An Introduction for Ryanair

Background in Brief Ryanair was established by the Ryan family with a staff of 25. Its first route was launched in 1985 with a 15-seat aircraft ferrying passengers between Waterford in Ireland and London. In 1986, Ryanair launched its route from Dublin to London to challenge British Airways and Aer Lingus, the two dominant airline carriers on that route, by offering fares at lower prices. With two routes in operation, Ryanair carried 82,000 passengers in its first full year of operation. By 1993 Ryanair has carried over 1 million passengers.

In 1995 Ryanair overtook Aer Lingus and British Airways to become the biggest international scheduled route carrier in Europe. The Organization Today Ryanair now operates more than 1,500 flights per day from 57 bases on 1,500 low fare routes across 28 countries. It connects 178 destinations and operating a fleet of 305 new Boeing 737-800 aircraft. In 2012, Ryanair had a team of more than 8,500 employees and carried over 78 million passengers. Ryanair’s main business is to provide “low-fare-no filling” airline services.

Ryanair also offers various ancillary services including in-flight sale of beverages and food, car hire services, internet-related services etc. To expend its network, Ryanair, which already owns 29. 82% of Aer Lingus in 2012 announced its intention to acquire Aer Lingus by making an all cash offer of €1. 30 per share for its entire share capital. Ryanair recorded a profit of €503 million in 2012 fiscal year, increased 25% compared with year 2011 despite a €367 million rise in fuel costs.

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Revenues rose 19% to €4325 million as traffic grew 5% to 75. 8 million passengers. Ryanair’s return on equity (ROE) is increased from 12. 7% to 16. % in fiscal 2012. In addition, the company’s free cash flow is increased from €-610. 9m to €702. 7m due to high net income and reduced capital expenditure.

Mission Ryanair' mission is to “become Europe’s most profitable lowest cost airline by rolling out our proven ‘low-fare-no-frills’ service in all markets in which we operate, to the benefit of our passengers, people, and shareholders”. To emphasis its focus on low fares, low frills, the CEO has stated, in response to criticisms of Ryanair's sub-standard customer service, that “any worthwhile passenger service commitment should involve commitments to low prices and high punctuality”.

Ryanair has the cost minimizer's aim of generating the most benefit to both its shareholders and its passengers through offering the lowest fare service. It offers customers the choice of exactly which services they want to pay for rather than forcing them to pay a high price for the bundle of services the airline wants to offer, as legacy carriers usually do.

Passengers benefit from paying less money by selecting and purchasing only the services they need. As a result, Ryanair is able to attract more customers, which helps Ryanair to grow its market and profits.

Goals and Objectives Generate greater passenger traffic through offering low fare services.

1. Expand the air passenger market and network by opening up new bases and routes.
2. Capture a larger market, such as by entry to the US airline market.
3. Gain additional profits through increasing passenger traffic while keeping its cost base low.
4. Maintain its low cost leadership position through continued cost efficiencies.

Demographic Segment

Airline travel passengers are mostly aged 18 to 65. Among them, passengers of age 25 to 55 years account for almost 75% of the total. The ageing of the post-1945 baby boom generation has reduced the numbers in the older higher income segment of this demographic.

The resulting tendency is for a greater proportion of air travellers to be younger and less affluent and more oriented toward lower cost transport as opposed to seeking a luxurious flying experience.

The political and legal Segment

The political and legal issues that concern Ryanair include regulations of regional and national governments and the European Union (EU), various legal actions, terrorism and security. Because many airlines are fully or partially owned by national governments, the airline industry has been affected by political regulation of both operation and ownership.

For example, the EU regulations charging all airlines for their carbon emissions, and the rules on flight and duty time limitations, both increase the operating costs of Ryanair. Furthermore, O'Leary's ambition to start an ultra-low cost transatlantic airline using Aer Lingus planes and US airport landing rights has been blocked by the European Commission's Merger Office. The Commission has refused to allow Ryanair to go ahead with purchase of control of Aer Lingus. In addition, the threat of terrorism has increased insurance and security costs in the airline industry.

