Strategic Management Case Study

Ryanair
Course: Student Lecturer Date CSM 4 Tadas Remeikis Paul Goodwin 23rd November 2009

Institute of Technology Carlow

Strategic Management Case Study CSM 4

The airline industry is becoming more competitive due to: y Market Maturity/Decline y Competitive Rivalry y Globalisation y Socio Cultural y Other Factors

MARKET MATURITY-DECLINE
The airline industry is in a state of maturity/decline due to slowing passenger growth rates and over capacity. This is putting pressure on yields and margins, which were then exacerbated due to 9/11. At this time, the budget airlines such as Ryanair were the only carriers that were making a profit and continuing to grow. The growth of the budget carriers further added to this over capacity. Airlines were therefore forced to look to new markets, which were in their infancy such as the European budget sector, which is growing due to the expansion of the E.U. This offered an attractive strategy for airlines eager to expand due to its large population base, higher fares environment and weaker competition. As competition increases and travel becomes more of a commodity, customers will demand lower fares and more frequent services, which again will favour the low cost carrier, giving them competitive advantage and adding to the pressures of the mainstream airlines.

SOCIO CULTURAL
Due to the high level of consumerism, customers are demanding more quality and value for money, thereby increasing competitiveness, which in turn, puts more demand on airlines to lower their prices. There is greater social mobility due to increased leisure time and more business/labour movement. Customers are therefore more prices conscious and look for the greatest value for money. Another factor to take into account is the increased level of education of the travelling population base. This creates a greater burden on airlines to meet their time schedules and avoid flight cancellations due to the passengers awareness of their increasing compensatory rights. There is a greater amount of younger people travelling due to changing population demographics, which may be of benefit to the low cost carrier. This is due to the no frills/low fares strategy of budget airlines, which is designed to stimulate demand from this budget conscious leisure, and business travellers who may have previously used other forms of transportation methods or possibly may not have travelled at all i.e. generic substitution.

Strategic Management Case Study CSM 4

GLOBALISATION
Airlines are going global to grow, expand and increase flagging profit margins due to: y Scale of economies y Competitors going global y Globalisation of government policies Scale of economies - Flight frequencies and high passenger numbers allows higher efficiencies and lower costs. - Sourcing efficiencies: post 9/11 bargain prices were paid for new/nearly new Boeing and Airbus planes were available for reduced prices. Manufacturers supplier power was therefore reduced at this time. - Companies were forced to source global cost effective solutions to reduce their operating cost. Competitors going global - Acquisition of landing and takeoff slots by company takeover or merger allowing more frequent flights in areas and hubs of intense competition. - Similar customer needs: Frequent schedule flights and lower fares, leading to price based selection by the customer. Globalisation of government policies (Trade Policies) - EU rules on overbooking and compensation - USA airlines receiving substitutes post 9/11 - EU climate protection charge for landing and takeoff. (Environmental charge) - Technical standards noise pollution hush kits, age restrictions, flight hours, maintenance standards and engineering quality and safety.

COMPETITIVE RIVALRY
Competitors are in balance creating lack of differentiation, with no customer brand loyalty to any one-airline brand. Customers chose flights on price because there is no switching costs or low emotional attachment. All mainstream airlines need to generate growth by adopting new business models. The only growth in European market is for low cost/low fares airlines. Main airlines have inherent cultural, competence and resource based problems in adopting this model. They are trying to differentiate by adapting the model to one of low cost with value added service, which is not a great success. The established airlines (as well as the new low cost airlines) also have to compete with direct substitutes such as high-speed rail links in continental Europe and also with high speed ferries. The generic substitution of doing without, people deciding not to travel at all, is also a factor forcing the airlines to adopt new models. To increase their competitive advantage all airlines will have to fix costs as best they can. Costs such as: fuel (hedging), labour, plane purchasing and leasing, airport charges, maintenance, cleaning and catering. They are forced to adopt these strategies and tactics to reach their breakeven point due to the high level of fixed costs in the industry. The drastic alternative of large-scale withdrawal presents serious exit barriers and is not a choice because of major political damage to reputation. A withdrawal will incur huge financial costs in the
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Strategic Management Case Study CSM 4

form of redundancy payments and a poor return on the sale of aircraft and equipment to a limited market.

