Ryanair Internal and External Factors

The following report analyses how internal and external factors control to the strategy that Ryanair Plc is following. This report undertakes a detailed study of Ryanair which include a brief outlining of the company’s products and services. Mission, vision and values of the airline will be also explained. It evaluate company’s current strategy and the management of that strategy. It also gives a brief evaluation of Ryanair’s financial structure as well as an environmental analysis of the European airline industry and how this affects Ryanair.

Each section of the following report represent the key findings. Introduction to company section includes Ryanair’s background, mission and vision statements, Corporate Social Responsibility policy, company’s stakeholders.

External environment section include SWOT analysis. This analysis explain Internal (Strengthens and Weaknesses) and External (Opportunities and Threats) factors. Furthermore, PEST analyse is described. In order to understand company’s profitability in relevance to the competitors, the Porter’s Five Forces framework is used.

In Financial sector the turnover , profit margins, operating profit, current ratio, solvency ratio, gearing ratio and the comparability of these during 2006-2008 period is explained.

Using the Ansoft’s growth matrix the main strategic direction that Ryanair follow was indentified.

The methods of development such as low cost, no- frills model, finding new markets for existing products, opening new routes are outlined and analysed.

Conclusions and recommendations was explained using a SPACE .

Introduction to Company

4.1 The largest low-fare European company Ryanair was set up in 1985 by Cristy and Tony Ryan and Liam Lonergan. Company started working only with 25 members of staff. Ryanair replicated the American Southwest Airline’s business model and re-launched it in 1990 growing in nowadays to be the biggest low fare European company with 7,118 of employees.

From the statistic of European Low fare Airline Association (June 2009) The number of passengers carried from June 2008 to June 2009 was 60,2 millions, the load factor was 81.4%, number of flight per day-1,200 and average fleet age is 2.8 years.(ELFAA 2009)

Chief Executive officer from 1994 is M. O’Leary.

Ryanair became a public company in 1997.

It is currently offering flights to 26 European Countries with 150 destinations and it operates on 880 different routes daily with 1,200 flights a day. (History of Ryanair)

Ryanair does not have a formal mission or vision statement. But from the public statements of the company “… is to simply continue to be the largest low -cost leader in the European airline industry…” (Box,Tomas M, Byus, Kent 2007, p 2). The company has a bigger market share, better customer service than its competitors, good reputation and a strong image. Ryanair aims to be a leader in all airline industry and have a stable competitive advantage.

Stakeholders

From the definition of Freman (1984) stakeholders are people or organisation who are affected or can be affected by the organisation’s actions. One type of stakeholders is individuals or groups who have any relationship with company. Another type is secondary stakeholders which are other societal groups affected by activities of a company.

First of all Ryanair’s stakeholders are shareholders who own the shares and have rights to claim dividends, elect the board of directors and have other important rights.

Employees are very important to the company as their knowledge, skills, loyalty and abilities provide success for Ryanair. Employees want to have satisfaction from job and various benefits from the company.

Customers are the biggest source of income for the company. Customers expect that the company meets their needs and wants.

Suppliers are part of the company providing goods and services to give service to the customers and meet their needs and wants.

Competitors are also important stakeholders as they are used to compare the service and product quality with to increase competitiveness.

Governments have direct impact on the company. Ryanair has to pay taxes and follow the rules and regulations set by the government.

Local communities are also stakeholders. Ryanair has to support the local governments, respect the locals and provide employment to take part in community relationships.

Corporate Social Responsibility

Corporate Social Responsibility policy is a function of self-regulating mechanism which ensures a loyalty to law and ethical standards. Company would ensure responsibility for the impact of their activities on the environment and all stakeholders. Wood (1984)

According to the spectrum created by Robin and Reidendach (1995) there are five levels of Corporate Social Responsibility: amoral, legalistic, responsive, ethically engaged and ethical.

Based on the articles from The Business Respect news (2007) the Ryanair provided incorrect information in regards to its CO2 emission. Instead of the correct figure of 5.5% it reported a figure of 2%. The company was also very misleading about its price in adverts in Denmark and Britain.

Another negative factor of Ryanair’s social responsibility was the Bob Ross case about disability discrimination. In January 2004 Ryanair refused to give free wheelchair to Mr Ross. (Archive of Ethical Corporation)

These examples of unacceptable behaviour show that Ryanair can be marked as a legalistic company without code of ethics. From the case study by Valerie Swaen (2005) negative image of company and negative CSR can cause bad reputation, decrease in sales and as the result loss in profits and future financial; performance.

