Executive Summary
Ryanair is among the most successful Low-Cost Carriers in Europe. The airline has a ‘no frills’ philosophy that enables it to offer the lowest airfares in Europe by cutting down its costs. This paper analyzes the strategies and the macro-environment of Ryanair. The paper also tackles the strategic development of Ryanair including the influence of the stakeholders on the strategies of the firm. A PEST analysis and Porter’s Five Forces analysis are also presented in order to explore the environment of Ryanair.
Chapter I: Introduction
This paper is based on the case ‘The Low Cost Airline Industry in Europe’ written by David Hodge in 2004. The aim of this paper is to present a case study of one of the leading low-cost airlines in the United Kingdom and in Europe – Ryanair. The author intends to analyze the strategic intent, the strategic development, the competitive strength, the aspirations of the stakeholders, and the business environment of Ryanair. The paper will also present a comparison between Ryanair and Cathay Pacific, one of the premiere airlines in Asia. The paper will be divided in four parts.
The first part will focus on the strategic development of Ryanair. The author will compare and contrast Ryanair’s strategic development with Cathay Pacific’s. The reason why the author chose Cathay Pacific as the airline to be compared with is because of its success in the industry. The author aims to present a contrasting views of the two airlines. Ryanair focuses on the low-fare market while on the other hand, Cathay Pacific has a more diversified business focus. The author inteds to analyze the effectivity of the airlines’ strategies.
The second part of the paper will be a discussion of the current strategies of the company while the third part will analyze the competitive strength of Ryanair in the United Kingdom. In order to analyze the competitive strength of Ryanair, the author will employ Porter’s Value Chain Analysis and PEST Analysis.
The fourth part will discuss aspirations of key stakeholders and how these aspirations affect Ryanair’s strategy. The key stakeholders of the company will be described and their importance to the creation of strategies and the success of the company.
Chapter II: Comparison of the Strategic Development of Ryanair and Cathay Pacific
Before discussing the strategic development of Ryanair and Cathay Pacific, it is important to first define what strategy is. Strategy is an area of management that is concerned with the general direction and long-term policy of the business as distinct from short-term tactics and day to day operations. The strategy of business is defined as the long term objectives and the general means by which the business intends to achieve them (Karami 2007). Andrews (1986) defines strategy as a pattern of decisions which represent the unity, coherence and internal consistency of a company’s decisions that position a company in its environment and give the firm its identity, its power to mobilize its strengths, and its likelihood of success in the market place. There are different strategy development methods that are identified by different authors. The strategy development framework that will be used in this paper is the one devised by Johnson and Scholes (1993). According to these authors, a company can approach strategy development in a number of ways:
· Natural Selection View – the organizations are under great environmental pressure and have constantly to adapt to the changes in their environment.
· Planning View – strategy comes about through highly systematized forms of planning.
· Logical Incremental View – an evolutionary step-by-step approach to strategy; it is an adaptive approach but one which is more controlled by the company.
· Cultural View – an approach to strategy based on the experiences, assumptions and beliefs of management over time and which may eventually permeate a whole organization.
· Political View – strategy emerges after a variety of internal battles, in which managers, individuals and groups bargain and trade their interests and information.
· Visionary View – strategy is dominated by one individual, or sometimes a small group, who have a particular vision where the organization can and should be.
· Command View – strategy developed through the direction of an individual or group, but not necessarily through formal planning.
Ryanair’s Strategic Development
The company has a logical incremental view and command view. The airline industry is highly competitive and there is a great environmental pressure on every airline. The company tries to adapt to the changes in the external environment in a step-by-step approach. The strategy of the company is developed by the top management which is composed by a group of people. The guiding principle of Ryanair which can be traced to its foundation is to provide low airfare to the passengers. The various strategies of Ryanair from its foundation up to the present are discussed below.
Strategy One: Alternative to Large Airlines
Initially, Ryanair’s strategy was to offer simple low-cost fares and exemplary customer service. Ryan Air was founded in 1985 by the Ryan family to provide scheduled airline services between Ireland and the United Kingdom, as an alternative to state monopoly carrier, Aer Lingus. Ryanair was the first low-cost, no frills airline that had an impact on the European airline industry. During its launching in 1985, it 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 significantly lower fares.
Strategy Two: Direct Competition with Large Airlines
The strategy of Ryanair to become an alternative to large airlines in the United Kingdom was successful. Not only did it become an alternative, it also became the airline of choice for an increasing number of passengers. In 1986 Ryanair received permission from the regulatory authorities to begin flying four flights a day on the Dublin-London route with two 46-seat BAE748 turbo-props. In doing so, they challenged the high cost monopoly of British Airways and Aer Lingus with fares that were set at half the prevailing fare of £209. In 1986 (the first full year of operations) they flew 82,000 passengers and began negotiations to acquire their first jet aircraft and additional routes. During the later part of the 1980s, Ryanair continued to compete vigorously with British Airways and Aer Lingus while adding additional routes and jet aircraft. By the end of 1989 Ryanair had 6 BAC-111 jets and 3 ATR 42 turbos.
