Ryanair has developed a niche. The key company elements that have led Ryanair to success shall be difficult to imitate because Ryanair has developed its market on these key strategies from the start which has worked like a magic for Ryanair. This is difficult to happen for every other airline that tries to follow Ryanair.

Conditions of entry

Despite the problems in the airline industry and meager earnings of the major airlines, many new airlines have tried to enter the market. Most of them have failed to make a secure place for themselves and halted their operations only after some time of their entry. Many have filed for bankruptcy. There are many strong barriers in a new entrants way namely, High start up costs and competition from existing major airlines. High start up costs is a major obstacle in the way of many starting airlines. Capital markets are usually helpful and ready to invest in new entrants in the airline industry despite a high failure rate. But due to lower consumer demands experienced after September 11 incident and consistent financial losses experienced by new comers have led the capital markets to give serious thought before attempting to invest in new ventures.

The other significant barrier that new comers have to face instantly is post-entry competition from existing major airlines in the market. To make its place is difficult for a starting airline against fully established and working airlines that have years of experience and reputation and their places are firmly rooted in the ground. One option for the new airline is to find space in regional markets where they can offer prices lower than existing giants because of their lower marginal costs as they have lower labor and maintenance cost. However, the price competition existing among airlines ahs created a strong incentive for established airlines to preserve their market place. Thus when a new comer competes with an existing major airline head to head for a destination the major airline will lower the cost against this new entrant while maintaining high cost on its other non competing routes therefore preserving its market.

Even after facing these barriers, possibility of new competitors still exist. But with the current market conditions it would take a long time for them to become stable and pose any threat to existing major airlines.

Substitutes and Complements

The airline industry has active competition from other transport options namely bus, automobile and train travels. The main substitute for airline industry is the automobile. It is the primary source of travel for short distances however as the distance to be traveled increases the usage of airlines increases alongside.

Trips of extended distances are impractical and tiring by automobile and do not have cost benefits. Another substitute may be intercity railroad transportation. Trains do not have the same comfort or efficiency as the airline offers and they may take a longer time to reach their destination.

Its low cost may attract a small number of persons away from airline industry but most of the travelers still travel through air to save time. These means of transportation can cause little effect to the airline industry.

There are many complements to airline travel but the magnitude of relationship may vary for individuals. Many services that are related to travel may be a complement to the airline like hotel rooms and car rentals available. But it may only be a concern for holiday travelers not the business traveler. The true determinants of demand of an airline travel are the economic and political factors.

Supplier power

The airline industry is sensitive to supplier power through three primary sources: jet-fuel, airframes and labor. The greatest source of increased supplier power comes from jet-fuel. Most of the airline industry including Ryanair Airlines faces declining margins due to increasing fuel costs. To counteract the situation Ryanair Airlines has installed the most extensive price hedge on fuel in the airline industry. Traditionally, many airlines have operated under the assumption that remaining exposed to fuel prices is the norm for the airline industry and therefore acceptable. Ryanair currently has an advantage over its competitors of starting an advanced hedging program that is continually trying to determine future cash flows relating to jet fuel prices to optimize their hedges.

However, each year Ryanair Airlines fuel hedges as a percentage of total fuel consumption decreases. In 2005, Ryanair Airlines fuel hedges covered 85% of fuel use but by 2009 they will only cover only 25% fuel hedging. Ryanair has extended its hedging position for FY2011, hedging 50% of 1Q2011 and 2Q2011 requirements, as follows:

Ryanair fuel hedges for FY2009: as at Sep-2009

The second important factor is the labor costs which is a large expense for the airline industry. The majority of airline employees have joined one of the many industry unions and they have the negotiation power at the time of recruitment of the employee. Many analysts have speculated that the recent bankruptcy filings by major airlines came about as an attempt to cut labor costs. Unions will maintain significant supplier power in the airline industry but the power has recently been reduced and may continue to decline if market conditions do not improve.

Buyer Power

Consumers currently have considerable buyer power over the airline industry. Airlines excess passenger capacity and the perishable nature of airplane seats have allowed consumers to exert the pressure on the price of airline tickets. Due to market competition and rivalry among airlines has provided great benefits for consumer and majority of airline consumers have become highly price sensitive choosing to travel through airlines that offer minimum fare. Ryanair Airlines was the first to offer online reservations to reduce agent cost but other airlines rapidly followed in order to reduce costs. Additionally, in an attempt to eliminate the commission required for travel agents, airlines invested in different travel websites for direct reservation. The availability of centralized websites for online reservation has removed the 3.5% commission for travel agents but it has again increased price competition. Now travel reservations can be made for most airlines through a travel site or their individual home websites. Ryanair offer online reservations through its individual websites.

Current market conditions and consumer preferences have made it difficult for airlines to price differentiate. The airline industry previously relied on business travel for price discrimination but with the ease of internet booking virtually all consumers have become price sensitive. The rise in price sensitivity has been compounded by the lack of product differentiation in the airline industry. Consumers choose Ryanair Airlines since they consistently offer the lowest fares. Low cost carriers face less buyer power from price sensitive consumer than high cost carriers.

Strategic Environment Matrix

The business environment matrix or the customer/competitor matrix is one way to evaluate and grade airlines according to their performance and customer satisfaction.

Data collected from Discount Airlines in Europe. See References.

Resources and Capabilities

The Ryanair Airline maintains a fleet of about 220 Boeing 737-800s.

Working with a single kind of airplane has increased overall efficiency of employees as instead of learning working and operation of different aircrafts they can concentrate their energies on a single airplane type. It has also been a means of reducing significant maintenance cost.