Business model innovation

Case Study: Ryanair Business Strategy Analysis

Ryanair is an Irish low-cost airline headquartered in Dublin, founded in 1985. It

operates 181 aircraft over 729 routes across Europe and North Africa from 31 bases.

Ryanair has seen large success over recent years due to its low-cost business

model and has become the world’s largest airline in terms of international passenger

numbers. Taking Porter’s generic business strategies into consideration, Ryanair

operates a cost-leadership strategy to drive itself into achieving its mission of being

the leading European low-cost carrier (LCC). Throughout this essay the business

strategy of Ryanair will be analysed and the sustainability of their model evaluated.

Ryanair’s objective is to firmly establish itself as Europe’s leading low-fares scheduled

passenger airline through continued improvements and expanded offerings of its low-

fares service. Considering their objectives and mission, Ryanair’s decision on their cost-

leadership strategy was based on a few main factors discussed below.

A major influence was the deregulation of the airline industry in 1978, which removed

government intervention within the European continent. Under the new rules, routes

and fare decisions were made by individual airlines which meant that they could

compete on other factors besides food, cabin crew and frequency. As a result of

deregulation, a large number of new airline start-ups emerged within the EU and

competition among airlines increased dramatically resulting in downward price

pressures. Ryanair was established to take full advantage of these market conditions.

By offering low prices, Ryanair entered a huge and virtually unlimited market.

Having seen the major success of the low-cost carrier Southwest in the United States,

Ryanair decided to follow in their footsteps by establishing an LCC for the European

continent that targeted fare-conscious leisure travellers and regular low cost business

travelers. By doing this Ryanair became the first low-fare airline in Europe. However,

they took the Southwest model further by offering no drinks and snacks at all and

abolishing the frequent flyer program that Southwest now offers its customers.

The evaluation of Porters five forces influenced Ryanair’s choice of a cost-leadership

strategy, as the threat presented by new entrants and the threat of substitutes could

hinder their success. The threat of new entrants is high within the aviation industry

which meant that low fares would help drive away any further competition. The threat

of substitutes to Ryanair had to also be carefully examined. Their primary market,

Europe, had the availability of high speed trains and car holidays. For Ryanair to be

successful, prices had to be low to attract the public, and resist strong

competition from substitutes like Eurostar.

As Europe’s largest low fare airline, Ryanair’s competitive advantage remains in their

ability to continue as cost leaders; providing the cheapest fares to its customers. This

dictates that the company must minimize its own costs to ensure that they are able to

offer customers the service at a price below their direct competitors. This leads us to

consider some key functional strategies which directly help Ryanair towards their

ultimate goal to be Europe’s leading low fares airline.

The marketing strategy is perhaps the most obvious and significant functional

strategy of Ryanair. Low fares are designed to stimulate demand, attracting fare-

conscious travelers, those who may have used alternative forms of transportation or

even those who may not have travelled at all. Penetration pricin,g as it is called helps

gain market share and simply, more customers equal more revenue. Tickets are almost

solely sold on their website ‘www.ryanair.com’ which very importantly keeps sales costs

to a minimum since very few phone operators are employed and computers can

cheaply handle all functions of sales. With ever-increasing accessibility of the internet

globally anybody with internet access can buy airline tickets from Ryanair, so

distribution practically takes care of itself through this medium. Ryan Air relies on low

cost promotions and in recent times has concentrated on their ‘One million seats at

one pound’, which is usually advertised through their internet site, national press and

bulletin boards. It is the simplicity of this promotion which helps keep costs low since

expensive advertising agencies can be entirely avoided and advertising can be dealt

with in house.

Ryanair’s operations strategy determines how the airline will deploy its resources and

the policies it will operate by. To keep costs low they operate a ‘no frills’ service

onboard aircraft. This means the fare only includes the flight. There are however a

number of other measures directly related to a no-frills service. These include ticket-

less boarding, unallocated seats, one class of travel, costs for check-in baggage, no

refund policy, basic seats (to increase aircraft capacity) and charging for any additional

service. All this significantly reduces costs to Ryanair. The Achilles heel of Ryanair is

their greater aircraft utilization through super quick turnaround times. Essentially this

means the aircraft spends very little time on the ground, they achieve this through

their human resource policies and by having none or very little cargo in the baggage

hold to speed up loading and unloading of the aircraft.

