Ryanair – the low-fares airlin

Ryanair – the low-fares airlines
Case Study
By
Sid Hegde

Table of Contents

Q1. Why has Ryanair been successful thus far? 3

Q2. Is Ryanair’s strategy sustainable? 4

Q3. Would you recommend any changes to Ryanair’s approach? 5

Q4. Should Ryanair continue to pursue the Aer Lingus bid? 6

Q5. Evaluate the strategic leadership of Michael O’Leary. 7

Conclusion 8

References 9

Bibliography 9

Appendix 10
A1. PESTEL Analysis 10
A2. 5-Forces Analysis 11
A3. Ryanair SWOT Analysis 12
A4. TOWS Matrix 13
A5. Strategic Capability and Competitive Advantage 13
A6. Stakeholder analysis on Ryanair’s bid for Aer Lingus 14
A7. Ansoff Matrix – Strategic Direction for Ryanair 14
A8. Growth/Share Matrix (BCG Matrix) 15
A9. Strategy Clock – competitive strategy options 16
A10. VRIO Analysis 17
A11. Evaluating Ryanair’s Business Strategy 17
A12. Cultural Web 18
A13. Exercise of Effective Strategic Leadership [2] 19
A14. Risk Analysis 20
A15. Individual Assignment Submission Form 21
Q1. Why has Ryanair been successful thus far?

Ryanair’s success can be attributed to quite a few factors

* Successful adaptation of Southwest’s low cost model
Michael O’Leary studied the low cost model of Southwest and successfully adapted the strategy to suit Ryanair
– Flying to secondary cities and airports
This is one of the founding cornerstone’s of Ryanair’s strategy. By flying to secondary airports, Ryanair avoids huge gate and landing charges charged by the major airports. It also avoids the congestion at the major airports helping it improve the turn-around time for the planes as well as setting the benchmark in on-time arrivals and take-off’s
– Point-to-Point flights
Flying point-to-point helps Ryanair eliminate a lot of additional operations like baggage transfers etc. helping it to turn-around the planes quite quickly
– Single type aircraft
Ryanair’s decision to fly only a single type of aircraft has helped it lower it’s maintenance cost. This has also contributed to Ryanair improving it’s organizational memory of it’s maintenance engineers, contributing to innovations by the engineers to improve the efficiency of the planes.
– Cost culture
Ryanair’s low cost culture has permeated to all of it’s employees and is spread throughout the organization, making this an integral part of the cultural web.

* First mover advantage
Ryanair was the first airline in Europe to introduce low fares and it has successfully made use of first mover advantage by negotiating very good rates with secondary airports and locking in landing slots at these airports.

* Michael O’Leary’s leadership
Michael O’Leary has been the key ingredient of success for Ryanair. His understanding of the Southwest model and it’s successful adaptation has transformed Ryanair and has made it the leading low fares airlines in Europe.

* Low cost operations
Ryanair has the best run low cost operations helping it achieve the best operating margin in the industry. All elements of it’s operations are geared towards reducing cost and improving efficiency.

Q2. Is Ryanair’s strategy sustainable?

Yes, Ryanair’s strategy is sustainable because it’s core competencies of ‘Low Price’, ‘Cost conscious culture’ and ‘R&D on aircraft design’ (A5) gives it competitive advantage.

* Low Price
Ryanair’s strategy is based upon this core competency. Strategies based upon core competencies are usually successful as articulated by Prahalad and Hamel in their article on core competencies [4].

* Cost conscious culture
As we can see from the cultural web (A12), the low cost culture has spread throughout Ryanair’s organization. The structures and policies that Ryanair has in place will make this culture sustainable

* Size
Ryanair’s market dominance gives it advantages of size that will help it sustain it’s low cost operations as it can use it’s size to dictate terms with it’s supplier

* Leadership
Even excluding Michael O’Leary, Ryanair’s management from senior management down to front line managers is wed to the lost cost culture and they are geared towards maintaining and sustaining the low cost culture

* Experience Curve
Ryanair has built up a huge low cost operations experience curve which will help it sustain going forwards
Analyzing these core competencies via the VRIO framework (A10) proves that the core competencies give Ryanair Sustained Competitive Advantage.