External Environment

5.1 From the research of the Euromonitor International (2008) using their SWOT analysis. Hill, T and Westbrook, R(1997 ) suggested that SWOT analysis is strategic planning method to estimate Strengths, Weaknesses, Opportunities and Treats engage in company.

5.1.1 Strengths –Ryanair’s biggest strength is its ability to maintain profitability and the position of leading low-cost carrier while offering the cheapest flight fares in the whole of industry.

5.1.2 Weaknesses – Poor reputation when it comes to cancelling flights on short notice and hidden fees. As any other airline the Ryanair is exposed to the high fuel prices, increased costs of airport security (as the response to the global terrorism threat) and generally bad economic climate. Struggling Irish economy also poses its risks as Ryanair is an Irish company. Customers prefer to spend less money for travel as result of global economic downturn and redundancy at work place for many people. Moreover there is a lot of competition in the low-cost flights market.

Strengths and weaknesses are internal environmental factors.

5.1.3 Opportunities: One of the main opportunities for Ryanair lays in opening new routes, for example US or Eastern European destinations. Another opportunity is favourable climate for acquisitions after bankruptcies of some airlines. As it will allow to expand the market for example market expansion in Italy after the Alitalia was bankrupted. Another opportunity that can be attached to the company is it would gain more customers if they would be able to conclude the latest trends in airline management and marketing to meet the demands of their target market.

5.1.4 Threats: One of the main threats is increasing taxes and airports surcharges. Threats of terrorist attracts on airplanes and in airports. Fall down in the number of passenger preferring the fly as the result of the economic downturn of European economic. Not using the main airports, especially Heathrow, will make it difficult to open new routes and will cause the company to lose share of the market.

5.2 PEST

It has been observed by Kotler (1998) that PEST analysis is a very useful tool for a company to find out the business situation and indentify important factors that could decline or help to grow the business. It also analyzes the entire market and discovers new market share.

Political

UK government put on enforced security and restrictions due to terrorism attacks on airline and airports. Also changes in policies and rules in countries where Ryanair flies to could affect the airline. Desire to support local air carriers by some national governments can hurt the Ryanair, but on the other hand other countries’ governments might welcome and support the Ryanair wanting to benefit from the increasing number of tourists coming to the country.

Economical

The main problems facing the company and the whole industry in general are the exchange rates -devaluation of GBP against the Euro and the USD and recent modern phenomenon known as the “Credit crunch -a panic-driven massive withdrawal of credit from all sections of society desperately in need of it by banks that have previously been engaged in an orgy of unsustainable, irresponsible lending of fictitious money in huge amounts largely to people who any fool could see had no means of repaying it. (Gegan(2009),p 1) which cause reduction of business activity in all sectors of the world economy. Also that puts off a significant number of people to spend money, moreover increasing the number of unemployed (Euromonitor International Report). Cost of fuel and sometimes volatile and unpredictable situations in countries which supply the fuel, as well as the economic change in countries where Ryanair want to open the new routes to. There is also the Bird flu; Swine flu and extreme weather change that can hurt company’s performance.(Guardian news paper 2003, 2007,2009 )

Social

Because of the low price for tickets company attract a wide range of demographic group of consumers. Expansion of the market as the result of new member countries joining the European Union.(Key Note, Airlines 2008 report)

Technological

Ryanair is using a well known aircraft the Boeing 737(European Low fare Airline Association 2009) that gives less pollution to atmosphere, less noise and less carbon emission (Boeing website). Using website sales and services as well as check-in online, self service checks at airports allows the company to reduce the costs, but also could put off some passenger for whom it might be too technical and make them unhappy. (Ryanair website)

Porter’s Five Forces (1979) is a framework used to analyze the strategy of business development. This analysis helps to understand and clarify the sustainability of profit of company against bargaining and competitors. The business strategies are :

• Barrier to entry
• Supplier power
• Buyer power
• Availability of substitute
• Rivalry

5.3.1 Barrier to entry

Entire airline industry needs a big capital investment. But a new company can grow gradually by leasing or buying small airplanes as it was with Ryanair that started with only one 15-seater plane (Ryanair website). Some difficult come with starting new routes which are particularly competitive. It is medium threat to entry.

Supplier power

The airline industry’s has two main suppliers: plane manufacturers and the aviation fuel suppliers. Ryanair has a very good and long-standing relationship with its main aeroplane supplier Boeing.

Ryanair’s relationship with fuel suppliers is a more difficult one. The cost of fuel heavily depends on the cost of oil. The price of oil is heavily influenced by market speculators, international cartels and the governments of several Middle-Eastern countries.