OTHER FACTORS Environmental Issues

Increased costs due to environmental issues such as climate protection charges are expected to have a major negative impact on the budget airlines more than the mainstream ones. This is because mainstream carriers combine long and short flights within and outside the EU.

Supplier Power
Supplier Power plays an important role in the airline industry. An airline can get tied into a single aircraft supplier such as Ryanairs reliance on the Boeing 737. This can lower their bargaining power due to the high exit cost of switching aircrafts. Government regulations also have an effect on supplier power through the introduction of legislation governing the deals offered to airline operators. This was seen when the EU Transport Commissioner, Loyola de Palacio investigated whether Ryanair had been in receipt of illegal state subsidies.

3(a) TEST OF SUITABILITY

Ryanairs strategy of low cost makes sense for several reasons: y y y y y Air travel is now a commodity. Competitive advantage is gained by low priced fares, achieved by Ryanairs low cost strategy and economies of scale. Passengers are travelling more; buying is based on price over service. Slowing of passenger growth and over capacity in the industry. Consolidation and Penetration: - Withdrawal from unprofitable routes - Aggressive protection of market share e.g. GO - They have the resources and competences to successfully open new routes. Ryanairs strategy of organic growth allows them to grow at their own pace, establishing processes and infrastructures, while managing a healthy cash flow ratio of 3:1. This allows for future expansion and investment, supporting CEO Michael OLearys aggressive approach to growth. Acquisition and strategic alliances are rare in the industry; however the Buzz acquisition allowed Ryanair entry to the UK/London market by obtaining lucrative slots at Stansted airport.

3 (b) TEST OF FEASIBILITY

Ryanair is more than capable of carrying out this low cost strategy because they have the necessary competence and resources: y Experience of lowering costs creating efficiencies. y Planes, Staff, Slots and Negotiation y Sales and marketing International branding y Economies of scale low fares to large volume of passengers y Purchasing policy not the cheapest but the best value for money y Potential for growth fixed assets and capital expenditure is up

Strategic Management Case Study CSM 4

Future y Costs will eventually be as low as possible; competitors will catch up and mimic the successful Ryanair low cost business model. y Ryanair needs to grow by expanding into new Eastern European routes. y Acquisitions, especially buying a European airline may encounter legal blocks. y International long haul will have high growth rate potential but also have very high risks including cultural differences and expected levels of service. Ryanair will need to develop new competences and skills to provide the necessary quality of service.

3 (c) TEST OF ACCEPTABILITY

CEO Michael OLeary and the Ryan family are major shareholders and will support the future plan and strategy because expansion will further increase profits. Stakeholders: y Workers will be unhappy with the low cost strategy as they will be expected to work more for the same pay. They are likely to attempt to block the strategy. Suppliers will be unhappy regarding Ryanairs low cost policy, however maintenance, catering and cleaning contractors will still enjoy benefits of Ryanairs volume of business. The power of Boeing, OPEC, and the airports remains high. They will be happy to see an increase in the volume of sales and will most likely accept and encourage the strategy. Customers will be happy with the new low cost service and extra routes at best possible value. They may be unhappy with the low quality of service but will choose price over service. They are likely to support the strategy. Shareholders will prefer dividends from profits and less investment in expansion programs and may consider blocking the strategy. Competitors they will attempt to block access to the more lucrative airports. Legislators may want to protect the status quo and stakes. Aviation authorities are apprehensive with Ryanairs policies for quick turn around and the potential for safety problems. This combined with paying more than their fair share of costs is likely to make them reluctant to facilitate new routes and they may block access to airports. Pension fund investors will be happy with expansion and growth. They want to see growth in assets, income and share value. They will support the strategy.

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