Using Rumelt’s [1] techniques (A11) to evaluate the Ryanair’s key business strategy of Low Price shows that this strategy does not have any critical flaw.
Q3. Would you recommend any changes to Ryanair’s approach?

Yes, I would recommend some changes to Ryanair’s approach. Some of the changes that I would recommend based on the TOWS (A4) analysis are

* Improve it’s oil hedging & currency trading practices

The international oil and currency market is a very volatile market and there could be huge spikes in oil prices in the event of a terrorist attack (or threat), political struggles in the oil producing countries etc. Improving it’s hedging practices could cushion Ryanair against unforeseen increases in oil prices.

As oil is traded in US dollars in the international market and Ryanair’s income is solely in Euros, Ryanair has a substantial exposure to the vagaries of the currency market. Ryanair needs to improve it’s policy of buying US dollars to pay for aviation fuel.

It would be beneficial for Ryanair to hire a specialist company that specializes in the future’s markets to help it improve it’s hedging practices.

* Improve Customer perception of Ryanair

One of Ryanair’s key edicts is that as long as it has low prices customers will fly with them. This was a reasonable approach when Ryanair was the first mover. But as the competition has increased customers could switch to another carrier which might be slightly more expensive than Ryanair because of Ryanair’s perceived poor customer service policies.

Even a marginal improvement in Ryanair’s image could help it future proof against potential competitors.

* Marketing of ancillary products

Ryanair’s approach of hard selling of ancillary products during flights seems to have had quite a push back from frequent fliers. Ryanair is probably better off trying to soft sell ancillary products during flights.

Ryanair should leverage it’s website to better sell ancillary products as well as looking into the possibility of gaining advertising revenue through it’s website.

A Ryanair credit card could be a good addition to it’s portfolio of ancillary products.

* Succession planning

The case study does not offer any insight into Ryanair’s succession planning after Michael O’Leary leaves the company.

A leader who is not as polarizing and rebellious as Michael O’Leary could be a good replacement as Ryanair further expands. A softer image projected by a new leader could help Ryanair mend it’s relationship with Irish and EU officials.

Q4. Should Ryanair continue to pursue the Aer Lingus bid?

No, in the present environment it’s not advisable for Ryanair to pursue the Aer Lingus bid. As we can see from the stakeholder analysis (A6) every one of the key stakeholders are against the bid. Some of the key players like the Aer Lingus board will not accept the bid as they are intrinsically opposed to the bid.

There is also considerable opposition from the Irish government as well as the EU as it might reduce competition.

But, it is recommended that Ryanair hold on to it’s current shares in Aer Lingus as it would be a good buffer against a possible take over of Aer Lingus by one of it’s rivals like Easy Jet.

If the financial struggles at Aer Lingus continues and it keeps loosing money then Ryanair can look into the possibility of making a bid for just the international operations of Aer Lingus. This would give it an opportunity to expand internationally and also give access to gates and landing slots at major airports.

Q5. Evaluate the strategic leadership of Michael O’Leary.

Using the model of ‘Exercise of Effective Strategic Leadership’ [2] (A18), we can evaluate the strategic leadership of Michael O’Leary on the below points

* Determining Strategic Direction
O’Leary was instrumental in adapting Southwest’s low price model and set a low price long term strategic direction for Ryanair. His philosophy was (and is) to reduce cost in all operations, eliminate non-value added operations and provide the lowest possible air fare to the customer.

* Effectively Managing the Firm’s Resource Portfolio
O’Leary was able to standardize on the aircraft used by Ryanair and ensuring a uniform resource for all engineers, pilots, cabin crew. This has been one of the key factors for Ryanair in keeping their cost down and offer low prices.

* Exploiting and Maintaining Core Competencies
O’Leary (and his management team) had to build a low cost culture amongst Ryanair’s workforce. Over the years, this low cost culture embedded into everyone at Ryanair and has become one of the key competencies of the firm.