Buyer power

Customers exert a huge power because they can easily go to competitors.

5.3.4 Availability of substitute

Ryanair does not have a strong loyalty from its customers. This is all the result of a bad reputation it gets in the press and by word of mouth. Mostly because of the delayed flights, missing luggage, dirty planes, low level of safety standards for disable people (The Independent 2006). All these problems should in theory make Ryanair’s customers run to its competitors and create a genuine risk to the company’s existence, but they don’t. Other low cost airlines suffer from similar problems while other types of transport such as Eurostar train, ferries, and cars do not offer the speed of travel modern customers need. So it can be concluded that availability of substitutes does not pose a high treat to Ryanair.

Rivalry

The number of low-cost airlines has increased in nowadays, but Ryanair has a very strong position on the market. The big advantage is in avoiding the main airports. It significantly reduces the operational costs. Unfortunately this is a disadvantage as well since lots of passengers prefer to use major airports. To compete with Ryanair will put a heavy pressure on price and profitability. Here is not much difference in provided services. All competition is about the price. Moreover there is a high exit barrier in the air industry.

Company Financial Performance

According to figures from FAME that help to measure financial performance of Ryanair to estimate progress and achievement of the business. Looking at the figures from 2006 to 2008 company’s turnover increased by 42% in the year 2007 as a result of adding on charges and side business and adding new popular routes in that year.

Figures of company profit margins decreased in 2008 by 16 % result of increasing fuel prices and increased number of employees. Furthermore critical globally changes to the economic climate also caused the decrease in profitability. In the year 2006 and 2007 profit margin was in a stable position at 20%.

Operating profit increased by 23% in 2007 and by 33% in 2008 thanks to bigger number of passengers using the services of Ryanair and growing subsidiary revenue.

The company has a good current ratio of 1.53. It has decreased from the year 2007 figure of 2.10. The current ratio indicates company’s ability to pay short-term obligation. The meaning of these figures is that Ryanair had less liquidity than in the year 2007, but still had enough funds to pay their debts.

Solvency ratio in year 2008 substitute less glowing than in previously years 2007 and 2006 .Solvency ratio in 2007 was 44.63% it is decreased by 2% comparing the ratio from year 2006 when it was 42.98%. Though the indicator of solvency ratio in 2008 which was 39.54% has decreased for five percent, company is in a condition to gather its liability obligations.

In 2008 Ryanair employed more staff because it opened new routes (Ryanair website) as result of it its gearing ratio increased by 18% from 87.12% in 2007 to 105.31% in 2008, also a result of rising cost of fuel. Gearing ratio measures the long term finance. If the gearing ratio is high the company depends on long term borrowing. Very high gearing ratio is quite risky for a company, but companies have to borrow money to invest it in their growing business.(Encyclopaedia online). In the face of all difficulties Ryanair achieved growing revenue and sales by attracting big numbers of customers by the low price for the ticket and giving the consumers what they want excluding the extra service. Ryanair can reduce the borrowing by decreasing the number of new aircrafts or by cancelling new purchases of planes and concentrating attention on efficient use of existing aircrafts (FAME) (See appendix 1).

Company Strategy

Using the Porter’s (1985) genetic competitive strategies Ryanair follows the cost leadership strategy. These include cost leadership, differentiation, cost focused and differentiation focus. Each generic strategy helps the company to establish and exploit a competitive advantage within an exacting competitive range. Cost leadership achieved competitive advantage by being the lowest cost company in air industry using the cost control. (Porter 1985)

Ryanair European low cost carrier provides to its passengers a big variety of routes and reduced prices of tickets by excluding extra facilities such as free meals, free drinks, first and business classes, pillows, blankets, which are usually offered to passenger who travel by full cost air operators.(Ryanair website) From The Daily Telegraph survey of 19.09.09 Ryanair charges more for the extra services than other low fare flights: 35% more for coffee and tea; 50% more for small bottle of wine and 30% more for sandwiches than EasyJet, Flybe, BMI and Monarch. Ryanair only gives service by provide transportation from one destination to another avoiding the main airports and excluding “frills”, all extra services are still available for an additional payment to a willing customer. According to Thompson, J and Martin, F (2009, chapter 5 p 301) “Cost focus strategies can be based on finding a distinct group of customers whose needs are slightly below average. Costs are saved by meeting their needs specifically and avoiding unnecessary additional cost.” In addition prices are reduced by providing 100% internet check-in, no tickets, no refund for tickets, putting more sits by reducing room for legs. Airline providing only direct flights from one airport to another maximizes the number of flights it can have per day. Prices are reduced by not depending on travel agents with direct tickets sales through phone and website. For Ryanair using the same aircraft Boeing is just another way to reduce the costs by saving money on retraining the staff. Furthermore newly recruited employees have to pay for the training by themselves.