Economic Segment

The global economic recession and fuel price increases have greatly affected the European airline industry. The recession has impacted the purchasing power of consumers. Ryanair’s low cost strategy has enhanced Ryanair’s ability to compete in these conditions. Through offering low fares, Ryanair enables airline passengers to continue travelling despite the economic crisis. The floating exchange rate also has a direct effect on Ryanair’s profitability. Ryanair collects fares in various currencies and has its expense mainly in US dollars for fuel and in Euros for labour.

In addition, the number of airline passengers could decline if their national currency loses value. Ryanair uses futures and options to hedge its fuel price, foreign exchange risks, and financing interest cost. The price for 90% of Ryanair's forecast fuel requirements for fiscal 2013 is hedged. Hedged prices for 2013 are significantly above 2012 prices.

Socio-cultural Segment

Due to changes in traveller’s behavioural and psychological patterns, the European airline industry has changed from traditional patterns.

People’s perspective towards air travel has been changed by the low cost revolution of air fares in Europe. Air travel is no longer being seen as expensive and is now accessible by low income people. Consequently passenger traffic in the Europe airline industry has increased. Ryanair's initial routes from Ireland to England were intended to provide a service to ethnic Irish people who had migrated to England to work due to lack of jobs in Ireland, but who still had most of their family in Ireland and wanted to visit often.

Technological Segment

Adopting advantageous technologies has helped Ryanair constantly reinvent its processes to maintain its low cost advantage. For example, by using its online booking system, Ryanair reduced its distribution costs by eliminating travel agency commissions. Better technology has also allowed other transportation industries to cut costs such as the innovation of lower fuel consumption cars and high speed trains. These changes both increase the competitiveness of the substitutes for airline travel and also increase the complementarity of airline and other travelling tools.

Global Segment

Globalization increases the demand for international air travel. There are an increasing number of people travelling between counties for work or to take vacations in foreign countries. The bargaining power of Ryanair’s aircraft suppliers is relatively high. Because Ryanair wants very low prices and many special conditions on aircraft purchases, so Boeing has refused to extend their supply contract with Ryanair, and Airbus has not been interested to seriously negotiate with Ryanair.

Moreover, the switching cost of changing supplier for Ryanair is moderately high due to the significant amount of expense needed in terms of pilot, mechanic retraining and spare parts inventories. Ryanair is reportedly negotiating to buy the new C919 aircraft being developed by COMAC, a Chinese manufacturer, due to its greater amounts of seats and the lower fuel consumption. This availability of this substitute increases Ryanair’s bargaining power with Boeing. Ryanair’s bargaining power with its suppliers of airport services is high, due to the current overbuilding of regional airports.

Bargaining Power of Buyers

The bargaining power of Ryanair’s buyers is high. The competition in the European short haul airline market is very intense, and many airlines have cut their cost in response to deregulation and availability of new cost saving technologies. Though Ryanair offers travel fares to passengers at very low prices, there is low switching cost for customers to change to another airline. The lack of brand loyalty in the air travel market increases buyer’s bargaining power. Threat of Entry

The threat of new entrants in the European short haul air travel market is high due to the relatively low cost of entry and the commodity nature of the capital required. However Ryanair has achieved economies of scale which would be difficult for a new entrant to achieve. Ryanair has a large network which would require a moderately large capital investment to duplicate. Availability of access to some routes is another barrier for new entrants due to the intense competition for primary routes and primary airport landing rights for some routes.

Threats from Substitute Products

The threat of substitute products and services for Ryanair is relatively low. Substitute services of Ryanair include trains, ferries, cars, as well as other low fare airlines. However, according to the record, it was shown that usually the tickets of train, bus or ferry are more expensive than Ryanair’s flight tickets. According to Ryanair's 2012 financial report presentation, Ryanair's average ticket price including bag is €45 (2013Q3 €50) and its closest price competitor's average ticket price is €71 (2013Q3 €79). This shows the threat to Ryanair's from substitute low ost airlines is relatively low as they are unable to achieve Ryanair's economies of scale and offer similar fares.