Logistics strategy deals with the flow of products into and out of Ryanair. Again there

is heavy emphasis on cost saving and reducing measures. Ryanair fly to secondary

airports which are potentially much further from the City centre but accessible enough

by other forms of ground transportation. At these airports Ryanair are able to

negotiate extremely aggressively and demand the lowest landing and handling fees.

Additionally Ryanair is usually able to gain financial assistance with marketing and

promotional campaigns at these airports.

As cost leader Ryanair strives to undercut all its rivals but this means very low income

per fare and requires maximum utilization of its resources. Fortunately their financial

policy ensures they are able to still profit handsomely from rock bottom fares. The aim

is to break-even on fares but to make their profits out of ancillary charges and

commissions from their partners. Ryanair has a number of affiliates such as Hertz car

rental, Acumus insurance and booking.com all of whom are advertised readily on the

Ryanair website. Since the website has high website traffic its partners are able to reach

out to Ryanair’s huge client base and are prepared to pay good commissions to the

firm for this privilege. Ryanair also generate income from advertising on board the

aircraft. Ancillary revenue is generated from many of the services that traditional

airlines wouldn’t charge for, such as large baggage into the cargo hold, allocated

seating, snacks and drinks.

Ryanair’s strategy when purchasing aircraft is to buy new, uniform aircraft. This is

beneficial for a number of reasons all of which directly help cost saving measures.

Firstly, by being able to order same aircraft in bulk they are able to negotiate a better

price per aircraft. Secondly, uniform aircraft mean that there are potential savings in

staff training; air stewards being more familiar with all aircraft and maintenance will be

simpler. Finally by buying new, the company has safer, more fuel efficient planes with

lower maintenance costs. Safer aircraft also means greater consumer confidence,

equating to more fare sales.

Furthermore Ryanair aggressively hedge and fix as many of their costs as possible,

such as oil and aircraft prices so they are not subject to future price fluctuations which

could adversely affect profitability.

The human resource policy is again directly related to reducing costs. Employees are

expected to pay for their own uniform and equipment. Training given is the required

minimum and staff utilization is among the highest in the airline industry. Many staff

are employed on performance contracts and those who do not meet their expectations

are readily replaced. Staff are also expected to take on a number of roles, cabin staff

will also clean the aircraft prior to the next service, check in staff assist in boarding the

aircraft etc.

Ryanair has successfully experienced years of growth both in the number of its aircrafts

and passengers since its launch. However, with the global financial system recently

suffering its greatest crisis in more than 70 years, existing business models of many

aviation firms are coming under great strain. As this economic downturn bankrupts

LCCs like XL and Zoom with more expected to follow, the question is whether Ryanair’s

cost-leadership strategy is sustainable or not as it continues to offer lower fares in the

face of high costs. Although Ryanair has posted losses along with other aviation firms

for the latest quarter, it is expected to emerge from this downturn with fewer

competitors because its â €š ¬1.8 billon balance sheet is one of the strongest in the

industry. Additionally, as the credit crunch takes its toll, traditional airlines are not in a

position to cut fares and the threat of new LCCs is virtually eliminated due to the lack

of financing. Although Ryanair faces competition from substitutes like Eurostar, it is at

an advantage because of Eurostar’s limited destinations.

Ryanair is sticking to its mantra, when the going gets tough, sell more seats for almost

nothing. By offering low fares, Ryanair expects passengers to trade down to the low

cost airlines rather than stop flying completely. This trend appears accurate so far

based on passenger numbers as recession forces millions of passengers to focus on

price. Additionally, the latest statistics from The European Low Fares Airline Association

members show a 15.7% year-on-year growth in the number of passengers for 2008,

indicating that the LCC model is robust, even in times of crisis. Consequently, there is

no doubt that Ryanair looks poised for substantial profits and passenger growth in the

coming years. However, in order to compete with other LCCs and maintain its

continued market share growth in the future, Ryanair needs to improve its poor

customer relations.