* Developing Human and Social Capital
This is probably one area where O’Leary’s leadership could improve. O’Leary does not seem to pay attention to the individual employee, except state that they are one of the best paid in the low price airline industry. In the long run, if enough attention is not paid to develop and nurture employees, Ryanair could experience low morale in the work. O’Leary probably needs to take a look at Maslow’s hierarchy of needs [3] to help him improve the human capital at Ryanair.

* Sustaining an Effective Organizational Culture
O’Leary has built and sustained a low cost organizational culture and this culture is the core of Ryanair and influences on how it operates and conducts it’s business.

* Other
* Mastery of details
O’Leary appears to have a mastery of all the details of Ryanair’s business. This helps him to better lead Ryanair as it expands throughout Europe.

* Attitude
His brazen attitude has probably hurt Ryanair’s image in the political and legal circles in Europe. This could be the weakest link in O’Leary’s strategic leadership. He is the face of Ryanair and his attitude and actions tend to convey a confrontist image for Ryanair. This probably was suitable in the earlier days, but it’s probably time for him to tone down his approach.
Bottom line
The success of Michael O’Leary’s strategic leadership can be summed by looking at Ryanair’s bottom line. They are the leading carrier in Europe with ever increasing profits.

Conclusion

Ryanair has built a low cost culture and it’s entire organization has bought into this philosophy. The leadership at Ryanair practices what it preaches and it helps further reinforce the low cost message throughout the organization.

But Ryanair needs to pay close attention to the risks highlighted in the Risk dashboard (A14) as it continues to grow. Ryanair need to start planning for life after Michael O’Leary.

A low price strategy is a sustainable strategy as we can see from other and similar organizations like Ikea, Southwest, Aldi etc. Ryanair’s low price strategy is a perfect fit for them and the future looks very rosy for Ryanair.
References

1. Evaluating Business Strategy, November 28, 1993 – Richard P. Rumelt
2. Strategic Management, 6th Edition – Hitt, Ireland and Hoskisson
3. A Theory of Human Motivation, Psychological Review 1943 – A.H. Maslow
4. The Core Competence of the Corporation, HBR, May-June 1990 – C.K. Prahalad and Gary Hamel
Bibliography
1. Exploring Corporate Strategy, 8th Edition – Gerry Johnson, Kevan Scholes and Richard Whittington
2. How Competitive Forces Shape Strategy, HBR, March-April 1979 – Michael E. Porter
3. What is Strategy, HBR, November-December 1996, Michael E. Porter
4. Crafting Strategy, HBR, 2001 – Henry Mintzberg
5. How Successful Leaders Think, HBR, June 2007 – Roger Martin
Appendix
A1. PESTEL Analysis

Environmental influences on Ryanair
Political
Most of Ryanair’s routes are in Europe where the political environment is quite stable. Ryanair’s only concern could be the local governments support for there own national carriers.
Economic
Ryanair has been cautious in it’s outlook for 2007. Few things that could hurt Ryanair (along with the entire Airline industry) would be a downturn in the European economic, Fuel prices going up, Terrorist attacks etc.
Social
Even though Ryanair is perceived to provide poor customer service, the cheap fares still make it attractive for the budget conscious customer.
Technological
Ryanair has made use of the internet technology to provide online booking and checking making their website one of the most heavily used websites. There is a potential for Ryanair to leverage their website traffic to sell/promote ancillary products.
Environment
As Ryanair’s fleet is one of the youngest it’s producing less emissions and more environmentally friendly than other carriers, especially the legacy carriers. This could be one of the USP’s for Ryanair in the future.
Legal
Ryanair is currently involved in quite a few legal battles with cases filed against it and cases filed by it. Regardless of whether Ryanair wins or losses the court battles it will still incur a lot of legal expenses and managements attention could get diverted from running the business to fighting in courts.

Looking at the PESTEL analysis, the Key drivers of change for Ryanair are the Economic and the Legal factors.

