Strategic Analysis for Ryanair to Enter China
Strategic Analysis for Ryanair to Enter China Submitted in part fulfilment of the Master September 2010 STRATEGIC BUSINESS ANALYSIS (ULMS 719) University of Liverpool Management School 17 September 2010 Abstract Ryanair, the leader of low-fare carriers in Europe, will expand its business throughout the world. This report discusses the strategies which Ryanair entre the Chinese market.
Through PESTEL analysis and SWOT analysis to have sophisticated understandings of the Chinese market situation and the civil aviation environment, then after a series of considerations, eventually, Ryanair makes the decision to cooperate with China Southern Airlines in the form of a joint venture.
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Based on this, Ryanair has set up plenty of adequate business strategies that are composed of market targeting strategy, price strategy and marketing strategy in order to successfully enter the Chinese market. Keywords: Ryanair; China; Strategic analysis Table of Contents
Abstract ———————————————————————————————-i List of Tables and Figures————————————————————————iv 1. Introduction————————————————————————————-1 2. Overview of Ryanair ————————————————————————-2 2. 1 General introduction of Ryanair————————————————————-2 2. 2 Ryanair’s competitive advantages ———————————————————-4 3.
Strategic analysis ——————————————————————————–6 3. 1 External environment-PESTEL Analysis ———————————————-7 3. 1. 1 Political ————————————————————————————7 3. 1. 2 Economic———————————————————————————–8 3. 1. 3 Social ————————————————————————————–10 3. 1. 4 Technology——————————————————————————–11 3. . 5 Environment——————————————————————————-12 3. 1. 6 Legal —————————————————————————————13 3. 2 Internal Environment-SWOT Analysis————————————————-14 3. 2. 1 Strengths ———————————————————————————-15 3. 2. 2Weaknesses———————————————————————————17 3. 2. 3 Opportunities——————————————————————————18 3. . 4 Threats————————————————————————————–19 3. 3 Summary ————————————————————————————-20 4. Business Strategic——————————————————————————–21 4. 1 Entry Mode Strategy————————————————————————21 4. 1. 1Problems that may cause ————————————————————–21 4. 1. 2 Joint Venture —————————————————————————22 4. 1. 2. 1 Brief introduction of Joint Venture ————————————————22 4. 1. 2. 2 Partner-China Southern Airlines —————————————————23 4. 2 Market Targeting strategy —————————————————————–25 4. 3 Pricing Strategy —————————————————————————–26 4. 3. 1 The level of highest price ————————————————————–27 4. 3. The level of lowest price —————————————————————27 4. 3. 3 The level of average price ——————————————————— —-27 4. 3. 4 Price choice on peak-season and off-season —————————————–28 4. 4 Marketing Strategy ————————————————————————-28 4. 4. 1 Cooperation with Mass Communication ———————————————-28 4. 4. 2 Cooperation with local authorities —————————————————–28 4. . 3 Cooperation with China Southern Airlines ——————————————-29 4. 5 Summary————————————————————————————-30 5. Conclusion—————————————————————————————-30 References——————————————————————————————-32 List of Tables and Figure Table1. The Development of Civil Aviation in Recent Years——————————— 9 Table2.
Ryanair’s SWOT Analysis —————————————————————- 15 Table3. Highlights of Ryanair’s Finances ——————————————————– 16 Table4. Key Statistics Comparison between Railways, Highways and Civil Aviation——19 Figure1. Comparison of Average Fares in four airlines —————————————–16 1. Introduction Low-cost carriers mainly operate high-volume passenger traffic on short-distance routes, use second-level airports, and offer no extra services.
Given their sharply reduced costs, normally low-cost carriers offer fares considerably lower than that of traditional airlines. The trend began in America, with Southwest Airlines as the chief representative. Since 1990, numerous low-fare airlines have sprung up on a global scale. Among these, Ryanair’s achievements stand out. As the most profitable airline company in the world, Ryanair is renowned for its low-cost and low fares to travel destinations throughout most European countries. However, current airline routes and markets cannot meet Ryanair’s long-term development.
To achieve its expanding ambitions across a global range, Ryanair decided to start with the Chinese market. Aviation in China is advancing at a staggering rate. Because of improvements in the living standard, more and more customers are willing to spend money on high-fare air tickets to save time and obtain excellent service, whereas the majority of middle-class individuals would rather travel by other vehicles than by plane due to its high price. Without doubt, the low-cost carrier is the only way to satisfy the growing requirements of the market in the next several years.
Ryanair sees China’s high-potential market and increasing demands. It must, therefore, address these paramount issues: how to carry out appropriate strategies and combine Ryanair’s own advantages with the framework of international regulations and the Chinese government’s policies. If Ryanair enters the Chinese market successfully, it will have a special meaning and impact on Ryanair’s sustainable development and will bring about a great change in current Chinese aviation patterns. This study will suggest specific measures for Ryanair to enter the Chinese market.
The study first introduces Ryanair’s history, its considerable achievements, and unique predominance. From these aspects, we can have deeper understanding of Ryanair. Then, this study will apply PESTEL and SWOT models to analyze the internal and external environments. Based on environmental assessment, during the entire entering process, some unpredictable problems will be generated. In accordance with these problems, this study will offer relative solutions. More specifically, it offers an entry-mode and business strategy.