The sustainability of Ryanair’s cost leadership strategy also depends largely on the

price of oil and how effective the firm is in cutting costs in order to continue offering

low fares. According to the firm’s latest financial report, Ryanair will enjoy significantly

lower oil costs thanks to their recent hedging programme, when most of their

competitors are already hedged at much higher prices. These lower prices will drive

Ryanair’s traffic growth, maintain high load factors and capture market share from

higher cost fuel surcharging competitors. In order to cut costs, Ryanair close all its

airport check-in desks and have passengers check-in online instead. Other cost saving

methods not yet implemented include charging customers for using toilets on

airplanes. These cost cutting ideas are not very popular among consumers and it

means that Ryanair needs to improve its already tarnished brand image in the future

which it had attained through negative press reporting and misleading

advertisements.

The current strategy at Ryanair is expected to work so well that despite the recession

Ryanair’s CEO has underlined the firm’s commitment to expansion. The firm is

expected to grow at 20 percent a year because of a 180 aircraft’s on order from Boeing.

These expansion plans for the future will require the company to increase its landing

slots at airports and recruit more employees. Currently Ryanair has limited access to

landing slots in major airports and the secondary airports are long distances away from

city centers which could make it less attractive in the future. However, a remarkable

cut in flights by other European airline carriers due to recession is creating enormous

opportunities for Ryanair, as many major airports compete to reduce charges in order

to attract Ryanair’s growth. Availability of skilled personnel shouldn’t be a problem for

Ryanair due to recent high unemployment levels. However, Ryanair needs to improve

its current low level of empathy for employees if it is to retain them in the future.

Even though Ryanair’s cost leadership strategy is robust and it looks set to serve them

well in the future, there are some key areas within the business that can be improved

on to enhance the firm’s profitability and brand image.

Ryanair has always been criticized for many aspects of its poor customer relations.

According to The Economist, Ryanair’s “cavalier treatment of passengers” had given

Ryanair “a deserved reputation for nastiness” and that the airline “has become a

byword for appalling customer service … and jeering rudeness towards anyone or

anything that gets in its way”. If Ryanair is to maintain its large customer base, it needs

to ensure that it acknowledges its customers’ concerns and maintains a service focused

attitude at all costs. Ryanair needs to invest in servicing customers better by providing

a non-premium contact number, improving its non-user friendly website, and

simplifying the terms and conditions of the flight service. Ryanair should also create a

frequent flyer program to establish a fixed customer base and encourage customer

loyalty.

Ryanair is notorious for its high staff turnover which negatively affects its reputation

as an employer. Over utilisation of employees, poor remuneration package, and

minimal training are a few other critical items to be considered by Ryanair if it is to

retain employees in the future. Ryanair needs to understand that although it is

currently possible to replace outgoing employees, but with time Ryanair’s overall

image will be tarnished. Resultantly, attracting new employees could become

impossible and this will hinder their expansion plans. Ryanair should incorporate a

flexible benefits package solely designed to improve employee morale such as flexible

working hours and extra holidays. To improve its image amongst employees, training

at all employee levels must include exposure to similar techniques and methods that

help promote the development of a uniform company identity.

Following massive success in Europe, Ryanair should consider introducing low cost

transatlantic flights to support its expansion plans and attain a larger customer base.

With a high demand for certain routes like London-New York and room for negotiation

in airplane prices and airport slots mainly due to the current financial climate, it is an

ideal time to further reap the rewards of the cost leadership strategy that has served

Ryanair so well over the years.

Ryanair’s model looks set to survive the current industrial downturn through its lower

costs and substantial cash balances. No airline is better placed in Europe than Ryanair

to trade through this downturn. It will therefore continue to grow, by lowering fares,

taking market share from competitors, and expanding in markets where competitors

either withdraw capacity or go bust. By taking the recommended improvements into

consideration, it looks like Ryanair’s cost leadership strategy seems ideal for the future.