Analysis of Interaction of External Force

In summary, the external environment provides Ryanair both opportunities and risks.

Though some political issues limited its operation and the intense competition in the airline industry poses some threats to Ryanair, the company has great opportunities to grow. The demand for air travelling is increasing as the reduction in fares has expanded numbers of passengers who can afford air travel, and existing travellers are choosing low cost carriers due to the economic recession. Ryanair has put itself in the right position to generate passenger traffic and market shares.

Airports: Ryanair has established distribution channels with low cost and uncongested airports, which enable it to deliver a 25 minute turnaround, which helps to create Ryanair’s competitive advantage. Not only secondary airports, Ryanair’s primary airports also delivered it a great value. Locations: More than 1,500 routes across 28 countries in Europe and North Africa to 178 airports (of which 57 are ‘bases’, where Ryanair bases aircraft and crew). Aircraft Fleet: Ryanair has a fleet consisting of a single aircraft type, the Boeing 737-800.

The average age of its 305 aircraft is around 4 years, which is younger than the 9-11 years of typical European airline carriers. This gives advantages in terms of fuel efficiency, maintenance costs and customer perception. Ryanair also benefits from its planes higher seating capacity (189 seats per aircraft, compared with Easyjet’s 156 on A319s and 174 on A320s).

The financial resources of the company come from the Ryan family, shareholders, investors and creditors. In addition, Ryanair has a high cash flow balance, which enables it to make emergency adjustments or further investments.

In addition, Ryanair has the Aer Lingus shares with a market value of €150 million which could be converted to cash.

Very sophisticated and precise controlling and coordinating systems to allow high operational efficiencies including shorter aircraft turnaround times than competitors. Online booking and checkin system which allows near elimination of airport checking counter costs. Ryanair employs approximately 8,388 employees, as of March 31, 2012, including 1,636 pilots and 2,867 cabin crew employed on a contract basis.

Ryanair’s Brand Recognition

Ryanair has a strong brand image as a cost leader and no-frills carrier. The landing rights and airport terminal slot rights for Ryanair as well as the government approvals to fly each particular route. Ryanair's senior management team has a strong capacity to constantly innovate and to cut costs by negotiating with suppliers to pressure for supply cost reductions and to change service routes to drop high rising cost suppliers in favour of low cost suppliers.

The senior management team has the capacity to innovate by nbundling the components of major airline service and offering the components individually allowing travellers to choose lower cost combinations. Innovative use of secondary airports distant form major cities allows Ryanair to profitably offer ancillary car rental and bus and accommodations services through the online booking and ticketing system. Ryanair’s main supplier, Boeing, provided Ryanair discount reported as approximately one third off for purchasing aircraft.

Ryanair outsources the labour, airport services, and employee training they need at low cost. Operations: Ryanair provides “low cost no frills” airline service. About 50% of Ryanair’s flight crew are contractors employed only when required. Ryanair uses uncongested airports and only makes point to point trips. Ryanair has quick 25 minute aircraft turnaround times. Ryanair has developed an online booking, ticketing, and confirmation system which eliminated the role and margin of travel agents taking the Ryanair service direct to the traveller.

Marketing and Sales: Ryanair has the biggest website in Europe which allows them to do the marketing- internet sales. They also generate ancillary revenues by selling products in flight and encouraging customers to buy alliance services such as hotel bookings, car rentals and travel insurance etc. Service: Ryanair provides limited free services to passengers, and a full variety of onboard and travel services is available to customers for purchase. Customers decide which services they want to pay for.

Ryanair has efficient MIS systems to minimize airport turnaround times and to very tightly control on-board fuel inventories to minimize the cost of carrying excess fuel carried any flight. Firm Infrastructure: Ryanair has 57 bases. The cost of Ryanair airports are low due to its use of airports are mostly uncongested secondly airports. Ryanair has only one type of aircraft (Boeing 737-800). Therefore, Ryanair only trains pilots to fly one type of plane, which cut costs of training employees.