Last but not least, the study concludes by offering a look at Ryanair’s experiences and improvements during the analysis process, and shows its drawbacks as well. Finally, the study offers suggestions to minimize the risks of entry into and for making profits in China. 2. Overview of Ryanair 2. 1 General introduction of Ryanair Ryanair’s legend dates back to 1985 when the Ryan family set up the company with only ? 1 share capital and 25 staff in Ireland. At that time, the Ryan family mainly operated scheduled passenger airline services between the UK and Ireland. At first, this mini-airline failed to draw the public’s attention.
In the meantime, due to blind business expansion, Ryanair opened up new routes and purchased new aircrafts regardless of risk, resulting in constantly increasing expenditures and making huge losses for four years running. The meaningful year for Ryanair was 1990. Under the leadership of a new CEO, Michael O’Leary, Ryanair first introduced low fares and low-cost operation modes, based on the American South West Airline’s successful experience. The move has proven a wise decision. From then on, Ryanair began to make a profit and gradually became the leader in low-fare air tickets in Europe.
After more than 20 years of unremitting efforts, Ryanair is recognized as the world’s favorite airline (Ryanair Annual Report, 2009). In addition, in accordance with its latest fiscal year report, Ryanair has developed into the largest low-fare airline, with over 7,000 employees, 43 bases and 1,100 routes between 26 counties (Ryanair. com). Also, Ryanair’s fleet includes 250 new Boeing 737-800 aircraft. Its number of passengers served reached 66. 5 million, which took the lead in the industry. In the next several years, Ryanair will still enlarge its fleet to deliver more passengers.
In recent years, the value of Ryanair shares has gone up more than 10 times compared to 1997 when Ryanair issued shares to the public( Ryanair Annual Report, 2010). This continued, even after the events of September 11, 2001, when global aviation changed dramatically. Although most airlines have been largely affected, Ryanair has retained profits for 12 years. In 2003, Ryanair successively merged and acquired Holland’s low-cost airline, Buzz, the budget airline subsidiary of KLM and the Dutch national airline. These moves led to the organization’s overall strengths and risk resistance for further improvement.
The 2010 financial report illustrated Ryanair earned €305. 3 million in 2010. In consequence, Ryanair was named as “the most profitable airline in the world” by The Economist magazine in 2005. Meanwhile Ryanair’s stock share is very popular with investors and shareholders. In addition, one reason why Ryanair continues to achieve milestones is that it has maintained its business philosophy of ‘providing its customers with a lowest price ticket even no fares, on the premise that Ryanair cuts into the whole company’s operating expense and other unnecessary cost” (Johnson, 2004) 2. Ryanair’s competitive advantages It is universally acknowledged in business that superior enterprises will prosper whereas inferior ones will be eliminated. That is to say, survival of the fittest. The main points allowing a company to gain success are competitive advantages. This is the final goal of the strategic process in management. Competitive advantages were first proposed by Michael Porter in 1990. If a firm is able to generate more economic value than rival firms, it has a competitive advantage.
In other words, not only could it bring benefits to customers, but also its opponents would find it hard to imitate and surpass it (Barney and Hesterly, 2007). In the competitive low-fare aviation market, Ryanair gradually created its own competitive advantages. They are as follows: A. Purchasing a single aircraft type: Ryanair only operates Boeing 737 and Boeing 737-800 “next generation. ” Ryanair took good advantage of its own bargaining power and stable reputation to gain favorable contracts. This advantage helps Ryanair save costs.
At the same time, Boeing aircraft not only suit the demands of European countries but also saves a large amount of maintenance and the costs of repair and staff employment. B. High efficiency in staff work: Employees’ efficiency at Ryanair is relatively higher than those at other airlines. For example, at Ryanair, an airhostess is responsible for service on the plane and for cleaning as well. Productive-based remuneration system is widely applied in Ryanair. It consists of the number of on-board sales of products on the flight and their working hours.
To arouse enthusiasm and initiative among staff, Ryanair distributes company’s stock as dividend and rewards. C. Masterful exploitation of second-level airport resources: In some European areas, use of second-tier airports is very low. Therefore, to raise the usage ratio and boost economic improvement, local governments have offered some favorable policies. Based on Ryanair’s large volume of passenger traffic and its rapid growth, Ryanair obtained great contracts and even some subsidies from local areas, leading to a decrease in airport access fees. D.
Taking advantage of the Internet: To save agency commission fees and simplify the purchasing process, Ryanair set up online reservations and spent a large amount of money on promoting online implementation widely. The Skylight system offers a platform for Internet users to book and confirm their ticket through Ryanair’s website promptly. Consequently, its Internet operation has significant advanced to reach 99% of ticket sales. E. Reducing expenses and making profits from other aspects: Ryanair no longer provides free meals, and Ryanair cancelled first and business classes to offer more seats.
