COLOGNE BUSINESS SCHOOL (CBS)

Case Study: Ryanair

The future of the leading low fares airline

Term paper for Transnational Management

Summer Semester 2014/2015

Lecturer: XXX

Anton Wischnewski

BA12 in International Business / International Trade

Student-No. XXX

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Table of Contents

1 Introduction .................................................................................................... 2 2 Overview of Ryanair ...................................................................................... 3

2.1 Facts and Figures .............................................................................................. 3 3 Internal Analysis ............................................................................................ 5 4 External Analysis ........................................................................................... 6

4.1 Key Drivers of change ........................................................................................ 8 5 Porter’s Five Forces Analysis ...................................................................... 9 6 Competition Analysis .................................................................................. 10 7 Scenario Analysis ........................................................................................ 11 8 SWOT Analysis ............................................................................................ 12 9 Stakeholder Analysis .................................................................................. 13 10 Evaluation of Michael O’Leary’s Leadership ......................................... 15 11 Recommendations .................................................................................... 17 12 Reference List ........................................................................................... 19 13 Appendix .................................................................................................... 20

A1: Ryanair’s Porter’s Generic Business-Level .......................................................... 20 A2: Ryanair’s Cost Reduction Strategy ....................................................................... 21 A3: Integration into Porter’s Value Chain .................................................................... 22 A4: Resource Based View Model ............................................................................... 23 A5: PESTLE Analysis ................................................................................................. 24 A6: Porter’s Five Forces Matrix ................................................................................... 25 A7: European Competitors .......................................................................................... 26 A8: Scenario 1 ............................................................................................................ 27 A9: Scenario 2 ............................................................................................................ 28 A10: SWOT Analysis .................................................................................................. 29 A11: Stakeholder Analysis .......................................................................................... 30 A12: TOWS Matrix ...................................................................................................... 31

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1 Introduction

As Tony Ryan intended to offer an alternative air route to the state-owned airline,

Are Lingus, in year 1985, he did not foreseen that until the year 2009 it will

become the leading budget airline in Europe. Built on the success of the

American Southwest Airline, Ryanair was the first airline introducing the low fares

model in Europe.

But the times are changing and new threats are emerging from the external

environment and the budget airline industry. More and more competitors try to

imitate the Ryanair’s model and they are increasing in size and scope.

Furthermore, EU regulations, substitutive transport possibilities and economical

uncertainty are challenges Ryanair airline has to face.

This term paper provides the analysis of Ryanair’s strategy and position in

Europe’s budget airline industry based on the case study ‘Ryanair: the low fares

airline - future destinations?’ by Eleanor O’Higgins. It evaluates if the budget

airline industry is an attractive industry to operate in and reveals advantages and

disadvantages of Ryanair’s strategic approach. The thesis questions ‘If and how

Ryanair can sustain its competitive advantage’ will be answered throughout the

term paper.

Finally, recommendations are presented on how to adjust Ryanair’s strategy in

order to beat the challenges and to maintain Ryanair’s leading position.

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2 Overview of Ryanair

Ryanair airline was founded by Tony Ryan in year 1985. Initially, he intended to

offer an alternative to the state-owned monopoly airline, called Are Lingus,

between the countries Ireland and UK. Based on the cost leadership strategy of

the American Southwest Airlines, Ryanair was the first airline introducing the

budget airline model in Europe. After dealing with huge problems such as large

debts Ryanair transformed to Europe’s leading low fares airline in the 90’s.

Until year 2009 Ryanair has managed to become the leading budget airline in

Europe and to sustain its competitive advantage.

2.1 Facts and Figures

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Mission Ryanair aims to offer low fares that generate increased passenger traffic while

maintaining a continuous focus on cost commitment and operating efficiencies.

Vision To firmly establish itself as Europe’s leading low-fares scheduled passenger

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

service.

Values Ryanair is committed to bring customers the lowest fares and most on-time

flights out in comparison to all competitors. Most importantly are safety issues,

punctuality, near-perfect baggage handling, and the green policy.

Goals Ryanair plans to increase efficiency and lower costs even further in comparison

to industry rivals. The company wants to become the 2nd largest international

airline.

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3 Internal Analysis

Why has Ryanair been so successful so far?

