Critically analyze and evaluate the current
strategic situation of RYANAIR making clear why you believe the company behaves
as it does
Low cost airlines have been a trend nowadays
anywhere in the world. There are many airlines that have adopted this strategy
and have become more successful because of this. The low cost
airlines
have the advantage over the premium
airlines
due to the fact that they will never get their costs to a point where they can
make a profit at low fares in bigger markets. Among these low cost airlines that
are in existence nowadays in Ryanair. The Irish airline company Ryanair is the
first low-cost, no-frills European airline to have any impact.
Ryanair was launched in 1985 and targeted the
Irish ethnic market between Ireland and the United Kingdom by offering a more or
less traditional type of service with a two-class cabin but at much lower fares
than was the usual. It stimulated a rapid growth of passenger traffic across the
Irish Sea, much of it diverted from the sea ferries. On the London-Dublin route,
where traffic had been stagnant for three years, the number of passengers more
or less doubled in the next three years in response to the low fares introduced
by Ryanair and to the lower fares forced on Aer Lingus and British Airways as a
result of Ryanair’s strategy (Doganis, 2001).
However, Ryanair was not profitable. Its unit
costs, though lower than those of Aer Lingus, were not low enough to sustain its
low fares strategy. By 1991 its accumulated losses amounted to close on
(Sterling) £18 million and the airline was facing serious cash flow problems. It
had also gone through five chief executives (Doganis, 2001). But in the long
run, the independent airline company was able to succeed.
The strategy for Ryanair is the closest to the
original Southwest model overall. Like most European flights it offers a
point-to-point rather than a hub service, it has absolutely no frills (meals,
seat allocation or frequent flyer program). It aims to turn flights around
within 25 minutes and routes are consistently the shortest of all the LCCs.
Interestingly, Ryanair is one of the most profitable low cost airlines in the
market (Strategic Direction, 2006).
In business, Ryan Air got the
low-cost
religion during the year 1991 (Pustay, 1992) and started aggressively hitting
the newly liberalizing European market soon after Stelios popularized the
no-frills concept to the masses. Unlike easy Jet, however, Ryan Air refused to
take on popular routes at congested and expensive airports, sticking to a strict
diet of cheaper regional flights to keep its prices the lowest in
Europe.
Owing to this offering of much lower fares,
Ryanair’s market share increased rapidly and before the end of the decade such
established carriers as British Airways and KLM were launching their own
‘low-cost’ subsidiaries. The spread of ‘low-cost’ airlines to medium-haul
international routes and possibly even long-haul will increase the downward
pressure on fares (Doganis, 2001).
Commercial aircraft industry has too
many uncertainties, which contain risks and factors that could affect its
overall success. Economy, terrorism and globalization are three factors that
could significantly affect or influence Ryanair’s strategic, tactical
operational, and contingency planning. The airline at present has reins on the pricing, profit margins and a
string cash flow. However,
given the volatile and fluctuating nature of the airline industry, Ryanair has
to take into consideration when making strategies several very important
factors.
Formulating effective
strategies
for achieving business goals has been, still is, and will continue to be one of
the most important concerns of business organizations. In this context, perhaps
no other organizational practice has captured more of the attention of academics
and practitioners in recent times than offshore outsourcing. As more and more
companies transfer their functions beyond the confines of national boundaries,
new insights are needed to deal with the associated complexities.
Offshore outsourcing refers to the practice of
migrating routine business processes to overseas locations with the aim of
achieving lower costs and at the same time maintaining quality. Competitive
advantage derived from cost leadership results “when the company sets out to be
the low-cost
producer in the industry” (Porter 1985, p. 12). Even if a company manages to be
the lowest-cost producer, some other company may dethrone it by pursuing
low-cost
strategy on a more aggressive scale. This has been the phenomenon in most
industries and is not new. To regain lost cost leadership, the company would
have to search for a new vendor that could provide at an even lower price than
can the nearest competitor’s provider. The search for
low-cost
providers becomes a continuous process. The
low-cost
position that Ryanair achieves through off sourcing enables them to serve target
customers more effectively by providing lower costs of services, and by
extending newer, differentiated services.
The downward pressure on yields also will in
turn make cost reduction a major priority for all airline managements. Cost
cutting is no longer a short-term strategy to deal with short-term economic
downturns in the airline business. Cost reduction has become a continuous and
long-term necessity for financial success. The aim must be to continue to reduce
unit costs and this has been continually the aim or Ryanair. The long-term
stability in the price of fuel will help, but it is not enough. The focus of
cost reduction strategies will inevitably be on reducing labor costs, which for
most airlines represent 25 to 35 per cent of total operating costs (Doganis,
2001).
Labor is also a major cost differentiator
between airlines competing in the same markets, since so many other input costs,
such as fuel, landing fees, aircraft purchase and ground handling, will be
broadly similar. Airlines will try to reduce labor costs first of all by
improving labor productivity through reductions in staff numbers, by
renegotiating work practices and by changing business and service processes.
This is unlikely to be enough.
Product and service quality is both an integral
part of an airline’s marketing strategy and a significant cost determinant. It
is also an area of cost over which an airline has much greater control. However,
airlines do not have complete control over such marketing costs except in those
few cases where an airline operates on its own, as a monopolist, on all or most
of its network. This is most likely to occur in domestic operations.
In order to cut labor costs more dramatically
airlines will increasingly try to outsource what were, hitherto, in-house
activities, as is discussed in the previous paragraphs. In the case of Ryanair,
the airline company may even ‘relocate’ many key functions to low-wage economies
or employ flight or cabin crews from these countries. The higher the wage levels
in an airline’s home country the greater will be the pressure to relocate
labor-intensive activities to countries with low wage structures (Doganis,
2001).