Apart from this, Ryanair limits weight of luggage to decrease fuel consumption. During the entire operation process, Ryanair always puts cost decreases in first place, and also attempt to seek a way to earn more money. For instance, Ryanair supplies different kinds of products and services including food, as well as information in terms of taxi and hotel booking for passengers. Simultaneously, the advertisements for colorful Ryanair’ aircraft and websites for other companies offer major sources of revenue. F.
Unique corporate culture: Ryanair’s headquarter was built in a rural area at a small location in Ireland. In the beginning, the entire company comprised only eight administrative workers. At times, the firm’s CEO and department managers would help customers check in and even load and upload their baggage. Every Thursday the company would hold football matches between various company departments. The corporate culture creates a harmonious work environment and makes a success of the business. 3. Strategic analysis The Chinese market is new for Ryanair.
There is no denying that the Chinese market has its own unique characteristics. To enter the Chinese market, it is imperative that Ryanair have a deep understanding of the external environment. Similarly, Ryanair should grasp if the internal environment is beneficial or detrimental to Ryanair. Only in this way, will Ryanair be able to exploit its own strong points to fulfill its potential and avoid some influences that may give rise to shortcomings. Meanwhile, environmental analysis offers a determinant factor to establish specific strategies. The following steps might be taken. . 1 External environment: PESTEL analysis Johnson pointed out the PESTEL framework as an effective tool for analyzing the macro-environment. Moreover, it helps the company to know what is going on outside the organization and how external factors are likely to change in the future. PESTEL refers to six points: political, economic, social, technological, environmental and legal (Johnson, 2008). It is clear that this framework includes all external aspects. Through this framework, Ryanair could get a better understand of the unfamiliar Chinese market.
Then, on the basis of this, Ryanair could carry out accurate methods that are suitable for Chinese customers. 3. 1. 1 Political issues The political point is related to political and state systems, policies and regulations. Aviation is an industry that is very sensitive to political changes. In the meantime, aviation is strictly regulated by government. Chinese aviation started late, therefore its laws and regulations have several shortcomings. With the gradual deepening of its economic reforms in recent years, the Civil Aviation Administration of China opened the door for non-state owned enterprises in 2004.
After that, a series of loosening policies regarding airline routes have been put forward to provide more chances for low-cost carriers. Up through late 2007, the Chinese government concluded 110 bilateral agreements with foreign states (The Report of Chinese Aviation, 2008). On the one hand, this move indicated that the Chinese aviation industry was at the international stage to seek further development. On the other hand, it means that the Chinese market relaxed rules on foreign ownership of airline. Through corporation, the monopoly concerning a reservation in fuel price, maintenance fees or tickets would be broken up.
In addition, there has been a dramatic increase in space resources. As of 2007, Chinese aviation implemented the Reduced Vertical Separation Minimum (RVSM) cruising altitude between 8,400 meters and 12,500 meters. RVSM went up from 7 to 13. This implied that space environment would be optimized and flights would be unobstructed. Beyond a new regulation applied regarding airline tickets in 2004, the Chinese government gradually relaxed price control. The measure was of immense significance in long-term development of airlines. 3. 1. 2 Economic
In 2009, the financial crisis swept through the global, and the world economy has been greatly affected by it. However, even under this circumstance, the Chinese GDP was 33. 5 trillion yuan, up by 8. 7 percent over the previous year. Fiscal revenues reached 6. 85 trillion yuan, an increase of 11. 7 percent (Report of the Work of the Government 2010). Constant economic growth provides an attractive environment for aviation industry. The following table indicates the development of civil aviation in recent years: Tab1e 1: The Development of Civil Aviation in Recent Years
Year Item| 2004| 2005| 2006| 2007| 2008| Length of Transport Routes (10 000 km)| 204. 94| 199. 85| 211. 35| 234. 30| 246. 18| Total Passengers Traffic (10,000 persons)| 12,123| 13,827| 15,968| 18,576| 19,251| Total Passage-Kilometers (100 million passenger-km)| 1,782. 3| 2,044. 9| 2,370. 7| 2,791. 7| 2,882. 8| Sources from China Statistic Yearbook 2009 As can be seen from Table 1, Chinese civil aviation has maintained a sustained, rapid and sound development. Moreover, the rise in the value of RMB will work to the advantage of aviation.
It contributed to cutting down the cost of crude oil import. To some extent, airlines could benefit from it and improve profitability. The financial crisis had a noticeable impact on the fuel market, which is the lifeline of aviation. As a whole, the global fuel price market decreased from $80 per barrel to $74. 07 per barrel. Whereas, in view of the Chinese fuel market monopolized by China National Aviation Fuel and high demand in the domestic market, Chinese fuel prices ran counter to the international situation and had an upward tendency.
Hence, this is a big challenge for airlines (Hu,2010). 3. 1. 3 Social Since the adoption of reform and opening policies, China has made headway socially and demographically. In the first place, Chinese people’s living standards have greatly improved. The annual per capita disposable income and annual per capita consumption expenditure of urban households have seen a dramatic increase to reach 15,781 yuan, 11,243 yuan, respectively. After 30 years of arduous efforts, the excessive population growth has been brought under effective control.