Ryanair’s success was based on a skilful adaptation of the Southwest Airline

model focusing on the cost leadership (see: Figure A1). It benefits from the first

mover advantage as it has implemented the budget model first in the European

market by negotiating best rates possible with secondary airports. Ryanair has

established a single type aircraft fleet that saves on training costs, point-to-point

flights that enable fast turn-around times and flights to secondary airports that

save airport fee costs. All of them enable Ryanair to keep its operations

extremely efficient. Furthermore, Ryanair sub contracts employees on temporary

basis, which again saves the company huge expenses making it flexible and

adaptable to environmental changes. Figure A2 illustrates all the key points as a

summary (see: Appendix). Further savings are generated through Ryanair’s

website where no advertisement is necessary. Through ancillary revenues as

e.g. on-board gaming and car renting Ryanair manages to generate highly

satisfying 20% of its revenues. The low-cost business strategy has been

successfully integrated into the Porter’s Value Chain (see: Figure A3). The

Resource Based View Model shows the internal analysis as a summary (see:

Figure A4).

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4 External Analysis

PESTLE Analysis is a suitable tool in order to analyse the external environment.

It summarises all the external factors, which might create opportunities or cause

significant threat to Ryanair’s operations (see: Figure A5)

Political The political institution European Union affects Ryanair’s strategy and operations

by establishing regulations and restrictions in the airline industry. For example,

the regulation setting a ceiling on flying hours in order to prevent pilot’s fatigue

forces Ryanair to hire more employees. In addition, the EU demands to refund air

passengers in case of delays or cancelled flights. Also, the EU might increase

the emission fees. All those EU regulations must be considered and Ryanair’s

strategy has to be accordingly adjusted in order to avoid a negative impact on the

business. In addition, Ryanair should be aware of regional distinctions as the

Irish tourist tax and national government laws acting in favour of national airlines

that increase Ryanair’s costs, e.g. national employees contracts in other

countries have different terms and conditions that must be applied and are more

expensive.

Economical Ryanair saves costs by operating over secondary airports. In that way they avoid

primary airport charges and extra costs.

The economics downturn in 2009 has shown that Ryanair as the leading budget

airline can offer the cheapest flights attracting customers and still generate

returns. As long as the low fares are guaranteed Ryanair will do well in

comparison to its competitors.

But if fuel price fluctuations occur, an increase in price will lead to an increase of

Ryanair’s operating costs causing problems to guarantee low fares, which stand

for the core competence of Ryanair. Failures in hedging, as it happened in year

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2008, should be avoided. Also exchange rates should be observed as they might

lead to supply chain disruptions.

Social Customers perceive Ryanair’s customer service as poor, as the passengers

expect to be compensated for cancelled and delayed flights.

The poor working conditions cause legal and safety issues that can scare

established and potential new customers away.

Additionally, the provoking and misleading advertisements lead to a bad image of

Ryanair from customer perspective. Those social factors should not be ignored,

as customers are key for further growth and market expansion.

Technological Ryanair has successfully demonstrated how to make use of modern technology

in order to save costs. Ryanair’s online check-in policy and marketing on

Ryanair’s website demonstrates how to make use of the Internet technology

avoiding expenses of travel agents and excessive advertising. Besides, if

technology such as on-board Internet connection and television are offered for a

fee they can generate additional revenue on board.

Legal Ryanair is involved in a few legal battles with Stansted and Dublin airport that

raise their departure duties.

Besides, Ryanair’s misleading and provoking advertisement assault media law

and civil law resulting in high penalty fees.

The poor working conditions and insufficient training might be an issue of labour

law (Ryanair Documentation, Youtube, 2011). Additionally, the poor working

conditions lead to safety issues and can cause a bad image. All those legal

issues are causing handling-, penalty fees and court expenses that should be

limited.

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External Labour Unions such as British Airline Pilot Association (BALPA) challenge

Ryanair’s business culture and do not accept the poor working conditions of their

employees. Ryanair is accused of unsatisfied working conditions such as long

working hours, insufficient employee training and qualification, manipulation of

employees to accept working conditions and low salary (Ryanair Documentary,

2011). Besides, EU regulations regarding environmental awareness state that

additional fees are applied if the CO2-limit is exceeded.