Strategy Three: Restructure
Despite the breath-taking increase in the number of passengers, the company suffered large losses. 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. The company has no other choice but to restructure. The entrance of a new CEO, Michael O’Leary to the company marked the beginning of a new strategy. O’Leary visited Southwest Airlines in Dallas, Texas to learn the fundamentals of Low Cost Leadership in the airline industry. After O’Leary’s visit to Southwest Airlines, he decided to reinforce the low-fare strategy of Ryanair. He abandoned the all frills in order to reduce costs. Ryanair moved its London base from Luton to Stansted airport, which was new and offered high-speed access to Central London.
Strategy Four: Leadership in the Low-Cost Arena
Ryan Air is considered as the largest low-cost airline in Europe. The company carries more or less 35 million passengers on 325 low fair destinations across twenty-one countries in Europe. The airline has 12 European bases, a large fleet that has more or less 250 aircrafts and more that 2700 employees. In order to maintain its leadership position in the low-cost sector, Ryan Air renders point-to-point services, cutting airport charges. Part of the strategic intent of the company is to maintain its leadership position by acquiring other companies. According to Michael Porter (1980; 1985), in order for a firm to maintain a sustainable competitive advantage, it must follow one of the three generic strategies. These strategies are:
1. Low-Cost – involves the sacrifice of some quality, fashion and even product innovation in order to keep costs low – the lowest in the industry (cited in Proctor 2000, p. 175).
2. Differentiation – focuses on the factors ignored by the low-cost strategy such as product variety, quality and service (cited in Proctor 2000, p. 176).
3. Focus – requires a firm to concentrate on a particular market segment rather than the overall market (Reid et al 1993).
The firm exemplifies most of the characteristics of a cost focus strategy. In order to keep the costs down, the airline maintains a no frills strategy. No frills is a direct approach to low cost which removes all frills and extras from a product or service. The goal is to generate a cost advantage that is sustainable for one of two reasons. First, competitors cannot easily stop offering services that their customers expect. Second, competitors’ operations and facilities have been designed for such services and cannot easily be changed (Proctor 2000).
Cathay Pacific’s Strategy Development
Cathay Pacific Airways is a Hong-Kong based airline that has a comprehensive network of flights to over 90 destinations around the world. It is considered as one of Asia’s biggest and most regarded airlines. The company was founded in 1946 in Hong Kong. The company since then has continued to develop Hong Kong’s airline industry and supported Hong Kong’s position as a major transportation center in the region. The airline company was founded by Roy Farrel (American) and Sydney de Kantzow (Australian). Like Ryanair, Cathay Pacific faces different challenges and problems from the external environment. The external environment plays an important role in the creation of Cathay Pacific’s strategy. Like Ryanair, Cathay Pacific has a logical incremental view. The company’s strategies are based on the changes in the external environment. The company also has a planning view – the company studies the changes in the external environment and then quickly designs strategies to keep up with the changes. The strategies of Cathay Pacific are as follows:
Strategy One: Service Straight From the Heart
One of the major differences between Cathay Pacific is the focus on service and other add-ons. While Ryanair maintains a no frills strategy, Cathay Pacific seeks to differentiate itself from other airlines through services, amenities and facilities. Ryanair chooses to minimize services and other features in order to cut cost while Cathay Pacific earn customer value through its quality service and top of the line facilities and amenities which comes with a much higher price compared to Ryanair.
Cathay Pacific believes that their business is selling experience to the passengers. The emotional bonding with the passengers is the key to building loyalty and one of the major factors that encourage the customers to repurchase the airline products. The biggest difference of Cathay Pacific to its competitors is its people. The employees at Cathay Pacific are the ones who bridge the gap between product development and customer expectation. The passengers in Cathay Pacific always feel welcomed, appreciated and reassured. Passengers that travel with Cathay Pacific know that they are in good hands. Service Straight from the Heart is a programme that aims to develop cultural change within the airline focused on improving customer service. Service is the principal means of differentiating between airlines and is highly influential in customer choice. Cathay Pacific has expressed within its programme its understanding of the importance of the people within the organization and its recognition of the contribution of those people to its success. Cathay Pacific provides excellent customer service.
Strategy Two: Customer Retention and Loyalty through Service
While Ryanair becomes the airline of choice for passengers that are looking for low fares, Cathay Pacific is able to build relationships with their passengers through quality service and high-end facilities and amenities.