Furthermore, China’s population has basically accomplished the change-over to the population reproduction pattern characterized by low-birth rate, death rate and growth. Based on statistics provided by the State Statistical Bureau, by 2008, China had a population of 1. 3 billion. In the second place, residence, transportation and communication, as well as recreation, education and culture contributed to the promotion of the continuous growth of domestic consumption. Take 2006 as an example, the annual per capita living expenses of urban residents was 59,370. 3 billion yuan.
In comparison with last year, transportation and communication rose by 13. 8%, and the other two items went up by 10. 8%. The major factor that caused the results above was due to changes of the social-cultural environment. Thus, people’s lifestyles, including transportation and travel choices have changed subsequently. In recent years, the rate of tourism had an upward tendency, climbing from 26% in 2001 to 36. 7% in 2007 throughout the whole air transportation market. Moreover, the number of self-funded travelers accounted for 50. 7% in the tourism industry (China Statistical Yearbook, 2009).
Last but not least, with close relationships of educational institutions between different nations, the quantity of students who study abroad is increasing year by year. In particular, through a ten-year development period, the number of students in 2008 was ten times higher than that in 1998; it reached 179,800 persons. 3. 1. 4 Technology First, we can acknowledge that advanced technology has resulted in cost reductions for airlines. As a result, as the most famous civil aircraft manufacturing companies in the world, Boeing and Airbus continually issue new economical and practical aircraft, like the Boeing 777 series and Airbus A380.
Secondly, simplifying the business program(StB)was proposed by International Air Transport Association in 2004. It is a new approach that aims to reduce airline expenses and offer better services for passengers. The StB program compromises five parts: bar-coded boarding passes (BCBP), IATA e-freight, IATA e-services, the Baggage Improvement Program and the Fast Travel Program. With the aid of the StB Program, airlines can sell tickets by direct marketing and vending machine or booking tickets via the Internet, mobile phones and land lines.
Since 2006, e-ticketing has been implemented widely in the domestic market and is up to 100%. It was estimated that, after implementing e-tickets, the cost of each ticket would decrease by two-thirds, and there is no denying that this measure would bring huge potentials regarding a decrease in operation expense for airlines(Wu,2007) Thirdly, with the rapid improvement of air-traffic management and overall industrial technology and equipment levels, the utilization rate of national airspace resources had a significant rise.
In the meantime, increased numbers of aircraft have driven the development of the aircraft maintenance market, extending the useful life of civil planes, which endure 25–30 years. Lastly, along with the quick development of civil airlines, the supply and demand of pilots in the transport market is increasingly prominent. With regard to training and recruiting pilots, there is fierce competition between new airlines and existing airlines. As an administrative department, the Civil Aviation Administration of China is cautious about turnover as to pilots.
To a great extent, the liberalization of rules pertaining to pilots is still restricted by laws and regulations, thereby hindering long-term development of new airlines (Fang, 2009) 3. 1. 5 Environment In contemporary society, human beings have gradually raised their awareness of saving resources and protecting the environment. Hence, consumers are willing to back “no-frill,” low-cost carriers. Analysis of the low-cost carrier market in China and the Investment Advisory Report, 2006–2007, showed that 79% of customers would accept products provided by low cost airlines.
Next, in 2012, the European Union will begin to charge for carbon emission. Obviously, it is not good for high-speed growth but imperfect Chinese aviation. In spite of China vigorously pushing forward energy conservation and greenhouse gas emissions reduction, nevertheless, under the current technology and situation, to reduce greenhouse gas emission, it must depend on technology rather than fuel decreases. Because of insufficiency or drawbacks of relevant laws and regulations, at present, China has not formulated a relevant policy in terms of charging carbon emissions.
This contributes to more and more foreign airlines paying more attention to the Chinese aviation market of the future (Li, 2010) Finally, through decades of operation and development, Chinese airports have begun to take shape. By 2008, China had 152 civil airports. Beyond that, passenger traffic and freight traffic achieved great performances: 19,251,000 persons and 4,076,376, tons respectively (The Year book of China, 2009). Currently China is speeding the construction pace. The Civil Aviation Administration of China has announced that by 2020, China will set up more than 97 airports.
By then, 80% of the area will be covered, so that 82% of the total population would enjoy airline service (Tan, 2003) 3. 1. 6 Legal Although world aviation has become wired, foreign airlines that would like to enter and operate in China also face a great many difficulties in the aspects of market and technology and, especially, laws and regulations. For instance, according to the General Administration of Civil Aviation Law of China, Article 177 states that it does not allow transportation between any two points in the areas of China for foreign airlines.
Besides, foreign airlines’ timetables and flight plans must report to relevant aviation departments in a timely fashion. To some extent, it undoubtedly becomes an obstacle to free development in aviation. In addition, lack of relative facilities results from the immature advancement of aviation in China. Like most cities having only one main airport, the construction of a secondary airport still falls far short of needs of modern aviation. Consequently, this is a big problem that should not be ignored by foreign airlines. 3. 2 Internal environment: SWOT analysis
SWOT was first put forward by Albert Humphrey in the 1960s and mainly deals with an enterprise’s internal environmental analysis. It is the method that is used for arriving at deep and comprehensive understanding of a company’s own strategic competence, as well as a business environment before the company works out the adaptation strategy in the new circumstances. SWOT refers to strength, weakness, opportunity and threat. Among these four aspects, ST focuses on company, while OT pays more attention to relevant competitors’ effects.