Business Level

Strategy Ryanair follows a cost leadership strategy. By controlling the cost of operations, Ryanair has a low cost base, which enables it to offer the lowest fares to passengers with acceptable service across Europe. Strategy Ryanair has a low-level of diversification. Ryanair's dominant business is passenger transport, with ancillary revenue from its ancillary services. According to Ryanair’s 2012 annual report ancillary revenue accounts for about 25% of the total revenue, while 75% of revenue come from is major business, which is scheduled airline service.

Ryanair follows a global strategy. Ryanair offers standardized services to all passengers across Europe, while the strategic decisions centralized in headquarters office to achieve economies of scale. Ryanair does not customize its products to individual national or regional market demands. Ryanair has cooperative or alliance relations with a broad range of hotel and other accommodation providers, as well as with airport car rental companies and airport bus transport companies. Ryanair offers the services of these companies through the Ryanair website and the companies rebate a portion of the revenue to Ryanair.

Ryanair’s cost leadership business strategy is built on senior management’s strength at negotiating low cost supplier agreements, and (2) unbundling air travel services from basic transport fares to allow lower willingness to pay customers to choose lower cost service. The cost leadership strategy and ability to negotiate lowest cost supplier agreements also puts Ryanair in position to exceed competitors network scale and thereby achieve competitively superior economies of scale.

Ryanair’s focus on cost leadership minimizes the negative effect that their disregard for customer inconvenience could have on a differentiated supplier. In summary Ryanair’s strategy is a good fit with its strengths, weakness, opportunities and threats.

Shift to primary airports and move upmarket by focusing on primary airports and increased customer service levels and fares, competing more closely with EasyJet. Expand secondary airports network, with the same customer service level but the lowest price. Expand secondary airport network and upscale the customer services with a bit higher price. Expand Network to US through buying Aer Lingus. Expand Network to US Irish destinations by buying planes, routes and airport slots. Develop a greenfield network in a non-European regional market.

Criteria for Analysis of Alternatives

• Increased Profit / ROE
• Financial Feasibility Maintain low cost leadership / Increase Economies of scale
• Government Issues Evaluation of Alternatives

As the primary airports will charge higher fees and tend to be more intensely competitive, the cost and fare price will be increased with a higher customer services level. The primary airport routes are served by many discount fare and major airline feeder service competitors  The lowest cost way to achieve additional economics of scale. Shifts the company cost structure to a higher cost curve and may reduce its economies of scale. Issue of European Commissions Merger office disapproval Combination of regulatory issues and cost of acquiring transatlantic certified aircraft. High start-up cost for a greenfield network and time required to build up revenue and profit. Recommended Alternative

Based on the evaluation, the best alternative for Ryanair is to continual to develop its network serving secondary airports, as it will generate more profit while and achieve greater economies of scale. Short Term Continue with company’s current strategy of expanding the network of secondary airports served. Maintain current levels of customer service and continue to emphasize the value of the levels of customer service provided to the Ryanair customer niche to avoid regulatory backlash. Long Term The secondary airport network in Europe will eventually be saturated by Ryanair’s expansion and to continue growing faster than demographic growth Ryanair will have to expand into other markets.

The recommended alternative is to make greater accommodations to the European Commission Merger Office regarding routes where Aer Lingus and Ryanair currently compete in order to gain the Merger offices approval for Ryanair to buy Aer Lingus. This will allow Ryanair to expand to the US market with guaranteed profits from the Irish traveller traffic visiting relatives in Boston, New York, and Chicago. Further the cost to buy the additional Aer Lingus shares to give Ryanair controlling a share in Aer Lingus is very inexpensive compared to other overseas expansion options. If the European Commission Merger Office does not give approval then Ryanair should consider development of an alternative regional network.

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