Customer retention and loyalty are among the primary causes of Cathay Pacific’s success. Customer service is a very vital aspect of the company. Cathay Pacific maintains its leaders status in the airline industry through its constant improvement in service. The company continuous to develop its self-help strategy in order to encourage growth among its employees. Self-help benefits are seen to make career management, career planning including blended learning opportunities possible within the company. The development program aims to equip the employees with the necessary knowledge and skills to fulfill their current positions as well as prepare them for future career advancements. One of the most significant improvements that Cathay Pacific employs is incorporating human touch in its high quality, reliable, and predictable service. The company wants to achieve growth through sustained, profitable growth. The company is committed to employee development and continues to enhance service and equip the employees with the ability to control the means of increasing the company’s productivity, reduce costs and ensure customer loyalty by focusing on the areas that matter most to the customers.
Chapter III: PEST Analysis and Porter’s Five Forces Analysis
PEST Analysis
Political
Ryanair and other airlines in Europe are subject to operating restrictions set by individual European governments and the European Union. Alliances have significant influence in the airline industry and many companies seek membership to utilize the benefits provided by alliances. The airline industry is facing increasing trade-union pressure. The European Union abolished duty-free sales. The airline is subject to the UK government’s and to EU policies on climate change.
Economic
The capacity of European airline industry exceeds the demand of the consumers causing airlines to engage in rate wars. In the economic sphere, alliances also play important roles. Alliances minimize competition while at the same time increasing profits for airlines. Airlines engage in codesharing, giving them more capabilities to offer services and enter markets that are risky to do on their own. Globalization has made cooperation and partnership between airlines more possible. The airline faces a fluctuating fuel price.
Social
The threat of terrorist attacks in the wake of September 11 bombing has reduced passenger confidence. Passengers are now exploring the benefits of land transportation across Europe. The market is changing and there is an increase in the grey market population. The advancements in cars and high-speed trains make land travel more efficient in Europe. Business travelers and lifestyle travelers are increasing in numbers.
Technological
Technological advancements are introduced in a breathtaking speed. Airlines spend considerable amount of money in order to keep up with the trends. There is an expansion of wireless technology.
Porter’s Five Forces
Internal Rivalry within the Industry (High)
In the airline industry where the market is highly saturated, the rivalry between existing airlines is one of the strongest forces. Ryanair has a first mover advantage in Europe, however, today there are many existing low-cost carriers across the region. The low-cost carrier market is highly competitive. The major competitor of Ryanair in the low-cost arena is Easyjet which also shares a first-mover advantage. Despite increasing competition from new players, Easyject and Ryanair avoid direct competition by choosing different routes to serve. The competition in the budget sector is very high as all airlines has the same ‘no frills’ philosophy. Price is the major differentiating factor in the low-cost carrier market.
Buyers’ Bargaining Power (Medium)
In the low-cost carrier market, airlines are competing for the same market segment. The bargaining power of the consumers is increasing as the supply exceeds the demands. The consumers are price sensitive. One of the challenges that Ryanair must face is the lack of customer loyalty in the low-cost carrier arena where passengers easily switch to airlines that offer lower fares. Buyers have no loyalty in low cost airlines such as Ryanair as the trip is purchased according to price.
Bargaining Power of Suppliers (Low)
Suppliers offer fuel, labor, airport and security services – all with changing prices. Changes in the prices of supplier’s products and services affect the rates of Ryanair’s fares. Ryanair has no influence of fuel price. Regional airports on the other hand, have low bargaining power as they are heavily dependant on airlines. Ryanair chooses suppliers that have low bargaining power.
Threats of New Entrants (Low)
Barriers to entry make it more difficult for new entrants to enter the low-cost carrier market. Infrastructure constraints pose as a formidable entry barrier. Because of the intense price war, a new entrant will find it almost impossible to offer rates that are lower than Ryanair’s or Easyjet’s. The airline industry is highly capital intensive. New entrants are challenged by expensive aircrafts, high cost of operation and war for talents. New entrants also find it very hard to look for suitable airport as airport slots are reserved for established airlines.
Threat of Substitute (Medium)
Customers have no brand loyalty. Customers decide based on the price that airlines offer. Ryanair is unable to build relationships with passengers as service quality is not given priority by the company. Customers can easily switch to another airline with lower costs. Other modes of transport in Europe are very efficient as well. Rail poses the biggest threat to airlines because it offers an excellent continental service around major cities in Europe. Rail is also more accessible than Ryanair. Technological advances can also lessen the number of passengers for Ryanair. Video conferencing make travelling to meet business associates abroad unnecessary.