A2. 5-Forces Analysis

Porter’s 5-Forces Analysis to determine whether the low price European airline industry is attractive or not

* Bargaining Power of Buyers
­ Bargaining power of buyers is high as buyers have a lot of choices as there are multiple low price airlines in the market
­ This is threat is quite high as customers can change their minds on which airlines to fly

* Bargaining Power of Suppliers
­ Bargaining power of Aircraft manufacturers is quite high as there are only two major suppliers in the market
­ As a the low price airline industry converts to a single model (or very few models) of aircraft to reduce price, the airlines become dependent on the aircraft manufactures
­ Bargaining power of aviation fuel suppliers is quite high as there are only a few major suppliers
­ This threat is quite high

* Threat of Substitute Products or Services
­ There is always a threat that the consumer might switch to alternate mode of transport like train or bus
­ But at this moment for point to point transportation within Europe, especially for island countries like Ireland & UK, flying is the most convenient option
­ This threat is quite low

* Threat of New Entrants
­ Even though the price barriers to entry are quite high, there have been a lot of new entrants in the market hoping to duplicate the success of the existing low price airlines
­ But new entrants face significant challenges in acquiring landing slots and gates at both primary and secondary airports as the existing airlines have stranglehold on most of slots and gates
­ This threat is quite low

* Rivalry Amongst Existing Competitors
­ Rivalry amongst existing competitors is not high as existing competitors try to avoid a direct clash with each other and concentrate most of their effort in poaching customers from existing legacy carriers.
­ This threat is quite low

The overall industry is attractive for existing low price airlines. The low price airlines is about 30% of the overall airline industry and there is quite a lot of opportunity to grow (at the expense of the legacy airlines)

A3. Ryanair SWOT Analysis

Strategic Analysis (Internal Analysis)

* Strengths
­ Brand – Ryanair name has become synonymous with the Low airfares
­ Size – Ryanair has become the biggest low price airlines in Europe and it’s able to leverage it’s size to negotiate better agreements from it’s suppliers
­ Low cost base – Well integrated strategy that takes advantage of it’s low cost operations offering low fares that’s driving up revenue
­ New airplanes – leading to less cost in maintenance; fuel efficiency etc.
­ War chest – Ryanair has a significant amount of cash on it’s books and this can be a major deterrent for any competition contemplating a price war with Ryanair

* Weakness
­ Perceived to be an airline that does not care for the customer
­ Perceived to be an airline that is obsessed on the bottom line at any cost

* Opportunities
­ Ryanair has been selling ancillary products during the flight that has high margins. If properly managed this could be very lucrative
­ Ryanair’s website is very popular and this opens up new opportunities to leverage the web traffic into advertising revenue etc.
­ The website’s popularity could also help Ryanair sell complete tour packages, for example car rental + flight + hotel. This could make it attractive for consumers as it would mean a one stop destination for their holidays etc.

* Threats
­ I think the main threat for Ryanair could come from rapid expansion as it might over stretch management’s capabilities as well as adding a burden on cash flow
­ The secondary threats (that are common to all airlines) would be a huge increase in fuel prices
­ Any new terrorist attacks (or threats) would impact Ryanair (as well as the other low price airlines) as security would be increased leading to longer turnaround times

A4. TOWS Matrix
Generating Strategic Options

Strengths Weakness Opportunities – Ryanair can leverage it’s huge customer base and get better at selling ancillary products
– Ryanair credit cards, frequent flyer programs, tasteful advertising through it’s website etc. has huge potential for additional earnings as well as increasing it’s customer base
– Ryanair can probably overcome it’s perceived poor customer service by better training and motivating their employees Threats – Ryanair should use it’s new fleet and try to project a ‘Green’ image. This could help Ryanair take a lead over other competitors whenever stronger emission rules are passed in the EU – Ryanair can better react to fuel prices by hedging for oil prices
– It can also get better at reacting to currency fluctuations as the oil industry primarily deals in US Dollars