4.1 Key Drivers of change

Key Drivers of Change are environmental factors likely have a high impact on the

success or failure of a strategy. According to PESTLE Analysis the Key Drivers

of Change are Economic, Political and Legal factors as those factors threaten

Ryanair’s business the most. Those factors have a tremendous influence on

Ryanair’s strategy and the power to abandon Ryanair’s operations.

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5 Porter’s Five Forces Analysis

The Porter’s Five Forces Framework helps to identify the attractiveness of an

industry in terms of five competitive forces. In Ryanair’s case it determines if the

European budget airline industry is an attractive one. (see: Figure A6)

1) The Threat of Entry The low fares industry, especially, with established leading players as Ryanair, is

really hard to enter. The entrants need high capital requirements in order to

generate high economies of scale to compete in the European market. Besides,

access to distribution channels is required. That means that the factor threat of

new entrants is pretty low.

2) The Threat of Substitutes A service that creates equivalent value to the customers as the airline industry

does is the railway networks, sea transports and car rental firms. The only

significant threat is the train service because the other options are too expensive.

Even though Europe has a good train network like EuRail, the disadvantage of

trains is the journey time. It takes much longer to reach a destination by train

than by plane, which results in a higher opportunity & transaction costs. To

conclude, the threat of substitute is low.

3) The bargaining power of buyers Customers have a high bargaining power because switching to another airline is

simple and there are no additional expenses required (e.g. EasyJet and Virgin

Express). Especially, in a strategy of cost leadership each customer becomes

important. Besides, an increasing problem is that more and more competitors

start to offer cheap prices, as well.

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4) The bargaining power of suppliers The bargaining power of suppliers is high, as there are only two manufacturers

competing in the aircraft industry. Supplier switching costs are high, as the pilots

will need to be retrained and high capital investments must be made. Ryanair’s

main supplier has traditionally been Boeing. But Ryanair can allow itself to

change suppliers because of its healthy cash flow and because it has already

tried to purchase Airbus aircrafts after the purchase of 200 jets from Boeing got

cancelled.

5) The extent of Rivalry between competitors The number of competitors that are trying to imitate Ryanair’s cost leadership is

increasing. As the market share of the budget airline is only 30% of the whole

airline industry the market contains the potential to grow. This might also be the

problem for Ryanair and its expansion strategy. As the threat of entry is high the

extent of rivalry stays as middle.

6 Competition Analysis

As it can be seen from the statistical figures (see: Figure A7) Ryanair is the

leading airline in terms of passenger numbers, which is 57,7 million. Besides,

Ryanair operates over 140 airports which is the highest number in the budget

airline industry. Costs per customer make up 36€ and an outstanding 89% cost

difference compared to the closest competitor EasyJet.

The Skytrax rating gives an overall evaluation rating for budget airlines. Criteria

of the evaluation are such as customer service and customer satisfaction. The

range goes from 1, as the worst, to 5, as the best rating. Ryanair received a

rating of 2, which is the lowest one in comparison to its competitors and which

indicates a bad customer service and satisfaction.

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7 Scenario Analysis

Based on the Key Drivers of Change (see above: 4.1 Key Drivers of Change)

and the factors of external environmental (see above: PETSLE, Porter’s Five

Forces) scenarios are developed. Scenarios are possible outcomes on how the

external environment, that could harm or benefit the company, might change.

According to those scenarios action plans are constructed on how to react to

those changes.

Scenario 1 (see: Figure A8)

As an economic downturn and fuel prices are major threats for Ryanair, Scenario

1 illustrates possible outcomes setting Economy according to the fuel price.

Scenario 2 (see: Figure A9)

As political factors and competition may harm Ryanair’s business Scenario 2

illustrates possible outcomes setting EU regulations according to competition.

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8 SWOT Analysis

The Strengths, Weaknesses, Opportunities and Threats - Analysis is the

summary of the Resource-Based View and the PESTLE analysis (see: Figure

A5: PESTLE Analysis).

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9 Stakeholder Analysis

Did the Aer Lingus bid make strategic sense?

Since the year 2006 Ryanair made a huge effort to take over the state-owned

Aer Lingus airline. The strategy made totally sense, the merger will allow Ryanair

to increase its market share significantly: 80% of all flights between Ireland and

other European countries will be operated by Ryanair in the future. Besides, it

should help Ryanair to focus on long-haul flights that correspond with its

prospective strategy plans.

