Strategic management: ryanair
This report clearly states ryanair's long term vision by using different business models. Here it shows how management factors focus in order to see its position in low cost market. The Business Plan ranges from an industry analysis to an internal financial analysis. It integrates the impact of competition in the market of low fare airlines with our own financial capability
This material critically analyses the process of strategic management in the areas of nature of competition, the strategy, the strategy process, method of entrepreneurship and resources of RYANAIR. The analysis has been done by using some major theories such as macro analysis, balance score card, double loop learning of Ryanair.
Accordingly, this material primarily analyses the current business strategies of Ryanair to understand the nature of their operations. Subsequently, conducts a PESTEL analysis, Porter's five forces and value chain analysis to understand the environment of Ryanair, drivers of profit in the industry at present and the future and financial analysis. In addition to balance score card analysis also has been done to understand finance situation in the context of Ryanair and to evaluate its performance.
Finally, this report will recommend the recommendations where it's applicable. The analysis of this report was complete with the support of the case information provided and through industry related information from academic books, journals, websites and other publicly available secondary data sources.
Ryanair started its operation in 1985. In the first year more than 5,000 passengers traveled between South Eastern Ireland and London. The company expanded continuously and 600, 000 passengers traveled per year in 14 aircrafts by1989.Past four years the cost increased substantially and ends up with loss of £20 million.
In 1990 the current CEO Mr. Michael O'Leary took over the management and conducted major changes in the company. Ryanair followed the low cost-low frills concept and reduces the routes from 19 to 5 by 1991. The company increased the fleet to 21 over the next 6 years and remarkable increase in passenger traveled in Ryanair due to its low pricing policy. European regulation restricted Ryanair to take advantage to implement low pricing policy.
Ryanair took full advantage in 1997 open new routes in Continental Europe due to deregulation of European Union air transportation regulation. Ryanair established 160 routes by 2001 and hubs established around the continent in London, Glasgow, Brussels, Frankfort, Milan, Now Ryanair is the most profitable and key players in the European budget airline market.
2. Identifying low cost airline's critical issues and core problem.
· Regulation by domestic and EU
European airline industry is always subject to regulation from both domestic and European Union. Before 1980 heavy restriction imposed by the individual countries to protect their national airlines. Towards deregulating industry Ireland and UK signed bilateral agreement. In 1997 EU also deregulate the industry and any European airline can operate anywhere within the Europe. Ryanair benefited by this move. Subsequently EU introduces competition law which it prevent taking state aid and commission. Also any airline having dominant position in the market should not abuse the dominant position. Ryanair affected by this rule
· Major airline's Charter operators and Franchises.
Charter carrier operators taken 25% of the market share in Europe. Major travel agents and major commercial airlines operators own charter flights. Small flight operators like Virgin Express has become franchise to major flag carriers. The independent airlines become franchise to major flag carrier. Ryanair and easyjet have to compete with each another as low cost budget carriers. Budget carriers cost structure doesn't allow these airlines to compete successfully on short-haul routes.
· Customer service satisfaction
Ryanair's secondary services are complementary meals and drinks, seat allocation and news papers. Ryanair eliminated traditional secondary service and take this opportunity to earn profit by charging fee for every in-fight service and other traveling expense as travel insurance, car hire, and internet. Ryanair is extremely sensitive in changing the fare value. Recently media announced that Ryanair is going to charge for lavatory service who are using in flights. (Refer appendix diagram 15)Although the Ryanair has remarkable track record for punctuality, flight completion the perception of the softer side of its customer service has not always been good with much bad media.
3. Objectives and long term vision for Ryanair.
Ryanair objective to operate the largest amount of routes with lowest fare compare without compromising low cost business model and quality of service in Europe. (Refer appendix diagram 1)
4. Purpose of this assignment
Purpose of this assignment is to analyze Ryanair's business model long term vision and submit a report to the management for the future planning in order to avoid any future threats and to bring success to the company. This report demonstrates
- Ryanair gives complete details about current strategy and the management approach which impact on business operations and functions towards carrier's customer relation and the management must take actions to be strong in the low cost market.
- The company's management team evaluates Ryanair's current strategy and takes preventive action to avoid any future threats in future.
- Brief evaluation of Ryanair's financial analysis and how the environmental factors affect the European airline low cost industry.
5. Process of strategic management followed at RYANAIR.
Businesses differ in the processes they use to prepare and express their strategic management activities. The model enhances the development of strategy formulation skills by guiding the analyst methodical and broad study of each business situation. (Refer appendix diagram 2)
6. Method and theory used
Most of the strategies and theories used in this analysis are industry analysis, environmental analysis, and financial analysis. Briefly discuss about external environment (pestel, potters diamond and strategy drivers) industry environment (Michael porter five force model, strategy grouping) and internal environment (value chain analysis)
7. Strategic factors and capabilities
7.1.0 External environment
The PESTEL analysis & Michael Porter's five forces analysis clearly talk about external factors on Ryanair function and the strategies which are adapted by the organization. Hence, a good perceptive of Ryanair external environment will identify the opportunities and avoid threats (Refer appendix diagram 3)
An airline industry includes well established key players and to compete with each and other but Ryanair has high potential of attracting the market. Thus, the PESTEL variables in macro environment have major force on the performance of Ryanair. (Refer appendix diagrams 4 &5)