By applying this, the enterprise could realize what factors are beneficial to it and then carry forward them in the future. Meanwhile, the organization should find some existing serious problems that would have adverse influence on further development. Then, it should find a solution to the problems or try to avoid them in practice. By this method, the company could make best use of the advantages and bypass the disadvantages so as to attain sustainable development (Johnson, et al. ,2008) The following picture shows a summary in respect of Ryanair’s SWOT analysis: Table 2: Ryanair’s SWOT Analysis
Strength| 1. Powerful brand support2. Low fares3. Low operation cost and high ancillary incomes4. High efficiency, flexible operation| Weakness| 1. Service quality decrease2. Regulation restrictions3. Changes of charges have great impact on Ryanair4. Limited niche market| Opportunities| 1. Tremendous civil market potentials2. Economic downturn3. Ambitious expansion | Threats| 1. High-speed development of other substitutes2. Fierce competition and pressure from other civil airlines3. Excessively depends on jet fuel market and low price| 3. 2. 1 Strengths
After 20 years of arduous efforts, Ryanair has already built up an enterprise image and exploited the brand with its own characteristic in the European LCC market. The Economist magazine called it “the best airline which could earn a large amount of money. ” Wall Street Daily considered Ryanair’s stock as the most popular and the most valuable to purchase (Wang, 2008) It has made marked achievements in every respect, as can be seen from the table below in terms of general accomplishments: Table 3: Highlights of Ryanair’s Finances € Key items| 2010 | 2009| change|
Operating revenue| 2,988. 1| 2,942. 0| +2%| Net profit /(loss) after tax| 305. 3| (169. 2)| +280%| Scheduled passengers| 66. 5m| 58. 6m| +14%| Fleet at period end| 232| 181| +28%| Average number of employees| 7,032| 6,369| +10%| Adapted from Ryanair Annual report 2010 Since its establishment until now, Ryanair has always persisted in the philosophy of business: Let more and more customers enjoy low fare, even for free. A survey of different airlines and their fares follows: Figure 1: Comparison of average fares of four airlines. € Source: Ryanair Annual Report 2010.
Ryanair can in fact issue tickets much cheaper than other airlines. That’s the reason why the total Ryanair scheduled passengers came out to € 66. 5 million. With such cheap fares, Ryanair can still make profits. The reason is attributed to an emphasis on minimizing operations costs, which includes: aircraft purchasing, daily maintenance and selection of airports, online booking and personnel expense. Apart from these, Ryanair tries to earn more from ancillary service while reducing costs. For example, customers could book cars or hotels, and even some low fare tickets of concerns from Ryanair’s websites easily.
Besides, Ryanair is considered a conspicuous billboard as its aircrafts and even its trays are fully sprayed with different companies’ advertisements. This action brings about considerable income to Ryanair. In 2010, the advertising income reached €663. 6million. Definitely, a highly productive work force also plays a pivotal role in the way to success. It is reported that each Ryanair’s emplyee can serve 9,457 passengers per year. To mobilize the enthusiasm of employees, Ryanair brought out air bonuses and participation in Ryanair’s valuable option project (Ryan air Annual Report 2010). 3. . 2 Weaknesses Due to reduction in Ryanair’s various operation expenses, a variety of free services have been cancelled. At present, customers must pay to use the toilet. Therefore, more limitations are sure to follow, service quality decrease and then, increasingly, customer complaints. The most serious negative issue has been the severe criticism continually released by the news media, and it has harmed the company’s overall image and interest. Ryanair’s target market mainly focuses on leisure-travel customers and short point-to-point routes. Although it does not have higher standards of ervice, Ryanair is extremely sensitive to price. That is to say, once Ryanair raises prices slightly, it will lose lots of customers. Nevertheless, as the company’s scale is constantly enlalrging, costs will go up proportionately. Therefore, limited niche market and increasing cost are not propitious for further expansion of the company. Currently, Ryanair confronts a tough situation, which involves how to balance the company’s benefits and customers’ requirements appropriately. In spite of Chinese aviation advocates; reform and innovation, China is not completely wide open to foreign airlines.
Local laws and regulation restrictions are not conducive to Ryanair’s entry. 3. 2. 3 Opportunities Compared with advanced countries, although China aviation is advancing rapidly, it still has plenty of drawbacks, particularly in the low-cost carrier area. 2008 Chinese Aviation Report implied that China has a huge market with big potential and wide prospects in civil aviation. However, nowadays, there is only one small-scale, low-cost airline, Spring Airline, in China’s domestic market. Apparently, existing fleets and routes are difficult to satisfy a increase of domestic demand.
Ryanair’s entry will fill the low-cost carrier vacancy. Moreover, it has been proved that low-cost carriers can benefit during economic downturn(Kerpen, 2004). lobal recession leads to a sharp fall in public income. Therefore, the public turns to low fares to reduce expenses. A host of customers would rather choose Ryanair, which does not have free services, than general flagship airlines that offer higher standards of service. Apparently, the economic slump brings infinite business chances and generous profits for Ryanair. Ryanair is planing to enlarge its fleet to acquire 200–300 planes by 2016.