Depending on the country where the
airline has decided to outsource, successful operations and resolution of
company- and industry-specific problems depends on forging good relations with
the government with which the airline is operating under, using joint ventures
and large sized investments and on long-term presence in the country. This is
one legal responsibility of Ryanair and of every airline company, to follow
country or area soecific impositions on the airline industry by different
governments. Foreign firms had to conduct normal business operations in a
politicized and bureaucratic environment. The safety of their passengers is also
a legal responsibility since this would reflect on the capability of the
aircraft used. When a plane crashes by accident without any outside
manipulation, for example, it is almost always to be taken as a legal
responsibility of the airline. Most often, the airline involved would have to
pay whatever compensatory damages arise.
The government can
influence an airline company’s strategy by imposing laws and legal restrictions.
Business has never been fond of
government’s having an activist role in establishing the ground rules under
which it operates, but then organizations have no choice. Government regulatory
actions can often force significant changes in industry practices and strategic
approaches. And it is a company’s legal responsibility to follow government
regulations. In some instances deregulation has proved to be a potent
pre-competitive force in many industries including the airline industry (Sims,
2003).
Within the constraints imposed by
sector times and by what competitors are doing, an airline has considerable
freedom to decide its marketing strategy. This means not only deciding which
markets to service, it also includes pricing policy as well as decisions on the
types of product and the quality of services that the airline wishes to offer in
those markets (Doganis, 2001).
One key element of running an airline profitably
is turnaround time. Ryanair has shown this core competence. When the aircraft is
on the ground, it does not generate revenue but costs money in the form of
running costs, costs for using the airport, capital costs and depreciation
charges. Ryanair has reduced the time the aircraft is on the ground. By not
providing proper meals or newspapers, the aircraft does not have to wait for
them to be taken on board. The clear-up of rubbish is done by the staff on board
during the flight when passengers are asked to dump any rubbish in a bin carried
around the cabin by the crew; passengers have to come early to the gate to make
sure everyone gets on board quickly; there is no fixed seating (this is
particularly clever because it does away with the cost of having a computer
system to allocate the seats and it is an encouragement for all passengers to be
at the gate early to get a good seat, thus ensuring no late passengers which
could delay departure and cause problems at the other end), etc. By doing away
with everything that extends the time on the ground Ryanair can turn around in
20 minutes, can afford to sell cheap tickets and has a core competence (Nilson,
2003).
Separating business travelers on a low cost
airline is difficult to achieve as it increases the vitally important costs to
the airline and requires reconfiguration of the aircraft. If the passengers do
not see the product as meeting the current business class standards, which three
in four passengers are already criticize as lacking value for money (Company
Barclaycard, 1999), such a scheme would seem unlikely to be successful. Similar
price discrimination is also practiced by Ryanair with their introduction of
business fares which has open fares that are most suited to meet the ticket
flexibility needs of business travelers (Company Barclaycard, 1999).
Even if Ryanair’s strategy has been doing very
well in the market, the airline company can still benefit from a few
recommendations and changes. Ryanair and other low cost
airlines
can improve their service quality image by communicating these attributes to
passengers through a variety of means. A bright future awaits those carriers
that recognize that providing excellent service quality can be done efficiently.
As regional
airlines continue to upgrade their fleets (including jets), it
is clear that regional
airlines
will play an increasingly important role in the transportation system.
In recent years, there have been a number of
changes in global
airlines industry which have had profound effects on the
development of this very volatile sector of the economy in most countries of the
world (Pustay 1992). The essence of the
marketing
concept incorporates three basic elements of customer-orientation, integrated
marketing
efforts and the resultant company profitability and customer satisfaction. In
this process, continuous relationship between
airlines
and their customers has become the watchword and airline industry standard (Kaynak
1987).
Customer satisfaction is very important in the
repeat purchases. In terms of developing strategic
marketing
plans, airline executives at Ryanair should place more
importance
to those attributes which are deemed most important by passengers. In the
development of new services and utilization of newer type of aircraft, consumer
driven type of input should be utilized (Pustay, 1992). The boom in
low-cost
airlines all over the
world, fuelled by tax incentives, is increasing the level of
toxic gases in the atmosphere and displacing less polluting and more efficient
means of transportation for shorter distances, like trains.
In addition, one strategy that Ryanair can
employ to overcome negative perceptions about the safety of low cost airline is
to educate existing and potential passengers of the enhanced safety features of
the new aircraft. Such an educational effort may be accomplished through direct
advertising programs, sales calls with travel agents and flight announcements
and literature.
References
Company Barclaycard, 1999. 1998-1999 Travel in
Business Survey, Company
Barclaycard, London.
Doganis, R. 2001. The Airline Business in the
Twenty-First Century. Routledge.
Kaynak, E., 1987. Global
Marketing:
Theory and Practice. Journal of Global
Marketing,
1, 1/2, pp. 3-24.
Kotler, P. 1972.
Marketing
Management, 2nd edition, Englewood Cliffs, NJ:
Prentice Hall.
Nilson, T.H. 2003. Customize the Brand: Make
it More Desirable and Profitable.
Wiley.
No Author. 2006. Easyjet and Ryanair Flying High
on the Southwest Model;
Charting the Ups and Downs of Low-Cost Carriers.
Strategic Direction Vol22 No6.
Porter, M.E. 1985. Competitive Advantage, New
York: Free Press.
Pustay, M. W. 1992. Toward a Global Airline
Industry: Prospects and
Impediments. Logistics and Transportation
Review, 28, 1, pp. 103-128.
Sims, R.R. 2003. Ethics and Corporate Social
Responsibility: Why Giants Fall.
Praeger.
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