7.1.1 Internal environment.
This environment analyses about the strengths and weaknesses of Ryanair. This aspect talks about Ryanair internal factors like skills, competitors and capabilities. Its measures the Rynair's efficiency and effectiveness to acquire competitive advantage (Refer appendix diagram 8)
According to the value chain analysis it is mainly rely on Ryanair's primary and supporting activities. Value chain analysis creates a value for Ryanair. However, through this analysis it is clearly focus on quality of Ryanair. (Refer appendix diagram 7)
8. Industry analysis
British was the main airline in Europe until the arrival of low cost airline. Prior to 1997 one member European nation was unable to fly passengers among another nation's domestic market. The Ryanair had challenging task when they enter in the low-cost market and lot of obstacle to overcome. Nevertheless Ryanair able to penetrate into the market and maintained the profit with low cost. Within short period Ryanair became European favorite low cost carrier.
In 1990 Ryanair operates with 41 Boeing 737-800, 21 Boeing737-200, 06 Boeing 737-300 and 6 BAE 146. Ryanair operated approximately 475 short-haul flights per day serving 84 locations in the UK, Ireland and Europe. Ryanair became largest airline carrying more than 23 million passengers in 2004 and overtook low-cost airline Easyjet. Ryanair achieved USD 1.32 Billion in 2004 increase of 43% from the previous year. Ryanair create a strong brand name among the low cost airline in Europe. (Refer appendix diagram 5&6)
Ryanair having all Boeing aircraft, hence it has grater bargaining power from the supplier. In 2002 Ryanair placed half of its order towards increase its aircraft by 112 in the next 10 years. (Appendix 12) Also it planned to purchases technology more advance and environmental friendly Boeing 737-800 and retiring old Boeing 737-200.
Boeing737-800 reduces fuel burn and CO2 emission per passenger kilometer by 45%. Ryanair bought all Boeing 737-800 are certified for category IIIA landings (automatic landing with minimum horizontal visibility of 300 metros and where there is no vertical visibility). Also Ryanair has installed Operational Flight Data Monitoring (OFDM) system in all Boeing 737-800 aircraft. The use of OFDM system is to monitor operational trends and inform the management. The management able analyzes report and identifies any deviation from the normal operating procedure in order to ensure Ryanair's flight safety standard. Ryanair did not have any single incident injuring passengers or member of its flight crew within past 24 year's operation.
Ryanair is the very competitive low cost airline in the Europe. Towards lower its cost Ryanair uses secondary airports whereas the closest competitor Easyjet does not. (Refer appendix diagram 10) Ryanair became no 1's in many areas.
* passenger traffic -over 23m for 2004 - over take Easyjet
* passenger growth
* European routes (149) and bases (11)
* Customer service delivery - punctuality, flight completion, and fewest lost baggage.
10. Process of strategic management followed by Ryanair
The Low cost carrier business model is highly competitive and the model enhances the development of strategy formulation skill by guiding business model systematic and comprehensive study of each business situation (Appendix 2)
11. External factors sharpen the competitive positioning the Ryanair.
There are not one but many factors which determine the strength of competition, the level of profitability of low cost carrier market. New entrance brings competition to the industry and risk of fall of market share and profitability.
12.1 External Environmental analysis
* European Union Regulations: The European airline always subject to regulation from European Union. By interfusing European Union competition law prevents getting state aid, beneficial relationship with airport operators. EU expects by introducing this regulation there will be healthy competition among flight operators. The well discussed fact that Ryanair's industry growth and very attractive low cost pricing achieved by favorable relationship with airport operators.EU commission in February 2004 found that Ryanair receiving illegal state benefit for its base airport at publically owned by Charleroi Airport (Appendix 11)
· Competition: Competition among airline careers increases after introducing the European competition law. This creates an environment for new low cost airline to enter the market. New comers could not last long due to heavy competitions on price. There are four main categories in the airline operators; they are flag carriers, Independent airline, franchises of major airlines and charter operators. The independent airline carriers include budget low fare carriers such as Ryanair, Easyjet. The low cost budget carrier's prices slightly lower than flag carriers. Flag carrier's uses independent carriers such as Virgin Express as franchises to compete the low cost airlines.
· External forces. Airline industry has always subjected any happenings in the world. Especially outbreak of foot and mouth in the UK, the SARS epidemic in Asia, Terrorist attack on 9/11, Gulf war, Economic downturn and recent volcano eruption in Island.
12.2 Internal Environmental analysis
· Human resources
Human resources are one of the most important function in a business. Ryanair is having more loyal and long standing service in the company. Because of the size of the company their total numbers of staffs are more than 2.300. The well trained staffs keep the company image in excellent position. The company keep the staff happy and motivated and the cabin crews running the flights smoothly and there is no any single bad incident from the inception. The company provide incentive and a share option scheme which encourage the employees to participate for the overall successes of the company. The company greatly depends on current CEO Mr.Michael O'Leary for any crucial decision taken by the company.