Should Ryanair launch another bid for Aer Lingus or any other carrier?

Ryanair has managed to bid until the year 2012 three times without success. Aer

Lingus and the European Commission rejected Ryanair’s bid arguing that the

acquisition will transform Ryanair to a monopoly, which is against the anti-

competition law. Furthermore, Aer Lingus stated that a harmonic cooperation of

both airlines is impossible. Both airlines have been competing with each other for

more than 20 years.

To conclude, Ryanair should not continue trying to take over the Aer Lingus

airline. As the majority of Aer Lingus airline, the Irish government, as well as the

EU Commission are against the merger (see: Figure A11).

On the other hand, Ryanair should keep the Aer Lingus shares in order to avoid

a possible merger of Aer Lingus with another budget airline as EasyJet.

In addition, if Aer Lingus continues to lose share value Ryanair should focus on

Aer Lingus international operations only. In that way Ryanair captures its

prospective plans to expand internationally.

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Does the proposal to introduce long haul flights make strategic sense?

As Ryanair has to plan for the future it would make sense to introduce long haul

flights only if they manage to keep the prices lower as the prices of competitors.

Ryanair would establish itself in a completely new market segment competing in

the international market. With operations over secondary airports it will be

possible to offer low fares. But it must be considered that in the international

market there is much stronger competition as in Europe. Southwest Airline can

become Ryanair’s threat that is operating in the much bigger US market. A

merger with a popular airline in Europe that offers long haul flight is a possibility.

Keep watching Aer Lingus development also should be considered.

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10 Evaluation of Michael O’Leary’s Leadership

Michael O’Leary is an extraordinary figure and key personality in Ryanair’s

management. He owns an aggressive and innovative leadership style. His

statements are provoking and direct. Even though he has a deep financial

understanding and became a wealthy person by selling 5 billion of Ryanair’s

shares, he still lives the life of a middle-class person.

Strong Leadership style O’Leary has an energetic, motivating leadership style. Former employees are

praising his leadership style and he received a the European Businessman

Award from the magazine Fortune.

Innovation abilities O’Leary persuades Ryanair to adopt the strategy model of Southwest Airlines

even though the majority of the management team was not willing to do so.

He was the inventor of charges for online check-in.

Skilful Promoter O’Leary was able to bring Ryanair to the customers by doing provoking stunts

and curious advertisement. He always managed to attract the attention of the

media and was able to put the company Ryanair on the first page in the news.

Maintaining Core Competencies and effective Organizational Culture Over the years, O’Leary managed to build a low-cost culture amongst Ryanair

workforce. The corporate culture determines how Ryanair operates and conducts

its business.

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Developing Human and Social Capital Social capabilities are O’Leary’s disadvantage. As he is totally focussed to

squeeze out everything out of the available resource, e.g. the employees, to

lower costs and offer the lowest price, he forgets about the social component. If

he and the company want to survive they need to start developing closer

relationships without exploiting all the resources. Ryanair has to manage to move

away from an autocratic leadership style and transfer to a democratic one.

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11 Recommendations

Would you recommend any changes to Ryanair’s approach in view of the

changing environmental circumstances?

SO strategy

Ryanair should definitely proceed with its plan to open up 146 routes in year

2010 according to its five years plan. Expanding further in the market pursue the

goal to achieve economies of scale that provide a guarantee to offer the lowest

price in the airline industry. Moreover, Ryanair should make use of the strengths

as its young, commonality aircraft fleet and start to promote a Greening-image.

Besides, more revenue can be generated by increasing cross-selling over the

website.

ST strategy

Ryanair should keep buying the newest aircraft models from Boing as supplier.

That will allow Ryanair to minimise its emission costs that will lead to competitive

prices. Especially, in time of increased competition Ryanair should promote the

greening image. In times of an economics downturn Ryanair can even allow to

raise the prices as the competition is forced to do the same and Ryanair

possesses a wide price difference of 89% compared to its competitors.