A5. Strategic Capability and Competitive Advantage

Resources Competencies Threshold capabilities
Threshold resources

– Aircraft
– Pilots, cabin crew (employees)
– Finance resources
– Office equipment
Threshold competencies

– Online booking / website
– Point-to-Point routing
– On time take-off and landing
– Low cost operations Capabilities for Competitive Advantage
Unique resources

– Management team
– Michael O’Leary
Core Competencies

– Low Price
– Cost conscious culture
– Experience curve in R&D on aircraft design to improve performance & reduce fuel cost
A6. Stakeholder analysis on Ryanair’s bid for Aer Lingus
The stakeholder analysis clearly shows the opposition to Ryanair’s bid for Aer Lingus. The chances of the key stake-holders changing their mind agreeing to a merger are quite low.
A7. Ansoff Matrix – Strategic Direction for Ryanair

Products M
A
R
K
E
T
S
Existing New Existing
Market Penetration & Consolidation

– This should be (and is) one of the key strategic directions for Ryanair, that is consolidating existing routes and increasing market share on existing routes

Product Development

– Ryanair’s expansion into Ancillary products is a good strategic fit New
Market Development

– Developing new routes, flying to new destinations can be profitable strategy for Ryanair
– Expansion outside of Europe might not be a strategic fit for Ryanair

Diversification

– Diversification into long haul flights or flying more than point-to-point flights would be a bad strategic choice for Ryanair

A8. Growth/Share Matrix (BCG Matrix)

Market Share M
A
R
K
E
T

G
R
O
W
T
H
Stars

– Ancillary products like in flight shopping, non-flight scheduled services etc. offers a very high margin
Question Marks

– Ryanair’s investment in Aer Lingus stock could loose money for it, as Aer Lingus has all the problems of a legacy carrier with very less benefits of a large legacy carrier (e.g. economics of scale)

Cash Cows

– Lucrative short hop routes (e.g. Dublin-London)

Dogs

– At present it seems that Ryanair does not have any dogs
A9. Strategy Clock – competitive strategy options
Ryanair is a textbook example of a ‘No Frills’ competitive strategy
A10. VRIO Analysis

Ryanair’s VRIO Framework Value Rarity Inimitability Organization Competitive Implications No frills strategy Yes No No Yes Temporary Competitive Advantage New Fleet Yes No No Yes Temporary Competitive Advantage Low cost culture Yes No Yes Yes Competitive Advantage Leadership Yes Yes Yes Yes Sustained Competitive Advantage War Chest Yes Yes Yes Yes Sustained Competitive Advantage
A11. Evaluating Ryanair’s Business Strategy

Strategy Test Conclusion Low Price Consistency
Pass: This is consistent with Ryanair’s procedures and policies of low costs with an aim of providing the customer with low prices
Consonance
Pass: When Ryanair embarked on providing customers with a low fare option to fly point-to-point, it was a breakthrough offer in the air transport environment
Advantage
Pass: The Low price strategy enabled Ryanair to take advantage of a gap in the air transport industry and capture a significant portion of the cost conscious customer base
Feasibility
Pass: A low cost culture was created at Ryanair that the management and employees bought into

Conclusion: The Low price strategy at Ryanair does not have any critical flaws
A12. Cultural Web
* Stories – Stories are told in the organization about Michael O’Leary’s thriftiness and this helps promote the low cost culture within the organization

* Symbols – The Ryanair brand symbolizes low cost

* Power Structures – Michael O’Leary is the boss and there is no doubt about it in the organization

* Organizational structures – It’s a top down structure, but employees are encouraged and empowered to take their own initiatives to reduce cost

* Control – All control derives from Michael O’Leary

* Rituals and Routines – Routine is get everything done fast
The paradigm:
A low cost culture has permeated throughout Ryanair through it’s history and culture and it has become a self enforcing and self sustaining culture.
A13. Exercise of Effective Strategic Leadership [2]
A14. Risk Analysis

Risk Matrix

Risk Dashboard

Ryanair – the low-fares airline

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