Due to bulk buying, Boeing and Airbus quote Ryanair the most favourable prices to acquire such big orders. In that case, it not only saves costs but also offers sufficient funds to invest in overseas markets. Ryanair’s ambitious expansion could come true in the near future. 3. 2. 4 Threats Rapid development of Chinese railways and highways in recent years should be a concern for air carriers. Ever since the transportation industry has advanced steadily, railways and highways have held leading positions. Because civil aviation is subject to its own conditions, in freight traffic, t had a very big lead compared with railways and highways. This is shown in the table below: Table 4: Key Statistics Comparision between Railways, Highways and Civil Aviation Items| Year| Passenger Traffic (10,000 persons)| Passenger-Kilometers (100million passenger-km)| Freight Traffic (10,000 tons)| Railways| 2006| 125,656| 6,622. 1| 288,224| | 2007| 135,670| 7,216. 3| 314,237| | 2008| 146,193| 7,778. 6| 330,354| Highways| 2006| 1860,487| 10,130. 8| 1,466,347| | 2007| 2,050,680| 11,506. 8| 1,639,432| | 2008| 2,682,114| 12,476. 1| 1,916,759| Civil Aviation| 2006| 15,968| 2,370. | 349. 4| | 2007| 18,576| 2,791. 7| 401. 8| | 2008| 19251| 2,882. 8| 407. 6| Adapt from Chinese Statistic Yearbook 2009 As shown in the diagram, from 2006 to 2009, people would rather choose railways and highways than civil aviation. Furthermore, as mentioned above, the statistics of railways and highways far exceed that of civil aviation. In 2002, civil aviation was reconstructed and reorganized. From then on, competition through three airline groups involving Air China, China Southern Airlines and China Eastern Airlines has taken shape in the civil aviation market.
The three airlines have the market share for 80% in China. There is no denying that these three airlines groups pose a huge threat to Ryanair. They would take full advantage of their own strengths to freeze out new competitors. More importantly, Ryanair is famous for its low fares. Jet fuel is a major component of Ryanair’s operations costs. However, as cost of jet fuel has risen, Ryanair’s ticket prices have spiraled up to match them. Therefore, this action is directly opposite to the aim of the company. Ryanair would lost a large number of customers because of its relative high fare compared with privious price. . 3 Summary As discussed in the PESTEL and SWOT analyses above, as a whole, the external environment is conducive to Ryanair’s entry and development in China, specifically, the attractive points were policy relaxation to foreign airlines and high demand for low-fare carriers. However, Ryanair would have to pay more attention to techniques and legal restrictions in certain aspects. Only after analysing the external environment objectively will Ryanair enter the Chinese market smoothly. In the meantime, the internal environment is equally fundamental.
After placing more emphasis on understanding the other airlines and Ryanair itself, then it will be able to fight a hundred battles without danger of defeat as the result of wise decision making and strategic adjustments in a short time. 4. Business strategy 4. 1 Entry mode strategy 4. 1. 1 Potential problems Given that aviation is a sensitive industry, there is no doubt that Ryanair will face some tough problems that could interfere with its entry plans or progress. In particular, the Chinese government puts up all sorts of obstacles, and these factors are concretely revealed by the following.
The first obstacle is the imposition of restrictions on setting ticket prices. Civil aviation-transport price reforms state that on the basis of benchmark prices, airlines may set a price which increases 25% and decreases no more than 45% (Wu, 2007). Compared to the previous rule, the government has relaxed controls on prices. Nevertheless, it is still hard to satisfy the requirements of low-cost carriers, which rely on low fares to gain a larger share of the market. The second obstacle is the control of air-route management rights. So far, there are 115 airports which are completely open.
Airlines could freely arrange air route entry and quit based on actual market demands by themselves. However, these airports’ handling capacities are relatively small and the low-cost carrier’s self-potential is subject to it. The last obstacle is the monopoly pattern in civil aviation. At present, Air China, China Southern Airlines and China Eastern Airlines have become three powers of civil aviation. At times, the three-airline group launches its own low-cost tickets in order to develop market share. Ultimately, their positions in the domestic market are strengthened.
As a new entrant to the Chinese market, the three-airline group’s low-cost strategy will negatively affect Ryanair. 4. 1. 2 Solution: Joint Ventures As stated above, the way to enter a new market is not completely clear for new entrants. To avoid some unpreditable factors that would arise in the Chinese market and to lower risks attributed to lack of knowledge regarding market information or market situations, joint ventures are the most convenient and effective solution for Ryanair, especially a minority joint venture. 4. 1. 2. 1 Brief introduction to joint ventures
A joint venture is a “corporate child” that is a new entity given birth and jointly owned by two or more parent companies. (Peng, 2009)Generally, this is a common measure for new entrants to enter unfamiliar environments. That is to say, that Ryanair should seek other partners in the Chinese market. Two parties hold different proportions of equity and also share investment, management, risks and responsibility for profits or losses. At the beginning, owing to the fact that Ryanair stands at a disadvantage, it is imperative that gaining support from domestic firms make up the shortage of funds and resources.