Chapter IV: Influence of the Stakeholders of Ryanair’s Strategies
Stakeholders are the people who are affected by or can affect the activities of the firm. There are two types of stakeholders – primary and secondary. Primary stakeholders are those who have formal, official, or contractual relationship with the organization. The secondary stakeholders are other societal groups who are affected by the activities of the firm. This section identifies the major stakeholders of Ryanair and how they affect the strategies of the firm. The stakeholders of Ryanair are:
- Shareholders – the shareholders participate in distribution of profits, additional stock offerings, assets on liquidation, inspection of company books, election of board of directors and other rights established in the contract with the firm.
- Employees – Employees are believed to be a source of competitive advantage. The knowledge, skills and abilities of the employees contribute to the success of the organization. In return, the employees expect economic, social and psychological satisfaction in the place of employment. The employees also expect freedom from arbitrary and capricious behavior on the part of company officials. The employees expect to share in fringe benefits, freedom to join union and participate in collective bargaining, individual freedom in offering up their services through an employment contract.
- Customers – the customers are the source of the firm’s earnings. The customers purchase the firm’s products and services in exchange with satisfaction of needs, wants and requirements.
- Suppliers – the suppliers are part of the firm’s value chain. In exchange with the suppliers products, services or expertise the firm is expected to be a source of business and facilitate a professional relationship in contracting for, purchasing, and receiving goods and services.
- Competitors – competitors are also important stakeholders. They expect the company to observe the norms of competitive conduct established by society and industry.
- Governments – the national government and other governmental departments are important stakeholders that have direct impact on the firm’s strategies. The government expect the firm to pay taxes, to adhere to the letter and intent of public policy dealing with the requirements of fair and free competition; discharge of legal obligations. In addition to the British government, the European Union also influences the strategies of Ryanair.
- Local Communities – the local communities are also important stakeholders. The firm needs to participate in community affairs and to provide regular employment and support to the local government.
Chapter V: Current Strategies of Ryanair and Strategies Regarding Diversification
Ryanair is among the most successful low-cost carriers in Europe today. The airline’s strategic advantages are:
- Lowest airfares
- No Frills and simple processes
- Large brand awareness
- Clear offer
- Innovative strategies on cost cutting
- Quick turnaround time
The current strategies of Ryanair are focused on maintaining the company’s cost leadership position in the market. The airline has a fleet that is composed on Boeing 737, one of the most widely-use aircraft today. Because of fleet commonality, Ryanair is able to cut on costs in obtaining spares and maintenance services. Ryanair also cuts the costs on out of services providers by engaging in a multi-year contracts at fixed prices. In order to cut the costs of airport charges, Ryanair selects secondary and regional airport destinations, which are not as congested as the main airports. In order to control employee compensation costs, the firm implements a performance related pay structure. Although the company provides lower labor costs, the employees can earn additional pay or remuneration base on their performance. Ryanair also has low marketing costs.
Strategies Regarding Diversification
Mergers and Acquisitions
Mergers and acquisitions have become one of the most important corporate-level strategies in the new millennium. Merger and acquisition strategies are important to firm growth and success in the 21st century. As Ryan Air continues to grow it is expected that the company will acquire other companies such as Buzz, in order to improve its capabilities and acquire more competitive advantage.
Chapter VI: Conclusion
There are differences in the strategic development of Ryanair and Cathay Pacific. Ryanair focuses on logical incremental view and command view while Cathay Pacific focuses on planning view. Ryanair develops strategies based on the changes in the environment and the creation of strategies rests heavily on the top management. Cathay Pacific emphasizes the importance of planning and quick strategy formulation.The airlines have different target markets and have different philosophies. Ryanair targets the price-sensitive market which is ready to overlook service quality, facilities and amenities for lower airfare. Cathay Pacific on the other hand builds a sustainable competitive advantage through quality service and top of the line facilities and amenities.
The current strategy of Ryanair remains focus on its desire to maintain its cost leadership in the low-cost carrier market. In order to maintain its position, Ryanair reduces cost by introducing innovative cost-reduction strategies. Ryanair’s strategies is shaped by the outside forces that affects the airline industry. In the political sphere, Ryanair is subject to governmental policies and trading block policies (EU). Economic conditions also affect Ryanairs strategies. The airline engages in serious price wars with other low-cost carriers. Ryanair is also affected by the changes in the society and the consumers. Consumer demands, needs and wants remain one of the most potent force in the creation of strategies. Technological advancements have a big impact on the operations of Ryanair. Through Porter’s Five Forces analysis, the researcher was able to find out that Ryanair is affected by the intensity of competition in the industry, the bargaining power of the consumers, the bargaining power of suppliers, threats of new entrants and threat of substitute.
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