WO strategy

In order to counteract against the bad public image because of controversial

advertisement and poor customer service Ryanair should try to look for a

dialogue with labour unions and its customers. The successful dialogues with the

labour unions should be promoted in marketing channels. Furthermore, Ryanair’s

website should be equipped with a feedback area for customers complaints. The

complaints must be constantly reviewed and responded.

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WT Strategy

Ryanair should definitely pay attention to its public image. The poor customer

service and safety issues can scare away customers. All problems concerning

safety must be eliminated. In order to decrease the pressure from employees

more staff should be hired.

(see: Appendix, Figure A12: TOWS Matrix)

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12 Reference List

CAPA - Centre for Aviation (2014). Ryanair SWOT analysis – Michael O'Leary's

maniacal focus on being the lowest cost producer. Retrieved 2014

from http://centreforaviation.com/analysis/ryanair-swot-analysis--michael-olearys-

maniacal-focus-on-being-the-lowest-cost-producer-96465

Eurail (2014). Retrieved 2014 from http://www.eurail.com/eurail-passes/what-eurail

Metro (2014). Ryanair’s top 10 cost-cutting plans. Retrieved 2014 from

http://metro.co.uk/2009/07/06/ryanairs-top-10-cost-cutting-plans-245605/

Ryanair (2014). About us. Retrieved 2014 from http://www.ryanair.com/en/about/

Ryanair (2014). Section: Presentations and reports. 3. Quarter Results 2009. Retrieved

2014 from http://corporate.ryanair.com/investors/presentation-reports/

Ryanair (2014). Section: Presentations and reports. Annual Report 2009 and 2010.

Retrieved 2014 from http://corporate.ryanair.com/investors/presentation-reports/

Eleanor O’Higgins (2007). Ryanair: the low fares airline - future destinations? Republic

of Ireland.

Telegraph Media Group Limited (2014). Ryanair's new controversial cost cutting plan:

one toilet per aircraft. Retrieved 2014 from

http://www.telegraph.co.uk/travel/travelnews/8823614/Ryanairs-new-controversial-cost-

cutting-plan-one-toilet-per-aircraft.html

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13 Appendix

A1: Ryanair’s Porter’s Generic Business-Level

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A2: Ryanair’s Cost Reduction Strategy

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A3: Integration into Porter’s Value Chain

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A4: Resource Based View Model

Resources (Tangible) (= what we have) Capabilities

(= what we can do)

• No-dividend policy • Healthy cash position Financial

• Healthy liquidity condition allow Ryanair to make Investment (e.g. Merger and Acquisitions)

• Youngest fleet in Europe • Fleet commonality • Point-to-Point Flights • Contracts with

secondary and regional airports

Physical

• New aicrafts allow to produce less emission and reduce maintenance costs

• Operating with only one aircraft type will allow to reduce expenses for employee training

• Fast turn-around and elimination of additional cost, e.g. baggage transfer

• Operating from secondary airports allow Ryanair to keep charges

• Ryanair website Technological • 99% of reservations are booked through

Ryanair's website. There is no need for travel agents.

Resources (Intangible) (= what we have) Capabilities

(= what we can do) • 6369 crews from 25

different countries, almost doubled over 3 years

• Michael O'Leary's leadership

Human Resources

• Passenger-per-employee ratio of 9195 was the highest in the industry

• Innovation, low-cost culture, promotion

• 100% web check-in policy: online check-in of bags and luggage

• 100% carry-on luggage

Innovation

• Ryanairs’ benefit: • Financial savings through less

administrative employees operating check-ins

• No need for expensive accumulative facilities

• Time savings • Customers benefit: • avoid long check-in procedure • avoid baggage discrepancies and loss

• Strong Marketing: • Controversial advertising • Public stunts • First mover advantage

Reputational Resources

• Minimise its marketing and advertising costs

• Negotiated best rates with secondary airports

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A5: PESTLE Analysis

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A6: Porter’s Five Forces Matrix

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A7: European Competitors

Sources: *European Low Fares Airlines Association (ELFAA), Company reports;

*² Skytrax star rating from 1-5 - not all airline rated. *³ Ryanair - Q3 Results - 31 Dec 2009; *4

Skytrax - The 3 Star Airline Rating

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A8: Scenario 1

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A9: Scenario 2

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A10: SWOT Analysis

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A11: Stakeholder Analysis

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A12: TOWS Matrix