From all of the above, this measure is acceptable and advocated by local authorities, and they will even offer a preferential policy in the developing aviation industry. Yet it is certain that there will exist some drawbacks during the application of joint ventures. On the one hand, because of differences in background and corporate culture, a new company will be easily split on objectives and interests and even conflicts. On the other hand, sometimes both paties cannot reach a consensus in regard to equity allocation and operational control.
At the end, it is often hard to coordinate globally on account of tight controls on a foreign subsidiary (Peng,2009). 4. 1. 2. 2 Partner: China Southern Airlines Based on an overrall consideration of various factors, Ryanair decided to choose China Southern Airlines as its partner. The following paragraphs show reasons why Ryanair mades the decision. First, highlights of China Southern Airlines follow. Its headquarter is in Guangzhou. The company is made up of 13 branches and 5 subsidiaries throughout China.
Futhermore, China Southern Airlines has set up two bases in Shanghai and Xian, and it also owns 54 foreign agencies abroad. China Southern Airlines possesses the highest number of aircraft, 400, the most advanced air route network and the biggest passenger traffic that up to 66,280,000 persons. At present, with Guangzhou and Beijing as major hubs, their air route networks and ranges of business have spread throughout the main cities in the world. In 2008, China Southern Airlines was honoured with “flight safety five stars” by the Civil Aviation Administration of China. Now it still keeps the longest safety records.
China Southern Airlines always insists on “Safety First Principle” On the premise of safety, the firm constantly brings forth management level and technology innovation to improve its strength and international competitiveness. China Southern Airlines is the only airline that fosters pilots independently. Second, in some ways China Southern Airlines and Ryanair are complementary, eventually accomplishing a win-win situation. For China Southern Airlines, in spite of the fact that it plays an irreplaceable position in domestic aviation, the pattern of company management still has gaps compared to other European airlines.
By joining Ryanair, China Southern Airlines not only brings fresh blood but also receives advanced management patterning. China Southern Airlines can absorb Ryanair’s rich experience regarding corporate governance and human resoure management to achieve rational resource allocation and high employee efficiency. In the meantime, China Southern Airlines’ business covers the whole country, and transport capacity cannot suit domestic market’s demands. Ryanair’s entry could lighten its burden in some air routes. More importantly, China Southern Airlines has lost in terms of international air routes in recent years.
Whilst Ryanair is the pioneer in the low-cost area in Europe. By means of Ryanair’s influence, China Southern Airlines could regulate tactics in Europe and make profits. Similarly, Ryanair can benefit from cooperating with China Southern Airlines. First and foremost, due to application of the joint venture, this it way complies with legal requirements, thereby diminishing entry resistance from the government to a great extent. Then Ryanair could develop smoothly regardless of culture or language differences under China Southern Airlines’ strong brand support and resouce sharing.
At last, China Southern Airlines will offer the permission of using its bases and airports and pilots to Ryanair. This measure will reduce the anxiety caused by the shortage of resources. This is the only way that lowers Ryanair’s operation costs and carries on its low-fare business in China. 4. 2 Market Targeting Strategy When it comes to the target clients of low-fare carrier service, it mainly focuses on the special group that is characterized by high sensitivity to fare, high-price elasticity and price factor as their first consideration.
Southwest Airlines was awared of the chief competitors of airlines are highways and railways. Generally, in short air routes, customers are sensitive to price. Because of short flight time, they do not require high-standard services. As a result, it is difficult to capture more customers through service differentiation. With regard to how to choose a target market accurately, there are three elements to be taken into consideration: First, price factor. Customers who prefer low-cost carriers are distributed into three classes.
Initially, self-funded travellers. In general, tourists are customers who visit families and friends in their schedule in advance. They pay attention to low fares rather than immediacy to save travel expenditures. Next, the main character of this group is time flexibility. Finally, general business customers. Due to high air-ticket prices, sometimes they are restricted by unit to take planes. Once low fare are implemented, there is no significant distance between air tickets and train tickets, and they will welcome low-fare air tickets.
Another thing is the length of flight time. In the present situation of the aviation market, the majority of flights take 3 hours. In order to decrease costs and raise aircraft utilization rates for low-fare carriers, 2 hours would be preferred. Humans usually select transportation like railways and highways due to cheaper prices, even if they spend a long time on the journey. Low-cost air fares not only save much time but also let more customers have access to comfortable trips and services (Olson and Peter, 2005) 4. 3 Pricing Strategy
There is no denying that low-cost strategy is the lifeblood for low-fare carriers’ existence. In the fierce competition of the aviation marketplace, flagship airlines launch their own ultra-low fare in the off-season. However, as flagship airlines are limited by high costs, offering low fares is only a temporary method to attract more customers. As a low-cost carrier, it is obvious that Ryanair’s fare should be much lower than the level of market. Only in this way can it obtain market share and optimize itself. So how to set its ticket prices? 4. 3. 1 The level of highest price
Low-cost carriers are known for low fares, therefore their highest prices cannot go beyond the full price of economy class of flagship airlines. If the price is quite low, it will affect the company’s profits. On the contrary, high price does not conform to the firm’s low-fare tenet. 4. 3. 2 The level of lowest price In China, owing to price control from the government, Ryanair could not implement its bottom-line price strategy. Hence, on the basis of regulation, Ryanair could properly provide two-thirds low fare tickets in every flight to draw customers.