Main competitors are EasyJeat, BMI baby; Flybe who also attract customers with cheap flights.

In the article written by Mun,J it is indicated that all the additional costs are passed to the passengers in order to maximise the profits. By providing the variety of destinations and routes in Europe give big opportunity for Ryanair increasing their market share and had become one of the most important core competencies for them to carry on competitive advantages.

Strategic Direction of Development

The Ansoff’s Growth matrix (1987) is a tool that helps businesses decide their product and market growth strategy. Using the matrix to analyse the main strategic direction that Ryanair follows.

Ryanair follows market penetration model. It penetrates market with both its products and services. It starts with existing customers of the company and convinces them to use company’s services more often. They do increase sales without forgetting the original strategy. Ryanair penetrate markets by getting competitors customers and attracting new customers by offering the lowest priced services. Retaining existing customers is more beneficial and cheaper than attracting new ones. This means that Ryanair has to gain more loyal customers.

Ryanair’s objective of establishing the company as Europe’s leading low-cost airline are being well carried out.

Methods of Development

Methods used by Ryanair to pursue its strategic directions have been successful so far.

Ryanair’s main response to its competitors remains providing the lowest fares from all the European budget airlines.

It offers frequent flights on short-haul routes. Ryanair uses the Internet as the main distribution channel to keep operational and customer service costs low. It further reduces expenditure by staying out of major airports and so avoiding excessive airport access fees.

Their low cost, no frills strategy has been very effective and has helped in challenging competitors.

Ryanair continued to demonstrate strong growth. It responds with low fares and aggressive pricing to attract customers and maintain high load factors.

(Mognetti, 2002).

Expansion strategy is one of the factors that put Ryanair to position itself in the air industry market. From Robinson and Lundstrom (2003) market expansion is the strategy of organisation’s growing when company is trying to find new market for existing product. Company could grow by attracting new customers or catch the attention of new geographic or demographic markets The company start only with one route and continuing to explore new. Buying the Buzz company gives to company opportunity to opened new routes in France. Ryanair already have 880 routes to different destination and their plans to opens routes to the US. In addition, the company website has been able to make the company position itself in the global market (Daily Mail 2009).

In terms of suitability, the opportunities of Ryanair are definitely directed to growth. This is based on the company’s on-going strategic planning. Further, by exhausting the company’s research and development efforts, the possible future strategies are feasible. By looking on the financial framework of Ryanair, it could be deemed that the company is able to carry out such strategies, while maximizing returns, enhancing profitability and minimizing risks. Finally, the acceptability of such strategies meets the expectations of the stakeholders.

Conclusions and Recommendations

The SPACE matrix (Rowe et al. (1989)) shows that company pursue an aggressive strategy. The company is the strong competitor in the market and is growing rapidly within the industry. Using the matrix it was identified that Ryanair could use its internal strengths to develop market penetration and market development strategy. (see appendix 2)

10.1 Changes that occurred in the airline industry over the past ten years directly reflect in how the Ryanair evolved over the last years. From a company servicing just few European destinations it became a leading low-cost carrier, outweighing any other company with the cheapest available fares on the market.

The airline industry is not a natural monopoly and the sunk costs are not that dramatic as planes can be both bought and sold, and the “air” that people fly through is essentially free. With deregulation however, the airline industry became a realistic version of a contestable market, and firms such as Ryanair and Easyjet were able to enter. But in the process, Ryanair has managed to take control of the European airline industry. However Ryanair have forced new entrants into investing in sunk costs far greater than when they entered the market themselves, coming through the importance and strength of the Ryanair brand name. The control and growth potential is and will be so strong that Ryanair appears to be single-handedly taking over the European airline market. This former minnow has persevered with a very simple but effective policy; people will travel for as little amount as possible.

10.2 In the airline industry Ryanair is more profitable than its competitors. Company needs to continue to expand into new markets and at the same time built better relationships with existing internal and external customers. Ryanair has to strive to become a more ethical company. Ryanair should build customers loyalty by improving their customer service.

Their challenges for the future will be sustaining growth, expanding globally and maintaining their cost leadership model.

Ryanair following the sustainable growth model should be able to generate more sales without borrowing.

Expanding their routes outside of Europe would be a great opportunity for Ryanair to become world leading low-cost airline.

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