The company is having all Boeing aircrafts and the company replaces the old Boeing 737-200 with new technically more advanced 737-800. It helps the company for easy training the pilots maintain the spare parts for the air craft. The company is having barraging power from the Boeing supplier to buy latest flights at cheap price.
Ryanaor's strong position in the market increases the share value. The graph shoes how the share prices increases for Rainair with comparing flag carrier British Airways.(Appendix 3). At present Ryanair refuses to pay dividend to their shareholders or at any foreseeable future. There is large amount of excess cash with the company. Ryanair should distribute the dividend to shareholders in order to stock is more attractive for the investors.
12.3 Financial analysis
After Ryanair introduces low fare business model every year the number of passengers travelling increased. From 2002 the company starts to purchases fuel efficiency and environmental friendly Boeing 737-800 and starts to retire old Boeing 737-200. The company had more liquid cash in hand. In 2002 general demand for aircraft s has been very low. The company had good bargaining power and placed half of its Boeing 737-800 orders in 2002 with very attractive price.
Ryanair's main income is from the total number of passengers flown in the airline. The new Boeing 737-800 is having 189 seats where as old 737-200 have 139 seats. Due to very attractive ticket price over the other airline there is steady annual growth of passengers travelling by Ryanair airline in the existing routes. Ryanair has planes to open new rout in Europe and North Africa. Any passenger decrease in the new rout is well compensated by the existing routes. Other than main revenue Ryanair earn subsidiary income such as car hire, internet, and in-flight sales. Ryanair; s financial figures refer (Refer appendix diagram 14) in graphical format and % changes. Also refer the comparison Ryanair with other low cost carriers and flag carriers. (Appendix 10)
Aviation fuel is the main overhead for airline. Ryanair is hedging 90% of its fuel cost and any fuel increase is not affected the airline. Also new Boeing 737-800 is technology advance and consumption of fuel is low compare to 737-299. Raynair's ticket booking cost reduced due to 94% of the passengers' book their ticket through internet. Ryanair bought all new Boeing 737-800 Flights reduces maintenance cost, pilot training cost and the marketing deduced due to very popular Ryanair;s very popular internet site. (Refer appendix diagram 13)
13 SWOT Analysis
Ryanair operates over the past 17 years in the low cost carrier market. It created strong brand name and gain reputation in the European market with its aggressive pricing straggles More than 94% of the booking for the Ryanair is through internet. It improves the cost for ticket booking and eliminates need for the travel agent. Boeing 737-800 has high seat capacity. High demand helps the airline to fill the seat capacity. It create good image among customers due its punctual, high rate of flight completion and few baggage loss. The company has all Boeing flights, it easy for maintain stocks and low maintenance cost and easy for training the pilots. Return on investment is high due to high utilization of flights. The company has hedge aviation fuel price. Hence any increase in fuel will not affect the company. It has small head quarters in Ireland reduces its overhead cost.
Although the company has many positive sides it has some weakness also. Due to the company stubborn attitude slight incident gets more media coverage. Entire company depend on the European low cost market and restricted expansion in niche market, It extremely sensitive for the price change. Inconvenience for the customers who comes late due to the distance of some of the regional airport. (Refer appendix diagram 9)
After deregulating the transportation laws by EU there are lot of potential low cost market untapped. Ryanair operates within Europe the risk is less. Economic slow down really helps low cost airline due to the fact some of the some of the flag carriers customers comes to low cost airline.
There is threat on the low cost airlines are facing grater competition. Ryanair and Easyjet are curtailing each other growth. Flights are depend on the oil market The customer are vey price sensitivity.
Currently Ryanair is doing well but these are the recommendation I prefer for Ryanair to perceive in future. Ryanair's main aim is to remain fares low. Part of Ryanair's success is based on its operation and performance but not only that most and also the customers attracted by low price. O'Higgins (2004) stopped cargo service due to cut down turnaround time of aircraft from 30minutes to 25 minutes to magnetize more business travelers who required punctuality. But they lose €500,000 of revenue a year. Hence they have to consider certain amount cargo service.
Ryanair's innovating action creates future sustainability. In future if they found new routes reach places quick it will bring more tradition of getting more passengers for Ryanair. Ryanair for low cost uses secondary airport it will cause inconvenient for some customers to reach their place so they have to consider this point to get a solution for customers to reach their place easier.
Ryanair is highly price sensitive if they increase the price little bit then there will be a switching cost. So there is no brand loyalty. Currently the management announced that they increase the price for luggage and planes to charge to use lavatory. This will lead to passengers shift from Ryanair to another competitor. (Refer appendix diagram 15)
Ryanair has strict policies towards customer they need to change their perception on customers and wish to be more flexible in the future. Because strict policies will cause inconvenient for customers and they might change their mind set towards Ryanair.
Overall Ryanair is in good position and used good strategies which are implemented effectively and successfully. Ryanair mainly know about their environment and aware about their customers. Its main advantage basically it adopts changes which occur in the environment.
Ryanair low-cost concept reaches all the customers they willing to travel through plane rather than going by vehicles.
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