After the company develops and reaches the maturity stage, it could gradually reduce low-fare tickets proportionally. 4. 3. 3 The level of average price On the one hand, the average price must be higher than the average cost to guarantee the firm’s normal operations and profits, ultimately, fulfilling Ryanair’s sustainable development and expansion. On the other hand, the low-cost carrier’s average price should be markedly lower than he average price of flagship airlines to win stable and long-term customers and capture a market share.
Through moderate pricing, althought Ryanair’s air tickets are low, it could increase the passenger load factor to improve profitability in every flight. 4. 3. 4 Price choice on peak- season and off-season In peak-season, like holidays or festivals, Ryanair could consider raising the price a little higher than usual in some special and hot routes due to high demands of these days. Likewise, in the off-season, the best way to stimulate customers’ consumption is to provide more low-fare tickets widely (Goddard, et al. ,2005) 4. 4 Marketing Strategy 4. 4. 1 Cooperation with mass commuication
At the beginning of its China venture, Ryanair could take full advantage of its own aircraft to advertise for other companies through charging for advertisement fees. They could then spend this income on creating advertising compaigns for its low fare by means of newspapers, magazines, and television. Through a lot of press publicity, more and more people would be interested in this new thing. Moreover, people would be willing to get more information about low-cost carrier and they would like to enjoy so cheap price. At that moment, Ryanair could launch some promotion plans to stimulate customer interest. . 4. 2 Cooperation with local authorities Low fares are the lifeline of Ryanair, without this advantage, it is impossible to compete with other airines. So enhancing cooperation with local authorities is necessary. As a matter of fact, current price control policy makes it difficult to meet the competitive market’s needs. Indeed, Ryanair should set a good example to abide by regulations, and then lead by example against unfair competition. Once having set up a good relationship with local authorities, Ryanair can obtain more benefits like use of second-level airports at very reasonable prices. . 4. 3 Cooperation with China Southern Airlines For Ryanair, air route selection and pilot demands are two main operation issues. With the help of China Southern Airlines, Ryanair can apply for the hottest tourism routes to carry out point-to-point flights. When the market turns to off-season, Ryanair should timely change its route to some charter flights. For instance, these years personnel, economic and cultural exchanges across the Taiwan Straits have kept increasing. Therefore, setting up regular air service in this route would satisfy demand growth.
In the meantime, Ryanair uses single type aircraft, so it can share pilots and aircraft maintenance expense with China Southern Airlines, and this leads to cost decline. Finally, Ryanair could truly implement its low fare and foster a good and healthy company image. What’s more, in order to avoid heavy traffic at hub airports, Ryanair could widely increase the second-level airport utilization rate of China Southern Airlines. This would result in punctual rates and leave a good impression on the customers. Besides, China Southern Airlines also provides Ryanair with its sselling platform: online booking or using agencies all over the country. . 5 Summary To sum up, before Ryanair decides to enter the Chinese market, it should anticipate some problems that may happen during the process. Then, based on an overall consideration of various factors, Ryanair should plan to invest in the form of a joint venture with China Southern Airlines. The next step wold be Ryanair’s market targeting emphasis on self-funded travellers, customers who would like to visit families or friends and general business customers. At the same time, flight time should take two hours. Ryanair must keep an eye on this group’s customers’s demands.
After that, it should look to the high level, the low level, average level and different period price principles to set up flexible and appropriate air-ticket prices. As to marketing, Ryan air should coordinate the relationship with mass commuication, local authorities and China Southern Airlines. Only combining the strategies listed above can Ryanair achieve global optimization and obtain long term development. 5. Conclusion The entry into the Chinese market is an essential step of Ryanair’s expansion plan outside Europe.
In this way, it is inevitable that Ryanair will face a rare chance for development as well as tough challenges. Therefore, this paper firstly summarized Ryanair’s own competitive advantages and showed why Ryanair possessed the capability to extend its low-cost business in China. On the basis of this, Ryanair must have a profound and thorough understanding of the new market, for instance: current policies and laws of aviation, Chinese customers’ consumption concepts and behaviours, and the differences between China and other European markets.
Hence, the next section objectively amplified on the internal and external environments with SWOT and PESTEL analyses. On the whole, although in some aspects Ryanair is still subject to Chinese aviation regulations and laws, owing to the fact that aviation develops at high speed and given the domestic market’s huge demand, the Chinese aviation environment is suitable for low-cost airlines existence and advancement. In accordance with the environmental analyses, specific business strategies to enter China are proposed.
At first, Ryanair should adopt a joint venture to cooperate with China Southern Airline. Only in this way can it reduce entry risks and restrictions from the government. Then, on that premise, Ryanair should set up a market target strategy, pricing strategy and marketing strategy in detail. Ultimately, Ryanair will fulfill its purpose of entering Chinese aviation smoothly and achieving success there. In this study, there still exists a problem to be considered